Failures of Oversight: Intel and Tesla
Sitting on the board of a major American corporation is often seen as both a privilege and a burden. It offers lucrative rewards—up to $300,000 annually in cash and stock—for relatively infrequent meetings. Yet, directors rarely receive accolades for a company's success while frequently bearing the brunt of criticism when things go wrong. Recent events involving Intel and Tesla illustrate the dilemmas faced by corporate boards and highlight systemic challenges in their ability to effectively oversee management and uphold fiduciary responsibilities.
On December 2, 2024, Intel's board dismissed its CEO, Pat Gelsinger, after his leadership resulted in a $150 billion decline in shareholder value over three years. This decision, while necessary, raises the question of why the board waited so long to act. Gelsinger's tenure starkly contrasted with the booming performance of other semiconductor companies thriving amidst the artificial intelligence revolution.
On the same day, a Delaware court reaffirmed its decision to annul Tesla CEO Elon Musk’s staggering $56 billion compensation package, granted in 2018. Although Tesla’s stock has soared in recent years, enriching its shareholders, the court found the board’s approval of the package questionable. Tesla’s directors, supposedly independent, appeared to be overly deferential to Musk’s dual role as CEO and controlling shareholder, casting doubt on their ability to act in the best interests of investors.
The Dual Challenges of Independence and Influence
These cases underscore two primary failures of corporate boards: excessive deference to powerful figures and disengagement from their oversight duties. Tesla’s board exemplifies the risks of acquiescence to a dominant leader. Musk’s influence over the company has created a situation where directors may prioritize his preferences over their fiduciary duties. This dynamic is increasingly common, especially as more companies adopt dual-class share structures that concentrate power in the hands of founders or CEOs.
Intel’s board, on the other hand, reflects the opposite problem. Directors who are sufficiently independent may still lack the engagement or motivation to act decisively. This can lead to inertia, allowing underperforming leadership to persist unchecked.
The Rise of Dual-Class Shares
The prevalence of dual-class share structures has grown significantly in recent years. These arrangements allow founders to retain disproportionate control despite owning a minority of the company’s equity. While rare two decades ago, dual-class shares now feature in nearly half of all tech initial public offerings (IPOs), including prominent firms like Airbnb and Zoom.
Investors’ attitudes toward these structures have shifted. Although Snap’s IPO in 2017—offering shares with no voting rights—sparked backlash and led to its exclusion from major indices like the S&P 500, companies with dual-class shares have since achieved immense valuations, including Alphabet, Berkshire Hathaway, and Meta. This success has softened opposition, with S&P Dow Jones reversing its ban on such companies in 2023. Even Musk has suggested implementing dual-class shares at Tesla to protect his influence.
While proponents argue that concentrated control enables visionary leadership, the trade-off is diminished accountability. Investors often tolerate this imbalance during periods of strong returns, but dissatisfaction mounts when performance falters, as seen with Snap, whose market value has significantly declined since its IPO.
The Problem of Disengaged Directors
Another issue plaguing boards is disengagement. While directors are often physically present at meetings, their effectiveness can be questionable. According to a PwC survey, only 30% of executives rate their board’s performance as good or excellent, while 20% consider it poor. Most notably, 84% of executives believe directors rarely challenge management—a critical aspect of effective oversight.
Overcommitment is a key factor in this disengagement. During the COVID-19 pandemic, boards convened much more frequently, exposing the challenges faced by directors juggling multiple roles. While many have since reduced the number of boards they serve on, the growing complexity of corporate governance demands greater time and effort from each director.
Recruitment Challenges and Diversity
Finding qualified, engaged board members is becoming increasingly difficult. In recent years, there has been a push for diversity in board composition, resulting in fewer chief executives—traditionally a key source of directors—serving on boards. While diversity can bring valuable perspectives, the decline in experienced executives may leave boards less equipped to navigate complex challenges.
Interestingly, research suggests that some characteristics, such as a wider age range among directors, can positively impact performance. For example, Expedia’s board includes Barry Diller, a media tycoon in his 80s, and Alex Wang, a young AI entrepreneur in his 20s. This intergenerational mix may foster healthy debates, keeping directors engaged and alert.
Proposals for Reform
To address these issues, experts have proposed various reforms. Lucian Bebchuk of Harvard Law School advocates for "enhanced-independence" directors who cannot be dismissed without the approval of minority shareholders. Such measures could counterbalance the influence of dominant figures like Musk.
Other reforms include limiting the number of boards a director can serve on and ensuring that directors have the time and expertise required to fulfill their responsibilities. Encouraging a broader range of voices and perspectives, including intergenerational diversity, may also enhance board performance.
Corporate boards play a vital role in safeguarding the interests of shareholders and ensuring effective management. Yet, as the cases of Intel and Tesla demonstrate, they are often hampered by either excessive deference to powerful leaders or a lack of engagement. Structural trends, such as the rise of dual-class shares and the increasing demands on directors, further exacerbate these challenges.
Reforming board practices will require a combination of enhanced accountability, greater diversity, and a renewed focus on directors’ responsibilities. While there is no single formula for creating the perfect board, fostering independence, vigilance, and active participation can help restore trust and improve corporate governance. Only then can boards effectively balance the rewards and responsibilities of their critical role in modern business.
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