Corporate governance failure

Phân tích thất bại trong quản trị doanh nghiệp tại sàn giao dịch chứng khoán FTX và bài học cho các doanh nghiệp tài chính. Cuối năm 2022, sàn chứng khoán FTX sụp đổ tạo nên một cú sốc lớn đối với thị trường chứng khoán quốc tế. Qua phân tích từ góc nhìn quản trị, doanh nghiệp này đã có nhiều thiếu sót trong hoạt động quản trị dẫn đến yếu kém trong quản lý và điều hành doanh nghiệp.

CORPORATE GOVERNANCE Assessment 1: Case Analysis Corporate Governance Failure: Lessons from the Collapse of FTX Abstract Corporate governance encompasses the systems, processes, and structures that regulate a business operations and decision-making It is an important part of modern business organizations, and plays a pivotal role in ensuring effective management within organizations This article examines the corporate governance failure exemplified by the collapse of FTX, shedding light on the consequences of poor governance practices The absence of a formal board of directors and the concentration of control in the hands of a select few individuals violates principles outlined in The UK Corporate Governance Code The company's flawed management practices and inadequate organizational structure further contributed to its downfall Financial control and transparency were compromised, with non-centralized cash management and questionable transfers of customer funds Audit risk emerged due to the absence of an audit committee, resulting in unaudited reports for affiliated entities To prevent such governance failures in the future, several recommendations are put forth Businesses should establish a balanced and independent board of directors, strengthen internal control and risk management systems, and foster stakeholder engagement and accountability These recommendations serve as valuable insights for companies aiming to prevent corporate governance failures and establish robust governance practices that promote sustainability and long-term success Introduction In 2022, FTX was valued at $40 billion and was the second-largest cryptocurrency exchange in the world It faced a crisis in November when leaked financial report revealed a significant reliance on its own crypto token, FTT (Byrne, 2022) This, stated by Hern (2022), raised concerns about liquidity and triggered panic among investors, ultimately leading to FTX's bankruptcy The collapse of FTX is a typical case of the consequences of poor corporate governance This paper analyzes the gaps in corporate governance of FTX, contrasting them with theories of corporate governance, the 2018 UK Corporate Governance Code, and the 2020 UK Stewardship Code Following, a number of governance recommendations are suggested for businesses to prevent such failures from occurring in the future Corporate Governance Failure The absence of a formal board of directors was a critical flaw in FTX's corporate governance (Calhoun, 2022) In fact, Mr Backman-Fried controlled the entire board, along with Jonathan Chessman and an unnamed attorney, who apparently resigned from the board several months before the company went bankrupt That goes against the principles in The UK Corporate Governance Code (2018), which stated that boards must have a balance of skills, experience, independence and knowledge to carry out their duties effectively Board diversity fosters accountability, transparency, and multiple perspectives, mitigating the risk of decision-making being concentrated in the hands of an individual (Torchia, 2015) In analyzing Stewardship theory, Keay (2017) emphasized the role of the board of directors as a supervisor and guide, ensuring that managers fulfill their managerial responsibilities and the protect longterm interests of shareholders Maclellan (2022) claimed that no board meetings have ever taken place at FTX Farma (1980) analyzed agency theory, which emphasizes the benefits that a company can receive when there is a clear division of ownership and control He argued that separating ownership and control allows individuals to specialize in their respective roles, where owners can focus on providing capital and making investment decisions, and professional managers can specialize in running the company’s operations As of November 2022, Backman-Fried remained the CEO of FTX, and operated without any oversight The concentration of control in the hands of a group of inexperienced and unsophisticated individuals is an unprecedented move for multi-billion dollar financial companies, according to Mr Laffin (2022) FTX was also assessed as having sloppy and flawed management practices Congressman Ritchie Torres considered the activities of this business more like a university fraternity (Chittum, 2022) Provision 27 of the 2018 UK Corporate Governance Code underlined the importance of strong internal control, risk management systems, and effective decision-making processes within the company It promoted the establishment of robust systems and processes to ensure effective governance and management of the company FTX's organizational structure showed many gaps when there was a lack of balance between departments such as development, security, and product (Calhoun, 2022) Operational support groups such as public service, general counsel, back office, middle office, CFO were not established and run as they should be A key flaw of FTX is also an absence of financial control The company did not maintain centralized control over its cash, and the management of the list of accounts and signatories is believed to be non-transparent (Calhoun, 2022) It violated Principle D in the 2018 UK Corporate Governance Code, which highlighted the importance of establishing a culture of integrity and ethical behavior within the company, including accurate financial reporting and compliance with relevant laws and regulations The FTX’s hedge fund called Alameda had made billions of dollars loans to its “related parties”, including Bankman-Fried’s personal company and himself All of these loans had not been tracked in FTX’s financial statements (Hern, 2022) Audit risk occurred when the company did not have an audit committee, which should have been one of the main executive committees of the board of directors The audit committee ensures that the financial statements are properly generated and accurately reflect the financial position of the business (UK Corporate Governance Code, 2018, Provision 26) It also plays an important role in internal control and risk management through its intensive oversight (DeZoort et al., 2002, p.38) There weren't any audited reports for Alameda when bankruptcy regulators stepped in The subsidiaries and partner funds in the FTX ecosystem are also unaudited and have no uniform regulatory authority (Calhoun, 2022) This can lead to threats of concealment of ownership, control, and transfer of assets and liabilities Recommendations To prevent governance failure as is the case with FTX in the future, some recommendations for businesses are given below Establishment of a balanced and independent Board of Directors Businesses must comply with the principles of the UK Corporate Governance Code (2018) and ensure the establishment of a formal board of directors with a balance of skills, experience, independence and knowledge According to Torchia (2015), a balanced board enables more robust and informed decision-making, helping the company navigate challenges and identify opportunities Independent directors, who are not affiliated with the company or its subsidiaries (Sarbanes Oxley Act, 2002), can provide objective assessments, challenge management's decisions, and act in the best interests of the company and its stakeholders They help ensure that the board's decisions are not unduly invested by conflicts of interest and promote transparency and accountability (Armstrong et al., 2014) Strengthen internal control and risk management Enterprises should improve their management practices by implementing robust internal control systems and effective risk management processes This concerns compliance with Provision 27 of the UK Corporate Governance Code (2018), which emphasized the need for a tight system of internal control, risk management, and regulatory compliance to promote effective decision-making in the company An internal control system helps to ensure that assets are used appropriately and in line with the company's objectives In addition, effective internal control ensures the accuracy and reliability of financial statements and other important information in operational processes, advancing trust among stakeholders (Root, 2000) According to Ellul (2015), the risk management process enables companies to effectively identify, assess and manage risks, reduce their likelihood and impact, and seize opportunities for the company’s growth Promote stakeholder engagement and accountability According to Spitzeck and Hansen (2010), businesses can demonstrate accountability, build trust, and improve decision-making processes by considering the interests of all stakeholders The UK Stewardship Code (2020) emphasized the role of effective management and participation of the parties involved in company’s operations It encouraged investors to be active participants in corporate governance, engage with companies on matters of strategy, performance, risk, and sustainability By addressing and understanding the stakeholders’ concerns, companies can mitigate risks, drive innovation, ensure long-term sustainability, and comply with legal requirements References  Armstrong, C S., Core, J E., and Guay, W R (2014) Do independent directors cause improvements in firm transparency? Journal of financial economics 113(3), pp.383-403  Calhoun, G (2022) FTX And ESG: A Panorama Of Failed Governance (Pt – The Internal Failures) Forbes [online] Available from: https://www.forbes.com/sites/ georgecalhoun/2022/11/21/ftx-and-esg-a-panorama-of-failed-governance-pt-1 theinternal-failures/?sh=20ed82242d9d [Accessed 28th June 2023]  Byrne, D (2022) FTX collapse is a case study in bad governance Corporate Governance Institute [online] Available from: https://www.thecorporategovernanceinstitute.com/insights/news-analysis/governancecauses-ftx-collapse/ [Accessed 28th June 2023]  Chittum, M (2022) Sam Bankman-Fried's FTX had the corporate governance of a college fraternity, congressman says Market Insider [online] Available from: https://markets.businessinsider.com/news/currencies/ftx-had-the-corporategovernance-of-a-college-fraternity-congressman-2022-12 [Accessed 28th June 2023]  DeZoort, F T., Hermanson, D R., Archambeault, D S., and Reed, S A (2002) Audit committee effectiveness: A synthesis of the empirical audit committee literature Audit Committee Effectiveness: A Synthesis of the Empirical Audit Committee Literature 21, pp.38  Ellul, A (2015) The role of risk management in corporate governance Annual review of financial economics 7, pp.279-299  Financial Reporting Council (2018) The UK Corporate Governance Code London  Financial Reporting Council (2020) The UK Stewardship Code London  Hern, A (2022) Polyamory, penthouses and plenty of loans: inside the crazy world of FTX The Guardian [online] Available from: https://www.theguardian.com/ technology/2022/nov/19/polyamory-penthouses-and-plenty-of-loans-inside-the-crazyworld-of-ftx?CMP=Share_iOSApp_Other [Accessed 29th June 2023]  Keay, A (2017) Stewardship theory: is board accountability necessary? International Journal of Law and Management 59(6), pp.1292-1314  Laffin, S (November 21, 2022) FTX – the last word in corporate governance Linkedin [online] Available from: https://www.linkedin.com/pulse/ftx-last-wordcorporate-governance-simon-laffin/ [Accessed 29th June 2023]  Maclellan, L (November 18, 2022) Investor Chamath Palihapitiya once advised Sam Bankman-Fried to form a board FTX’s response? ‘Go f—k yourself’ Fortune [online] Available from: https://fortune.com/2022/11/18/ftx-board-investor-chamathpalihapitiya-sam-bankman-fried-board-directors-crypto/ [Accessed 29th June 2023]  Public Law 107 - 204 - Sarbanes-Oxley Act 2002 Washington DC: U.S Government Printing Office  Root, S J (2000) Beyond COSO: internal control to enhance corporate governance John Wiley & Sons  Spitzeck, H and Hansen, E G (2010) Stakeholder governance: how stakeholders influence corporate decision making Corporate Governance: The international journal of business in society 10(4), pp.378-391  Torchia, M., Calabrò, A., and Morner, M (2015) Board of Directors’ Diversity, Creativity, and Cognitive Conflict: The Role of Board Members’ Interaction International Studies of Management & Organization 45(1), pp.6–24