Thought Leadership At UC-Davis Graduate School Of Management: Professor Paul Griffin On Business Risks

Emeritus Distinguished Professor Paul Griffin joined UC Davis’ Graduate School of Management some 43 years ago

Byrne: I imagine they worry a lot more today than they did 10 years ago.

Griffin: But even 10 years ago, we were able to prove through analysis that investors did pay attention to that, even though there was no mandatory disclosure. There were only climate advocates saying, ‘Well, we need to figure out what companies are doing. And on our own, we are going to present this information.’ But the companies were not doing it.

And so we were able to use that data to argue and essentially prove the point that carbon emissions matter to markets. Everybody accepts that today, except a few. But they didn’t accept that back in 2010 or 2011, more than a decade ago. We’re moving people to think in different ways than they thought a decade or more ago.

Byrne: This goes back to what Peter Drucker said. ‘What gets managed is what gets measured.’ So if you’re measuring this, inevitably it will get managed, right?

Griffin: Correct.

Byrne: And that’s the practical effect of it. If managers and executives know that there is some correlation between their carbon emissions and their stock price, they’re going to be paying attention to it.

Griffin: If they’re measuring and managing, but not telling anybody else, it’s not such an issue for the companies. But you’re absolutely correct. Going back a few years around that same time, I did some work on what’s called the Conflict Minerals Rule, and this came out of the Dodd-Frank Act, came out the Great Recession, and so forth. And that was a disclosure rule that said if you have operations or if you are mining in the DRC (Democratic Republic of the Congo) in Africa, which is a conflicted country, you’ve got to disclose that. And the companies just were totally against any disclosure. But the SEC and the Dodd-Frank (Wall Street Reform and Consumer Protection Act) required this rule. Companies didn’t like it. But within two or three years later, under the measure-and-manage notion, they found that the disclosure rule was getting them to improve upon their understanding of their supply chains. So the overall benefit was positive for these companies because they understood much better the supply chains. It was a sort of unintended consequence of the disclosure rule.

Byrne: Right. And if anything, global supply chains have been very much in the news through the years of the pandemic.  I’m sure our dependence on global sources for parts and equipment is a risk that is increasingly being assessed today. Right?

Griffin: You are referring to one of my most recent articles. As you know, American companies have been very well integrated globally. Those supply chains are the biggest contributors to emissions. So to understand firms’ emissions, we’ve got to understand the supply chains.

Byrne: True, because just the cost of transporting these materials and the energy that’s used to do it is considerable.

Griffin: And there’s a proposed rule under consideration by the SEC right now that would require firms to disclose their their supply chain emissions. It’s getting a lot of pushback. But once they get to measure those emissions and manage them, as you said, they will find it beneficial because they’ll understand more about their supply chains. They’ll understand the true cost of a supply chain in terms of emissions that are incorporated in products which people may not want to purchase if their emissions are very intensive. So overall, this is many years from now, but there will be a benefit from that even though there’s a lot of pushback right now.

Byrne: Another example of the risk that supply chains pose could fall on Apple and its extensive use of contract manufacturing in China. Obviously, our relationship with China is not what it was and has turned adversarial. How do you assess a risk like that where a company is solely dependent on manufacturing a high-margin product like an iPhone from a country that could be a very big adversary to the United States?  If in fact there was some sort of conflict, Apple’s supply could be completely cut off. Do you think investors fully appreciate that risk and it’s reflected in the stock price of Apple today?

Griffin: I think we could certainly learn more about those risks. There’s a trade-off that firms and investors have to consider here, and that is that, yes, we would like more information as investors, but some of that information could be harmful to the company. So they can’t give too much away in terms of what they’re doing, where they’re operating and so forth. There’s a nice balance that needs to be drawn between information that we think we would like, but information that probably we shouldn’t have because it’s going to affect the way our firms do business and affect the value of the company.

Just an interesting little anecdote on Apple. When the Conflict Mineral Rule came up, Apple was producing iPhones, which included conflict mineral. A reporter from Florida got hold of my study. And the reporter from Florida would say, ‘Professor Griffin, I have some of my readers, and they’re worried about their phones. Should they be buying them?’ And I said, ‘Well, I don’t know if they should or not, but it’s pretty clear that they have these conflict minerals, and that’s something that is potentially harmful if you believe in correcting some wrongs taking place in different parts of the world.’ So you never know what’s going to happen to your research.

Byrne: That’s really true. How has your research and your career changed you as a person?

Griffin: I wouldn’t say change. I just think it makes me continually interested in looking at issues and thinking about ways to address them with the tools and the knowledge that I have. So it keeps my mind 100% alive and interested, interested in research, interested in using research to answer questions. Hopefully some of those questions could have policy or investor implications.

Byrne: Which probably is tied to your initial motivation to be someone who spent this life curious about how things work.

Griffin: Intellectual curiosity, I think is just a fantastic driver to make you feel alive, to make you feel you want to get up in the morning and you want to get down and just work hard on something. Science is naturally frustrating. You think you have results and somebody disagrees with them, and you go back and you look at them and say, ‘Well, yeah, that person was right. I had it wrong. I’ve got to start over again and look at things a little differently.’ So it definitely is frustrating, but if you have a long goal, a long horizon, it’s the best place to be.

Byrne: Indeed. Well, Paul, it’s been a real pleasure. Thank you so much.

Griffin: It’s been great to talk to you. Thank you for having me.

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