Buzz
Elon Musk has had a rough few months lately.
He’s back in the spotlight with a 60 Minutes interview, where he declares his disrespect for the SEC and attributes his stress to the intense hours he works.
Tesla's stock has mirrored Musk’s actions over the past year. Shares dropped seven percent after his controversial marijuana moment, rose when he suggested taking Tesla private, only to fall again when it became apparent that wouldn’t happen.
So, how exactly does this all work?
The CEO serves as the public face of their company, and one of their primary responsibilities is to avoid unsettling investors and, in general, refraining from making irrational statements or actions. Musk, in particular, is closely associated with his company in the minds of investors—its 'success' is partly linked to Musk’s perceived success (whether Tesla is truly successful at manufacturing electric cars is another matter).
“Most CEOs are very cautious about their public statements because they want the stock to perform well, as their compensation is tied to it, and boards expect shareholder value to rise,” says Erik Sherman, a freelance journalist and columnist at Inc. who has tracked Musk’s behavior. “Musk doesn’t always exercise such caution.”
In the past, Musk's public statements and tweets had a positive impact on Tesla's stock price. But that’s no longer necessarily true.
“It’s prudent for CEOs to carefully consider their words in public statements,” says Sherman. “Because public remarks like these raise concerns about the CEO's stability and character, which in turn reflects on the company, as the CEO holds significant power to influence outcomes.”
Part of this can be explained by the fact that markets are not always rational. Retail and institutional investors are human, after all, and are swayed by emotion. Likewise, the biases that influence us are also embedded in the computer algorithms we use to buy and sell stock, because, ultimately, we are the ones who create them.
“It’s a mix of emotional reactions and the drive to make money,” says Sherman. Investors “react to the market conditions and seek to profit. They want insight into what’s happening, and if they sense things are falling apart, they’ll want to sell.”
When a CEO makes a positive statement—such as announcing increased profits or a new technology—shares tend to rise in value. Conversely, negative statements have the opposite effect. For instance, Musk’s tweet about taking Tesla private at $420 per share caught the SEC's attention, as it appeared to manipulate stock prices, leading to a negative impact.
“In essence, any executive’s actions affect how the firm’s stability and investment appeal are perceived,” says Virginie O’Shea, research director at Aite Group, a market research firm, in an email. “Governance codes in most public companies prohibit risky or inappropriate behaviors—including market manipulation (like the recent tweet incident) and issues related to #MeToo—by executives.”
It’s impossible to predict the long-term effects, but one thing is certain: The SEC will closely monitor Musk and Tesla for the foreseeable future. This doesn’t exactly inspire confidence. “If the behavior leads to shareholders demanding the CEO’s resignation, that has a major short-term impact,” says O’Shea. “Stock prices may rebound after corrective action, but everything hinges on confidence and trust—both of which are hard to measure.”
Update 11:45 a.m.: This article has been updated with a comment from Virginie O’Shea.
