Paul Griffin
Description: Paul Griffin is a Distinguished Professor Emeritus at the UC Davis Graduate School of Management. His research focuses on risk management, climate change impacts on financial markets, and the role of technology and AI in transforming business practices. In this episode, we talk about the evolution of business education, how climate risk is beginning to reshape asset pricing, the responsibilities of insurers and governments in a changing environment, and the future of accounting in an AI-driven world. Professor Griffin also shares advice for young professionals on the importance of creativity and adaptability and reflects on how his lifelong passion for polo mirrors the quick decision-making and resilience needed in today’s business world.
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Show Notes:
[0:09] Love for Polo
[3:04] Journey to UC Davis
[4:33] Building the Business School
[6:06] Evolution of Business Education
[9:01] Understanding Risk
[10:47] Perceptions of Climate Risk
[14:12] Climate Change and Market Pricing
[17:48] Responsibilities of Insurance and Government
[23:05] Legal Framework for Climate Risk
[24:45] Emissions Reporting Challenges
[29:52] Carbon Credits and Innovation
[32:25] Tax Incentives for Emission Reduction
[32:43] Political Influence on Corporate Culture
[35:19] Short-Term vs. Long-Term Thinking
[37:52] Communicating Climate Strategies
[41:06] Innovation in Traditional Industries
[48:16] Future of Accounting with AI
[52:50] Parting Advice for Future Leaders
Unedited AI Generated Transcript:
Brent:
[0:05] Welcome, Professor Paul Griffin. Thank you for coming on today.
Paul:
[0:09] Thank you very much. It's great to be here.
Keller:
[0:12] We'd love to start off by hearing, what do you love about polo?
Paul:
[0:15] Ah, my favorite sport. Thanks for asking that question. What do I love about it? It literally is probably the greatest sport that ever existed. It's been around for thousands of years, you know, and we play polo. I'm playing like three days a week during the summer. And so I'm dedicated to the sport. We have a club of about 50 members, one of the largest clubs in California. The Will Rogers Club down in LA just got burned to the ground. So all of the LA players are looking for clubs. They may even show up in Northern California for what we know. Um um but it is a great sport um you have to be uh you're clearly pretty pretty active and fit right um but it's not fit fitness is not enough you've got to be able to balance and ride a horse and riding a horse is an acquired taste it's years and years and years of practice uh every horse is different so it's never you can never just sit there in the same position You never know what's going to go on. So there's that. There's also the fact that the game is changing split second by split second. That ball is going one direction and quickly goes in another direction. The ball is traveling almost at the speed of a bullet.
Keller:
[1:42] Really?
Paul:
[1:43] Okay. And I know this because one of my good player friends did a back shot, which is turning the ball behind them. And that ball, and I was following this player, and he quickly turned and did a back shot. That ball came to me, right, and it actually hit me on the head. But I saw the ball coming, but it was coming so quickly, my brain could not move my head. That's how quickly that ball was coming. I had no way, even though I could see it, it was coming so quick.
Keller:
[2:20] Wow.
Paul:
[2:22] Fortunately, over the many years, played 25 years, I haven't really been injured. I've had a few falls, but nothing major. And I just love the sport. it's a dangerous sport and, But only dangerous if you don't play by the rules, all right? The rules are almost like the Encyclopedia of Britannica. They're very detailed. Sometimes it's quite difficult to know what the rule is. But if you play by the rules, it's safe, challenging, physically demanding, the greatest sport that ever existed, in my view.
Paul:
[3:01] Others would debate that, but that's my view.
Brent:
[3:04] Yeah. Is that one of the reasons you came out to Davis to begin with, to be able to have horses and be in this country?
Paul:
[3:11] No, no. I was in Palo Alto before Stanford came over here. At the time, this is in 81, 1981, goes back a few years. At the time, the school was beginning. It was the founding of the school, and I was like one of the very first faculty, the seven of us. We came from all over the country, from the East Coast, Stanford, from the South, and so forth. So, we came over at that time. And then I started learning about UC Davis. Well, the first thing I learned about UC Davis is the cycling capital world. So, I became an avid cyclist, right? It was fantastic. And then I learned about all the equestrian activities. At that time, they had a polo field. They had a jumping field. They had a cross-country field. They had a track. They had so much that they don't have now because they've been replaced by buildings. But I could give a lecture to my couple of hundred undergraduates, pack up my bag, five minutes. I could be on a rental horse because the university was getting donated horses. So I could be on a rental horse with a student instructor ending my day. What a great way to end a day, you know?
Brent:
[4:30] Sounds perfect.
Paul:
[4:30] And couldn't ask for anything more. And so that was the beginning of it.
Keller:
[4:33] Okay, yeah. And when you first got to Davis and they were building out the business school, what was that process like when you're going out starting a new, I guess, you know, portion of the university? What are the building blocks you guys were looking at?
Paul:
[4:46] Well, it was like seven or eight faculty. In a dark room, not knowing where the walls were or where the windows were. We didn't have a clue what we were doing other than a few experiences that we all had. But we had to put together a curriculum because we had students. And it was a sort of on-the-fly type of operation in those very early days. We'd admitted students, right, without having a course plan. And so, I like that The idea that we went from a very sort of ad hoc approach there, we sort of knew what we were doing, but looking back, we probably didn't. And now we have a ranked school with some of the top faculty in the country. I mean, forget about me, but the rest of us are all pretty good, highly qualified people.
Brent:
[5:41] Yeah, no, certainly.
Paul:
[5:43] So it's been a fantastic journey in that sense.
Brent:
[5:46] Yeah.
Keller:
[5:47] And how has it evolved from when you guys first established? Because I saw a lot of the stuff, you're talking about rankings, a lot of what I've seen recently is kind of Davis is trying to differentiate from some of the other top business schools by kind of having a more unique curriculum. How would you describe, I guess, like that shift throughout,
Keller:
[6:05] you know, the 40 years you've been here?
Paul:
[6:06] Well, it's interesting because I can look at this from a fairly long standpoint. From 1981 to 24, that's quite a few years. But back in the 80s, business was not really favored on Davis. Davis was a liberal campus, liberal arts, sciences, and so forth. So we were a brand new kid on the block, and nobody quite thought how to treat us. But they knew that they didn't really like business a lot. But then people got used to us and business became the thing. The MBAs became the thing. Everybody wanted an MBA. Remember, go back a few years, MBAs were guaranteed success, pathway to success. So we got massive enrollments and that's where we were able to build up the faculty and build up resources and get donors and alums to help us out. I might say graduated. So that was a great period, and it was a great period for American business too.
Brent:
[7:11] Right?
Paul:
[7:12] And then you go through the recessions and so forth, and the political winds change. And what students want changes. You know, now it's not so much the MBA, but it's more like technology and some of the things we might talk about, how to use technology and AI to run businesses or mitigate or assess risks of businesses and so forth. And then during that time, of course, the internet was invented. Right. So we had to adapt to that. Right. And then social media came along. We're adapting to that. And now AI is right there and we have to adapt to that.
Brent:
[7:55] Yeah.
Paul:
[7:56] So it's been really interesting from that point of view because we have to respond to what people want and what society is offering and what businesses want in terms of, you know, the various talents of their employees.
Brent:
[8:10] Yeah.
Paul:
[8:11] So we have to respond to all of that.
Brent:
[8:12] Yeah. Because I know, I think Northwestern has a new MBA eye attached to it. Yeah, really? Yeah.
Keller:
[8:19] Oh, they put ice in.
Brent:
[8:19] Yeah, yeah. So I think the MBA schools or business schools as a whole probably are a little bit more forward thinking than other parts of academia and their ability to adapt to changes quicker. Would you agree?
Paul:
[8:33] Yeah, no. I mean, adaptation is really the key here. And one of our advantages is we're on the smallest side. So I think we can adapt better and more quickly than some of these larger schools that have sort of entrenched people and they're very hesitant to change. But we're more like a nimble, smaller, more adapting time to school. So that's really benefited us over the years.
Brent:
[9:00] Yeah, I can see that.
Keller:
[9:02] And looking at your work, we saw you published a lot on risk and I read an article recently about risk specifically. I want to ask, what's the biggest risk you've taken in your life?
Paul:
[9:11] Or the biggest risk I've taken, like jumping off a cliff or something?
Keller:
[9:16] Interpret how you want.
Paul:
[9:18] No, no. I mean, thinking back, I guess the biggest risk I took would be something I was about your age. Okay. So I was undergraduate, doing well, you know, got good grades and so forth. But it dawned on me that I needed something more than that. And having more than that meant I had to leave my country because I was a Kiwi-born person. So I had to leave my country and come over to America to a completely unknown setting. And, of course, we talk about risk as upsides and downsides. And I guess I looked at that time as the risk being 99% upside and 1% downside. That's kind of the way it's turned out. But it certainly was a risky decision. Anyone, you know, young person to leave their family, leave their friends, go to a new situation, all about education, wanting to do something, you know, to advance yourself. Yeah. Right?
Brent:
[10:24] And then kind of going back a little bit more to your work specifically, how do you think about risk in the business setting?
Paul:
[10:34] Well, I mean, risk is defined in many ways. I like to think of it as sort of there's two levels. There's risk and there's uncertainty.
Paul:
[10:44] Okay? And if you think about risk, other people would have different views. But if you think about risk, that's other things that we know about. And we can look at the outcomes and the distribution of outcomes and there may be extreme outcomes on something we know about. Right? But when you look at uncertainty, there may be things that we don't know about that are simply going to come along. We've got to deal with them and they come along. All right? I mean, just like a recent example would be when we're thinking about running businesses, right, global business and so forth, up until about six months ago or maybe a year or two ago, we wouldn't have thought much about tariffs. Now, tariffs are a huge risk, right? And people are running spreadsheets all over the place trying to figure out what the different options are. Tariffs go up, tariffs go down, what sort of products they're bringing. So that becomes then a measurable risk. But before that time, it was really uncertain. Nobody really knew when and how much and what it would be like. So you can see just on that concept alone, you've got these two sort of sides to risk. One's measurable, one's more known, and the other's less known or unknown.
Brent:
[11:58] Yeah. Do you think the tariff example is even more risky because they don't know how long the tariff will even be in place? How much the tariff will be— Well.
Paul:
[12:07] Yeah, that's what I'm saying.
Brent:
[12:07] Yeah.
Paul:
[12:08] Because you can compound the unknowns on the tariff.
Brent:
[12:11] Right? Okay. Yeah.
Paul:
[12:12] Because this is playing out, and we don't have a history other than maybe 100 years. We don't have a history of what it looks like under these different options.
Brent:
[12:22] Yeah.
Paul:
[12:22] Right?
Brent:
[12:23] No.
Paul:
[12:23] We don't have the data to look at the distributions of the outcomes.
Brent:
[12:27] Yeah.
Paul:
[12:27] Right.
Brent:
[12:27] And then when you kind of lack that data, how do you go about quantifying the risk?
Paul:
[12:33] If you lack the data?
Brent:
[12:35] Yeah. You can't. Okay. But what about with your work with the environmental impacts and looking at the environment and you, before people were even reporting, you were able to still tease out some of the environmental risk factors?
Paul:
[12:47] Well, going on the environmental side, I mean, you really have this notion of outcomes and extreme outcomes and what's going on in the tail of it. So, there's plenty of data, I think, in terms of what those distributions look like. And then you can extrapolate a little bit to look at even more severe type situations. So the issue is when you have an extreme outcome what do you know about, the consequences of those extreme outcomes. So those are things we know less about. We know we could have tornadoes. We know we can have climate change and sea level rise and so forth. We know all of that. The question is what are those impacts going to be, right, and how severe will they be? And we don't really know a lot about that yet.
Brent:
[13:44] Right?
Paul:
[13:45] So those are more like guesstimates, and people kind of know these events can occur, right? Maybe the 500-year flood is going to occur every 10 years from now on. We know that sort of thing's going on. But what those impacts are, dollars or health, all the different impacts, health-wise, societal-wise, economic-wise, and these different kinds of impacts you can look at.
Brent:
[14:11] Yeah.
Keller:
[14:12] Then I was diving more into the climate change example. Do you think that climate change risk is properly priced into the market currently?
Paul:
[14:21] It's a challenging question. A lot of people are asking that question, so thanks for asking it. The issue with the recognition of that risk is that in the early days, it was clearly underestimated or underpriced.
Paul:
[14:40] As we get more information about what's going on, what the impacts are, and what the distributions extremes look like, we're getting much better at incorporating that risk into various asset prices or things that we do. For example, climate risk is being pretty accurately now impounded into house values, right? You see that in insurance rates. You see that in companies not even being willing to insure because they've judged that they cannot provide insurance to the extent that those risks are out there and sufficiently high. So, I think that the climate risk is becoming more and more correctly priced now before it wasn't. The issue with climate risk is that, yes, we're going to be able to price it accurately, but when we start pricing it accurately, it's possible that the markets could break down. In other words, just to give you an example, if we're pricing flood or hurricane risk accurately, It could be that the insurers are going to pull out of areas where those events are likely to be severe or high-frequency events, right?
Brent:
[16:04] Yeah.
Paul:
[16:05] So if the insurers pull out, then the housing market could collapse. If the housing market collapses, we have a problem in terms of people finding place to live, right? And if the housing market collapses, it's not just on the home aspect, but it could be on the rental thing as well. In other words, rents could go sky high and nobody could afford a rent because people are not willing to absorb the entire climate risk themselves. They've got to be able to mitigate or build it out in terms of have it absorbed by somebody, insurance companies. If the insurance companies pull out and what's left are the governments and the governments say, there's no way we can fund all of this flood damage or hurricane damage, then what's left?
Brent:
[16:57] That's a good question.
Paul:
[16:59] Right? I mean, it's a tricky situation and challenging. And so those outcomes are something we need to consider when we start ignoring the risk of climate change.
Brent:
[17:11] Yeah. I think that's a good example, too, where do you think that there's ever a time where quantifying risk might actually do more harm than good from the standpoint of now that we know the full truth, quote unquote, we react differently and that causes a lot of harm.
Paul:
[17:30] So you're talking about put your head in the sand strategy.
Brent:
[17:32] A little bit. A little bit.
Paul:
[17:34] I'm not going to buy into that. Sorry. No, you've got to pull your head out. You've got to face the realities.
Paul:
[17:43] Adapt build invest innovate deal with the challenge don't ignore.
Keller:
[17:48] And in terms of like keeping on the housing example do you think that you know extrapolating out if there was going to be you know a crashing of the housing market as a result of these risks coming in is that on the insurance companies to take more responsibility or is that on government to take more responsibility is that everyone like how does that fall out or because the individual homeowners aren't going to want to take responsibility for the climate issue but insurers don't want to take all that loss for no you know no apparent upside i don't know yeah.
Paul:
[18:19] It's actually it's an interesting issue because the insurance industry should be viewed as a private sector industry and they can do what they want if they want to insure they can't they don't want to insure they don't have to right their freedom they have freedom to choose as a business all right but insurance is part partly regulated, right? And it's regulated usually at the state level to make it a little bit more affordable to everybody. So what that means is that the states are absorbing some of the risk because they're lowering the cost to everybody else. People are not paying the full price for the risk. But if the states decide that they're not going to subsidize flood insurance, home insurance, whatever it might be, then who's left? And the government will say, well, I'm not going to come in and take care of California or Arizona or wherever it might be.
Brent:
[19:21] Yeah.
Paul:
[19:22] Or maybe they will. I mean, that becomes a political issue.
Keller:
[19:25] Yeah.
Paul:
[19:25] Right?
Keller:
[19:26] Yeah.
Paul:
[19:27] So, insurance companies, they can ensure that they can do other things or they can choose to insure in different products or against different kinds of events or activities.
Keller:
[19:41] Yeah. And then looking at, I guess, reporting of climate risk, I know one of the players was talking about, you know, the definition of like material risk and when a firm has to report a risk, you know, in their actual financial, like what they're sending out to their shareholders. Do you see a point in which all firms across different industries will have to have climate risks as part of a material risk? Or will some firms be able to claim that they're not impacted by this change?
Paul:
[20:07] Well, the concept you're referring to is the financial concept of materiality. So, under the law, under securities laws, that a firm is required to disclose an event which is deemed material to its business. Now, materiality could mean one thing to somebody and another. It's not like a super well-defined concept. But if it is material, and if 99% of people would judge it to be material, and a company does not disclose, they're on the hook. Not criminally, but on a civil basis. It's a subject to damages.
Paul:
[20:51] But they're only going to be subject to damages if their lack of disclosure caused harm. Right and the problem with materiality today the absence of disclosure causing harm right has to be measured financially right, Okay, under the concept today, if it's measured by way of emissions or sea level rise or whatever, you run into problems in terms of being able to enforce a claim that you suffer damage because it's harder to put that in financial terms. So, there's a big discussion among academics and others about what materiality means. Does it mean harm and just only in monetary terms? What does it mean harm in terms of harming the environment or what other, you know, harming social, customs, social activities?
Brent:
[21:55] Like health even.
Paul:
[21:57] Or health, exactly. So, we're not at the point where we've got consensus on what that means. We have consensus that something that's misrepresented is material if there's financial harm. That we're less uncertain and the laws are dealing with this as to whether a lack of disclosure that causes non-financial harm is actually something which is subject to litigation. And you're seeing this rolling through the courts in terms of some of the climate change cases, right? Because they're saying, well, look, it's causing health issues. And the courts are still very reluctant to take that on and to impose some sort of liability on the firms for not disclosing whatever it might be about their activities.
Brent:
[22:56] Yeah.
Keller:
[22:57] Do you think there's a – like under the current laws, do you think there is
Keller:
[23:00] a legal framework to make that argument that these kind of non-financial harms?
Paul:
[23:06] The legal frameworks are evolving. And it will depend on the highest courts in various jurisdictions. It could be the Supreme Court in the United States, but it could be another court maybe in Europe or somewhere else. So those courts, I mean, there was a decision made a couple of years ago in Holland. And they actually imposed a penalty, I think on shell oil, for pollution, right? And so it was a non-financial damage. and that decision just got overturned.
Brent:
[23:42] Really?
Paul:
[23:43] Yes.
Brent:
[23:44] Why? Do you know?
Paul:
[23:46] You'd have to look, but it was subject to appellate arguments that got overturned. So we're going to go like two steps forward and maybe one step back for quite a few years to come, I would think, on this issue.
Brent:
[24:01] Yeah. And then on a slightly different issue, I think you've done research where you've seen companies report emissions or like their supply chain emissions and that type of thing. But then the actual emissions that they're putting out, even like despite increased reporting, isn't really changing that much. How do we think about like the incentive structure, like how to change actual emissions despite having to report more?
Paul:
[24:29] Yeah, I acknowledge the point, right? Now, that's a concern that people, the companies are not giving the full picture, basically, is that what you're saying? And some people call it virtue signaling, greenwashing, and so forth. Okay.
Paul:
[24:46] I think that this problem we saw, I think this is a short-term issue.
Brent:
[24:50] Okay.
Paul:
[24:50] I think it will be solved through technology. Okay. And the technology will be such that I can take, I can look at almost any firm, right? And I can use whatever mapping, I can use instruments, I can use different satellites and so forth, and I can figure out exactly how much CO2 that firm is putting out. I can figure out how much methane they're putting out. I can figure out where their waste is going. And all of that, I think, is going to be done to be able to identify far more accurately and unbiasedly as to what firms are doing in terms of these outside externalities, right, much more accurately than what the firm would do because the firm's going to be biased, right? So we're seeing that already. We've got these outside data vendors that are saying, look, you give me a firm, I'll tell you exactly what their environmental impact is without the firm having to do it. So, once we get that up and running and comprehensive for a large number of firms, problem solved. We don't have to worry about so much about what the firms are doing. Because we can model the firm without the firm getting involved. We can do it. So as long as we get it accurately, we're fine.
Keller:
[26:13] Right?
Brent:
[26:14] Would that then require the legal frameworks to then punish those firms that are polluting too much or having that? Because it's one thing to be, you're emitting more, but then what? How do you price it?
Paul:
[26:27] There's different ways to do that. You can punish firms by simply looking at their market activity or stock market, or consumers can punish firms by staying away from the products. There's lots of market-based ways to exact a penalty on firms, but we need accurate information so that everybody believes that that actually is the case, that they're doing more than what they say they're doing, or they're doing more than what their competitors or peers are doing. Right so there's ways to do that of course we're a relationship of laws and so everything has to be done through some sort of legal mechanisms we have to do that, but once we've got the good data good solid reliable data I think we can hold firms to account much more accurately than we can today, and they will have less redress by saying our data is a bunch of rubbish because it's obeying the highest standards of science. And so what's happening is that some of these firms are now doing this, right? The firms are actually buying their data rather than creating themselves. It's cheaper and it's better, right? For a firm that's wants to do good things with what they're doing.
Keller:
[27:57] And then in terms of modeling environmental impacts for a firm, do you have an opinion on the selling of carbon credits? Because that's something I've looked at a couple of times for classes. To me, it just seems like a very dangerous gray zone where a massive company can be selling carbon credits or double counting even, you know, there could be a middleman that can count some of these credits. And to me, it just seems like a backwards approach to actually trying to reduce emissions, because if you're implementing that into a model, it would seem as though, you know, some massive corporations are becoming more environmentally friendly, but functionally, they're changing nothing in their supply chain. Do you have any thoughts on how that market currently works and maybe how we could improve it?
Paul:
[28:46] Well, the notion of getting credits or some sort of coupon or whatever to do something good has been around for eons. It's how to use the market to deal with a negative externality to price it and so forth. So the notion that you're allowed to have credits that are tradable is a good notion. It's suited to the way markets work, but you have to have accurate information, right? And you have to have a system whereby the credit market actually addresses the problem and reduces maybe emissions, as that's what you're up to. Um, so, you know, there, there are some issues with those markets right now in terms of people are creating credits out of nothing and, and they're getting money for them where they're not really achieving any objective, right? So there's, there are issues like that that need to be dealt with, but if you get reliable, you're well-monitored, even regulated markets, um, that's going to be part of the solution.
Paul:
[29:52] Um, and the other thing about credits is that if, if companies, uh, can get credits by reducing their environmental footprint, and if they can sell credits by reducing environmental.
Paul:
[30:06] There's two benefits. One is they get money for the credits. And two, they get a higher stock price because they can show their investors that they're a better, more environmentally friendly company. So there's a double whammy win on that for companies. And I'm actually studying that not only with the CO2 credits, which is that Elon Musk type of thing with Tesla, but it's also very beneficial for companies that are big on methane. All right. And you have to think that if we are transitioning away from oil to natural gas as one of our main energy sources, which is what you're hearing out there, right? India, for example, is on record as wanting to take the entire country, largest country in the world, onto natural gas away from fossil, from oil-based fossil. But the exploration, delivery of natural gas involves methane leaks. So the more we have natural gas the more we're going to have a methane problem, because methane is literally unburnt natural gas.
Paul:
[31:15] And if we can get money for reducing methane leaks, that's good for the investors, it's good for the firm. It's a win-win. So, it's just on the methane, but there's CO2 and there's other pollutants as well. So, it's a good mechanism. Again, markets have to work in terms of being transparent and having accurate information so people can make honest trades, basically.
Brent:
[31:43] Yeah.
Paul:
[31:44] Right?
Brent:
[31:44] Has anyone ever looked at tax credits for reduced emissions?
Paul:
[31:51] Probably. I mean, I don't have my hands on the detail of that. I would think there would be, yeah, actually I'm sure there would be, there would be tax credits for investments in emission reducing activities. Right? So maybe there's an investment tax rate. I mean, we get tax credits for putting this all around a roof. So, that's, yeah. So, there's plenty of tax credits out there.
Brent:
[32:18] Yeah.
Paul:
[32:18] I mean, I just don't run down a list of what you're looking at. But it's an incentive device.
Brent:
[32:24] Yeah.
Paul:
[32:25] Yeah.
Brent:
[32:25] Because the only thing I was thinking of there was you pay a lower corporate tax rate if you can prove you are actually polluting less or something along those lines.
Paul:
[32:34] We have that as individuals. We buy an electric car. I'm getting a reduction in my taxes.
Brent:
[32:42] Yeah no definitely.
Keller:
[32:44] And looking at kind of larger scale trends especially in the u.s because of our you know the nature of our political system is rather quickly churning do you see kind of administrations playing a large role in corporate culture as it relates to climate change or do you think that the market and the people wanting more climate to be priced in is still going to move the market towards a more sustainable future.
Paul:
[33:11] Well, I mean, eventually, it's inevitable that we'll have to be in a more sustainable future. I mean, the trends are not going to reverse substantially. So, we have to do something. There's questions of timing. So, right now, we have an administration that's going to delay the ultimate transition, right? By focusing more and more energy exploration or fossil-based energy exploration and some other things. and they're putting pressure on the SEC to relax the rules on climate disclosure. So there's a few things like that that are sort of going to delay the inevitable that's on its way. It's a ship, a huge ship that's sailing. It's going to be very hard to steer off course. All right? And some of these regulations are not only changing here, but they're actually having sort of carryover effects in other countries. Europeans have just delayed some implementation of a similar kind of climate disclosure rule. Down and down under, there's some rumblings along the same lines.
Paul:
[34:27] But these regulations are in place since what's going on is rather than being required for all firms, they're just saying well it's voluntary, you can do it if you want, and it may come to a point where it makes very very good sense to do it voluntarily so that you don't need someone whipping you on the backside to make you do something. You do it because you want to do it and make good sense for your firm or your shareholders or customers, employees, and so forth.
Brent:
[35:02] Yeah, because I know people have talked about that idea with the ocean. It's like trillions of dollars are reliant upon a healthy, clean ocean. And then at some point, if it's too polluted, you don't have enough fish, like you're losing trillions of dollars worth of industry or industries are disappearing and whatnot.
Brent:
[35:19] Do you think the quarterly nature of reporting for public companies kind of limits their ability to think long term, maybe about these environmental issues?
Paul:
[35:31] You know i mean up to a point i mean that having to produce sort of good results every quarter or be positive positive news every quarter is is encouraging firms to think shorter term versus longer term all right but the way i look at it is that the long term is always the sum of the short terms.
Brent:
[35:56] Right?
Paul:
[36:01] So, and in the long term, you want to stick around. So, the idea is to look at those short terms to make sure that the long term is viable for you as a business. So, if you ignore that, you run the risk of the business closing down or losing customers or being taken over or acquired or something like that. So that's the way I look at it. Think of the long-term as simply adding up all the short-terms.
Brent:
[36:33] Would we need to change any incentive structures within the market to encourage more of that long-term thinking, though?
Paul:
[36:41] Well, that's the issue for boards and so forth, is to balance the needs of the various stakeholders they have, right? Some are going to want long-term benefits. Others are interested in shorter-term solutions. So what the directors, boards of directors have to do is they have to look at what everybody wants and engage in this best or near optimal balancing act. And that balancing act is not going to be static. It's going to be changing every year. It could be changing every quarter, depending on what's out there and what people want and what they don't want. So it's a tricky problem, but it's describable and doable. But it requires some sort of deep thinking and comprehensive thinking about all of these people that want something out of the firms and some of them want it now, some of them are happy to defer, right? But they're all important people for your business so you have to cater to all of them and balance all the various needs that they have.
Keller:
[37:52] Do you think there's like a particular language or way of framing these climate changes in firms that kind of caters to both the progressive shareholders and the more conservative? Because one thing we've seen is people kind of claim ESG is just this corporate greenwashing. It's not actually making any changes. And they're just very turned off by the idea that you have to kind of put on a layer that maybe isn't considered free market to a firm's decisions. Do you think there's a way that we can explain or I guess, yeah, frame these climate changes in a way that is a financially viable and potentially a very profitable opportunity for both sides.
Paul:
[38:36] Um, the, the short answer is yes, but let me give you like a concrete example. Okay. Um, if you, if you look at, at, you know, the big, the big bad boys out there, it's like Exxon and Chevron, right? Um, they, they sell a product, they sell fossil fuel based products and they, uh, argue ugly or increasing emissions, right?
Paul:
[39:06] The other side of the coin is that firms like that, particularly Exxon, because I know this, are actually the most innovative in terms of looking at climate solutions, okay? And the way we look at that, we identify who is applying for and developing patents on different activities which are associated with reducing the various negative aspects of climate change. And so oil and gas industry that's doing this. So in some ways, they're very progressive, but it's not that well publicized. The current sort of discussion is that we've got to monitor, regulate, you know, eliminate certain products of these firms, and it's almost an acknowledgement that they understand that because they are engaged so much in innovation. And as I said, this is well documented. It's not just saying it's out of thin air. You can track patents. They're registered. We have the U.S. Patent Office that registers all these things, and you get a lot of detail in terms of, if you look at a patent application there's a lot of detail on what's going on, what they're doing so it's interesting in that sense that.
Paul:
[40:35] The most conservative actors are actually the most engaged in innovation.
Keller:
[40:41] Right?
Paul:
[40:42] And innovation to solve a climate issue.
Brent:
[40:44] That they're causing.
Paul:
[40:46] Yeah, I find that just fascinating. Maybe they're feeling the pinch and trying to correct their own issues, right? But at the same time, a lot of innovation is done on the basis of making money, right? You solve a good problem and you make money solving it, there's a win-win there.
Brent:
[41:07] Do you have any examples of what some of those patents are?
Paul:
[41:11] I don't know specifically, but there would be like carbon capture would be one of them, for example. Eliminating certain compounds from products would be, I mean, there's lots of things like that.
Brent:
[41:24] Yeah. I've also think I've read that the oil companies had the best models of future climate change and what that's going to look like. I think going back to the 70s or 80s, they were predicting better than a lot of academics were just how their own practices are going to impact global emissions or global warming.
Paul:
[41:45] Yeah. I mean, they may have the strongest incentives for that as well, right?
Brent:
[41:49] Yeah.
Paul:
[41:49] Because they have most to lose. Yeah. Right?
Keller:
[41:53] And looking at some extreme weather examples, and I guess this technically wasn't deemed fully a wildfire, but for the LA fires that just happened, what are some of the ways you see that impacting the economy in LA, and maybe in some ways that are less obvious to the public than just housing? What are some of the secondary impacts you're seeing?
Paul:
[42:13] Well, I told you it affected all my polo friends in L.A., right? They can't play polo anymore down there.
Brent:
[42:21] Did they get the horses?
Paul:
[42:21] Will Rogers was in that same Palisades area.
Brent:
[42:24] Right?
Paul:
[42:25] Got burned out. But anyway, that's just a few people.
Brent:
[42:31] Right?
Paul:
[42:32] Let's talk about everybody else. I think what happened is it's people are waking up now. They realize there's certainly a wildfire risk. And LA, they maybe didn't think they thought it was Malibu, but never Palisades and so forth. So they're waking up at that risk, and they're realizing at the same time that insurance is not the answer. Self-insurance is part of the solution. Self-insurance means making your home more resilient, cutting back, planting the right trees, and so on and so forth, not building right up to a wildfire area. There's a lot of things like that that can be done that are actually not that expensive to wildfire-proof your home, right? You wildfire-proof your home and you do that for an entire area, like a suburb or a region, community. And then the insurance companies come back in.
Paul:
[43:35] So, you act in a way to help mitigate this risk, an insurance company to recognize this, and they'll come back with products because they can see that they can handle the risk at this point. So, that's where I see what I would like to see going on. I've seen it go on here because we've had the wildfires here up in Paradise and so forth. And so that's had a sort of a spillover effect to what we do around here to wildfire proof our properties more, whether it's building materials or whether it's the shrubs and so forth. There's a lot of activity now, and we have inspections. The local, I guess, the local government's actually going around inspecting, and it's voluntary on their part. There's no real consequences, but they just tell you what you need to do or what you haven't, or if you've done enough, right?
Keller:
[44:29] And in terms of self-insuring your home, one thing I saw with the LA fires was a lot of the drought-tolerant home yards that were encouraged, whether they were incentivized financially or whether it was having fake grass that was paid for by the state, to try to reduce the overall water impact and climate impact that homes have. A lot of those houses ended up having more burn effects because there was less kind of water to support when the virus came in. How do you think about balancing, you know, different, I guess, climate change agendas or plans to work that can, you know, one thing that's supporting against wildfires might not be supporting against the water issue. And I guess I haven't seen a lot of examples of conversations between these two different groups. How do you think those operators should navigate and communicate that they're still moving the ball forward with climate change, but also doing so in a way that can prepare against extreme risk?
Paul:
[45:29] Well, I'm not sure I understand the question, but the notion of having adequate water is for the firefighters to have adequate water to put out the fire. But the horses now escape the paddock.
Keller:
[45:47] Right?
Paul:
[45:47] You're trying to get the horse back in, right? The horse shouldn't be able to get out in the first place. So that's why we've got to do much more mitigation in terms of the wildfire not having to get to a point where we require these masses of water. Of course, we've got to have water supplies if we're going to be fires that need water to put them out. But we shouldn't be relying on that. That's not the only way we can deal with this.
Brent:
[46:12] Yeah. I think maybe what you're getting at is which risk do we like see that there's like a higher price on if it goes wrong like what do we how do we evaluate what risk is the riskiest addressing that first and then balancing the other ones that come downstream of that because if you don't have enough water you clearly can't fight the fire but if everyone has drought tolerant plants those are also the plants that are meant to burn so like how do you see companies like weighing different risks that like kind of act against each other well.
Paul:
[46:47] I think i think they are i mean you have to look at each area each area is going to have its unique characteristics right so some areas will be, much more subject to drought and and a lot of you know low moisture in the area others will We'll have a lot of rain, and, of course, that creates growth potentially that could burn in a hot summer. So each area is going to be different. So the solutions are not going to be uniform.
Brent:
[47:17] Right?
Paul:
[47:19] And so I think we need more of that. We could have a lot more aerial monitoring of what we are, what our risks are. The insurance company is doing that. A lot of people don't like it because somebody's looking down from above. But when you stand back and think about it, that's actually a pretty good solution because now we know all the different risks of things that you're talking about, whether it's moisture or whether we need water and so forth. And, of course, there's always the case for water conservation. We should be doing that anyway. And, you know, there's plenty of other parts of the world that are good models for water conservation. We're actually pretty well off here in America in terms of water supply, relatively other parts of the world. But we do have droughts, and we've had them in California, and other parts are running short of water as well. But water conservation is obviously part of it.
Keller:
[48:17] And stepping back a little bit to just accounting broadly, in your career you've seen the internet come through and take over a massive swing, and now with AI. What do you see the future of the accounting industry looking like? And how do you see accounting integrating AI, integrating big data into the way it's done? And, you know, just, yeah, what do you see the future of accounting?
Paul:
[48:41] Well, the accounting profession, you're talking about the accounting profession as a whole?
Brent:
[48:47] Sure. Yeah, we can start there.
Paul:
[48:49] I mean, AI obviously is actually quite suited to accounting because a lot of accounting is very routine, like filling out tax returns and so forth. So, a lot of that is going to, will be, and probably is already being handled by AI technology.
Paul:
[49:07] I think the government could probably use AI more in terms of the way it provides services or interacts with members of the public and so forth. They could do that. But at the end of the day, what is in AI is what we already know.
Paul:
[49:28] What we don't know could never be in AI. It can only be in AI once we know it. Right so the the the advantage you have in a world of ai is creating knowledge not distributing existing knowledge or managing existing knowledge so the so the advantages you know to people employees and so forth will be where they can contribute in ways that AI cannot, and that's likely to be in innovation, right? It's likely to be in imagining new products and scenarios and so forth that literally haven't been thought of. So that's where the benefits will be for people that want to do well in an AI world. We have to think in those terms, not just in terms of managing or manipulating what we already do because that's going to be, that'd be easily handled by AI. Data input and stuff like that. Reading documents, easily handled by AI. Getting better. I've noticed in six months, it's getting better all the time.
Brent:
[50:41] Yeah. There's always new updates.
Paul:
[50:43] Yeah.
Brent:
[50:43] Yeah. I think there'll be a lot of really creative ways of harvesting more data. I think the ag world is like a really good example of that, of there's constantly innovations around, i can now put a sensor out in the field and collect these data points that i never have before and get ai to like comb through all that data and make sense of it so then we kind of have a little bit more of that information of like what's the environment looking like in this area but, yeah yeah.
Paul:
[51:12] No i mean it's like you can only like just take myself for example if you put in my name, professor, whatever, what you get back from AI is whatever's on my wiki page.
Brent:
[51:25] Yeah.
Paul:
[51:25] So I could just, I could see, you know, the wheels turning in this AI machine, but that's only one element, and there's so much more that I do that would never potentially come up. They just go to the wiki page.
Brent:
[51:42] No.
Keller:
[51:43] Yeah.
Paul:
[51:44] I mean, and so I control the wiki page. So in some ways I can control AI, but what I put on that page, right? Because that's what it's doing.
Keller:
[51:52] Yeah. I think that's a big fear. Some of the other professors we've talked to have kind of expressed a similar sentiment where they are worried about students over-relying on the tools early and not actually understanding the creation process of knowledge.
Paul:
[52:07] Right.
Keller:
[52:07] Because obviously yeah ai has its its threshold and its limit and if that's all you know or all you've taken the opportunity to learn once it hits that limit you're not going to be able to provide really anything new um.
Brent:
[52:20] Or just distinguish what's true yeah yeah because we all see it like there's always results that are just flat out wrong i'm sure i can get ai to say something about you that you hate polo or something if i talked to it long enough but yeah you.
Paul:
[52:39] Could run a test on that.
Brent:
[52:40] They actually they they probably.
Paul:
[52:43] Uh are um uh scraping the polo story right because that was that was that's in the uc davis magazine.
Brent:
[52:51] So they.
Paul:
[52:51] Probably are um but it depends i mean there's tons and tons of paul griffins out there so they're probably confused about that.
Brent:
[52:58] Too Oh, sure. But do you have any other parting advice that you want to give to students or young MBA professionals that are entering the field, just what they should think about moving forward?
Paul:
[53:11] Well, I think it goes back to what I said is, you know, the benefit to you in terms of moving forward yourself is going to be on what is not already known or not already out there, not already being manipulated in some way. So you've got to be creative. You've got to see things that other people don't see. So how do you do that? Not everybody's built for that, right? How do you become an imaginative person and then capitalize on that imagination? That's what you need to do. That's what we need to be thinking. You're teaching students. Not just to read and read and read and say, I read a book A, B, C, D, but take from those books and say, We put them all together. What insights do I get about the way the world is now and how potentially I could change it?
Keller:
[54:05] That's great advice. Well, thank you so much for your time.
Paul:
[54:08] Thank you.