Introduction
Generally, Tesla Company has a policy and legal framework that regulates its activities and operations. Being one of the largest multinational companies, Tesla has complex corporate governance that defines and guides its operations across its many branches. The company deals in the making and assembly of motor vehicles, and as of 2023, Tesla has risen to become the most valuable automaker in the world. While the firm has attained a milestone in its growth, the unpopular decision to recall its employees back to the office in May 2020 amid the COVID-19 pandemic triggered a lot of controversies and invited heightened criticisms of its corporate governance.
The study aims to discuss the 2020 back-to-office corporate scandal of Tesla Company critically, what led to it, and how it became known. Thereafter, the research will critically evaluate the consequences of the scandal on the firm’s reputation and the market at large while analyzing the criticism it attracted. The paper will then discuss how proper corporate governance could have prevented the situation and provide practical recommendations for the board of directors to avoid similar future scenarios. The research will summarize the discussion by evaluating the impact of corporate governance scandals on the performance of firms.
The Scandal
Following the COVID-19 outbreak, many businesses were forced to adopt remote operations as a way of mitigating the spread of the deadly virus. Since contact promoted the spread of the contagious disease, social distancing became an effective control measure. As a result, organizations were encouraged to adopt home-working as a way of reducing the risk. Large businesses such as Tesla, with a massive number of employees, became the target for health guidelines (Reid Jr & Charles, 2023).
Firms across the globe adopted remote operations, with the bulk of work being done at home premises. In addition, conferences and other business-related activities were done virtually. Like other firms, Tesla adopted the home-working system, sending its employees back home and allowing them to work from home. With several workers and limited space, it was necessary tomake a decision to mitigate the potential spread of the virus among the congested personnel. However, in May 2020, Tesla Company, through its co-founder and largest shareholder, Elon Musk, rescinded the decision and called back the workers to the office following the government reopening of production.
The company co-founder, who equally enjoys the biggest percentage of shares, decided to overturn the earlier decision of remote working while defiantly reopening physical operations in one of its branches in San Francisco, the Fremont, California factory. Through his email tweet, the firm’s CEO, Elon Musk, without relent, ordered the factory workers back to work in a physical capacity. In the tweet, the CEO wrote, “If you feel uncomfortable coming back to work at this time, please do not feel obligated to do so” in his address to the firm’s employees (Siddiqui, 2020, p. 2). The organization began to track down absenteeism, punishing colleagues who did not report to work. During this time, COVID-19 was still a threat, with workers risking contracting the deadly virus amidst the increased number of cases.
According to some Tesla personnel, the company had grown in the workforce with the increase in the number of employees; however, the company had failed to improve the working space despite the workforce surge. Thus, the order to return to work would expose them to the virus, as the congestion of workers encouraged the chances of contracting the illness. According to confessions from anonymous firm employees, the organization had run out of working space, leading to overcrowding.
“There are 15, 20 people standing right up on each other, front to back, at the time clock in a group. When they sit down and eat, everybody is right on each other, mask down and everything,” one worker was quoted by the Washington Post (Siddiqui, 2020, p. 2). The confession exposed the unhealthy and risky situation the company workers were exposed to and how the firm did not care about the welfare of its personnel.
Despite the employees’ resentment and health concerns, the CEO remained unmoved and proceeded with the implementation of the return to work order. In implementing the directive, the organization, through human resources, terminated the contract of two employees, Carlos Gabriel and Jessica Naro, who reported back in June for lateness. The two victims who cited health concerns received phone calls from the human resource representatives, informing them of their termination (Minchin, 2021). Concurrently, the workers feared that the organization was experiencing an increase in the number of COVID-19 cases, with many individuals potentially contracting the virus. Still, the company was reluctant to disclose health information.
The mistreatment of workers became a matter of public interest following the disclosure by the Washington Post, which exposed the CEO’s tweet and the confessions of some workers. The Washington Post managed to uncover the company’s unethical behavior of putting its welfare above the interests of everyone, including its employees. It became clear that Tesla was more concerned with producing cars at the expense of everyone’s health (Reid Jr & Charles, 2023). At the time when the global community was battling the deadly coronavirus with most multinational organizations taking the lead, Tesla confirmed its uninterest in corporate social responsibility.
Consequences of the Scandal
Market Reaction
The scandal exposed the company’s poor corporate social responsibility in the market. Tesla is one of the largest multinational companies, with an equally large market following. Like other firms, Tesla was expected to join hands with others to help the global community in fighting the deadly coronavirus pandemic.
The organization was anticipated to embrace and encourage the social distancing and home working policies advised by the health governing body using its advanced technology, thereby setting the pace for others (Wagner & Storm, 2022). However, this did not happen as the firm opted to defy the guidelines and expose its workers to health dangers, as evidenced by the decision to order employees back to physical operations. This decision confirmed Tesla Company’s carelessness and contempt for the interests of personnel and the community at large.
Company Reputation
The scandal soiled the company’s reputation, portraying Tesla as careless about the interests of its employees. Businesses with proper corporate governance consider the interests of all stakeholders of the organization, including the employees and the community. That is, they consider the concerns and issues that affect the personnel and the community at large. With the emergence of COVID-19, the company should have considered the health interests of its stakeholders and taken precautionary measures to protect them.
As advised by the global health body, the company should have been at the forefront of implementing measures to protect the stakeholders (Wagner & Storm, 2022). When the workers were reluctant to return to work, citing health concerns, the company ought to have understood their pleas and improved its working space to increase their safety. However, forcing workers back to work without improving the health concerns demonstrated a poor consideration of stakeholders’ interests and contempt for the community at large.
Furthermore, the scandal gave the company negative publicity for the poor worker-manager relationship. In the motor industry, with stiff competition from large established companies such as Toyota and Mercedes, among others, worker motivation plays a significant role in success. Firms compete for the best talent in the market to gain an advantage and increase innovation.
However, because of the news of the mistreatment of workers, new talents are discouraged from joining the company, lowering innovation and labor power (Huang, 2022). In the same vein, existing employees who feel threatened and mistreated by the organization’s poor decisions become discouraged and disconnected from the company, lowering their morale and, in turn, affecting the general performance of the enterprise. In addition, the scandal painted the company as regressive and dictatorial. The order by the organization’s CEO demonstrated that the company was a one-man show, run by a single person who does not consult or seek the opinions of other stakeholders concerning decisions affecting the company.
Properly managed businesses embrace consultative leadership where the management aims and consults all the players before making important decisions. In the case of health issues, a properly managed organization could have investigated the health concerns of the stakeholders, especially the workers who would be affected directly by the order (Huang, 2022). Concerns such as a congested workplace were genuine issues that could have been solved before ordering the employees back to work.
Criticism
The incident was unpopular and triggered numerous criticisms against the company. Tesla Company came under fire from various players, including the labor union and health sector, among other groups, which accused the company of contempt for healthcare and carelessness for workers (Reid Jr & Charles, 2023). According to the critics, the decision to force employees to return to work under poor health conditions and terminate the contracts of some workers equated to unfair treatment of the workforce. Moreover, the company was criticized for sacrificing the lives of its workers for its financial gain (Wagner & Storm, 2022). The firm’s management demonstrated that they only valued financial gains but disregarded the interests of the personnel who worked tirelessly to ensure it attained its financial objectives and could sacrifice them at the slightest opportunity, which is against the principles of corporate governance and proper management.
Functions of Corporate Governance in Preventing the Scandal
Proper governance structure as an aspect of corporate governance was the missing piece that could have helped the firm escape the scandal. A company that practices corporate governance is bureaucratic in leadership and embraces consultative decision-making. With independent membership, the board of directors is always calculative in their decisions and develops policies that ensure the success of the business. They take into consideration the interests of all the stakeholders of the firm, including workers, suppliers, consumers, and the community, thereby preventing cases of conflict of interest (Rehman, 2022).
However, Tesla Company was co-founded by Elon Musk, who doubles as the CEO and makes critical decisions, thus creating the likelihood of a conflict of interest. As the CEO, he became sentimental in his judgments, overlooking the essential aspect of workers’ interests and that of the community (Huang, 2022). With an independent board of directors and shared decision-making, the scandal would not have arisen, as the board would have engaged widely before deciding. Still, because the CEO is running the company as a one-man show, he makes all the decisions without doing the necessary consultation.
Secondly, stakeholder engagement is another aspect of corporate governance that could have helped prevent the scandal. From the scandal, it is clear that the company does not conduct stakeholder engagement in its day-to-day activities and decisions. When the government reopened production following the long period of shutdown, Tesla Company ought to have engaged all its stakeholders on the best way to resume physical operations.
With the employees raising health concerns and citing workplace congestion, the firm should have consulted widely and come up with a better solution (Al-Mamun et al., 2022). Instead, the CEO became sentimental in decision-making, overlooking the workers’ interests and ordering them back to work. When some employees rightly defied the orders and reported to work in June, the company proceeded to fire them, terminating their contracts. The scandal could have been prevented if the organization had allowed stakeholder engagement.
Recommendations
To avoid similar situations in the future, the company, through its board of directors, must encourage a two-way communication system. The scandal occurred because the firm did not encourage stakeholders’ engagement in its framework, causing the management, through the CEO, to treat workers’ concerns with contempt. With two-way communication, the company could have listened to the serious health concerns of the employees and considered them during decision-making (Wagner & Storm, 2022). Even though the concerns were genuine, the management did not care to listen or give the workers’ opinions the deserved attention. Some of the complaints, such as the congested workplace, were genuine and could have been improved by consultation.
In the same vein, the organization could have extended the engagement to other key stakeholders, such as the government, and deliberated on the best possible way to resume physical operations without risking the health of employees. However, the lack of communication provided room for the scandal to develop and escalate, something which could have been easily prevented by engagement. Finally, the board of directors should introduce a private legal body for the company tasked with handling every legal concern of the organization. By having a legal body, all cases involving the company would be handled internally without exposing them to the public domain (Huang, 2022). As in the case of the two workers, the firm’s private legal body or tribunal could have resolved the issue amicably without escalating to the public, thereby protecting the reputation.
Impact of Corporate Scandals
If there is are way a business reputation can be ruined is through a scandal. Whether real or apparent scandal, a firm’s reputation will always be on the line when associated with one. Depending on the type of scandal, the brand of an organization suffers if linked with unethical behavior or questionable activities. The reputation may trigger negative publicity on product quality, workforce, or customer service.
As in the case of the Tesla scandal, the incident of recalling workers during the coronavirus pandemic and terminating the contract of two workers ruined the reputation of the company in management and employee relationships (De Oliveira, 2022). New workers interested in the company likely changed their minds after reading the news of mistreatment and contempt for employees’ interests. Scandals are spoilers, considering organizations depend on their brand reputation for success.
A practical example is the Enron Scandal, where the executives of the company engaged in a false accounting practice, inflating the company’s revenue and making it the seventh-largest corporation in America. However, on exposure, the firm’s apparent massive revenue steadily fell, and it finally became bankrupt (Demetriades & Owusu-Agyei, 2022). The scandal ruined the company’s reputation, leading to its collapse.
In addition, scandals affect motivation and work morale, and in turn, lower productivity. Some scandals are capable of affecting the level of motivation in a company, especially if they directly interfere with the employees. As in the case of Tesla Company, the 2020 scandal adversely affected the motivation of workers, lowering their general morale. The scandal demonstrated that the firm did not care about the interests of its workforce, something which negatively affected their morale (Huang, 2022).
In the example of the HealthSouth Scandal of 2003, where CEO Richard Scrushy inflated the firm’s earnings by over $1.8 billion after selling stock of $75 million, causing the company to incur a significant loss, the employees who worked tirelessly, putting their lives on the line became discouraged upon realizing the CEO was responsible for the company’s misfortune by faking earnings while selling the company’s stock (Danter, 2022).
Scandals ruin executives’ profiles at the company in question. Once a scandal emerges in a business, the whole executive team and the management at large become questionable.Whether one is directly or not involved, it is unanimously assumed that the entire executive and management participated in the scandal, thereby limiting their chances of transferring or joining other firms (Broccardo et al., 2022). As in the example of the HealthSouth Scandal, the respective CEO and their accomplice executive members were painted negatively, denying them a chance to transfer or be absorbed by other firms.
Finally, scandals corrupt good and healthy organizational culture. It takes time and resources for an organization to cultivate and nurture a positive culture in its system. However, scandals by some members of the company, be it executives or junior members, can spoil that culture. For example, in the Tyco Scandal of 2002, the CEO, Dennis Kozlowski, together with the CFO, Mark Swartz, were reported to have stolen over $150 million from the company and then inflated the firm’s earnings by over $500 million to cover the theft (Li & McMurray, 2022). The act was against the principles of accountability and transparency.
Such behaviors, especially from senior leadership, usually corrupt organizational culture and encourage other members to engage in similar acts of fraud. Managers influence the behaviors of their juniors, who trust and look up to them for direction and guidance. Therefore, if they engage in unethical behaviors, their team members may be tempted to copy them and behave accordingly. For instance, in the Tyco scandal, the junior members of the company’s finance department could have been tempted to emulate the executives and extort the firm.
Conclusion
Corporate governance is a critical tool in a business’s operation and performance. Tesla Company’s 2020 scandal demonstrated its lack of proper corporate governance, allowing the situation to occur. However, the implementation of a functional framework would have promoted two-way communication and stakeholder engagement, thereby preventing the problem. In the same vein, if the company adopts the framework, then similar problems would be avoided in the future. In addition, scandals have adverse impacts on business, spoiling the reputation, lowering worker motivation, and undermining a good and ethical culture in an organization.
References
Al-Mamun, A., Rashid, M., Roudaki, H., & Yasser, Q. R. (2022). An overview of corporate fraud and its prevention approach. Australasian Accounting, Business and Finance Journal, 16(1), 6. Web.
Broccardo, L., Culasso, F., Dhir, A., & Truant, E. (2023). Corporate social responsibility: Does it matter in the luxury context?Corporate Social Responsibility and Environmental Management, 30(1), 105-118. Web.
Danter, E. (2022). Responsibilities, regulations, control frameworks. In Audit defense: A management audit readiness guide (pp. 9-30). Cham: Springer International Publishing. Web.
De Oliveira, R. G. (2022). Adverse impacts of business and transnationalism on achieving the 2030 sustainable development goals. Multidisciplinary International Journal of Research and Development, 2(2). Web.
Demetriades, P., & Owusu-Agyei, S. (2022). Fraudulent financial reporting: an application of fraud diamond to Toshiba’s accounting scandal. Journal of Financial Crime, 29(2), 729-763. Web.
Huang, L. (2022). A moderation of business misdeeds on corporate remedy strategies. Journal of Marketing Analytics, 1-11. Web.
Li, L., & McMurray, A. (2022). Types of Corporate Fraud. In L. Li & A. McMurray (Eds.), Corporate fraud across the globe (pp. 23-41). Singapore: Springer Nature Singapore. Web.
Minchin, T. J. (2021). ‘The factory of the future’ historical continuity and labor rights at Tesla. Labor History, 62(4), 434-453. Web.
Rehman, A. (2022). Organizational Corruption Prevention, Internal Audit, and Sustainable Corporate Governance: Evidence from Omani Public Listed Companies. International Journal of Social Sciences and Economic Review, 4(2), 10-22. Web.
Reid Jr, D., & Charles, J. (2023). Two There Are That Rule the World: Private Power and Political Authority. University of St. Thomas Law Journal, 19(1), 3. Web.
Seigner, B. D. C., Milanov, H., Lundmark, E., & Shepherd, D. A. (2023). Tweeting like Elon? Provocative language, new-venture status, and audience engagement on social media. Journal of Business Venturing, 38(2), 106282. Web.
Siddiqui, F. (2020). The Bay Area ordered millions to shelter in place. Elon Musk had Tesla employees report to work anyway. The Washington Post. Web.
Wagner, U., & Storm, R. K. (2022). Theorizing the form and impact of sports scandals. International Review for the Sociology of Sport, 57(6), 821-844. Web.