The Prof G Pod with Scott Galloway - What Options Elon Has Left – with Andrew Jennings

Episode Date: October 20, 2022

Andrew Jennings, a professor of corporate governance and securities at Brooklyn Law School, joins Scott to discuss the latest around the Elon Musk v. Twitter Trial. Follow Professor Jennings on Twitter, @akjennings. Scott opens with his thoughts on what makes good management.  Algebra of Happiness: planning for an empty nest Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Episode 205. 205 is the area code that covers birmingham alabama in 2005 wedding crashers was one of the year's top grossing movies russell crowe pleaded guilty to assaulting a hotel employee and jennifer anderson filed for divorce from brad pitt every movie i see with jennifer anderson she plays the exact same character i am outra outraged. This is Rachel Profiling. Go, go, go! Welcome to the 205th episode of the Prop G Pod.

In today's episode, we speak with Andrew Jennings, a professor of corporate law and securities regulation at Brooklyn Law School. We discuss with Professor Jennings the state of play regarding the Elon Musk Twitter trial. Professor Jennings also discusses the broader state of corporate governance. Okay, what's happening? Today, we're going to try and provide a lesson in management, all thanks to Trump's media group. So, some quick background. Will Wilkerson, an early employee of Trump's media company, filed a complaint with the SEC back in August that claims the SPAC attempting to take Trump's media company public relied on fraudulent misrepresentations concerning the attempted mergers between these companies in violation of federal securities law. Wilkerson went to the Washington Post with details on how Trump pressured top employees to transfer their shares to Melania Trump and, in one instance, allegedly fired an employee for not

doing so. The Post's exclusive report also notes how Trump's media company has been plagued by, quote, bitter infighting, technical failures, and a chaotic jockeying for power among Trump allies that undermined its potential and left some employees crying at their deaths, unquote. Wilkerson has since been fired for going to the post with unauthorized disclosures. So what's the learning here? So first off, people will immediately start off with this bullshit pushback. Well, well, kind of success speaks for itself. No, success speaks to how wrong this is. Specifically, specifically, if Donald Trump had taken his inheritance from his father and just invested it in the S&P and SPY index funds, he would be worth more than he is now.

Donald Trump is a shitty businessman. You're fired. Now, there are probably a lot of reasons why he's a shitty business person, but one of them, or I would argue the key, is he is a terrible manager. A terrible manager. What are the keys to being a great leader in a corporate setting? I think it comes down to three things. First off, you have to demonstrate excellence.

People want to know that if I follow this gal or guy, there's a good chance I'll be successful because they will build something that's successful. If you expect to manage other people, you have to develop excellence. And sometimes excellence is just attitude, and that is a willingness to roll up your sleeves and do anything that you would ask anyone else to do.

Two, you need to hold people accountable. A strategic firing, letting people know when they're not performing. What happens when people, a lot of people cannot perform and everyone can stick at home and walk their dogs or just kind of do barely enough? Then all your high performers look around and think, what the fuck am I busting my ass for? It becomes a lowest common denominator problem.

It becomes a race to the bottom. Good managers, good leaders hold themselves accountable and hold other people accountable. And then finally, and I think this is the most important thing, good leaders and good managers show empathy. What do I mean by that? That doesn't mean you need to be Oprah. It doesn't mean you need to be Mr. Rogers. What it means is you say, look, if I'm successful, you're going to be successful. And part of that success will be me figuring out what makes you happy and what you're looking for at work. Not everyone is looking for the same thing. Some people want to manage other people.

They get excited by having direct reports. Some people want fame. I get inquiries from media occasionally. If I think it would really excite somebody, I say, well, why don't you take this? Some people get a huge thrill out of seeing their name in lights or presenting at the client, whatever it might be. Some people want to be mentored. That's the most important thing to them. Some people are simply put all about the Benjamin's full stop. That's all they want. And everybody mostly wants a lot

of those things. But if you can reflect, if you can demonstrate that you've gotten to know that person and you are pulling for them, can demonstrate that you've gotten to know that person and you are pulling for them, and specifically you're pulling in a sense that I recognize, boss, that you may not want exactly what I want. When I was younger, I thought everyone just wanted what I wanted. I wanted to be rich and fucking awesome. Full stop. That's all I wanted. Those two things, to be loved and admired. Wow, look at that guy. He's a baller. And to have a jet. Not everyone wants those things. Or actually,. Not everyone wants those things. Or actually, I think everyone wants those things,

but people prioritize different things. Some people want balance. I used to think you could only have an organization where everyone worked 24 by seven. That's just dumb. You're merely screening out a big part of the workforce. But you're not going to build a company with all A players. It's just to think that that happens is a myth.

You're going to have, quote unquote, B players who don't live to work but work to live. And that's okay as long as it's pretty obvious. You're probably not going to make as much money or advance as quickly as the person who's kind of all in. But to think that it's one size fits all doesn't make sense. There's a culture and there's certain norms. But your ability as a manager and as a leader to say, I get you and I'm pulling for you. And if I win, you're going to win. I have got your back and you are going to share in my success. And part of that is I'm going to figure out what

success looks like for you. And back to Trump. Here are just a few stats from the Times 2019 report. Trump's core businesses, which include casinos, hotels, and apartment buildings, lost money every year between 1985 and 1994, racking up a total of $1.2 billion in losses. Between 1990 and 1991, these core businesses lost more than $250 million each year, which was more than double compared to similar taxpayers. And lastly, Trump lost so much money that he was able to avoid paying income taxes for eight of the 10 years. This guy literally, again, see above the worst business person in the history of the United States. Entrepreneurs succeed by navigating an ecosystem of counterweights. Customers want the lowest price and the highest quality. Employees want you to compensate them at or above market rates.

Those two are in direct conflict with each other. And investors want to dilute your stake in exchange for their capital. And the big hand of government is also calloused and slow and also wants their piece. The most formal and obvious counterweight, your boss and the board of directors. Building a company requires that you listen to and balance all of these counterweights. You're essentially a triathlete trying to figure out where you're going to focus your energy, where you're going to train, and you have to be great at a number of things. If you want to be in senior management, you have to be good at managing

up, managing down, and managing sideways. Who does everybody hate? The guy or the gal that's really good at managing up and is an asshole to everyone to the side and down to them. I worked with a lot of very successful people at Morgan Stanley and big corporations. And one of the things that got in the way from them being the number five or the number four person and getting to the number one was they made too many enemies along the way. Because one attribute of many successful people is they are so used to being the winner. They're so used to being on the gold medal stand all the time from the age of like zero to 45, that they see anyone that is potentially also as good as them as a threat, not someone they can work with, not a mutual partnership, but as a threat. And they start shitposting and bad-mouthing

them and see it as sort of like a Hunger Games. Those people make enemies. And most CEOs, most CEOs have one thing in common. They've been very good at not making enemies. They're supportive of people. They don't respond to every slight. They recognize occasionally if they get passed over for a position or someone else makes more money than them, they're not gonna storm out of the office.

Some entrepreneurs achieve enormous success within this system, balancing leadership and consensus. And with great success comes great power, the power to stop, you guessed it, the power to stop listening, which often results in a fall from grace and loss of power. What undermines more? What is the Achilles heel of very successful people? They surround themselves. And I won't even say they surround themselves. Naturally speaking, success is a flame and you get all sorts of moths who will tell you that you're just a fucking genius and laugh at your jokes. It happens to me.

Not a lot. Not a lot. The people I work with are generally irritable and very smart and push back on me a lot. And I appreciate that. It pisses me off in the moment, but it's really important. But over time, very successful people, the natural state of things that the people around them will tell them that everything they do is amazing. And then they become very susceptible to taking outsized risks without really understanding the downside or even acknowledging when things aren't going well.

So what's the learning here? What's the learning? One, excellence never goes out of fashion. Two, you need to hold people accountable. Two, you need to hold people accountable. Three, you need to invest in understanding people such that you can reward them on levels that they will get the most compensation from. Also, surround yourself with people who are occasionally willing to push back. Do you think any of that? Do you think any of that exists in the ecosystem of the world's worst businessman, Donald Trump. We'll be right back for our conversation

with Andrew Jennings. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea. Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Hello, I'm Esther Perel, psychotherapist and host of the podcast, Where Should We Begin?, which delves into the multiple layers of relationships, mostly romantic. But in this special series, I focus on our relationships with our colleagues, business partners and managers.

Listen in as I talk to co-workers facing their own challenges with one another and get the real work done. Tune into Housework, a special series from Where Should We Begin, sponsored by Klaviyo. Andrew, where does this podcast find you? I'm sitting here in downtown Brooklyn, New York. Wow, with all the cool kids. With all the cool kids. I'm not quite cool enough to be here sometimes, but here I am. There you go. So the Elon Musk versus Twitter trial was supposed to take place this week. However, it's been pushed back to later this month. To start off, can you walk us through where this takeover stands today?

As of today, the court has given the parties a time and date certain by which they are supposed to close the deal. That's October 28th at 5 p.m., I believe. The court has instructed the parties, particularly Twitter, that if the deal hasn't closed by then, they should send her an email and she will get back to them with court dates in November. So let's assume that Elon Musk, short of actually going to Mars, where he recognizes he'd die a slow, painful death, that just behind that is closing on this deal and watching $30 billion evaporate as he pays $45 billion for a company worth $15 billion. Let's assume he would like to figure out a way to get out of this deal.

What, if any, are his options to exit this thing right now? Well, he's really put himself in the bind. He, by agreeing to go forward and close the deal, has really destroyed a lot of the justifications, the pretextual justifications in the eyes of many that he spent and his lawyers have spent a lot of time trying to establish over the summer, the issue with bots, the issue with the Zadko whistleblower allegations, etc. So he's really, by saying, I'm willing to go forward with closing the deal, destroyed all that work. He'd have to come up with something new, one supposes, or perhaps there are various gambits that he might be seen as running.

So there's some suggestion in the air that maybe the issue with some of the Ukraine or Taiwan tweets might create concern around the U.S. government. The CFIUS review process might lead to regulators just saying, no, you can't close this deal. It's a national security issue. That gambit I don't think is terribly likely, and I don't know that that's necessarily his goal here, but it would really require some outside-the-box thinking on his part in terms of a new gambit to pursue. Perhaps he could do something to try to prevent the financing from being available. The commitment letters that the banks have agreed to are pretty solid, however, so that would be a difficult road to take as well. So it's looking pretty much like he's stuck with the deal that he's made.

Can you think of any analogs here or any other cases that can be used as a benchmark for this? I think this is a unique case in a lot of ways. I think that observers of Delaware Chancery cases probably haven't seen a case quite like this since maybe the Disney dispute of several decades ago now over the firing of their COO. That, I think, really pales in comparison to this transaction. In some ways, for social salience, for the cultural and social salience, we might look at the AOL-Time Warner merger of the late 1990s. That was a successful merger in that it closed. It was a famously unsuccessful merger in that it didn't make a lot of industrial sense. And a few years later, AOL and Time Warner split, and Time Warner has been in a process of

splitting up ever since. But in terms of sort of watershed M&A moments, I think this might be on that par. Because keep in mind that this is not only about Elon Musk and Twitter, but there's also one of the most prominent EV companies in the world that is implicated here because their stock is the currency or the larger share of the currency that Elon Musk will be using to make this purchase. So there's a lot wrapped up here. And then I don't think that there's any similar M&A case in terms of the global implications and the global political implications that this merger has raised, as we've seen just last week with the tweets about Ukraine and Taiwan. Yeah, my sense is he's on the green mile. I think he's run out of appeals, if you will, or stays

of trying to exit this deal. So let's switch gears. In a recent article for the Duke Law Journal, you examined how enforcement agencies reduce corporate penalties for promises of reform. What did you mean by that? Typically, when the government is investigating wrongdoing at a company, they are limited resource-wise in their ability to investigate the wrongdoing at the company. And so they make several offers to companies. These are kind of general offers that are in the air. Companies know that this is available. It's partly codified in various policies and guidelines, but it's also in the air as well.

If you company, you help us, the government, with the enforcement process, if you do an internal investigation, if you come forward and tell us something has gone wrong before we find out through other means, we're going to give you some discount on the penalty that we impose. Perhaps if we were going to give you a billion-dollar penalty and that's what you deserve for whatever it is that you did, We're going to give you a $750 million penalty instead. So you're going to get a quarter billion dollar discount for helping us in the investigation process. The government also does that in terms of, well, we don't want you to do it again. And if you do things that give us some comfort or some hope that you won't do it

again, then we're going to give you a further discount. And so a company that might say, listen, we're going to adopt certain reforms. We're going to implement a new compliance program that will prevent us from doing the bad thing again. Perhaps that's something that the government will give it some credit for in the penalty stage. I'm skeptical about how well those promises of reform work, but it is something that the government will do. And how do you, you've written about corporate democracy, how would you, or how do you define an effective corporate democracy? The corporate demos is similar in some ways to the political demos. The shareholders in a large company are anonymous to each other,

they're disparate. They have different things that they're looking to get. There's some unity in that shareholders probably are looking to make a return on their investment. They probably have maybe different views of what return on investment should look like, whether it's a short-term return or a long-term return. So those are some considerations that go into the corporate demos. Recently, we've seen a rise in ESG in which perhaps we recognize that shareholders care more about just making a profit because shareholders have to live in a world, they have to live in a society, and they might care about what companies are doing apart from how profitable

they are. So these are some of the tensions that go into the corporate demos. And when we talk about the corporate democracy, I think it's tricky in terms of what an effective corporate democracy is. It's probably a system that allows shareholder views to be expressed, to be manifested in the policy of the company. But it's probably not a system that lacks certain of the paternalistic protections that might be in place. So a board of directors might want to push back against some democratic impulses within a firm because it has a long-term view or it has superior information as compared to shareholders or to certain shareholders. So in terms of what's an effective corporate democracy, it's as complicated a question as what's a an effective corporate democracy it's as complicated

question as what's a good political democracy and as we we've seen uh in recent years that can take a lot of forms uh even getting down to how voting is done that's been a controversial question in our political democracy uh for a number of years some new voting methods are arriving. We're being experimented with in some states and localities around the country. Similarly, within the corporate democracy, how voting is done, how many votes per share am I going to have, how are the votes going to be counted, who gets to vote? These are all going to be pretty important questions in terms of just who is elected to a board of directors, who gets to set corporate policy, how are shareholders able to express their views on the direction of a company. What do you think about the idea of our elected representatives being able to trade stocks? What

do you think is the appropriate level of regulation for that? I'm skeptical of the idea of banning all stock trades for a few reasons. I will always be tempted as a political official to monetize my access, monetize the information I have. And so I'm worried that if we were to ban officials from purchasing things like stock, which is something that can be pretty well surveilled and violations can be detected, they might move to more opaque types of investments or arrangements. So that's a concern that I have about whether or not we're going to ban members of Congress or federal judges from purchasing individual stocks or certain types of financial assets. So nothing wallpapers over, you know, sketchy behavior than a bull market. My thesis is we're going to see a lot more legal action and a lot more people in orange jumpsuits if we go into a severe recession? Because just generally speaking, there's going to be a lot more angry people and a lot more pain, which will justify or will inspire

much more scrutiny. Is there any evidence that that is what happened? I would suggest it's probably the opposite. One, if somebody believes, let's think about institutional VCs here. If somebody believes that he's been defrauded and these VCs are usually men, there are pretty strong incentives not to say that I was tricked, I was lied to, I gave a bunch of my client's money to somebody based on false representations. One, it's pretty embarrassing

and people want to avoid embarrassment. Two, it's an awful signal to the market that this is somebody who can't be trusted with your limited partner funds because he, and it's usually a he, has been careless in the past. And so I suspect that there's pretty strong incentive that even if you think you've been hoodwinked, that's a much harder thing to admit and a much harder conversation to have with limited partners. Are there any situations out there unfolding that you think are going to turn into landmark legal cases, or you think that there's a legal case brewing, if you will? I think that we are only starting now to see a lot of litigation in the crypto space, particularly in the DAO, the DAO space. The CFTC has recently brought an action that essentially alleges, and I think aptly so, that DAOs are just general partnerships. And general partnerships can be scary to be in

because the partners in a general partnership are individually liable for the debts of the partnership or for the liabilities of the partnership. And so as a general matter, one wants to avoid that default. And there are perhaps a lot of general partnerships out there that people didn't realize that they're in. So I'll be interested to see how that develops going forward. But I think probably crypto litigation will be an area that is really just starting to get going. It raises a lot of tricky questions from a legal perspective about, well, for example, how do you provide notice? How do you serve somebody in the crypto space? How do you enforce judgments in the crypto space? How do you even proceed with the litigation when

people are perhaps anonymous, decentralized, scattered around the world? I think it'll be an interesting area of development. I don't think there's particularly one headline case that we'll see, but I think it will be a pretty active area, particularly as you point out, well, valuations are down, there are kind of questions. Oftentimes, that's when frauds are revealed or other liabilities are revealed. So I do think that we might be seeing more on that front. And, Annie, what are the cliff notes on when you work for a corporation and you don't want to have a federal investigator or someone from the FBI or the SEC in your office? Any sort of best practices around staying out of trouble other than just being a good ethical person?

I think it's important that a company have a good monitoring system in place to be able to detect these issues. It's usually best to be in a position to be the company that goes and tells the Department of Justice or the SEC or the EPA, listen, we have a problem, as opposed to waiting until a whistleblower goes and tells them. And by the way, some of these whistleblowers are very well incented these days financially. So it's best to probably be in a position to be upfront with an issue. It probably allows you to control the process a little bit better. But you want to have good ex-ante compliance programs in place.

That includes, are we setting a good tone at the top? A CEO who emphasizes the importance of compliance and staying on the right side of law is going to be somebody who influences middle managers to do that. And middle managers who then echo to their teams, hey, let's stay on the right side of law here. Let's act in an appropriate way, are going to be people who inculcate those values and behaviors in their teams. So that's something that companies can do ex ante to avoid these types of run-ins with the law. Companies should also be thinking about their compensation policies. Do our compensation policies potentially encourage bad behavior or do they encourage good behavior? So you can imagine if I am required to sell X number of products a week or a month in order to keep my job or to get a livable wage, maybe I'm incented to engage in some sales practices that aren't quite aligned with what I should be doing. So guardrails and being transparent about your shortcomings. It feels like that's a pretty decent advice for all aspects of your life.

Andrew Jennings teaches corporate law and securities regulation at Brooklyn Law School. His research interests focus on corporate governance and compliance, securities regulation, and white-collar crime. Professor Jennings was previously a lecturer in law and the teaching fellow for the Corporate Governance and Practice Program at Stanford Law School and a scholar in residence at Duke Law School. He joins us from his home in Brooklyn. Professor Jennings, we appreciate your time.

Thank you. It's a pleasure. We'll be right back. Hey, it's Scott Galloway. And on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for?

And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life. So, tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. is probably more complicated than you want it to be. The average U.S. company deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools we use to do it. So what is enterprise software anyway? What is productivity software? How will AI affect both?

And how are these tools changing the way we use our computers to make stuff, communicate, and plan for the future? In this three-part special series, Decoder is surveying the IT landscape presented by AWS. Check it out wherever you get your podcasts. As a word of happiness, so just a word to dads and moms. I always thought I would have when my kids were 10, I just assume I'm going to have them for another eight years. And what's become painfully clear to me is that's not true. You have them for about another four or five and that is at 14 or 15 they develop or they have these natural instincts that say it's time to push their parents away and start hanging out with their friends and doing their own thing. It exacerbates it when you make the mistake or you get talked into letting your kid or endorsing your son going to boarding school. I'm now seeing my son one day a week, which is in a word awful for me. And I find myself following him around the house because I'm lonely or not lonely, hungry for his attention and want

to be with him. And he's kind of like walking up to his bedroom and I'm following him for no real reason. So no real kind of learning here other than advice. And that is, as you calculate the tensions in your life and what's pulling you different ways, it's very easy to put off, well, if I can just get to this position professionally, or I have my kid, as you do the calculus and you think about the amount of time you have with your kids, just base it on 14 or 15. Because even if they don't go off to boarding school, my observation now, knowing a lot of people with 14 and 15-year-olds, is they kind of go do their own thing. Now, it's not all tears. Watching them develop and watching them get an interest in other people and their

peers is a lot of fun and very rewarding in its own way. But again, as it relates to your time with them, just keep in mind that end point or that place where the time with them will slow down, that exit is coming a lot sooner than you think. So what do you do? Easy to say, just spend a lot of time with him. I try, I still have my 12-year-old at home. I'll get off this pod and I'll go FaceTime him for no real reason. I'm constantly forwarding him stuff on soccer. I'm doing a lot of virtue signaling right now, but I used to make a lot of excuses and think, oh, I need to, you know, I still got him for a while. And all I can tell you is you just, you literally just wake up and your son's at boarding school and he comes home and he's an inch taller. So anyways, plan against that end point of 14 or 15, not 18. That off-ramp is coming sooner than you think. Our producers are Caroline Shagrin, Claire Miller, and Drew Burrows. Sammy

Resnick is our associate producer. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Prop G Pod from the Vox Media Podcast Network. We will catch you next week. Support for the show comes from Alex Partners. Did you know that almost 90% of executives see potential for growth from digital disruption, with 37% seeing significant or extremely high positive impact on revenue growth. In Alex Partners' 2024 Digital Disruption Report, you can learn the best path to turning that disruption into growth for your business. With a focus on clarity, direction, and effective implementation, Alex Partners provides essential support when decisive leadership is crucial.

You can discover insights like these by reading Alex Partners' latest technology industry insights, Thank you. of disruption, businesses trust Alex Partners to get straight to the point and deliver results when it really matters. into real-time connections across AI-powered email, SMS, and more, making every moment count. Over 100,000 brands trust Klaviyo's unified data and marketing platform to build smarter digital relationships with their customers during Black Friday, Cyber Monday, and beyond. Make every moment count with Klaviyo. Learn more at klaviyo.com slash BFCM.