You quit Paris, so I quit you. It may sound like a part of the conversation pertaining

Question:

“You quit Paris, so I quit you.” It may sound like a part of the conversation pertaining to travel or airline industries that debate about the stop of service to Paris, France. However, this is the title of a CNN news article reporting that Elon Musk, CEO of Tesla, quit two presidential councils— the Strategy and Policy Forum and the Manufacturing Jobs Initiative—after President Donald Trump officially announced that the United States would withdraw from the Paris Agreement on June 1, 2017. What is the Paris Agreement? What made the CEO of an innovative company become the first council member who gave up the honorary position with a tremendous opportunity to network with the brand-new president who had been only in the White House for slightly more than five months?

The Paris Agreement is an international convention on climate change, specifically aiming at the reduction of greenhouse gas (GHG). The Obama administration decided to join this agreement in December 2015. The Paris Agreement was the first international convention or protocol that the United States officially signed up since the climate change issue emerged in international societies in the 1990s.

The US government had been lukewarm with the climate change issue. It might be because the United States was one of the largest GHG-emitting countries in the world. If the US government supports the global movement toward the reduction of GHG emission, the US domestic industries that heavily engage in fossil fuel usage would not be so happy with their government’s apparently ethical but industry-unfriendly decision making. This might be one reason why the US government warded off the global trend of GHG reduction pursued by other major countries such as the EU and Japan, which were the initial signatory countries of the Kyoto Protocol in 1997, the predecessor of the Paris Agreement.

The Obama administration deviated from the conventional attitude of the US government and entered the Paris Agreement. However, Trump vowed to withdraw from the Paris Agreement even when he was a presidential candidate. One of the first actions Trump took right after his inauguration ceremony was the removal of climate change issues from the White House website, which was a clear barometer of how the new president would lead his country pertaining to climate change.

Although many US companies may support Trump’s attitude against the reduction of GHG emission, several business leaders attempted to persuade the new president to stay in the Paris Agreement. Musk was one of those business leaders who were appointed to Trump’s two advisory presidential councils, and he left the two councils upon Trump’s withdrawal from the Paris Agreement. The business leaders might raise their hands and ask Trump to think twice, but it might be “too much” to quit the councils and lose the opportunity to network with the current administration.

Why did Musk quit President Trump? Is it because Musk is an ethical business person? That might also be true. Yet, there might be another driver—the business characteristics of Tesla. Musk himself holds a diverse spectrum in his business lineup from spacecraft to tunnel, but he focuses on electric vehicles (EVs) under Tesla.

Different from conventional EVs, the Tesla models had strong horsepower to qualify as luxury sedans or sports cars. Customers welcomed this attractiveness offered by Tesla because they were less enthusiastic about the conventional EVs due to their smaller size and lower horsepower than gasoline vehicles. Then, how about Tesla’s firm performance?

Table 1 shows two streams of firm performance since Tesla went public in 2010. Its market capitalization shows increasing trend, whereas its net income remains in red consistently. In other words, investors see that Tesla will make money in the future, but the company is not making any money right now. If you were Musk, you may not be so comfortable with these results. Although you may promise the results to be fine in the near future, you cannot provide dividends to your shareholders at this moment.
Why was Musk so desperate with the Paris Agreement that he quit the two presidential councils in protest of Trump’s withdrawal and ran the risk of damaging his political connections in Washington? Without Trump’s withdrawal from the Paris Agreement, the US government may commence the stricter enforcement of the environmental protection regulations against GHG emission than before. Given that traditional gasoline vehicles are one of the principal sources of GHG emission, such stricter curb would provide Tesla with more opportunities to sell its EVs than before. EVs emit no GHG and therefore stricter enforcement of environmental protection against GHG emission may encourage the production and consumption of such environment-friendly vehicles. Trump’s withdrawal from the Paris Agreement means that Musk may lose the chance to enhance the sales of Tesla vehicles and improve its financial performance.
Musk’s reaction to Trump’s withdrawal from the Paris Agreement might gain public attention in that Musk is an ethical business person. Musk might be an ethical person and thus might have behaved in the same way even if he did not have EVs in his business portfolio. The notable thing here may be, however, the closer a firm’s business is in line with public good as Tesla’s environment-friendly products are, the easier it is for a firm to behave ethically in front of social issues.
Societal pressures are burgeoning when it comes to the ethical behavior of companies. To meet such requests, managers may want to consider philanthropic donations or green energy usages. However, if managers can align product offerings to customers with such societal needs as Tesla’s Musk does, such a business model may be able to achieve sustainability efficiently. In other words, firms’ activities to increase profits may enhance social values as well—as a proverb has it, you can kill two birds with one stone.
Case Discussion Questions

1. From a resource-based view, what would be the sources of Tesla’s competitive advantages?

2. If you were Musk, would you also quit the presidential councils in order to protest? Why?
Or why not?

3. From an institution-based view, President Trump’s withdrawal from the Paris Agreement may be regarded as the weaker enforcement of formal institutions against GHG. When these formal institutions against GHG become unclear or failing, how would Tesla leverage informal institutions against GHG?

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