Twitter and Elon Musk dominated headlines in April 2022. In a matter of weeks, Musk disclosed his 9.2% stake in Twitter,1 was offered a seat on the board and then turned it down. Next, Twitter adopted a poison pill to defend against a hostile takeover,2 concluding with Twitter agreeing to Musk’s USD 54.20 a share cash purchase, or USD 44 billion. However, the deal quickly fell apart when Musk tweeted the deal was “temporarily on hold3” the following month, citing issues with spam and bot accounts, and sought termination of the deal in July 2022.4 Twitter sued Musk to enforce the original merger agreement. The uncertainty surrounding the resolution of the deal and legal battle has negatively impacted the company’s share price. This article focuses on some of the ESG risks Twitter may face if the agreement goes through, based on Musk’s original intentions for the business, recognizing that these new developments carry their own additional risks.
The risks of “free speech absolutism”
A self-proclaimed “free speech absolutist”, Musk has criticized what he views as excessive moderation on online platforms, indicating his desire to ease Twitter’s content moderation policies and only remove content deemed illegal by governments. Twitter currently bans content that is not explicitly illegal, including election and medical misinformation, deepfakes and manipulated media, targeted attacks and hateful conduct, and non-consensual nudity.5 Loosening content moderation may lead to an increase of misinformation proliferation, bullying, violent speech, hate speech and other abusive content; the consequence of which could be a decrease in users and ultimately advertisers.
Additionally, advertisers are often wary of having their adverts appear alongside undesirable content or controversial posts, a risk that rises with loosened content moderation rules. Given nearly 90% of its revenues are generated by advertising, the loss of advertisers could have a material impact on the company.
Two new upcoming regulations, EU Digital Services Act (DSA) and UK Online Safety Bill (OBA), will require tech companies to moderate legal yet harmful content, implement robust content moderation systems and more aggressively police content on their platforms. Fines for non-compliance for the DSA and OBA can go up to 6% or 10% of global sales, respectively, with the OBA adding potential jail time for company executives for serious violations.6
Human Capital Risks
Would a takeover lead to higher attrition?
Like others in the internet software and services space, Twitter relies on its workforce’s expertise for continued innovation and growth. As such, its ability to attract, retain and develop that talent is crucial to its success. During a company-wide meeting following the takeover announcement, management was asked how they “planned to handle an anticipated mass exodus prompted by Elon Musk.” Management responded that staff attrition would be monitored daily but emphasized it was too early to determine the impact of the takeover on staff retention.7 While there are always employee retention risks following mergers and acquisitions, the company needs to be prepared if a large number of employees were to leave. As of the end of 2021, Twitter employed over 7,500 full-time employees.
A board of directors paid… nothing?
Musk tweeted, without explanation, that the Twitter “board salary will be $0 if my bid succeeds, so that’s ~$3M/year saved right there.8” The exposure to this risk would depend on how board members would be compensated, if not with salary. Corporate board of director positions are not volunteer roles, and not compensating these individuals appropriately could create attraction and retention risks, impacting overall strategy.
Musk plans to take Twitter private with the sale and bring it to IPO in as little as three years.9 During that period, investors could lose transparency into the company’s operations, financials, policies, and programs, removing a layer of oversight. Private companies are not required to produce publicly available annual reports, and disclosure is limited. Twitter published its very first sustainability report in April 2021. It is uncertain which reports it will continue to provide once it has gone private. Interestingly, Musk stated he “will endeavor to keep as many shareholders in privatized Twitter as allowed by law.10” which may provide some checks and balances, given he would have to consider the interest of the minority stakeholders.
The deal passed US Federal Trade Commission (FTC)’s antitrust review.11
Legal experts believe the deal could face US national security regulatory scrutiny by the Committee on Foreign Investment in the United States (CFIUS) given the funding includes foreign investors such as Saudi Arabia's Prince Alwaleed bin Talal and Binance, the world's biggest cryptocurrency exchange founded by Chinese native Changpeng Zhao. CFIUS typically views social media companies as critical infrastructure due to its handling of personal data. A CFIUS block could depend on the influence of these foreign investors on the company, where the risk would be small if they acquired relatively small stakes but would increase if they were provided more influence, such as a seat on the board.
These legal experts also pointed out an area of potential scrutiny, which relates to Musk’s “business dealings with foreign governments hostile to free speech or keen to overtake the United States technologically”.12 A prime example, Tesla produces half of its vehicles and generates a quarter of its revenue in China. Twitter has been blocked in China since 2009. There is the possibility the deal could be blocked if there were risks that Musk’s business ties could compromise Twitter.
Portfolio Screening as Due Diligence: How Investors Can Implement Responsible Business Conduct
This blog outlines how investors with access to screening options that follow the criteria of the OECD MNE Guidelines and the UNGPs can better assess investee companies’ risk of causing actual and potential adverse impacts. It shows what these research modules can look like and provides some examples outcomes on the effect of applying certain thresholds.