TRANSCRIPT
Matt Voiceover
Welcome back to Sound-Up Governance. My name is Matt Fullbrook. And this is the first episode I've ever done where there's no guest. Just me. I've had a busy month of governance stuff, and I'm learning a lot and my perspectives on trendy topics like ESG and AI are evolving fast. And I just kind of feel like expressing myself. So here you have it, a bit of a Matt fest. We'll get back to more normal programming soon, though, I promise. Here we go.
Matt
I feel like I should start this by saying that I don't usually talk to myself like this, it feels a little self indulgent. And I'm going to do it anyway. But there's a reason... there's a couple of different reasons. One, if I'm being completely candid with you guys, it's a weird part of the year to do a sort of production schedule for an interview based podcast. I've got some really cool stuff happening in the summer, but there was a bit of a lull and so you've got me instead of me plus some other people. But there's another reason which is that I keep on coming across stuff out in the governance world and the governance adjacent world that is making me feel stuff. And well, I guess that is kind of self indulgent, I wanted to tell you all how I'm feeling. And I'm curious the extent to which this is making you guys feel the same way. I'm going to start with the broad headline of ESG. I've mentioned before on Sound-Up Governance, I think way back at the beginning when I was talking with Lisa Oldridge that was like episode number three, I think. Where I thought at the beginning, when I first heard the term ESG however many millions of years ago, I thought it meant the governance of environmental and social stuff. So like the G of E and S. And that kind of made a lot of sense to me. And now though, I've got a increasingly clear sense that ESG is something a lot less useful than any of that. Even less useful than just a catch all for non financial stuff. I think it's a type of disclosure. So like a series of things that people on the outside, whether they be consultants or institutional investors or regulators, it's the collection of disclosures that they expect from organizations around the broad sense of whether it's non financial stuff generally, or environmental and social stuff specifically. So disclosure on the one hand. But on the other hand, something even, at least to me, slightly more annoying than that, which is some kind of investment philosophy. I was listening recently to the Freakonomics Radio Podcast, which I actually really, really like. And they had an episode about ESG. And they talked to a researcher, the name of which I'm not remembering at the moment. So I'm going to pause my recording and find her name and come back. Stand by. Okay, her name is Kelly Shue. She's a professor of finance at Yale. And this is episode 546 of Freakonomics Radio. It's called "Are ESG investors actually helping the environment?" So you should check it out. Just really briefly, but I'll tell you guys what I think I learned from that episode, and then react to it a little bit. So what I think I learned was that, first of all, the E part of ESG is what matters to most investors. And that wielding ESG as an attack against polluting firms is probably not smart. And that's what most institutional investors, for example are doing is they the if they embrace an ESG based investment philosophy, they're divesting from polluting firms, and re emphasizing their investment on green quote, unquote, firms. And so what Kelly Shue found in her research is that divestment from polluting firms, makes them potentially react by cutting their own investment into becoming more green or cutting pollution. And making matters more silly is when you invest into companies that are already not polluting, it doesn't change anything because they're already not polluting right.
Matt Voiceover
Just let me interject here to say that the reason why non polluting firms don't pollute is because they tend to be in businesses and industries where polluting isn't really a thing. So it's not like they've done some special thing to make the world better. It's just part of how they do business. It's like the difference between a financial services firm and an oil and gas firm.
Matt
So we're we're missing an opportunity to provide an incentive to polluting firms to stop polluting because we're starving them of capital or increasing the cost of capital. So they have to become, they do in fact react by by polluting more.
Matt Voiceover
Yes, I'm interrupting myself again and with a bit of a sloppy edit. But what's happening here really is short termism, right? It's not that the polluting firms couldn't, in theory, invest in to making themselves greener, it's that they don't, because the increased cost of capital and the pressures of short term financial performance make it more useful to them to pollute a little bit more, because it's cheaper and easier.
Matt
The other piece that I think was in this episode, and that really brought me back to my very beginning of my idea around ESG, is that it turns out that in the successful cases, where investment can be used to enforce sort of, or to promote actual improvement around environmental and social stuff. It's the G part that's the answer, right? It's by investors, especially activists engaging with boards to help to make sure the right people are in the room and help to make sure that the right decisions are made, and so on, and so on. So the question I left with is "Wait, is ESG really the G of E and S after all?" And so here's how I feel about all that. First of all, listen to the episode because great and I learned a lot, and it made me think. But second of all, this just really feels to me like yet another illustration of a misinformed or at least not very useful concept of governance. I think this this idea of ESG as an investment philosophy, and some kind of disclosure or compliance around disclosure, it frames the governance of environmental and social stuff in a really box tick-y awful, useless kind of way. It becomes as a result of an incentive for boards to focus on more on compliance, even if they want to be focusing on something that's more actual value creating, they're focusing on compliance because the pressure from the outside whether it be from investors, or regulators or talking heads or whomever, they they focus on compliance because that's where the pressure is, instead of doing something actually useful. And the other piece that I really came away with is from his I feel like it's super freakin exciting to have some real research and a significant platform being Freakonomics Radio amplifying that work. So here we are, with a good and credible researcher doing work to try to see what actually helps, right, if we're thinking about environmental and social stuff, and we now have some, at least preliminary evidence, some really good preliminary evidence that this investment philosophy approach of divestment from polluting firms and reemphasizing green firms isn't actually working, it's not having the impact that we want, you would hope that now investors and boards and executives will change their behavior, or at least start asking better questions and say, Hmm, what could work better than this? The problem is, as we all know, about the world of corporate governance, there's no reason to be optimistic that these facts or this research will influence behavior in that way, or at least not very quickly. And so I would like to leave you guys with this sense that look, we have this new way, or this new set of ideas and this new set of research that we can use as investors, as executives, as board members, as advisors, and so on. And I know there's this great influential world of ESG advice going around. That thinking about ESG as a disclosure exercise, a compliance exercise, a divestment from polluting firms exercise is not likely to have the impact that we want, which is the decarbonisation of the industries that matter. Well, they're not going to act that way. So what's a new approach that we can take? And I think that's a much more interesting set of questions than wondering how we can tick the compliance boxes a little bit better than we did before.
Matt Voiceover
Okay, I commend myself on being kind of polite there, let me be a little bit less polite. There may be some of you out there who are corporate directors and senior executives and ESG advisors and so on, who already know this stuff, right? Who already realized that there's a high potential for divestment from polluting firms to have the opposite result that you think it will, but for those of us who are out there trying to push divestment and trying to think of ESG as a compliance exercise instead of actually being curious about the impact of our decisions. You're doing it wrong. So please listen to that podcast episode or read Kelly Shue's research. And I'm not saying that they're 100% right, and you're 100% wrong, but it seems like that might be the case.
Matt
So the other piece that has been on my mind, to I'm sure, nobody's surprise, has been AI and boardrooms and have had an opportunity over the past month or so to be a part of a few conversations and roundtables and conferences and so on, about people talking about AI and boards and organizations, and governance, and so on. And you'll remember back, I think it was episode 12 of Sound-Up Governance, where I'd had chatGPT as a guest, quote, unquote, interviewed chatGPT and used the fake Snoop Dogg voice. And it was, it was a really fun and very kind of inspiring conversation. And that was my sort of trigger or spark to become inspired by what I thought that type of have it's not the large language model AI that I'm interested in as much as the interface, right? The fact that you can have a conversation with a large language model AI, and use it to spark creativity, and it works really, really fast. And the more creative you are, the more creative it will be.
Matt Voiceover
I should add here that the other amazing thing about using chatGPT and Bard and other stuff is that it requires absolutely no experience or training. I mean, you don't even really have to be able to spell very well, and you can use it and it's amazing.
Matt
So it's it's kind of a shortcut to breaking down barriers of how we might usually talk about governance, because you can ask it a silly question and it will generate a thoughtful, if not entirely fact based answer. So that was my introduction to it. And there's a couple of things have occurred to me, especially over the past few weeks, where I've been having conversations and listening to presentations on the intersection of AI and governance. One is, there's still - and if this is you, fair enough, that's fine, but I'm just gonna say I see you, and I hope that you'll rethink your position - I've met more people than I expected to, who have very strong opinions about for instance, chatGPT - especially chatGPT, and how it might be used in boardrooms - who have never used chat GPT. And so I think the first thing if this is you, if you have a strong opinion about chatGPT or Bard or whichever other platform, yet you've never used it, I encourage you to just sort of pause this podcast right now and go and play with chatGPT for like an hour, just play with it. And then get to know it a little bit and see what it is and what it isn't. And then come back and and listen to more of what's up because I kind of honestly find it a bit obnoxious that there's people out there talking in the real world about AI and boardrooms - and talking specifically about chatGPT and boardrooms - who haven't even touched the thing. So stop being obnoxious, go and use it. I've seen a couple of conversations or heard or been a part of a couple of conversations where I think we're at risk of missing the point a little bit here. Which is, yeah, you know what, of course, we need to be concerned about privacy. And of course, we don't want to reveal anything to chatGPT that that would be confidential and so on. Right? So we've got to we don't want to be negligent, or, or stupid here. But chatGPT, for example, is such a useful tool to break down stubborn barriers really fast. So I had this great exercise. And I gotta give a shout out to my friend, Paul Smith from Future Directors Institute, who he's been on the podcast before you'll all recognize him. If you don't look him up. Don't you can't just google "Paul Smith," you have to google "Paul Smith future" or else you get a bunch of sexy clothes. So Paul put together this roundtable and I went down to DC and hung out with him. It was great. He lives in Australia. So this was it was a real treat for me to not have to go very far to see him. And we broke into these pairs, and I sat down with Erin Essenmacher, who used to be at the NACD and now she's at the Athena Alliance. Erin, I'm sorry if I got that wrong. But what she's up to his amazing
Matt Voiceover
Hey, I didn't get it wrong! Athena alliance is an online platform for women in leadership. They describe themselves as quote, activating the connections, knowledge and opportunities executive leaders need to break through the barriers that line the last mile of their career to the C suite, boardroom, or the world of entrepreneurship and investing.
Matt
This is the first time Erin and I had met face to face. And we just sat and kind of let ourselves be silly for a minute with chatGPT in service of solving a problem, a real world problem. So we didn't tell, chatGPT "here's my problem, here's the organization." We didn't reveal anything confidential to it, we had the confidential conversation among the two of us. And then we prompted chatGPT to, I think the first thing that we asked it was, "hey, could you help to maybe create a game that we could play in the boardroom that would address a problem like so and so?" which we articulated quite vaguely, and it came up with a cool idea. And we said, "oh, this is something that we really like about your idea, and maybe a little bit, we like this other piece a little bit less, could you come up with something else?" And it did. And then we just sort of kept on prompting it to come up with new interesting stuff. I think the last prompt we gave it was, "what are the top three reasons why it would be better to have 100 board meetings per year instead of four?" And it's just a really fun way to instead of having a bunch of opinionated conversations about these types of things that go nowhere, we can generate some ideas, friction free really quickly, that that we can then have a conversation about. And all of this happened in 10 minutes, maybe, maybe less. And we ended up with a bunch of interesting stuff that Erin and I, I think, both felt pretty inspired by. And finding a way to create or, or grasp some inspiration on a difficult piece within 10 minutes, and we just did this in pairs with a laptop in front of us. That's a result that I've never seen, or rarely seen, never is an exaggeration, I've rarely seen in a real boardroom context. And yes, we have to be careful about what we feed into these things. And yes, we don't want to get distracted and go off into directions in our board meeting that don't generate any value or waste time or whatever. But we also, and this is no surprise to any of you if you're familiar with my stuff, we also have to give ourselves time and room to experiment or else all we end up being is oversight bodies, which is basically obsessing over the present and the past. And then everyone complains afterwards that we don't spend enough time on the future. chatGPT, Bard, anything like it, can be - if we use them thoughtfully and carefully, and maybe even playfully - can be tools to help us to open our minds very quickly and come up with cool ideas and have some fun and generate inspiration. And I think those are all things that are way too scarce in boardrooms. The other piece that I've noticed is that a lot of the conversations and presentations and resources that are available to boards around AI and governance are from the perspective of really well resourced organizations. I went to a panel, for example, where one of the panelists talked about "oh, well, you know, my organization bought a big AI firm." And the next person said, "Yeah, my organization is an AI firm." And this is one. And those are great, it's cool stories. But the room had about 100 directors from all kinds of different organizations in it. And their questions were more like, "tell me more about what AI is." Not how can I buy AI? Or how can I build AI? So I think, what I'm hoping for is there's a bit of a call to action here, which is, maybe let's collectively share our experiences any of you who are using AI, again, I know that chatGPT and Bard and that that sort of interface is just one really idiosyncratic illustration of AI. There's so many other ways to use it and deploy it and much more sophisticated than that. They just happen to be really accessible. So it to the extent that you have in your boardroom or in your organization embraced or deployed AI, let's start sharing those stories a little bit more liberally, to the extent that it's practical. Because the rest of us are out here just trying to learn, right? And the resources that are available to us are dominated by players that are already all the way in, or by people who have strong opinions but absolutely no experience. So if you have a story to tell, especially if it's about how AI has improved the way that your organization has functioned, and even more especially if it's about how you've deployed AI in whatever form in service of good governance. These are the stories I want to hear. Please put them out there. I'll do anything I tend to amplify them because I think they're sorely needed. And everybody really wants them. With all this stuff said, you know, I think it's worth sharing and worth really emphasizing that I'm feeling actually really positive about corporate governance lately. And maybe that's a little delusional. But it's true. I mean, I had a great time, for example, a couple of weeks ago at the Institute of Corporate Directors conference, where I was just surrounded by so many amazing brilliant friends who are corporate directors and senior executives and professionals in and around governance. And everybody is so interested in doing things a little bit better tomorrow than they did yesterday. And it's really inspiring to be in that space with that energy. And, you know, yeah, there's a lot to improve, and to the extent that you buy into my framing of good governance as intentionally cultivating effective conditions for making decisions, there's a lot that can and probably should change to reorient what boards and executives do, right? Cultivating effective conditions for making decisions is something really different from what the work of a board of directors and senior executives has typically been thought of. So I know I slag a lot on the status quo. And, yeah, the status quo is really both sub optimal and really sticky, but better is close at hand. I mean, just remember that the board's most useful role isn't oversight, as much as we like to use that word. The board's most useful role isn't in catastrophe, avoidance. But, instead, it's in bringing many perspectives to the table in service of making decisions about a better future for your organization. And also try to remember that a spirit of experimentation will serve you well, because that's the way you start doing new stuff. So experiment in moderation. And also remember that the headline of good governance is decision making, not financial performance, not compliance, not duty, not policy, not any of that stuff. And there's so much good science and really fun writing out there to guide you along the way. And I guess, remember to stay tuned to Sound-Up Governance, because we've got a great lineup of guests throughout the summer, and maybe a little bit more of me, too, if you enjoyed this at all. So let me pass you over to myself to wrap up the episode.
Matt Voiceover
Well, that was a thing. Something really different for me at least. And I'm really curious the extent to which you found it interesting and useful, and especially if it's something that you'd like to hear more of in the future. I know it's really different from a typical interview style episode of Sound-Up Governance, but I hope you got something out of it. And thanks, as always, for tuning in. If you have any questions or complaints or comments or anything, shoot me a voice memo or an email to soundup@groundupgovernance.com. And thanks again. Until next time.
Sound-Up Governance (ep.36) - Getting oriented around the state of ESG and AI and stuff (feat. Matt talking to himself)