Could Elon Musk's alliance with Donald Trump hurt Tesla's business? Not as per Company's 'Risk Factor' list

Given Trump's polarizing personality, you might think that the Tesla CEO's high-profile political leanings risk turning off some potential car buyers. According to Tesla's lawyers, the answer is not at all.

In the company's latest 10-Q filing with the SEC, Tesla made no mention of Trump or Musk's political activities in the “risk factors” section, which has not been updated since Tesla's annual report from January. The annual report's long list of potential risks notes that the company is highly dependent on Musk's (“technocking”) services and that employees may leave or look elsewhere “for a variety of reasons,” including “any negative publicity regarding us.” ”

But when it comes to Tesla technoking's high-profile move to tie its personal brand to MAGA politics, which has increased dramatically since July when Musk publicly endorsed Trump and announced a Super Pac, the company clearly sees no particular business risk.

Some Tesla investors aren't so cool. Dozens of shareholders recently asked Tesla to disclose information about how Musk's politics have affected hiring and sales. Some say Musk should either stop campaigning or step down as CEO.

As with many things for Musk, his first plunge into politics is challenging established norms, including the subtle language of regulatory filings. Political activism isn't something that would typically show up in Securities and Exchange Commission reports, corporate leaders and securities experts say. But Musk, the face and head of a publicly traded company and one of the world's richest men, has rarely shown such deep and committed devotion to one of the world's most controversial political figures.

“It would be most unusual to list an individual CEO as a risk factor,” said Hilary Sale, director of Cboe US Securities Exchange, Cboe Futures Exchange and Cboe SEF and a professor at Georgetown University. “If a director feels this way about the CEO, they have a fiduciary duty to reconsider the CEO.”

The SEC requires companies to disclose all types of information, and companies can voluntarily disclose additional risks, as long as those risks are material — meaning they would significantly change business operations or regulations. Firms are often forthcoming about their executives' extracurriculars (see meta Mark Zuckerberg's affinity for extreme sports, or Tesla's own comments about Musk's attention to other business ventures). But some issues don't – in 2008, Apple faced questions about whether it had a duty to disclose Steve Jobs' deteriorating health.

The US Supreme Court ruled earlier this year that investors cannot bring suit for omissions in SEC filings. The SEC itself could theoretically bring a lawsuit, but the agency does not mandate disclosure of political activity, and doing so could be criticized as an affront to free speech. (Or in Apple's case, invasion of privacy).

And because Musk's political activities are far from secret, investors aren't completely in the dark, notes Alan Horwich, a former securities lawyer turned professor emeritus at Northwestern University. The question becomes whether Tesla knows anything about how Musk's political sideshow is affecting its share price—and is failing to offer answers to endless shareholder questions.

“We know what he's doing, but do they know what he's at risk for doing this to the company?” Horwich said. His advice to his former clients when questions arise about disclosure: If there's an internal dispute about whether a risk is material, “Why aren't you disclosing it?”

At a special forum for Tesla shareholders held by the company ahead of quarterly earnings earlier this week, an investor asked if Musk's “board has made efforts to ensure that political engagement does not detract from Tesla's core mission and protects shareholder value and brand integrity?” The post It earned 533 up-votes from investors, who own a total of 397,000 Tesla shares, according to company calculations.

Tesla did not respond to Fortune's request for comment.

Investors are used to this behavior of Musk

Adam Owak, a professor of management at the University of Notre Dame, added Musk has more leeway to run the company than other CEOs of publicly traded companies, thanks to investors voting on a pay package that gives him about 20% control over Tesla. . The vote share combined with his deep ties to the brand gives him more power on the board than his peers, who may have to steer things like big political donations or endorsements by board members.

It's also not unusual for Musk to get involved in things that would cause problems for CEOs of other public companies — some might argue it's part of his brand. He famously smoked a joint on the Joe Rogan podcast in 2018. And he has a history of clashing with government agencies overseeing various businesses, including space exploration company SpaceX, tunneling company The Boring Co, human implant firm Neuralink and AI developer X.AI, to name a few.

When the Federal Aviation Administration went after SpaceX over rocket launches, Musk threatened to sue for regulatory overreach. He says Democrats are threatening his X social network so much that the Harris administration will personally jail and prosecute Musk and “shut it down by any means necessary.” He condemned the “weaponization” of government agencies in response to the Federal Trade Commission's privacy probe.

Musk's alliance with Trump is at stake. Trump's win could be a boon for Tesla as Trump mentions hiring Musk as his “cost-cutting secretary.”

But regardless of the election, Musk's full-throated endorsement of Trump clearly puts Tesla in a spotlight far brighter than that faced by CEOs who donate to or support political candidates or causes.

“Typically, CEOs exercise some caution about getting deeply involved in politics, because not all shareholders agree,” notes Sells, the Georgetown professor.

Without speculating about whether such political ties should be reported to the SEC, “there's certainly reason to think that repeated behavior from a public company's CEO could be a serious risk to a firm's value,” said Chris Poliquin, UCLA. Professor of Management at the Anderson School of Management.

As investors await Tesla's quarterly results this week, the company's stock has fallen 14% since Musk's Trump endorsement in mid-July. The S&P 500, by contrast, gained 3% over the same period.

Tesla reported a modest 2% increase in car sales, but Wall Street topped profit targets due to regulatory credit sales to other automakers and strength in its energy business. Musk said his “best estimate” was that “vehicle growth” would increase between 20% and 30% over the next year.

Tesla stock is now up 7% since Musk's Trump endorsement.