FTX collapse exposes a crisis of corporate governance inside the boardrooms of their investors too
IN the ongoing furore over the collapse of FTX, many understandably frame this scandal as a telling judgement upon the use case for cryptocurrency as well as an indictment of the mis-leading claims, lax leadership and non-existent management systems at FTX.
In sharp contrast to FTX which collapsed into disarray and bankruptcy without any meaningful internal controls, all the major equity investors in FTX operate executive boardrooms fully – often showily – compliant with the existing legal and regulatory environment. Additionally all these FTX investors enjoy the attentions, checks and balances of vastly experienced independent directors on hand to guide, supervise and double-check their strategic decision-making.
To my mind, the FTX scandal also raises serious but currently overlooked questions about the corporate governance practices of many FTX investors too. Namely, where were their numerous and experienced independent directors when it came to adequate due diligence? Such serial simultaneous multiple failures of their corporate governance due diligence duties by so many of these independent directors (and their committees) must surely call into question their actual independence?^
Post-hoc focus on the risk profile of the asset class or, indeed, which regulatory body purview this FTX scandal falls under, misses or obscures the complete failure of the collegiate independent director decision-making guardrails that are supposed to question if not stop preventable boardroom strategic, investment and governance mis-steps.
So, why exactly did all these various but different investors go so badly off the corporate governance rails?
According to Professor Randall S. Peterson, Founder and Head of the Leadership Institute at the London Business School and my co-author for Disaster in the Boardroom, the dysfunctions exhibited in the boardrooms of these FTX investors are commonly-found behavioural and cultural ones.
His research identifies that whenever corporate and elite team culture gets distorted, as it so often does, there is a strong risk that decision-making will be warped by psychologically undesirable and dysfunctional behaviours that run counter to both the stated ambitions and actual interests of the organisation. The specific dysfunctions our research of 300 years of business scandals identified all apply here in the boardroom decision-making of these FTX investors. Namely: denial, groupthink, bystander groups, diffusion of responsibility, rule bound cultures and lack of independence.^^
These six psychological ‘blind spots’ hamper and distort effective decision-making, despite positive intentions and best efforts. Despite best intentions, wrong-doing, scandals, and malpractice continue to happen with alarmingly regularity. They are almost no longer notable until noticeably excessive, as here, with FTX itself but also across the bystanders and group-thinkers etc. apparently commonly found in the boardrooms of various FTX investors.
^ Though Black Rock, Sequoia Capital, Tiger Global Management, Paradigm, SoftBank and others all present as robustly stewarded and fully subscribed to the executive boardroom decision-making safe mode provided by existing legal, regulatory and compliance, they have all - somehow – simultaneously thrown off their shackles of independent analysis and questioning to deep dive into the FTX shenanigans with their equity investments.”
^^ But what should good supervision and corporate governance from independent directors look like? Without throwing further shade, any business would do well to operate as FTX investor Black Rock often does. They operate with an exemplary responsible board (“compromised of a majority of Directors who meet the criteria of independence required by the listing standards of the NYSE”) focus on many attributes and activities including “risk oversight” (this involves “risk assessment and risk management”) ideally with “full and free access to [any] officers and employees” as well as facilitating “discussion and open dialogue among the independent directors” during and outside of board meetings.
Photo credit: cryptonary.com