Thought Leadership

FTX: A Failure Of Management, Governance And Leadership

US Attorney Damian Williams stated, “This is one of the biggest financial frauds in American history,” and more indictments are expected.

John Ray, the new FTX CEO, was the expert that oversaw the Enron bankruptcy and commented in his November court filing, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

The situation continues to embarrass establishment figures, celebrities, and those on both sides of the political divide that have been recipients of donations from SBF, one of biggest political donors in history.

Fraud, Gross Incompetence, Or Both

SBF hit the virtual media road a couple of weeks before the indictment, against the advice of his lawyers, to tell the world, “I screwed up,” denying fraud and claiming huge management failures and sloppy accounting.

Whether fraud and malfeasance or gross incompetence and non-feasance, consumers trusted their money to FTX which was allegedly abused on a grand scale in FTX’s sister company Alameda for high-risk investments resulting in significant losses.

This is not a failure of crypto or of regulation. This is a human failure that extends to a systematic failure of management, governance, and leadership.

Regulation did not prevent the Great Financial Crisis of 2008, also a failure of leadership in the highly regulated banking sector, where the quality of (leveraged) sub-prime assets was arguably poor and failed with dire systematic consequences.

The fatal failure of management controls and governance is in its roots, a very human failure. The best processes, controls, systems, and experience are often little match for an individual or individuals set on circumventing “the system”. The failure of leadership when management and governance fail is often criminal.

“Management is doing things right; leadership is doing the right things,” said Peter Drucker in his principal leadership tenet, whose writing should be high atop every aspiring leader’s reading list.’

Don’t Worship False Idols

There is a deep recall of anthropological instincts that renders many humans hypnotized by the cult of celebrity and the fairytale of the alchemist transforming normal things through a magical-like process – it’s very Pavlovian.

SBF, the 30-year-old techno-wonderkid, with a baby-faced “do good” persona, was a regular at excess virtue signaling and caught many leading policymakers, investors, and partners in his spell, most of whom appear to have inconveniently forgotten to ask the basic questions of due diligence.

One must ask, “Where were the adults while SBF was running amuck with FTX’s customer funds?”

Larry and Sergey wisely appointed Eric Schmidt CEO at Google to help them navigate the world of business, regulation, and global scaling. After 17 years, they reckoned they no longer needed adult supervision and Schmidt stepped down. The rest is history.

Steve Jobs brought in CEO John Scully as the adult supervision for Apple in the 80’s. Jobs was removed and shortly resigned. Life after Apple was a deeply cathartic journey for Jobs and led to his reunion with the company 12 years later, and the rest is leadership history of legendary proportions.

It is often the network effect of the failure that deserves attention here – everyone assumed someone else had done the FTX due diligence. Courting and attracting big named investors and flouting a large valuation sends the signal that “the market” values a company and its leadership.

Better public standards are required in the future that must address, “Are the founders and executives experienced enough to act responsibly and reliably, with the appropriate controls, and especially in a major market crisis?”

Integrity Is The Foundation Of Leadership

Author William A. Cohen studied military leadership and worked with Peter Drucker to develop the 8 Principles of Leadership. As Drucker pointed out to Cohen, “In no other type of leadership must the leader make decisions based on less or less reliable information.”

Of the 8 Principles, Integrity First is Cohen’s number of choice where Drucker states, “A leader can be well-liked and popular and even competent and that’s all well and good, but if he lacks integrity of character he is not fit to be a leader.”

It is the integrity of a leader, and all that comes with it, that lays the foundation that condemns toxic behaviors and sets the tone at the top for doing the right things for a company, its customers, staff, and shareholders.

Developing Our Aspiring Leaders With Greater Network Resilience

Most people do not want to be managers. Good management and good governance often require saying NO more than YES, which is difficult for most people to do and makes management plainly unpopular.

World class managers and leaders are cultivated, and it takes time to learn this craft, especially when making decisions on behalf of thousands of customers, staff, and shareholders.

Move fast and break things, Mark Zuckerberg’s motto used by Facebook until 2014, does not apply very well to financial services, and SBF has found this out the hard way. He will likely spend years in prison reflecting on this and his failures.

Is it reasonable to expect that aspiring leaders have the technical experience, people skills, and maturity to manage large rapidly growing businesses?

Good leadership, beyond everything, requires surrounding yourself with people that have diverse perspectives who can disagree with you without any fear of retaliation. Young tech entrepreneurs are often ageist themselves, and quick to dismiss older more experienced managers who do not easily understand their “tech speak” or the alchemy they are practicing.

It is often the experienced managers who can see through the jargon of alchemy that young tech entrepreneurs enthusiastically champion as dogma. Many were once younger leaders or entrepreneurs themselves, and do not have the time, the mandate, the interest, or the incentive to engage or intervene, even when they are stakeholders.

Getting these factors better aligned to support aspiring leaders in the network would be a good start to improving the network resilience against systematic failures like FTX and creating better management, governance, and leadership in our start-ups.

Ultimately, it is our innovation and technology that will play one of the biggest roles in our future prosperity and safety. We need to take its development and growth much more seriously if we are to become better at managing it and leading it.

About the Author:

Lawrence Wintermeyer is a globally recognised digital finance advocate with a track record as an advisor, executive, and board member, working with startups to institutions. He is the Chair of GBBC Digital Finance (GDF), a not for-profit promoting fair and transparent markets for crypto and digital assets, and is the former CEO of Innovate Finance, the UK fintech members association. He is the Principal of Elipses, a digital investment management firm focused on sustainable investments, systematic investment management strategies, big data analytics, machine learning, and DLT technologies. Lawrence has an MBA, is a regular Forbes and Fintech.TV contributor, and promotes ethical and sustainable finance policies for a transparent, secure, and quality digital future for everyone.