Protecting Reputation in Crisis: Case Study of Strategic

Reputational Risk Management at Tesla Inc.

Term paper

Copenhagen Business School

Course: Strategic Risk Management of Multinational Enterprise

(CCMVV2610U_E17)
Professor: Torben Juul Andersen
Author: Adam Bučko
Submission date: January 22, 2018
Introduction
Reputation is one of the most important assets for every business company, but it is also very
fragile and it can be hard to earn back, once it was lost. Reputational risk can be defined as a
risk of failure to fulfil the expectations of company’s stakeholders in terms of performance and
behaviour (Fitzsimmons & Atkins, 2017). Reputational risk can arise as a by-product of other
risks but the reputational damage can go far beyond the material loss. In many cases, reputation
of a company does not reflect the real state of affairs and even a small event can easily spiral
into a major reputational crisis.

This paper seeks to explore reputational risk management practices of Tesla Inc. and examine
key components that limits the exposure of the company to reputational harm. In the
contemporary world of business and technology, few companies get as much attention of media
and public as Tesla. However, the hype around Tesla is not always caused by positive news and
the company has had to face several reputational crises throughout its rather short and turbulent
history. The reason why Tesla’s approach to management of reputational risks is worth studying
is that the company managed to overcome every crisis and even turn it into opportunity. This
paper aims to find out what stands behind Tesla’s effective management of reputational risks.

In the first chapter, we will present the theoretical and conceptual background of the
reputational risk management in relation to strategic management. In the second chapter, we
will analyse Tesla’s organizational structure, risk management mechanisms, corporate culture
and leadership. In the third chapter, the focus will be turned on an analysis of a reputational
crisis caused by a series of fire incidents involving Tesla vehicles. We will analyse how the
company responded to the crisis and successfully managed the reputational risk. In the final
chapter, we will summarize based on the previous analysis the key elements of Tesla’s approach
to reputational risk management.

1. Theoretical background
What is reputation and why it is important
The term reputation sounds so familiar to everyone that it seems even unnecessary to provide
a definition. Reputational concerns to a large extent drive our everyday decisions. We avoid
meeting people with bad reputation and we care about keeping our own reputation as good as
possible to secure our social status, career, friends and partners. Defining something as
omnipresent as reputation in simple terms appears not so complicated indeed and the latest book
on reputational risk defines it as follows: “Your reputation is the sum total of how your
stakeholders perceive you.” (Fitzsimmons & Atkins, 2017: 14). If we apply this definition on
business companies and boil it down to more specific issues, we find out that it incorporates six
important elements. First, the reputation of a company depends on perception of stakeholders
and it does not have to match the view by the company itself (Ibid.). In other words, when the
CEO is proud of the image of company, customers, business partners and other stakeholders
might see very different picture. Second, the reputation of a company depends on a perception
which does not always reflect reality of the true nature (Ibid.). This can be positive or negative
depending on situation. In some cases, companies with serious problems can maintain good
image and in other cases a minor mistake with no real consequences can negatively influence
the perception of stakeholders. Therefore, based on the previous point, if the stakeholders’
perception changes, the reputation of company changes likewise (Ibid.). Next, the ‘sum total’
may vary depending on the importance of particular stakeholder groups what makes important
to understand all the stakeholders (Ibid.). Lastly and most importantly: “You lose your
reputation when stakeholders come to believe, rightly or wrongly, that you are not as good as,
or are worse than, they previously believed you to be.” (Ibid.: 15). Reputational risk can be
therefore defined as follows:

“Reputational risk is the risk of failure to fulfil the expectations of your stakeholders in terms
of performance and behaviour.” (Ibid.:15)

The reputation is also closely related to trust (Rainer, 2003) and if company loses trust of their
customers, who stop buying the products or services, or shareholders, who start to sell its shares,
such company can be pushed to the brink of bankruptcy. Most companies recognize risk of
losing their brand’s reputation as their largest threat 1 (Tarantino, 2011) and therefore protecting
reputation is one of the most important tasks managers must face. Reputational risks have
growing significance for multiple reasons such as growing complexity of global environment,

1
According to a 2005 survey, 80% of companies say that their brand is their most important asset and
reputational risk received highest score (52 out of 100) marking it the most significant threat to
companies’ global business operations (The Economist Intelligence Unit, 2005).
increased public scrutiny and calls for transparency (Larkin, 2002). Consumers put larger
emphasis on socially responsible behaviour of companies and information about any
misconduct can spread freely and fast thanks to social media channels. The discussion about
reputational risks have intensified in the financial sector after the last financial crisis which had
shaken the very foundation of the industry and eroded public trust in bankers’ work. Multiple
studies have found that reputational loss can far outweigh the mere loss related to fines, class
action lawsuits and accounting write-offs (Walter, 2010).
But is it a real thing?
The opinions of scholars vary on whether reputational risk should be considered a category on
its own or whether it is only a consequence of failures to prevent other risks, such as financial,
operational or regulatory. In fact, 2003 book with a title Manging reputational risk argues right
in the beginning that there is no such a thing as reputational risk and there is only risk to
reputation which emerges in a consequence of other risks (Rainer, 2003). According to
Fitzsimons and Atkins (2017), the concept of reputational risk as a risk in its own right is useful,
even if we agree that it needs to be boiled down into its components, because asking the question
‘What could cause reputational damage?’ can yield very different and valuable insights from
what we get when dealing with other risks. Furthermore, a 2005 survey of 269 senior risk
managers and executives showed that 52% of respondents consider reputational risks a risk
category in its own right, compared to 48% who think that reputational risk is something that
arises as a consequence of a variety of other risks (The Economist Intelligence Unit, 2005).
Another argument for this perspective is that managing reputational risks means not only to
identify and avoid the risks which can harm the reputation, but it involves effort on multiple
levels, including building culture of risk-awareness (Andersen & Schrøder, 2010: 187), value-
driven leadership (Andersen, 2017) and state-of-the-art crisis communication skills. In this
paper, we adopt the same perspective and will argue that successful management of reputational
risks must go way beyond identifying and managing operational, financial risks, or human risks
with a potential for reputational harm.
Strategic management of reputational risks
In the aftermath of reputational crises, the same old words always resonate in the discussion.
The attention is focused on the proximate cause of the crisis and the failure is ascribed to human
error, operational error, mismanagement, miscommunication or other cause (Fitzsimmons &
Atkins, 2017). In a second look, however, the underlying causes behind the reputational crisis
appears to emerge from strategic, organisational and cultural rather than operational level of
the organization. In the case of Volkswagen Dieselgate affair, after which it took company more
than two years and billions of dollars to recover from the reputational shock, the governance
structure and corporate culture which obstruct information from flowing freely within the
organization were found out to be the underlying causes of the disaster (Ibidem). Open
corporate culture and smart governance structure are indeed important elements that help
prevent company from making fatal mistakes. There is, however, another element that helps
mitigate the reputational damage not only before, but also after the crisis breaks out – values
and ethics. Corporate culture built on ethical foundations ensures that employees of the
company always act in goodwill which makes the reputational crisis less likely (Giles, 2015),
the response more fair and therefore ensures that company will maintain its moral integrity and
will suffer less reputational harm. As Andersen (2017) found out in his study of Maersk’s
corporate responsible behaviour, leadership driven by moral values and corporate culture that
encourage employees to ‘do the right thing’ created a reputation of a conscious industry player
and associated goodwill helped to minimize the reputational risk related to the charges of
infringement to the European competition laws.

As we argued in the first chapter, reputational risk is rather a matter of trust, of how stakeholders
perceive and evaluate the conduct of a company according to their individual standards, and it
does not necessarily reflect the real situation in objective sense. Due to this, the ability of
management to predict a clear link between actions and consequences is highly limited. In a
sense, every other risk may have consequences for the reputation and therefore it is interrelated
with reputational risk. The challenge to manage reputational risks is even more complicated for
companies operating in highly uncertain and rapidly changing environment. Strategic risk
management perspective suggests that effective risk management and strategic management
processes should combine central handling of risks with decentralized responses in order to
tackle the abovementioned challenges of risk interrelatedness and uncertainty (Andersen &
Schrøder, 2010).

Based on these theoretical foundations, we can identify several elements important for effective
strategic reputational risk management – effective governance structure accompanied by
compliance mechanisms and right incentives for employees, corporate culture which allows for
free exchange of information within the organization both on vertical and horizontal scale and
which promotes ethical conduct on all occasions, leadership driven by moral values and
integrity, and central-decentralized approach. In the following case study, we will examine how
these elements are incorporated in a specific business company and what are their implications
for effective reputational risk management practice.
Methodology
The paper seeks to explore reputational risk management practices of Tesla Inc. and examine
key components that limits the exposure of the company to reputational harm. Qualitative
methods of a single-case study are used to explore new and original case which have not been
studied before from this perspective and to provide an understanding of a complex
contemporary phenomenon within its context (Yin, 2009). In the next part, we will explore
different elements that, according to theory presented in the previous part, are essential for
companies’ ability to manage reputational risks, namely corporate culture, governance and risk
management structure, strategy and leadership. By analysing the conduct of Tesla during
multiple crises company went through, we will identify the most important elements of Tesla’s
success and draw implications for the theory of reputational risk management. Regarding the
sources of data, we will work with the official corporate sources available at Tesla’s website
and blog, news reports, academic sources analysing Tesla’s performance, and qualitative social
media data from official profiles of Tesla and its executives.

In this paper, we are working with the assumption that Tesla is remarkably successful in
managing its reputational risks and the aim of the paper is to identify the main sources of this
success. The general argument to support this assumption is that Tesla has been during 14 years
in business able to avoid major reputational crises that would cause serious harm in terms of
sales figures, financial performance, consumer trust, and share price. As we will present in the
next part, Tesla have gone through multiple crisis that carried with them enormous reputational
risks, but none of these risks had materialized into causing significant damage to the reputation
of the company.

2. Company analysis
Corporate background
Tesla Motors company was founded by two engineers Martin Eberhard and Marc Tarpenning
in 2003 in Menlo Park, California, in the famous cradle of tech companies - Silicon Valley
(Vance, 2015). The idea of the company was to build a high-performance sports car with
electric propulsion based on the body of Lotus Elise (Ibidem). In 2004, Tesla was joined by the
entrepreneur and visionary Elon Musk who became the largest investor in the company and
eventually replaced Eberhard on the position of CEO in 2007 (Ibidem). A year before, Musk
revealed in online blog article his vision of Tesla’s future, famously known as Master Plan. In
this document, he made clear that building expensive sports car, Tesla Roadster, is only the first
step on a journey to transform the entire automotive industry from hydro-carbon to a new green
electric era. The strategy he presented was to enter at the high-end of the market, where
customers are willing to pay a premium, use the profit to build an affordable family car and use
that money to build an even more affordable, mass produced car (Musk, 2006). While doing
that, he also pledged to provide zero emission electric power generation options (Ibidem).

After launching the first model Tesla Roadster in 2008, company introduced larger five-door
liftback Model S in 2012, followed by luxurious SUV Model X in 2015 and finally, an
affordable Model 3 – the last step in Musk’s Master Plan. Apart from the cars, Tesla have
developed unique battery storage and charging technology transformed into products of
Powerwall and Supercharger 2. Ten years after the original Master Plan, Musk presented part
two of the plan which aims to integrate energy generation and storage in cooperation with the
SolarCity company3, expand electric vehicle product line, develop an extremely safe self-
driving capability, and introduce car sharing service (Musk, 2016).
Corporate structure and risk management
The organizational structure of Tesla Inc. is not particularly different from structure of other
similar companies. Tesla has a U-form structure that uses organizational function as the main
defining factor (Meyer, 2018). On the top of the hierarchy is the Chairman and Chief Executive
Officer, Elon Musk. The hierarchy further consists of functional units divided into Finance,
Technology, Global Sales and Service, Engineering, Legal, and geographical divisions
(Ibidem). The structure of Tesla is highly centralized which means that regional units have
minimal autonomy and most of the decisions are taken on the level of headquarters (Ibidem).

2 In 2012, Tesla introduced the network of free and fast charging networks called Supercharger. In
2015, Tesla introduced Powerwall – home battery intended to be used for storage of solar energy
(Tesla, 2017).
3 SolarCity, a producer of solar panels, was acquired by Tesla in Q4 2016 (Tesla, 2016)
The Global Risk Management department is organized under the Finance unit and since
November 2016 it is led by Brad Young. According to available information, Global Risk
Management team is primary responsible for managing financial risks to the company and
deals, for instance, with insurance of assets (LinkedIn, 2018). Physical and cyber risks are
managed by the Global Security unit led by Jeff Jones. The responsibilities of the unit ranges
from physical protection of Tesla’s facilities worldwide to protecting company from cyber
attacks such as the one in 2015, which for several hours hijacked the company’s website and
Twitter account (Lambert, 2015).

The corporate structure shows that risk management competences in Tesla are decentralized
and distributed among the functional and geographical units. There is no specialized role of
Chief Risk Officer who would be responsible for integrating different elements of risk.
Although there is no mention of a specific enterprise risk management (ERM) framework in
place, based on available information, Tesla is most likely to conduct annual enterprise risk
assessment according to COSO framework4. General oversight over the corporate governance
and risk management is conducted by the Board and its committees, namely Corporate
Governance Committee and Audit Committee. The latter has a responsibility to assist the Board
in oversight of the company’s risk management, including data privacy and security (Tesla,
2017). The competences of the Audit Committee in regard to risk management are defined as
follows, with no explicit mention of reputational risk management:
• “Discussing guidelines and policies with respect to risk assessment and risk
management with the Company's management and overseeing financial risk exposures,
including monitoring the Company's financial condition and investments, the integrity
of the Company's financial statements, accounting matters, internal controls over
financial reporting, the independence of the Company's independent auditor, and
guidelines and policies with respect to risk assessment and risk management;
• Overseeing the Company's annual enterprise business risk assessment, which is
conducted by the internal audit function and which includes review of the primary risks
facing the Company and the Company's associated risk mitigation measures. …

4
Annual enterprise risk assessment is mentioned in the Audit Committee charter and the assumption
that Tesla uses COSO framework is based on the information that PricewaterhouseCoopers, the author
of the framework, also provides external auditing services for Tesla.
 • Reviewing insurance coverage.” (Tesla, 2017: 3)

The Audit Committee is further responsible for reviewing and discussing with management the
policies and practices with respect to data privacy, security risk exposures, and legal compliance
(Tesla, 2017). Although these aspects of risk management are briefly mentioned, the focus is
very much on financial risk management and there is no evidence of reputational risks being
considered either by the Audit Committee, or annual enterprise business risk assessment.

If we compare the organisational structure and risk management structures with other large car
manufacturers, we can find both similar and completely different approaches across the market.
The world largest car manufacturer Toyota has appointed Chief Risk Officer on the executive
level who presides over Corporate Governance Meetings (Toyota, 2018). At Honda Motor Co.
Ltd. the roles of Vice President, Chief Operating Officer, Risk Management Officer, Corporate
Brand Officer and Representative Director are assigned to a single person (Reuters, 2018),
which signals integration of operational and reputational risk management. Another approach
is taken by Fiat Chrysler Automobiles, which implemented COSO ERM framework on the
level of individual business units with Group CFO responsible for coordination (FCA Group,
2014).
Seemingly rigid and centralized organizational structure of Tesla, with little attention to
strategic management of risks, does not provide the best foundation for effective reputational
risk management. Based on the fact, that company provide very little information about
corporate governance and risk management mechanisms, we can conclude this chapter with a
finding that reputational risk management is not an issue of paramount importance for Tesla.
However, the downsides of the organizational structure are mitigated by company’s specific
culture which enables close cooperation between units and teams, as will be shown in the next
chapter.
Corporate culture
The corporate culture is the main distinctive element which moves the company far away from
other competitors in car manufacturing. Tesla’s corporate culture derives from the personality
of its CEO Elon Musk, as well as from the roots of the company. Founded as a technological
start-up in Silicon Valley, the main cultural principle, shared with other start-up companies, has
always been ‘move fast and break things’. However, few companies have been able to stick to
the agile principles of start-up culture as they were growing. Tesla with its roughly 33 thousand
employees worldwide has successfully maintained their corporate culture since the day one.
Therefore, the most frequently cited features of the Tesla’s culture are enormous speed, high
pressure on employees who are expected to work long hours to deliver on ambitious goals and
stretch goals (Quora, 2018; Indeed, 2018; Meyer, 2018). Such work culture provides an extreme
potential for innovation and exploitation of upside opportunities, but it is also extremely prone
to mistakes that can create various risk, including reputational risks.
However, these risks are facilitated by the powerful effect of a unique mission of Tesla: “To
accelerate the world’s transition to sustainable energy.” (Tesla, 2018). This mission does
trickle down the employee hierarchy and rigid organizational structure and brings the focus on
the work. It creates a positive atmosphere and it is one of the main sources of the enormous
motivation and pride of the employees. Employees are encouraged to think as the CEO and to
see beyond their specific work task. This culture encourages each employee to become a part
of the Tesla brand and to enhance company’s reputation.

Another important element of the Tesla’s corporate culture is the practical ignorance of formal
hierarchy in reporting and collaboration. The culture encourages every employee to reach out
to anyone in the company, regardless of the formal structure, in order to discuss any issue, if it
is helpful for bringing an effective solution to a problem. This allows bringing together different
perspectives and identifying and managing complex risks. The Tesla’s UK and Ireland director
Georg Ell described the logic behind building such culture: “The best perk you can give smart
people is the chance to work with other smart people,” (Nicholson, 2014). Related to this, we
can say that another principle applied in Tesla’s culture is ‘idea over seniority’: it doesn’t matter
whether someone is a director or junior engineer, everyone can come forward with their ideas
and solutions and the best one wins.

Finally, Tesla’s culture promotes reasoning from first principles (Meyer, 2018) therefore
identifying the root factors to understand and solve problems. This reasoning, promoted by the
CEO Elon Musk, has contributed to solving multiple critical problems in Tesla and other
Musk’s companies. The most famous case is the series of blog article explaining the failure of
the first SpaceX’s Falcon 1 test flights, where Musk’s explanation goes into incredible depth to
ensure that the issue will never occur again (Vance, 2015). This aspect of Tesla’s culture has
proven effective in managing reputational risks, as will be illustrated in chapter 4.5.
Tesla’s culture constitutes one of the basic cornerstones in strategic management of reputational
risks. In a culture where everyone is driven by a common mission and long term objective,
strategic perspective is brought to the forefront and guides the decisions of each employee. If
the mission of a company means nothing less than changing the world to advance the humanity
and each employee is strongly determined to contribute, employees have a strong incentive to
act with good intentions. Strong loyalty and determination of employees creates feeling of
individual responsibility for the reputation of Tesla brand and therefore strengthens the
resilience of the brand. In this culture, everyone has strong incentives to manage reputational
risks. The power of culture is further reinforced by the leadership based on moral values.
Values, Ethics, and leadership
Many companies have put a lot of effort into crafting vision and mission statements that pledge
to improve the world but only a handful of them is genuinely driven by these noble objectives.
If a vision is not aligned with strategy and leadership, it can create a source of reputational risks
for a company. The reasons for this derives from the definition of the reputation risk as a “...risk
of failure to fulfil the expectations of your stakeholders in terms of performance and
behaviour.”. Simply put, if a company continuously fails to meet the expectations set by its
vision and mission, it will necessarily fail to fulfil the expectations of stakeholders. Leadership
driven by ethical and moral values is therefore of a paramount importance for an effective
management of reputational risks.

The leadership of Elon Musk is one of the most important elements in managing Tesla’s risks.
Musk follows the idea that the leader must lead by example and he also applies this principle
by being deeply engaged in company’s risk management. In every crisis situation, he is the
‘fireman’ who steps in and shows personal effort to solve the problem, no matter the cause. He
often uses carefully crafted memos to manage the risks within the company and blog and social
media channels to manage the reputational risk and protect the Tesla brand from the outside by
showing the goodwill and intention to solve the problem. Musk recognizes the employees as
an important stakeholders and reflects it in the internal communication. After the reports of
Tesla underperforming in terms of safety of employees, Musk sent an email to employees which
included following message:
“… Going forward, I've asked that every injury be reported directly to me, without exception.
I'm meeting with the safety team every week and would like to meet every injured person as
soon as they are well, so that I can understand from them exactly what we need to do to make
it better. I will then go down to the production line and perform the same task that they perform.
This is what all managers at Tesla should do as a matter of course. At Tesla, we lead from the
front line, not from some safe and comfortable ivory tower.” (Inc., 2017)

The personal involvement and dedication of Musk does not end with writing memos and
working hard overtime. Since the very beginning of the Tesla story, he has never been afraid to
put the money where his mouth is. In the early years of Tesla, he has invested $70 million of
his own money into the company (Vance, 2015) and according to the deal he signed in 2018,
he will continue to receive no salary over the next decade, with a possibility to cash out a $55
billion bonus if the company reaches its highly ambitious market capitalization milestones
(Wired, 2018). Such personal dedication of a leader reaffirms the confidence of stakeholders
and strengthen the reputation of the company.

Finally, Musk employs in his leadership the values of openness, honesty and equality that aim
to facilitate information flow and promote the company’s culture we analysed in the previous
part. In yet another email to employees, he states: “… You can talk to your manager's manager
without his permission, you can talk directly to a VP in another department, you can talk to me,
you can talk to anyone without anyone else's permission. … managers should work hard to
ensure that they are not creating silos within the company that create an us vs. them mentality
or impede communication in any way. … We are all in the same boat.” (Inc., 2017)

If we mentioned in the theoretical part of this paper that value-led leadership should encourage
the employees to ‘do the right thing’ on every occasion, Elon Musk takes this approach quite
literally: on May 31, 2017, he addressed the employees by an email with subject line “Doing
the right thing” in which he elaborates on ethical principles that shall guide the work of every
Tesla employee (Musk, 2017). The final line of the email summarizes the ethical guidelines
into one simple rule: “What it comes down to is this: do what would make your parents proud.
If you can’t look someone you respect in the eye and explain what you did, don’t do it.” (Musk,
2017)
In order to evaluate how the Tesla’s structure, culture and leadership elements described in
previous parts enable the company to manage reputational risks, we need to examine how they
performed in real crisis situations.

3. Managing reputational risk in crisis

Since Elon Musk become the CEO of Tesla in 2017, the company have struggled with multiple
crises that brought its reputation in question. Especially in the early stages of production the
company had to successfully manage its reputational risks in order to gain trust of the customers
for an innovative product which had been previously used only by a small group of early
adopters and tech geeks – the fully electric vehicle.

The most serious reputational crisis struck the company in 2013, after the series of battery fires
that occurred in Tesla Model S vehicles. On October 2, 2013, tech news portal Jalopnik brought
up a highly sensational story with a title “This Is What Fiery Tesla Model S Death Looks Like”
reporting on Tesla vehicle that caught fire on a highway outside Seattle, followed by other
newspapers reporting on the incident (George, 2013). The Tesla’s stock plummeted later
afternoon but that might have been also a reaction to the release of a Bard report which
downgraded the stock rating due to unsatisfactory financial results (Shea, 2013). As the story
about Tesla fire was developing, the stock price continued to decrease despite the immediate
official press release in which Tesla explained that the fire was a result of a rare accident. On
October 4, Elon Musk publishes a blog article on Tesla’s website (Appendix 1) where he
provides a full explanation of the event, reaffirms the public about the fire safety of Tesla cars
in comparison to gasoline vehicles and adds the copy of an email by owner of the burned car
who expressed an unshaken confidence in the brand (Musk, 2013a). After the release of the
article, the stock price made an upside correction but later continued in its drop after another
report of a Model S fire on October 18 (Herron, 2014).
On November 6, 2013, media reported on the third Tesla fire in less than 5 weeks, which was
a result of a high-speed collision with a tow hitch that was in the middle of a lane, and damaged
the car’s undercarriage where the batteries are stored (Herron, 2014). The panic started to
spread over the social media, the stock price immediately plummeted and was more than 30%
down from the early October’s highs. At this point, the reputation crisis was in full swing and
the future of the brand was seriously threatened.
At this point, Elon Musk was already fully engaged in a crisis management and on November
18, he published another blog post. Although the previous article focused on thoroughly
explaining the causes of fire and conveying the message that ‘everything is ok’, further
development did not inspire confidence of the public and therefore Musk altered the
communication strategy in order to effectively mitigate the reputational risk. In the blog article
named The Mission of Tesla (Appendix 2), he emphasises the importance of Tesla’s mission
to accelerate the advent of sustainable transport and acknowledges that the new technology
must respond to the highest standards of scrutiny, but he also bashes the unfair, sensational
media coverage and endorses media who reported about the Tesla’s problems fairly (Musk,
2013b). Most importantly, Musk demonstrates good intention by introducing three
countermeasures: software update to raise ground clearance in high speeds to prevent collisions
like ones that caused the fires, full investigation of the incidents by the National Highway
Traffic Safety Administration (NHTSA), and full coverage of damage due to fire. The Mission
of Tesla blog marks the turning point in this crisis which is followed by rapid recovery of the
stock price, and less than three months later, the Tesla stock hits new historical high. The
development of stock price throughout the crisis is illustrated in Appendix 3.
Aftermath
In March 2014, NHTSA finished their investigation, concluding that no safety defect has been
identified and no recall of vehicles is required (LA Times, 2014). Despite the conclusion of the
official investigation, Tesla decided to implement changes into the construction of the Model S
vehicle that will prevent future fires resulting from a collision with road debris. The company
also announced that all the 16.000 Tesla vehicles in operation can be upgraded with high-
strength undercarriage shields to reduce the risk of future incidents (LA Times, 2004).
Since the Tesla fire crisis in 2013, the company has experienced other incidents that put the
reputation of the company in question and triggered official investigations by authorities. On
June 30, 2016, Elon Musk announced the first deadly incident involving a Tesla Model S
vehicle using Autopilot feature (Musk, 2016) and the NHTSA announced a preliminary
investigation into the accident. This event, which presented a serious reputational risk, was
actively managed by the company and the CEO from the beginning what prevented a negative
media coverage and limited the exposure of the company. As a result, this event had no impact
whatsoever on the stock price or stakeholder confidence.
So far the last reputational emergency occurred in October 2017 when a former employee filed
a lawsuit against the company for alleged racial discrimination. As in the previous cases, Elon
Musk himself addressed the allegations in a blog article following the same pattern as on
previous occasions: carefully explain the situation, correct the misinformation, demonstrate the
ethical position and good intention of the company. Although the stock price plummeted in the
period after the accusations, it was most likely a result of Tesla’s poor financial performance in
the previous quarter and the decrease was projected by market analysts weeks before the
discrimination allegations surfaced (Collins, 2017).

4. Discussion and conclusion

The analysis of cases of reputational crisis in the previous chapter showed an extraordinary
resilience of Tesla to reputational risks. Despite a serious drop in stock price following the 2013
fire incidents, the effective response and mitigation of reputational risk managed to stop the
downfall and revive the confidence of shareholders. None of the crises was able to shake the
confidence of car owners and potential customers or negatively impact the sale figures.
Drawing on the analysis of Tesla’s organizational structure, risk management capabilities,
culture, leadership, and cases of successful management of reputational risk, we can identify
the main factors behind the company’s extraordinary performance in crisis situations.
Leadership
The most important element of Tesla’s management of reputational risks is the leadership of its
CEO Elon Musk, driven by the values of fairness, honesty and personal engagement. The very
fact that Musk himself, rather than specialized PR team, takes care of the crisis communication
supports the confidence of stakeholders. However, the nature of the communication is the real
decisive factor. By providing full and honest explanation of the problem, emphasising Tesla’s
mission and values, and showing good intention to solve the issue in question despite the extra
costs, Musk manage to maintain the trust of stakeholders and uphold the reputation of Tesla. It
is important to note that the solutions proposed by Musk in response to a reputational crisis go
far beyond necessary compliance with legislation what, again, provides the proof that Tesla
stands by its word and is genuinely committed to its proclaimed values.
The mission and the product
The mission of Tesla is another element which distinguishes the company from its traditional
competitors. Daimler has no mission, only strategy of profitable growth. The vision of BMW
states “We are Number ONE.” (BMW Group, 2018), which is neither a vision, nor truth.
Volkswagen’s vision of a “leading provider of sustainable mobility” (Volkswagen AG, 2018)
cannot be taken seriously anymore after its disregard for both the customers and the
environment has been revealed by the Diesel-gate scandal. Only Elon Musk knows whether the
Tesla is genuinely driven by its mission to accelerate the world’s transition to sustainable
energy. What we know is that the stakeholders believe in it and company can use it as a reliable
anchor in any reputational storm, as Elon Musk did in his response to the 2013 Model S fires.
The mission is big part of what make the stakeholders excited about the company. The
employees are becoming the brand ambassadors because they feel being part of something
bigger than just a car company. People who drive Tesla feel as they are contributing to better
future of mankind. As long as the company’s good intention to fulfil its mission is not
compromised, Tesla will be able to use it in managing reputational risks.
One of the major sources of Tesla’s resilience to reputational risk is the special nature of the
products they make. Creating a revolutionary product is a double-edged sword. On the one
hand, new technology must struggle to build trust of the public and it is subject to much severe
public and media scrutiny compared to technologies that are widely adopted. On the other hand,
customers are much more likely to overlook small missteps knowing that the product they use
is unlike any other and by using it, they become part of a technological revolution. Unparalleled
acceleration and handling of Tesla vehicles along with technical specialities such as self-driving
capability create a second-to-none user experience, making the owners love their cars and
causing the determination to buy Tesla vehicle again in the future despite the problems they
encounter and read about. Good reputation among customers translates into growing sale
figures which in turn inspire confidence of other stakeholders, most importantly shareholders,
who buy into the future of the company regardless zero profitability in the present.
Concerning Tesla’s high pace of innovation and expansion, we can expect that mistakes will be
made in the future and the reputation of the company will be questioned over and over again.
As this analysis has shown, the combination of Tesla’s mission, product, culture and value-led
leadership makes company well equipped to effectively manage reputational risks and
withstand its ground in crisis.
Appendices
Appendix 1: The 1st blog article
Model S Fire
Elon Musk, Chairman, Product Architect & CEO October 4, 2013
Earlier this week, a Model S traveling at highway speed struck a large metal object, causing
significant damage to the vehicle. A curved section that fell off a semi-trailer was recovered
from the roadway near where the accident occurred and, according to the road crew that was
on the scene, appears to be the culprit. The geometry of the object caused a powerful lever
action as it went under the car, punching upward and impaling the Model S with a peak force
on the order of 25 tons. Only a force of this magnitude would be strong enough to punch a 3
inch diameter hole through the quarter inch armor plate protecting the base of the vehicle.

The Model S owner was nonetheless able to exit the highway as instructed by the onboard alert
system, bring the car to a stop and depart the vehicle without injury. A fire caused by the impact
began in the front battery module – the battery pack has a total of 16 modules – but was
contained to the front section of the car by internal firewalls within the pack. Vents built into
the battery pack directed the flames down towards the road and away from the vehicle.

When the fire department arrived, they observed standard procedure, which was to gain access
to the source of the fire by puncturing holes in the top of the battery's protective metal plate and
applying water. For the Model S lithium-ion battery, it was correct to apply water (vs. dry
chemical extinguisher), but not to puncture the metal firewall, as the newly created holes
allowed the flames to then vent upwards into the front trunk section of the Model S.
Nonetheless, a combination of water followed by dry chemical extinguisher quickly brought
the fire to an end.

It is important to note that the fire in the battery was contained to a small section near the front
by the internal firewalls built into the pack structure. At no point did fire enter the passenger
compartment.

Had a conventional gasoline car encountered the same object on the highway, the result could
have been far worse. A typical gasoline car only has a thin metal sheet protecting the underbody,
leaving it vulnerable to destruction of the fuel supply lines or fuel tank, which causes a pool of
gasoline to form and often burn the entire car to the ground. In contrast, the combustion energy
of our battery pack is only about 10% of the energy contained in a gasoline tank and is divided
into 16 modules with firewalls in between. As a consequence, the effective combustion
potential is only about 1% that of the fuel in a comparable gasoline sedan.

The nationwide driving statistics make this very clear: there are 150,000 car fires per year
according to the National Fire Protection Association, and Americans drive about 3 trillion
miles per year according to the Department of Transportation. That equates to 1 vehicle fire for
every 20 million miles driven, compared to 1 fire in over 100 million miles for Tesla. This
means you are 5 times more likely to experience a fire in a conventional gasoline car than a
Tesla!

For consumers concerned about fire risk, there should be absolutely zero doubt that it is safer
to power a car with a battery than a large tank of highly flammable liquid.

— Elon

Below is our email correspondence with the Model S owner that experienced the fire, reprinted
with his permission:

From: robert Carlson

Sent: Thursday, October 03, 2013 12:53 PM
To: Jerome Guillen
Subject: carlson 0389

Mr. Guillen,

Thanks for the support. I completely agree with the assessment to date. I guess you can test for
everything, but some other celestial bullet comes along and challenges your design. I agree that
the car performed very well under such an extreme test. The batteries went through a controlled
burn which the internet images really exaggerates. Anyway, I am still a big fan of your car and
look forward to getting back into one. Justin offered a white loaner--thanks. I am also an
investor and have to say that the response I am observing is really supportive of the future for
electric vehicles. I was thinking this was bound to happen, just not to me. But now it is out there
and probably gets a sigh of relief as a test and risk issue-this "doomsday" event has now been
tested, and the design and engineering works.

rob carlson

On Oct 3, 2013, at 12:29 PM, Jerome Guillen wrote:

Dear Mr. Carlson:

I am the VP of sales and service for Tesla, reporting directly to Elon Musk, Tesla's CEO.

I am sorry to hear that you experienced a collision in your Model S 2 days ago. We are happy
that the Model S performed in such a way that you were not injured in the accident and that
nobody else was hurt.

I believe you have been in contact with Justin Samson, our service manager, since the accident.
We are following this case extremely closely and we have sent a team of experts to review your
vehicle. All indications are that your Model S drove over large, oddly-shaped metal object
which impacted the leading edge of the vehicle's undercarriage and rotated into the underside
of the vehicle ("pole vault" effect). This is a highly uncommon occurrence.

Based on our review thus far, we believe that the Model S performed as designed by limiting
the resulting fire to the affected zones only. Given the significant intensity of the impact, which
managed to pierce the 1/4 inch bottom plate (something that is extremely hard to do), the Model
S energy containment functions operated correctly. In particular, the top cover of the battery
provided a strong barrier and there was no apparent propagation of the fire into the cabin. This
ensured cabin integrity and occupant safety, which remains our most important goal.
We very much appreciate your support, patience and understanding while we proceed with the
investigation. Justin keeps me closely informed. Please feel free to contact me directly, if you
have any question or concern.

Best regards,
Jerome Guillen I VP, WW sales and service
Appendix 2: The 2nd blog article
The Mission of Tesla
Elon Musk, Chairman, Product Architect & CEO November 18, 2013
Our goal when we created Tesla a decade ago was the same as it is today: to accelerate the
advent of sustainable transport by bringing compelling mass market electric cars to market as
soon as possible. If we could have done that with our first product, we would have, but that was
simply impossible to achieve for a startup company that had never built a car and that had one
technology iteration and no economies of scale. Our first product was going to be expensive no
matter what it looked like, so we decided to build a sports car, as that seemed like it had the
best chance of being competitive with its gasoline alternatives.

I suspected that this could be misinterpreted as Tesla believing that there was a shortage of
sports cars for rich people, so I described the three step “master plan” for getting to compelling
and affordable electric vehicles in my first blog piece about our company. This was
unfortunately almost entirely ignored.

In order to get to that end goal, big leaps in technology are required, which naturally invites a
high level of scrutiny. That is fair, as new technology should be held to a higher standard than
what has come before. However, there should also be some reasonable limit to how high such
a standard should be, and we believe that this has been vastly exceeded in recent media
coverage.

How Does the Tesla Model S Fire Risk Compare to Gasoline Cars?
Since the Model S went into production last year, there have been more than a quarter million
gasoline car fires in the United States alone, resulting in over 400 deaths and approximately
1,200 serious injuries (extrapolating 2012 NFPA data). However, the three Model S fires, which
only occurred after very high-speed collisions and caused no serious injuries or deaths, received
more national headlines than all 250,000+ gasoline fires combined. The media coverage of
Model S fires vs. gasoline car fires is disproportionate by several orders of magnitude, despite
the latter actually being far more deadly.
Reading the headlines, it is therefore easy to assume that the Tesla Model S and perhaps electric
cars in general have a greater propensity to catch fire than gasoline cars when nothing could be
further from the truth.

Journalists with a deep knowledge of the car industry, such as the news editor of Automotive
News, understand and attempt to rebut this notion, but they have been drowned out by an
onslaught of popular and financial media seeking to make a sensation out of something that a
simple Google search would reveal to be false. I would also like to express appreciation for the
investigative journalists who took the time to research and write an accurate article.

The degree to which this is outrageous is described well in the above-mentioned Automotive
News article. There are now substantially more than the 19,000 Model S vehicles on the road
that were reported in our Q3 shareholder letter for an average of one fire per at least 6,333 cars,
compared to the rate for gasoline vehicles of one fire per 1,350 cars. By this metric, you are
more than four and a half times more likely to experience a fire in a gasoline car than a Model
S! Considering the odds in the absolute, you are more likely to be struck by lightning in your
lifetime than experience even a non-injurious fire in a Tesla.

Those metrics tell only part of the story. The far more deadly nature of a gasoline car fire
deserves to be re-emphasized. Since the Model S went into production mid last year, there have
been over 400 deaths and 1,200 serious injuries in the United States alone due to gasoline car
fires, compared to zero deaths and zero injuries due to Tesla fires anywhere in the world.

There is a real, physical reason for this: a gasoline tank has 10 times more combustion energy
than our battery pack. Moreover, the Model S battery pack also has internal firewalls between
the 16 modules and a firewall between the battery pack and passenger compartment. This
effectively limits the fire energy to a few percent that of a gasoline car and is the reason why
Dr. Shibayama was able to retrieve his pens and papers from the glove compartment completely
untouched after the recent fire (caused by a high speed impact with a tow hitch). It is also why
arsonists tend to favor gasoline. Trying to set the side of a building on fire with a battery pack
is far less effective.
What About Safety Overall?
Our primary concern is not for the safety of the vehicle, which can easily be replaced, but for
the safety of our customers and the families they entrust to our cars. Based on the Model S track
record so far, you have a zero percent chance of being hurt in an accident resulting in a battery
fire, but what about other types of accidents? Despite multiple high-speed accidents, there have
been no deaths or serious injuries in a Model S of any kind ever. Of course, at some point, the
law of large numbers dictates that this, too, will change, but the record is long enough already
for us to be extremely proud of this achievement. This is why the Model S achieved the lowest
probability of injury of any car ever tested by the US government. The probability of injury is
the most accurate statistical figure of merit, showing clearly that the Model S is safer in an
accident than any other vehicle without exception. It is literally impossible for another car to
have a better safety track record, as it would have to possess mystical powers of healing.

Further Actions
While we believe the evidence is clear that there is no safer car on the road than the Model S,
we are taking three specific actions.

First, we have rolled out an over-the-air update to the air suspension that will result in greater
ground clearance at highway speeds. To be clear, this is about reducing the chances of
underbody impact damage, not improving safety. The theoretical probability of a fire injury is
already vanishingly small and the actual number to date is zero. Another software update
expected in January will give the driver direct control of the air suspension ride height
transitions.

Second, we have requested that the National Highway Traffic Safety Administration conduct a
full investigation as soon as possible into the fire incidents. While we think it is highly unlikely,
if something is discovered that would result in a material improvement in occupant fire safety,
we will immediately apply that change to new cars and offer it as a free retrofit to all existing
cars. Given that the incidence of fires in the Model S is far lower than combustion cars and that
there have been no resulting injuries, this did not at first seem like a good use of NHTSA’s time
compared to the hundreds of gasoline fire deaths per year that warrant their attention. However,
there is a larger issue at stake: if a false perception about the safety of electric cars is allowed
to linger, it will delay the advent of sustainable transport and increase the risk of global climate
change, with potentially disastrous consequences worldwide. That cannot be allowed to happen.

Third, to reinforce how strongly we feel about the low risk of fire in our cars, we will be
amending our warranty policy to cover damage due to a fire, even if due to driver error. Unless
a Model S owner actively tries to destroy the car, they are covered. Our goal here is to eliminate
any concern about the cost of such an event and ensure that over time the Model S has the
lowest insurance cost of any car at our price point. Either our belief in the safety of our car is
correct and this is a minor cost or we are wrong, in which case the right thing is for Tesla to
bear the cost rather than the car buyer.

All of these actions are taken in order to make clear the confidence we have in our product and
to eliminate any misperceptions regarding the integrity of our technology and the safety of our
cars.
Appendix 3: Stock price development

Source: Yahoo Finance

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