SpaceX leaks, independent directors

Summary

Podcast Summary: Shareholder Primacy

Episode: SpaceX Leaks, Independent Directors

Date: April 29, 2026
Host(s): Mike Levin (activist investor) and Ann Lipton (Colorado Law professor)
Podcast by: Free Float Media Inc.

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Overview

This episode of Shareholder Primacy delves into the recent confidential leaks surrounding the anticipated SpaceX IPO and explores the roles and realities of independent directors in public companies. Ann and Mike provide a detailed, spirited discussion about how the intersection of securities law, governance, and real-world financial practice plays out—using current events and boardroom dynamics as teaching tools.

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Key Discussion Points & Insights

1. SpaceX IPO Leaks and Potential Securities Law Breaches

[00:34-19:43]

A. Background on the SpaceX IPO Situation

• SpaceX has filed a confidential S-1 registration statement with the SEC, but details—including governance, structure, financials, and unusual provisions—have been leaking regularly to the press, particularly via Reuters and The Information.
  • Leaked details include:
    • Dual-class share structure with Musk retaining 40-50% control [03:07]
    • Texas incorporation [03:34]
    • Arbitration clauses of undisclosed scope [03:36]
    • Rumors about valuation ($1.5-2 trillion), financials, affiliate deals (notably XAI), and structuring maneuvers to avoid registration for certain transactions [03:52-04:37]

B. Securities Law Context and The “Drip” of Leaks

• Ann explains the Securities Act of 1933—especially Section 5—designed to ensure investors receive a full, truthful prospectus before any securities are offered to the public [06:06-07:23].
  • Key Quote:
    • "Section 5 says you can't offer securities for sale to the public. You can't even offer unless there's a registration statement that is publicly on file with the SEC." (Ann, [06:06])
• Only after the registration statement is public can offers (and eventually sales) be made. Selective leaks intended to generate interest before public disclosure are precisely what the rules aim to prevent.
  • Why? To avoid “conditioning the market”—that is, letting companies whip up hype without disclosing all risks [07:23-08:17].

C. Are the Leaks Illegal “Offers”?

• The leaks, Ann notes, aren't necessarily explicit offers but are likely “conditioning the market” under SEC interpretation:
  • "The SEC interprets Offers to mean any information that's intended to induce investor excitement...to condition the market." (Ann, [10:01-10:27])
• Although the reporting is legal (journalists are protected by the First Amendment), the source of the leaks may face liability if SpaceX (or affiliates) authorized the disclosures [13:11-14:57].
  • Key Quote:
    • "The issue is not the reporters. The issue is where the leaks are coming from. And specifically if it's coming from SpaceX, either directly...or authorizing someone to." (Ann, [13:12])
• It’s unclear if leaks are coming from investors (who are allowed to see drafts) or SpaceX itself; Mike and Ann doubt the company is unaware or uninvolved given the orchestrated nature of the leaks.
  • "If they really cared...there's no hint that SpaceX is trying to [stop the leaks]." (Mike, [14:31-14:41])

D. What the SEC Could (But May Not) Do

• If the SEC were to take this seriously, they could delay the IPO, “wait for the market to cool down,” or initiate an investigation [16:23-17:07].
  • "What the SEC has done in the past is...delay the IPO, wait for the market to cool down. That's what it would look like." (Ann, [17:04])
• Both hosts expect little intervention from the SEC leadership, even though staff may harbor concerns.
• Market Impact:
  • With SpaceX planning to allocate around a third of shares to retail investors, the protections of Section 5 matter—and yet appear compromised [17:51].
  • "Even if you think this law is outdated or unnecessary, it is still the law." (Ann, [18:07])

Memorable Moments / Notable Quotes:

• "I can't think of a more emblematic company where this [hype before disclosure] is so potentially likely than SpaceX." (Ann, [08:17])
• "Technically this is illegal, but I don't think anyone cares about anything." (Ann, [19:01])
• "There's way too many red governance flags in this for my taste." (Mike, [19:54])

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2. The Realities Behind 'Independent' Directors

[20:47-35:41]

A. Definitional Mess: Legally vs. Practically Independent

• Independence requirements exist at the level of exchanges and Delaware law, but the legal definition often differs from actual behavior [21:40-23:37].
  • "I'm more concerned...with kind of independence in action, how independent minded somebody is...rather than whether their resume represents independence." (Mike, [22:46])
  • Delaware uses the term “controlled mindset.” [22:53]

B. How Directors Are Chosen – And For What?

• Most “independent” directors are nominated by existing boards or through executive recruiters—often the same ones who helped hire the CEO [25:59-26:58].
  • "They get there because a board invited them...a nominating committee did a whole process...hired a recruiter, whatever they did." (Mike, [25:53])

C. What Are Boards Actually Looking For? (Not Independence)

• Mike shares his review of director position specs from real companies and search firms (e.g., Colgate-Palmolive, Spencer Stuart):
  • The word “independent” is barely mentioned, even in documents for “independent” directors [28:33].
  • Behavioral signs of true independence (courage to question, willingness to dissent) are rare to nonexistent in the job descriptions [30:45].
• What do they prioritize?
  • Industry expertise, prior executive experience (preferably CEOs), collegiality, and subject matter skills (e.g., regulatory, AI, cybersecurity), not willingness to challenge management [31:45-32:57].
  • "Immediately they have this kind of kinship, this affinity for...the CEO. You know, 'I'm going to give him another six months.' That's baloney. We don't want that." (Mike, [32:02])

D. The Socialization and “Collegiality” Problem

• The culture boards seek is often not independence but conformity, smooth relations, and social fit.
  • "Collegiality is...the nice signal for we're not looking for somebody who's going to [challenge anyone]." (Mike, [34:36])
• Measurement attempts like Free Float’s new “deference” metric are trying to objectively track just how deferential or independent directors really are [33:36-34:16].

Memorable Moments / Notable Quotes:

• "There's very little here that shows we are looking for independent thinking, that we're looking for people who are willing to challenge other directors and the executive." (Mike, [31:42])
• "If investors are relying on nominating committees to find independent directors to advocate for their interests and to challenge management...they're going to be a little disappointed." (Mike, [34:41])
• "Collegiality...overrated. How's that sound?" (Mike, [35:41])

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Timestamps: Important Segments

• [00:34] – Why SpaceX leaks matter; introduction to the IPO’s governance details
• [03:07] – Dual-class shares/Musk’s outsized control
• [04:11] – Leaked financials and trillion-dollar valuation
• [05:26] – Potential securities law violations begin
• [06:06] – Primer on the Securities Act of 1933, Section 5
• [10:01] – What constitutes an “offer” under securities law
• [13:11] – Role of journalists vs. company/investor leaks
• [17:04] – How the SEC could respond (and likely won’t)
• [18:07] – Irrelevance of regulation if unenforced
• [20:47] – Start of Independent Directors segment
• [22:46] – Real-world independence vs. legal checkboxes
• [28:33] – What job specs actually say (and don’t)
• [31:42] – Absence of behavioral independence in recruiting
• [33:36] – Early attempts to measure “deference”
• [34:36] – Collegiality as code for conformity

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Flow, Tone, and Takeaways

Ann and Mike maintain a sharp, sometimes wry, but always deeply informed dialogue. Their approach is both accessible (lots of practical analogies and asides) and technical when needed. They are candid about what the law is, how it’s really applied, and why the gap between the two matters for investors and governance reform.

Overall Takeaways:

• SpaceX is repeatedly testing, if not transgressing, the spirit and possibly the letter of federal securities law while drumming up IPO excitement.
• The SEC’s enforcement inertia calls into question the relevance of old legal frameworks in today's media-saturated, sophisticated investor landscape—even as those frameworks should matter more when retail is involved.
• “Independent” directors as constructed by corporate America are rarely truly independent in thought or action; the recruitment process is tacitly designed to select for conformity, credentials, and personal relationships—not advocacy or oversight.

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Standout Quotes (with Timestamps)

• "Section 5 says you can't offer securities for sale to the public. You can't even offer unless there's a registration statement that is publicly on file with the SEC."
  — Ann Lipton [06:06]

• "The issue is not the reporters. The issue is where the leaks are coming from. And specifically if it's coming from SpaceX, either directly...or authorizing someone to."
  — Ann Lipton [13:12]

• "Even if you think this law is outdated or unnecessary, it is still the law."
  — Ann Lipton [18:07]

• "There's very little here that shows we are looking for independent thinking, that we're looking for people who are willing to challenge other directors and the executive."
  — Mike Levin [31:42]

• "Collegiality is...the nice signal for we're not looking for somebody who's going to [challenge anyone]."
  — Mike Levin [34:36]

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Conclusion

This episode gives investors, lawyers, and governance enthusiasts a model of how proactive companies can bend legal frameworks to their will—and how board culture is engineered to preserve the status quo. It sets up future in-depth analysis of both the SpaceX IPO as its details become public, and the evolving role (or lack thereof) of truly independent directors.

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For questions, feedback, or to dive deeper into corporate governance and activism, the hosts invite you to reach out via their emails, available in the episode endnotes.

Transcript

[A]

Foreign. Welcome to Shareholder Primacy from Free Float Media podcast about activist investing, securities law, and all the ways the financial and legal worlds intersect and collide in real life. Ann Lipton and I are here for you, our listeners and followers. Ann Lipton is a law professor at the University of Colorado who teaches and researches securities and business law. She holds up the legal end of the podcast.

[B]

And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast.

[A]

All right, what do you want to talk about today? Let's talk about something different or different a little bit. Well, let's talk about SpaceX.

[B]

We haven't talked about. We've talked about the people behind SpaceX.

[A]

Let's not talk. I was going to say we can talk about someone other than Elon Musk, but unfortunately that's going to haunt us.

[B]

Unfortunately. Now that's just crazy talk.

[A]

So. So at Space X we have a glimpse, a hint at what's going on. We will learn so much more so soon, but we will talk about some of what we've already found out. The registration statement isn't public yet, the S1, but from what we've kind of gleaned, we can sort of talk about their attention to and compliance with securities laws.

[B]

Yeah, seems to be a running theme with Elon Musk.

[A]

Yes, correct.

[B]

So we can look at, we can look at what we already know about legal compliance from what has been leaked, and we'll take another look from a different direction at independent directors, how they get on the board and what they might do when they're there.

[A]

Yes, we shall.

[B]

So, okay. And once again, just a reminder, people can email us comments, requests, whatever, at shareholderPrimacy1Wordreefloat LLC.

[A]

All righty, cool. Let's plunge into SpaceX. We were planning on and should and will wait until the registration statement is out to really talk about it. We have learned a couple of things just kind of from reporting and reporting, of course, is code for leaks. You know, people have seen drafts or maybe even the file version. It was solid confidentiality.

[B]

There was a confidential version that was filed that presumably is being edited with. You know, they're getting SEC comments of some kind.

[A]

Right, right. So they filed one version with the sec. It's not. You can't find an Edgar anybody, but don't look. But based on that version, we know some stuff. But go ahead. You were going to say.

[B]

Yeah. So bits and pieces of it have been like, it's like almost daily, Drip, drip, drip. There's another Story usually from Reuters. Also from the information with more details about what's in.

[A]

Well, let's just highlight really quick a couple of the salient things that we've learned that are important. Some of the details that have been leaked. Like it's going to be a controlled company. Right. I think.

[B]

Right. Well, I could have told you that before the leak. Like I actually told my students, I will. He didn't go public with Tesla with dual class company. And I told my students, literally, I will bet body parts that he will have dual class in SpaceX. So unquestionably.

[A]

So there's dual class with lots of control musk. I think the number I've seen is somewhere between 40 and 50%.

[B]

Yeah.

[A]

I don't know.

[B]

Yeah, there might be other, there might be other investors who also have outsized control rights. We don't know.

[A]

Right.

[B]

We know they're going to be incorporated in Texas.

[A]

Yes.

[B]

Apparently there's some kind of arbitration provision I assume for securities claims, but we don't know. They just said arbitration. So until I see it, I don't know exactly what it covers.

[A]

Right.

[B]

Things like that.

[A]

All right, so, so, and then there

[B]

are some financials that have been leaked which are of more interest to you than they would be to me.

[A]

Well, no, they should be interested everybody. But yes, the, the valuation on this based on some very. I mean again, no one has ever seen SpaceX financials but the valuation based on the amount of money that they raised is looking somewhere between. I'm going to use a broad range 1.5 to $2 trillion.

[B]

That's what they're saying.

[A]

Yes, yes. I think they've kind of focused originally to talk closer to the two number, but maybe 175. So let's say one and a half to two, which is something like 100 times forward looking. Revenues. Revenues, not earnings revenues and a lot of their cat.

[B]

And also what's also been leaked, you know, like huge amounts of being. Which we could have guessed. Huge amounts being poured into xai. Like. Yes, that's so.

[A]

Right. So anyway, so there's all sorts of fun stuff. There's the. We can't even. I mean the whole thing about merging with Cursor, you saw that that was a possibility but that's not going to be in the. I don't think it's being. I mean the reason they structured it is to avoid the registration statement anyway. So there's some salient details that have been leaked or rumored. Probably leaked related to the offering, the structure of the equity, the Things that shareholders are invested in. So based on what these leaks look like, what can we glean now that there's not an official public version of the statement on file? What do we, what do we think?

[B]

Well, I mean, honestly, again, I, you know, we've seen leaks about some of the substance, and I'm reserving real commentary on that until we actually see the full document. But what we can tell is that tentatively, one might reasonably conclude that space X is ahead of the curve in violating the securities law already. We are already violating the securities laws right out of the get. Very possibly. I can't prove it, but I strongly suspect.

[A]

So these would be violating the SEC rules about, like.

[B]

Yeah, yeah, like the federal. Basically the securities act of 1933.

[A]

Okay, so what's, what's, what are those requirements? Go ahead.

[B]

Well, okay, so the securities act of 1933 obviously passed in the wake of the 1929 market crash, and it's focused on forcing companies to disclose information when they sell securities to the public. If you're selling to the public, as opposed to a private sale. Let's lot of disclosure requirements. And the key provision of that is section five. That provision says you can't offer securities for sale to the public. You can't even offer unless there's a registration statement that is publicly on file with the sec, publicly filed.

[A]

Okay.

[B]

So you can't even offer for sale until it's publicly filed, and then you can't actually sell. You can't close the deal. You can't actually transact until the registration statement becomes effective, which happens sometime after it's been filed. So, okay, you know, it files. Usually the SEC has comments, they make amendments, it becomes effective, and then they can sell. So what's in the registration statement? Well, as we already talked about, a lot of required information about the company and about the nature of the securities being sold. Technically, legally, the registration statement itself is an offer for the sale of securities. It consists of a prospectus, but it's also required to contain not just all the good sales hype.

[A]

Yay.

[B]

My company is so great. But all the risks and all the drawbacks and all the, all the problems that might arise.

[A]

Financial statements. There's all this stuff, right?

[B]

All the disclosure so that investors have a complete picture of what they may get. And I have to point out the law could have been much simpler. The law could have been just, you can't sell securities until the registration statement is effective. But it doesn't stop there. You can't even offer the securities until the registration statement is available to the public. Why is that? Well, the theory absolutely is paternalistic. The concern is that if a company is allowed to make offers before the registration statement is available, they'll emphasize all the good stuff and leave out all the bad stuff. Not necessarily fraudulently. There are separate programs. Yeah, they'll just talk up the good side and not mention all the bad side. And then eventually the registration statement is going to become public. But the fear is that by then it's too late. Investors will have kind of anchored around the initial hype, they'll have gotten all excited and by the time the full risks are disclosed, they won't really adjust their thinking.

[A]

And I can't think of a more emblematic company where this is a potential. This is so potentially likely that SpaceX.

[B]

Exactly. So it's not fraud. No one said anything false. But the theory is that if you are, if you don't have the full, you know, you know, warts and all registration statement available for everyone to read before you make offers, then you'll end up manipulating investors. They'll get too excited and they'll never adjust their thinking. Now, over the years, some exceptions have been made. For example, the SEC recently loosened the rules a bit so that now instead of banning all offers before the registration statement is public, the SEC now permits companies to make offers before the filing as long as those offers are made solely to institutional investors who have at least $5 million in assets under their.

[A]

So some version of the accredited investor,

[B]

literally accredited investors who are institutions.

[A]

Right.

[B]

And the theory is that, and you can see the logic, it's that accredited institutions are a lot less likely to get overexcited about early hype and when, and they won't actually do anything until they see the full document.

[A]

Right.

[B]

So that is the legal setup.

[A]

Okay, so what's going on with SpaceX then?

[B]

Well, with SpaceX, they have filed a registration statement, but confidentially they don't have a public filing. But as long as the filing is confidential, they can't make offers. Except what's happening now is they're leaking what the registration statement says, or at least someone is. Every day, like, new bits of the registration statement are coming out, and those leaks may very well count as offers because first of all, legally the registration statement itself is an offer.

[A]

Oh sure.

[B]

So necessarily the information in it is an offer. But it's more than that. For many decades, the SEC has interpreted the concept of offering not just to include literal offers. I will sell you X stock at X price. But the SEC interprets Offers to mean any information that's intended to induce investor excitement.

[A]

Because if you say, okay, is that SEC language intended to induce that.

[B]

To condition the market. Induce investor excitement? Yes, that's the kind of language.

[A]

So that verb.

[B]

Well, they. Because think about what the SEC is concerned about. If you say only literal offers are prohibited, then that just invites companies to put out press releases that say, we're not offering anyone anything. We're just letting you know that we

[A]

will be offering investment opportunities we'll be offering soon.

[B]

But it's not an offering, I swear. Which is exactly what happened. Because I swear, like every possible loophole has always been tried. So that's the fear, which the SEC has said since at least the 1950s. Offer includes any attempt to condition the market to arouse investor interest before the registration statement is publicly available. Now, as you obviously guess, that's obviously a vague standard, so the SEC has a few safe harbors. If you comply with this rule, it doesn't count. But that's not this. What's going on right now is we can't see the registration statement. We don't have all the details, but drip, drip, drip. Every single day it's in the news about this fabulous $2 trillion offering that's going to dominate the market. A couple of days ago I saw a headline. The SpaceX IPO could millionaires. Here's what investors need to know for sure. The details aren't all positive. There are disclosures about how Xai is burning cash, the limits on investor rights. But I don't think that matters. Investors are supposed to see everything, not just select details. And meanwhile, all this here's secret information we've got a little glimpse is just adding to the hype and keeping the offering in the news. And this is the core. The core of what Section 5 is supposed to prohibit.

[A]

Oh, got it. All right, so. So the sec, presumably when they said this is confidential, they meant it.

[B]

It was supposed to.

[A]

I mean, we'll talk about that. We'll talk about that in a second. And we should be learning nothing.

[B]

Yes, exactly.

[A]

About any of this.

[B]

Other than the fact that there is an offer. There are like limited things that they can disclose. Like we filed confidentially.

[A]

Right, exactly. Right. And the name of the company and. But the size and the classes of shares and the arbitration terms and all that.

[B]

The finances, like all of that is just absolutely. Should be off limits.

[A]

Right. Okay. So. And again, everything, at least that you and I know about this came out of the media. I think there was an article in, well, Reuters Yeah. Okay. So obviously these reporters, I think, have just been basically doing a good job. They're. I mean, they're not like, they're not complicit in this. No, no, no, no, no violation.

[B]

Gotta be clear. Somebody's leaking. They've seen. I mean, the reporting is that they've actually seen pieces of the registration statement. So someone's giving that to them. Now, let's be very clear. I am in no way blaming the reporters.

[A]

That's what I'm asking. Yes.

[B]

Right, yeah. Journalists are not subject to Section five. They are not subject to the securities laws, because that would be a First Amendment problem. They can print what they want. And of course, if they get this information, they're going to disclose it. They haven't done anything wrong. I need to be very clear. The issue is not the reporters. They. The issue is where the leaks are coming from. And specifically if it's coming from SpaceX either directly handing them sections of the registration statement or authorizing someone to. And that brings me to my big caveat here, because I don't want to get sued. I don't know for sure where these leaks are coming from. As I said, SpaceX is allowed to share this information with large institutional investors. So it's possible that those investors are the ones who are leaking.

[A]

Yeah, they would have it. They would. There's no motivation for them to do that.

[B]

I want to say it's possible the investors are leaking. And in the past, the SEC's position has been that if communications are distributed legally by the company, and then someone else decides to just go off on their own and distribute them elsewhere, that's not the company's problem. But as you say, like, I am skeptical. I mean, I have no inside information. I'm reading the same public documents as everyone else, which I am saying for legal reasons to disclaim any accusations. But I really doubt that this is coming from rogue investors handing this information over to reporters, because if they were, you'd think the company would be taking action to stop it. They would make themselves.

[A]

Oh, sure, if they really cared. Yeah, right. Yeah, right, right.

[B]

But there's no hint that SpaceX is trying to. And it's not like one document dump. This is every day. It's like, oh, we saw a new

[A]

piece of stuff, there's more stuff.

[B]

Yeah. So I suspect that either SpaceX is leaking or it's kind of wink, wink,

[A]

nudge, nudge, encouraging or his bankers or

[B]

his lawyers, but in some way with SpaceX tacitly or blessing it.

[A]

Yes.

[B]

Yeah. And that is what Section 5 prohibits. So, in fact, the fact that we're getting select portions over time almost suggests to me that, like, after they kind of make everything.

[A]

Oh, this is like orchestrated.

[B]

Yeah. Or orchestrated. Or more like, you know, the point of a confidential filing is so that they can have some discussions with the sec. And it might be that once they get a kind of okay from the sec, that's when another piece is leaked or something like that. I don't know.

[A]

Oh, so. So as, as their discussion, it seems to you there's a potential explanation for this fact pattern. That is every time something leaks. It's possible that SpaceX and its advisors have already discussed that the substance of that section with the SEC last week. Go, say three days later, okay, we're going to send these 10 pages out.

[B]

That is my, that would be my best guess, but obviously I don't know. But, so, but the problem is that if this is either explicitly or implicitly being done with SpaceX approval, that this is what Section 5 exists to prohibit, to police.

[A]

Okay, so if the SEC were to police it, what would that look like? Well, I mean, I mean, I don't. I am, I have, I have, at best, modest expectations that the SEC would care. I mean, excuse me, I think the SEC staff cares deeply about this problem, but I would speculate that the SEC leadership is kind of leaving this one alone. Yeah, see, if they were not to leave it alone, what would that look like?

[B]

Yeah. Okay, so like, unless we just say that this is not really something that private investors can sue over, like there's, it's not that there's literally no path for a private investor to sue, but this is not the case.

[A]

They don't really have standing over this.

[B]

This is theoretically, but it's, it's complicated. It's very limited. So it would have to be the SEC and what the SEC has done. Well, first of all, I'd expect them to at the very least start asking questions, who is leaking this? Why aren't you protecting this confidential filing more, whatever it is? But then what they have done in the past is since the theory is you're going to get investors too excited and then they won't read the real. The full registration statement. What the SEC has done in the past is delay the ipo, wait for the market to cool down. That's what it would look like.

[A]

Oh, so instead of June, we're talking October?

[B]

Exactly. That is what the SEC would do.

[A]

That's the last thing. That's the last thing SpaceX wants.

[B]

But I share your intuition that it may very well be that the SEC staff is concerned, but the SEC leadership so far does not appear to be demonstrating any concern. And I just want to be clear on this that I think you could reasonably argue that maybe Section five is anachronistic, it's overly paternalistic, maybe we don't need all of its protections. Maybe now the market is filled with professional investors who are not going to get overly excited by just a few leaks. But first of all, it's already been reported that SpaceX may reserve up to a third of its shares for retail investors. I don't know if anything's been settled there, but like, this is a retail offering, so it's one where you expect.

[A]

Based on that, based on that, there'll be a significant retail investor base that should theoretically enjoy protection from this law.

[B]

And they're not getting it. And the other problem I have is that even if you think this law is outdated or unnecessary, it is still the law.

[A]

Right? If you don't like. If you don't like the law, the way to. Or in this case, a regulation, statute, it's a law of statute. If you don't like the statute, you gotta go to Congress and change it.

[B]

You go to Congress and you change it. And so, like, I don't. So this is just. It is disheartening to watch the SEC just openly ignore what, at the very least, are serious red flags of lawbreaking. Maybe it's isn't law breaking if they investigated, but it doesn't even look like they're doing that. And I don't know how to teach students like this. They can see the same things I do. They see the headlines. What am I supposed to tell them about what the law requires when I teach section 5? Is this a real thing anywhere?

[A]

Does it exist anymore? Was that this semester?

[B]

It was not this semester, happily, but next semester. Well, not in the fall, so it will be a year from now. But I don't know how to teach students in a situation like. Well, technically this is illegal, but I don't think anyone cares about anything.

[A]

Right? Right. Right. Here's a law I'm going to instruct you on that you don't have to worry about. Yes, because practically speaking, no one else does. Oh, man. All right, so this was. This was, I suppose, a glimpse, as we said, this is our inaugural look at Space X, which will no doubt occupy a lot of thinking. It's going to break a lot of new ground, I think. Not just in terms of its magnitudes. But also in terms of some of the law and some of how it's going to be structured, a third for the public, a Texas domiciled ipo. There's all sorts of fun stuff to talk about, isn't there?

[B]

Yeah, I'm looking forward to.

[A]

It'll be exciting.

[B]

Hey. Well, quite frankly, hateful.

[A]

Right. I'm looking for it, but I'm looking forward to not buying any. How does that sound?

[B]

Unless you have an index fund, I

[A]

don't usually get allocations of this stuff and if I did, in this case, it's not for me. There's, there's way too many red governance flags in this for, for my taste. But anyway. All right, we will return to SpaceX. Not sadly, it'll probably a little later here for me, but probably as soon as. Well, S1, they should be like next couple weeks, right. I would guess for a June IPO.

[B]

For a June IPO, I'd expect the S1 to be out. Well, legally it has to be out. I would expect it about 30 days. Legally it would be closer to 15, but I would expect it to be out 30 days.

[A]

Yeah. So we may be talking about this at S one time in the next couple of weeks. We'll sort of see what that looks like. Cool. All right, let's put a pin in that. And then we'll come back to another subject about independent directors here at Shareholder Primacy.

[B]

Shareholder Primacy is brought to you by free flow analytics.com, the only free database of corporate directors, their influence and, and their performance. If you own a stock or retirement plan, go to free flow analytics.com and look up which of your elected directors are performing well and which aren't. Use your vote in the alternative democracy and get your data @free flow analytics.com now back to the show. Welcome back to Shareholder Primacy. I'm Ann Lipton here with Mike Levin. And we're going to look again at a different angle, something we've talked about before, which is independent directors on company boards we know is important. It's a legal requirement for most public companies. Boards have to identify the independent directors under exchange rules. Delaware Cleansing depends on director independence. They're not all the same idea of independence, but it's an important concept. Right.

[A]

So, Mike, you ask what's going on?

[B]

Yeah.

[A]

Well, yes, about how boards are thinking

[B]

about this and how they're searching.

[A]

So, so as, as, as we've talked about before, this is another one of my pet peeves.

[B]

Yes.

[A]

And there's like different levels to this. You Hinted at a moment ago, the legal definitions of independence, and those are enshrined in sec, in law, and really not much in statute, but certainly in regulation. And the exchanges have rules about who's independent and what it means and so on and so forth. And that's great. And we'll refer to that a little bit as we kind of plunge into this. I'm more concerned, at least today and broadly with kind of independence in action, how independent minded somebody is and how whether they think independently rather than whether their resume represents independence. Go ahead.

[B]

No, I'm just gonna say that Delaware recognized that concept and they have a phrase for it, a controlled mindset.

[A]

Yeah, okay, sure. So, Right. And so because when you think about it, the vast majority of public, us public company directors are so called independents. Okay, very. You know, in a board of 10, one is the CEO who is strictly not. And when we talk about independent, we're talking about independent from the company. I mean, sort of writ large. We're not talking about independent from other, an individual shareholder. The law is, I think, silent on that.

[B]

Yeah, independence from the. I agree with you. Delaware cares about independence from other people, but the legal standards of the exchanges are independence from the company.

[A]

Right, exactly. And Delaware, when they look at it, they're on certain kind of cases or transactions and so forth. But I'm thinking, you know, what creates allegiance to an affinity for the CEO among that 80 or 90% or more of directors that are so called independent. Okay. And this is something I have hammered at before in writing on our podcast before. I looked at the NACD at one point, who really bugs me because they purport to educate and guide to how independent directors should behave. And really we looked at a lot of the evidence and all they really do is try to find ways for these so called independent directors to make life hard for shareholders, not represent them well. So we've looked at why portfolio managers serve as independent directors on boards, and again, we talked about some of the legal principles. I recently was wondering, how do the boards themselves think about independence? And so I did a little looking at some other bits of evidence. And so again, when we look at these, you know, this vast majority of independent directors that are on boards, they get there because a board invited them, them, a board recruited them, the nominating committee did a whole process, you know, talked to some friends, hired a recruiter, whatever they did. We'll talk about that in a minute. And I was wondering, okay, when a board, when a nominated committee is starting to look for a new independent director, and that phrase comes up a lot. What is, What's. What are they looking for? So I went and looked at a few kind of sources. Okay. I asked a friend of mine who does board searches, send me some specs. And again, anytime. Anytime a search firm does a board search, they create a spec. They create a job description, they send it to the candidate. They make sure that the nominating committee likes the description of the person they're trying to recruit.

[B]

Can I ask a question?

[A]

Sure.

[B]

Like, right from the beginning is how often? Because I have no idea, like, how often is there really an executive search firm as opposed to, well, I know a guy who knows a guy. Or do you hire the search firm to cleanse the. I know a guy who knows a guy.

[A]

I mean, like, yes to both. I mean, okay, there's. At larger companies, it's pretty frequent that they're going to hire a search firm in part for that reason to just, you know, do a thorough job and,

[B]

you know, just to make sure that the person who they kind of had in mind was appropriate anyway.

[A]

Yeah. And, you know, do some of the

[B]

backgrounds or the same thing. Like somebody makes an offer for a company, you still survey the market to make sure it's the best offer.

[A]

Exactly. And then for smaller companies, sometimes you'll, you know, friend of a friend or the CEO knows somebody. But increasingly, there is a nice little niche business for director searches among executive recruiting firms. And, you know, frequently it's the same firm that got you the CEO.

[B]

Right. Okay.

[A]

Which itself is a problem, but we'll fix it for another day. So I looked at a couple specs from this search firm that I know that specializes in director searches. Conveniently, some companies list the position description that they like to use. I found one for Colgate Palmolive Cl Public company, and they actually put out this is the kind of director on their website. And this is the kind of person. This is what we look for in an independent director.

[B]

Okay.

[A]

Okay.

[B]

So wait, they're not searching now. They just say, this is.

[A]

No, this is just. This is our general principles. This is what we want our independent directors to look like.

[B]

I see.

[A]

Okay. And then I found, you know, I looked at all the search firms, you know, Russell Reynolds and Korn Ferry and so forth. And Spencer Stewart has something on their website like, it's called becoming an independent director. So anybody. And again, there's a whole group of retired executives and academics, people who want to do this. So they're all over the place going to search for them, saying, here's my Resume. How do I, how do I get in on this game? And Spencer Stewart conveniently put some guidance on their website to help these individuals who want to become independent directors. So if you read all of these sources kind of critically, it starts to kind of reveal what companies kind of are looking for, you know, presumably. Well, we know exactly what, in one case, Colgate Palmala is looking for. They told us.

[B]

Okay.

[A]

Okay. You know, presumably what the search firms, this search firm. I know. And then Spencer Stewart is an accurate reflection of, of company preferences. Okay. You know, they're not going to put that out there, you know, just because, you know, to have companies disagree with them, it's, it's, it's what companies want. So if you look, do a critical read of these sources, you notice some interesting stuff. For openers, there's barely any mention of the word independence or independent. Okay. You know, Colgate Palmolive spec has those words only four times, but that's in a document with that title. The document Independent Board Candidate Qualifications. Okay. You know, Spencer Stewart talks about independent four times in like 20 pages. Okay. The recruiter spec mentions it once. So this was kind of, you know, I kind of had this, this idea that when they say they're looking for independent directors, they don't really mean. But then if you look at some of the actual specs, you know, these are like, you know, here's the kind of person we're looking for. Here's the kind of experience we're looking for there, you know, and there's nothing obvious about how to think independently. You know, there's some sort of vague references to actual behaviors about like, you know, having courage to ask difficult questions. But, you know, there's, you know, Spencer Stewart talks about the actual legal fiduciary duties of care and loyalty and good faith, which is not a duty I'm

[B]

familiar with, but it's, it's, it technically, it's an aspect of the duty of loyalty.

[A]

Great, thank you. In Delaware, so there's a little bit of reference to some legal duties, but, you know, presumably the specs could be used to try to discern actual behaviors. It was a behavioral interview kind of thing. You know, give me examples.

[B]

Yeah.

[A]

Of where you have acted independently and disagreed. Disagreed with the CEO or, you know, on a past board where you voted against or something. Okay, exactly. So, so there's nothing in the substance of any of these that really gets at independent behavior. And, and, and again, you could go. And like I wrote about it and it's in a post something, somewhere that you could sort of say there's, there's really no intent based on these three, I think credible, you know, they're limited. There's probably, it's a small sample, you know, credible expressions of what nominating committees want. There's very little here that shows we are looking for independent thinking, that we're looking for people who are willing to challenge other directors and the executive executive.

[B]

So what kinds of things are they asking about?

[A]

Oh, like, you know, industry experience, you know, tell us all about, you know, how, you know, our business, a lot of executive experience. You know, they want people who've kind of been there. And especially on that latter point, I, I disagree.

[B]

Challenge the common wisdom.

[A]

Exactly. But, you know, if you're looking, if someone, if you're recruiting someone especially who's like a retired CEO who's moving on to their next career, they immediately have this kind of kinship, this affinity for. And say, ah, you know, this CEO is going through a lot. I kind of, you know, I'm going to give him another six months. You know, that's, that's baloney. We don't want that. Another thing is, is there's a lot of subject matter, not industry, but like, you know, working for someone who's got regulatory experience. We've got. Looking for someone who's, you know, knows these days it's AI and or used for a while it was cyber, cybersecurity. So they're looking for individual people who kind of have subject matter experience which, you know, that's not bad. But, you know, I've long maintained that the, you know, the best credential for an independent director after financial literacy, because you'd be surprised how few people here actually know how to read a balance sheet. Well, it's funny you should say that

[B]

because it's a legal requirement for the. They had to make it a legal requirement for the audit committee because.

[A]

Well, because it was profitable. Right. Is this kind of independent minded? And again, it's pretty clear that the nominating committees, when they say we're looking for independent directors, aren't. They may not.

[B]

Yeah. They're looking for independence.

[A]

They might not be sincere. They're looking for independence. Go ahead.

[B]

No, I'm repeating in the very legal sense of they don't have ties to the company, but they are not looking for somebody who is going to chat like they are not pitching their ways. And to tell me about the time you had your own and buck the crowd, had your own ideas.

[A]

And what's, what's kind of interesting is that the the guys at Free Float, you know, Matt and Damien have started to try to measure independence. I see they now have a metric from their vast database of directors that's, it's, I think they call it deference, which is of course the opposite of independence.

[B]

Right, right.

[A]

But it's, it's sort of this initial effort to measure, to try to measure that. Well, that's how, how frequently or how much and so called independent directors interests and decision making is aligned with or follows kind of what the CEO kind of wants.

[B]

Yeah. I mean anyways, the kind of CV that they're looking for or they're looking for people who are socialized well into.

[A]

Not to agree. Right. Going along, you know, we're looking for people. You know, this is a common theme in the position style. The specs I looked at was we're looking for collegiality.

[B]

Collegiality is, that's the, that's the nice signal for we're not looking for somebody who's going to.

[A]

Exactly. So if investors are relying on nominating committees to find independent directors to advocate for their interests and to challenge management, I think at least based on what we've seen, they're going to be a little disappointed in at least what nominating committees have come up with based on the, those, those sources we talked about. So anyway, I thought that was kind of interesting to kind of take that perspective about you know, trying to really sort of tease out what, what at least boards, how they think about independence.

[B]

So anyway, yeah, it'll be interesting to see the free float data when that's available.

[A]

Yeah, yeah, we'll probably talk about that. Maybe we'll get Matt and Damian here to, to talk about, you know, this new metric and so forth sometime soon. All right, so that was, that was my current, current axe to grind just for today. But collegiality is just great about collegiality. Colleg, overrated. How's that sound? All right, let's, let's move along here. How about it?

[B]

Okay.

[A]

Shareholder Primacy. This is hosted by Ann Lipton and me, Mike Levin and Yoda. Shareholder Primacy. I am an independent activist, investor and advisor to investors about their activist situation and is professor of law and The Lawrence W. DeMuth Chair of Business Law at the University of Colorado Law School. You can find me Mike at the activist investor1word.com and [e-mail] edu three words separated by periods. Edu. Our podcast is produced and distributed by Free Float Media. Thanks for listening. We'll talk again soon.