Elon Musk’s decision to turn down a seat on Twitter’s board of directors came as a surprise to most observers. Musk, a Twitter power user, has no shortage of ideas on how to change the service, and a board seat seemed like a logical perch to shape Twitter to his liking.
A deeper understanding of how companies operate and the strictures placed on board members help explain why Musk and Twitter found themselves unwinding a hastily hammered-together agreement to place him on the board. There’s also the matter of a little-noticed shareholder vote last summer that places a big obstacle in the way of anyone seeking to overhaul Twitter’s governance.
So what exactly is going on? The short answer is, nobody has all the answers yet. Twitter CEO Parag Agrawal didn’t lend much clarity when he simultaneously argued Sunday that appointing Musk to Twitter’s board and moving on without him as a director were both for “the best.” Musk’s U-turn will certainly relieve a bit of the pressure Agrawal faced from some Twitter employees who vocally resisted the idea of taking orders from a self-labeled “free speech absolutist” whose own companies have been roiled by charges of racism and sexism.
Twitter’s corporate governance helps explain how things played out and what’s likely to happen next. Musk will now be free to accumulate an ownership stake beyond 14.9%, though exercising that power to change Twitter’s board may prove difficult. And a conspicuous reference to a “background check” in Agrawal’s statement may have been more intentional than you think.
Agrawal’s dealings with Musk are far from over, and the Twitter CEO acknowledged that “Elon is our biggest shareholder and we will remain open to his input.” Musk has been uncharacteristically quiet — which is to say, he hasn’t tweeted since Sunday afternoon, and deleted several posts in which he proposed increasingly wild ideas for Twitter. He did, however, like a reply to Agrawal’s statement that proclaimed, “Let me break this down for you … Elon was told to play nice and not speak freely.”
What would it take for Musk to gain a controlling stake in Twitter?
Musk controls 9.1% of Twitter’s outstanding shares, likely making him the company’s second-largest shareholder (behind mutual-fund giant Vanguard) and the largest individual shareholder. To have a controlling stake, Musk would need to hold more than 50% of Twitter’s voting stock. So unless Musk is willing to pay a huge premium for the rest of Twitter’s shares, he’ll have to work with other shareholders if he wants to force Twitter to make specific changes.
Lone investors are seldom in a position to unilaterally demand changes, and that’s particularly true for a company the size of Twitter. Vanguard — one of the world’s largest investment funds, with around $7 trillion in assets under management — held a 10.3% stake in Twitter common stock at the end of March. Morgan Stanley held an 8.4% stake as of the end of 2021. Few individuals hold meaningful stakes: Co-founder Jack Dorsey held a little over 2% of Twitter’s shares as of its most recent proxy filing.
A stake the size of Musk’s is enough to command an audience from institutional investors, according to Santa Clara University School of Law professor Stephen Diamond, who advises activist investors in corporate governance matters, including some involved in a campaign aimed at Tesla.
Whether Musk proves persuasive in those meetings may be crucial. Investors are obviously pleased with Tesla’s huge run-up in market value, but Vanguard has clashed with Tesla over governance issues.
What’s the upside of having a board seat?
Shareholders don’t get a direct say in the management of the company. Rather, the shareholders elect board members who exercise oversight of company management. A CEO serves at the behest of the board, and it’s only in rare circumstances where the CEO has maintained power over board appointments — see Mark Zuckerberg at Meta — that that power dynamic has been reversed.
“The company must be managed by or under the direction of the board of directors — period, end of story,” Diamond told Protocol.
Board directors are insiders, and in theory have access to all the same information the CEO has. By contrast, a typical investor only receives public financial disclosures. That would give Musk a theoretical advantage
So in Musk’s case, gaining a seat on Twitter’s board of directors would have been a critical first step toward shaping Twitter to his liking. Musk would have become the 12th board member at Twitter. One vote out of 12 doesn’t get you much.
What restrictions would Musk have faced as a Twitter board member?
Musk made some key concessions in his agreement to join the Twitter board. Most notably, he couldn’t increase his ownership stake beyond 14.9%. He’d also have to abide by Twitter’s code of conduct, which applies to board members as well as employees.
Board members must also uphold a fiduciary duty to their fellow shareholders. That means Musk would have to justify his vision for Twitter in terms of shareholder value. It couldn’t just be “free speech is good for society,” but rather “free speech is good for our bottom line.”
“I don’t actually think you can continue in a corporate governance role to just advocate for free speech at all costs,” said Ann Skeet, senior director at Santa Clara University’s Markkula Center for Applied Ethics.
What can he do now that he couldn’t do as a board member?
Abandoning the board seat agreement frees Musk to buy more Twitter shares, which would give him more leverage to demand changes. A larger ownership stake could allow Musk to lobby for additional seats on the board for his allies.
Shareholders didn’t pass a proposal to change Twitter’s board structure last year that would have smoothed Musk’s path. That “declassification” proposal would have allowed for annual elections of directors; currently, directors are elected in classes serving three-year terms. Without it, Musk or anyone else trying to change the composition of Twitter’s board would have to wait years to replace directors. Twitter has said it would try to get shareholder approval for the proposal again this year.
Aside from winning board seats, Musk can only demand changes from Twitter by engaging in a hostile tender offer. Such campaigns are extremely rare and often prohibitively expensive, even by Musk’s standards.
What was up with Twitter asking for a background check?
Agrawal mentioned a background check in his tweet about Musk, and Twitter went further in a filing, saying his appointment was conditioned on both the background check and filling out a directors' and officers' questionnaire.
The D&O questionnaire asks for information required so the company can make needed SEC filings, for example. And one standard question asks about violations of federal or state securities laws. Musk settled securities fraud charges with the SEC in 2018 and is under an ongoing agreement limiting his ability to tweet about Tesla and preventing him from serving as chairman of Tesla’s board. (Twitter told Protocol earlier Monday the background check had not been a problem.)
Both the background check and the D&O questionnaire are standard practice, according to Diamond.
“Were they signaling something by repeating that? I don’t know,” said Diamond. “It’s possible that they started to actually pay attention to Elon Musk and said, ‘Wait a minute … this guy is a bit of a loose cannon.’”
“I don't think [Agrawal] would just slip that in without having thought about it in advance,” said Skeet. She added that Agrawal may have been signaling that “Elon Musk might be the kind of person who's not willing to submit themselves to that kind of review — and that unwillingness to participate in the fundamental processes of being screened and selected to a board is a flag.”
Update: This story has been updated to reflect that Twitter told Protocol earlier that Musk's background check was not an issue.