What Does Elon Musk Teach Us About Financial Communication?ELON MUSK AND TESLA HAVE BECOME A CASE STUDY ON ERRORS TO AVOID WHEN A COMPANY PUBLISHES ACCOUNTING INFORMATION AND DISCUSSES IT WITH THE EXPERTS
by Xiaoxi Wu, Bocconi Department of Accounting
When we talk about firms disclosing information, what usually pops up in people’s minds? Most likely numbers - how big corporations give accounting numbers about their profits, cash flows, cost controls and other financial topics to help investors make investment decisions.
In fact, it is more than just numbers. Financial communication is a multidimensional concept: the sentiment of firms’ narrative disclosures, executives’ voice pitch in earnings calls and facial expressions in TV interviews – those subtle details are important elements of financial communication and can contain information about a firm’s current situation and future outlook.
Tesla’s Elon Musk is a gold mine for financial communication case studies. As the founder and CEO of Tesla and SpaceX, he is an inventor, an engineer with vision, as well as a celebrity bad boy who dated Grimes. However, when it comes to financial communication skills as a CEO, he learned it the hard way. Let’s rewind to 2018 and look at Musk’s three ‘astonishing’ moments (or as the media calls it: bizarre Muskian performance).
Tesla’s 2018 first-quarter earnings call on May 2nd, 2018 has been rated as "arguably the most unusual" earnings call by Morgan Stanley’s star analyst Adam Jonas. The reason is how Musk treated analysts’ questions during the call. The CEO rejected a question about Tesla’s capital requirements by saying: “Excuse me. Next. Boring bonehead questions are not cool”. He also rejected a question about Model 3 because “these questions are so dry. They're killing me”. While it’s typical for CEOs to be reluctant to provide sensitive or negative information, the stock market was shocked by Musk’s impolite and unprofessional attitude towards analysts. Tesla’s share price plummeted seven percent on that day, and almost six percent the day after. To repair the relationship with analysts and investors, Musk had to apologize to the analysts in public during Tesla’s 2018 second-quarter earnings call.
Shortly afterwards, on August 7, Musk tweeted: “Am considering taking Tesla private at $420. Funding Secured”. Those nine words caused panic among shareholders and employees. Some were questioning the truthfulness and accuracy of the information, whereas some suffered great loss in the stock market because of the tweet - it was estimated that short sellers lost about $1.3 billion. Later, it turned out no final decision regarding privatization was actually made. Musk just tweeted, carelessly. Both Musk himself and Tesla were punished greatly by the regulator, including forcing Musk out as chairman, $20 million fines to both Musk and the firm, and that Musk cannot tweet without approval from Tesla’s in-house counsel.
Social media is an inseparable part of financial communication and is being closely monitored by regulators to protect investors’ interest. Not necessarily an official component of corporate disclosure, yet executives’ personal social media account is definitely on investors’ and regulators’ radar. In Musk’s case, we see how it can potentially cause damages for shareholders and the firm. Some even suggested Musk to never tweet ever again. Nonetheless, if used properly, top managers’ social media communication can be beneficial. For example, researchers at University of Illinois at Urbana–Champaign and University of Washington show that CEOs can use personal twitter account to foster shareholders’ trust.
Back to Musk. In September 2018, Musk took a puff of cannabis on podcast. This created another fire for Tesla to put out. Tesla’s share price immediately plunged nine percent. This is a classic example of how share price is moved not only by firm financial information, but also top managers’ public image. A CEO’s behavior, both professionally and personally, is a mirror that reflects the firm’s financial conditions, corporate culture and internal control. Accounting and corporate finance researchers refer to this as ‘the tone at the top’. Shareholders hold public company CEOs to a high level of professionalism. When a CEO’s behavior appears inconsistent with shareholders’ expectations, the CEO’s capability to manage the firm effectively might be questioned. Consequently, share price suffers.
With all the Muskian performances in mind, it is essential for firms to make effective and careful use of financial communication. In the era of information, managers’ behavior can be observed by shareholders instantaneously and is monitored under the microscope. Every little detail might be interpreted as a signal and potentially cause tornado effects in the financial market.