In this special one-year anniversary episode of the Boardroom Governance Podcast, I talk with Joe Grundfest, the William A. Franke Professor of Law and Business at Stanford Law School. As some of you may recall, Joe was the very first guest of this podcast so for this edition we skipped the traditional personal & professional background discussions and the rapid-fire questions at the end. Instead, we jumped straight into corporate governance hot topics such as the current capital markets environment, regulation of bitcoin & cryptocurrencies, the push for corporate board diversity, stakeholder capitalism, ESG, and the implications of the recent Exxon Mobil proxy fight for corporate directors. If you like this show, please consider subscribing, leaving a review or sharing this podcast on social media. You can find all the show notes on the website boardroom-governance.com and please feel free to subscribe to the Boardroom Governance Newsletter at evanepstein.substack.com
(0:00) Intro.
(1:42) Start of interview.
(3:11) Joe's take on the rise of IPOs and SPACs since 2020. "There is a level where it is all entirely rational."
(4:16) Staying private vs going public in this environment. "In today's world, companies have three alternatives: do another VC round, a SPAC or an IPO."
(6:43) On the fundraising environment: "This is historically unprecedented... due to fiscal and monetary stimulus throughout the U.S. and global economies." "But you have to combine that with the observation that we really do have some fundamental technological and economic changes going on."
(8:47) Are you bullish or bearish on the economy and markets? "I'm confused-ish"
(10:46) On Bitcoin, and the new Bitcoin Law from El Salvador (making it legal tender in that country): It has serious repercussions for US law (currency vs security, money transmission, tax implications, etc).
(12:56) On US public corporations adding Bitcoin to the corporate treasuries. On bitcoin mining ("dirty, dirty, dirty") and the distinctions between "proof of work" and "proof of stake" cryptos. On Elon's decision to not accept Bitcoin to purchase Teslas.
(16:12) On DeFi: "Once regulators figure out what's going on here, they are going to try to crush it." "You know, the SEC has no idea what to do with crypto. The SEC is asking for legislation, they're actually begging for legislation, because if you get legislation, then it's not their job. Unless (the SEC's nightmare) Congress gives the SEC all the authority it needs to regulate crypto and says to the SEC: here you go, do it."
(19:30) On DAOs: "They can lead to chaos. I mean, what is the governance structure? Each one of these has a very different governance structure. And one of the things that we know is that there's no perfect governance structure, right? If you want to over intellectualize this, go back to Ken Arrow's Impossibility Theorem where he demonstrated that there are lots of criteria we would like to see in a society and you can't simultaneously have them all. Well, you know, that's a super brainiac way of saying that governments are always going to fail to one degree or another. Putting the problem of social organization on the blockchain does not solve the problem of social organization. It simply replicates the problem on the blockchain, right? So why do people think that putting an insoluble problem on the blockchain solves the insoluble problem is an insoluble problem to me."
(21:13) On the different approach to blockchain by computer scientists and lawyers. The Stanford Center for Blockchain Research. "What can I say? The computer science people don't get sued 25 times... you know, in computer science, your equations are generally fairly well behaved. And if you write a system, you know how it's going to operate. We're lawyers, we deal with people. Not only deal with people, we deal with plaintiffs. It's a very different problem. I mean look, in engineering you're often dealing with fairly well behaved systems. If systems were well-behaved, you wouldn't need lawyers. So what can I say? I only go where there's chaos and mayhem."
(22:57) On SB-826 (gender) board diversity quota in CA: "the data suggests pretty strongly, almost conclusively, that SB-826 has worked. The number of women on corporate boards in California has increased significantly. The majority of corporations in CA are now in compliance with SB-826."
(24:23) On AB-979 (minorities) board diversity quota in CA: "figuring out the effect of the AB 979 is more difficult. It's very hard to separate that out from what I call the George Floyd effect."
(25:21) On the constitutionality of these laws: "there's a deeper mystery here. And something that I think is really more profound. If you look objectively at both pieces of legislation, and if you ask yourself, what's the probability that the U.S. Supreme court as currently composed (a 6-3 conservative majority) would find either one of these pieces of legislation is constitutional? The answer would be a resounding no." "The fascinating thing is typically when legislation is potentially unconstitutional, everybody's jumping up and down and they're suing to get it invalidated. Here, not only is that not happening, but the vast majority of corporations are complying with legislation."
(27:33) "These bills are what I would call The Miracle of Unconstitutional Legislation: "These are the most effective unconstitutional pieces of legislation that I've ever seen in American history. And I think the answer for why they've been so successful is that at least when it comes to legislating the composition of corporate boards, the majority of America is out of tune with Supreme court doctrine regarding the existence of quotas." "Diversity on corporate boards is being treated very differently to diversity in other areas of society and the parties most directly affected aren't complaining about it. It's a remarkable situation."
(31:08) On stakeholder capitalism and the BRT restatement of 2019: "This is nothing new. You always had to consider all of the constituencies, otherwise you're out of business."
(34:45) On Engine No. 1 proxy fight with Exxon Mobil: "This is huge. I think going forward, every proxy contest is going to be measured as either before Exxon or after Exxon. What it demonstrates is that in today's world, you don't need a large equity position. What you really need to understand is the story that is going to resonate with the large institutional investors. Engine No. 1 had a terrific story that resonated extraordinarily well. They had the perfect target because Exxon had built up a reputation over decades as being the most arrogant corporation in the United States. They'd basically refused to listen to institutional investors. You combine that with the big push towards ESG investing, and the fact that many institutions now feel they can't afford to be on the wrong side of ESG momentum. You know, it created a situation where if you were economically and politically smart, and these guys I think are, you would be able to leverage your position by a factor of 2,500 and grab three seats on the Exxon board of directors. They did something that people thought would have been impossible. And I think it's highly innovative and you're going to see many forums of what I would call corporate electoral innovation over the next year or two. And a lot of it will wind up pushing the ESG direction."
(38:04) "Look, my joke line about ESG is that given the current state of the art, it stands for Extremely Subjective Guessing"!
Joseph A. Grundfest is Stanford Law School Professor and an expert on capital markets, corporate governance, and securities litigation.