Risk management: Twitter, FTX and what boards should not do

One of the crucial roles a high-functioning board oversees is risk management – it’s a crucial aspect of best-practice governance. But when major international companies FTX and Twitter hit the media headlines last year, they provided some memorable examples of ‘what not to do’.

The downfall of crypto exchange FTX revealed the company did not have board meetings, or were just thinking about having them. And Elon Musk’s Twitter takeover – and the significant board changes that followed – reinforced how important boards are in providing stability for an organisation.

In a situation where an entire board has been sacked or has resigned and where culture, conduct, and strategic shifts are happening at pace, this is exactly when more attention needs to be paid to good governance, and to managing risk and opportunity.

The same applies to when a company is in high-growth mode.

When Sheryl Sandberg became chief operating officer at Facebook in 2008, the commentary that followed was that she was appointed as ‘adult supervision’ at a time where the company was growing and needed an element of structure.

Boards exist for a reason. They provide that additional layer of protection, security, and supervision of the organisation they oversee.

Looking to the Institute of Directors’ Four Pillars of Best Practice Governance, one of the board’s roles is to hold management to account, and to do so early. The board should do this through informed, astute, effective, and independent oversight of performance and conformance. They are responsible for appointing the chief executive and monitoring their performance.

While it’s not the board’s role to manage the company or organisation, it is responsible for ensuring the agreed purpose and strategy are understood and implemented by management.

When a company fails, it is often due to accumulated under-performance, strategic drift, and poor risk management that triggers an event pushing a company into serious difficulty.

In the case of FTX and Twitter, the risks around big personalities getting in the way of good governance practices are obvious. Comparisons could also be made to failed American health technology company Theranos, where deficiencies at board level played out and the directors were swept up by charismatic founder, CEO and chair Elizabeth Holmes.

Controls, checks, balances

In governance terms, we talk about boards and ‘CEO capture’ where boards have been captured by a dynamic and highly influential CEO – emphasised where the CEO is also an owner and/or founder. 

This is when it is crucial for boards and directors to have controls, checks and balances in place. There are times when a board may need to counterbalance management passion, creativity, or drive when it reaches a level that may see a company exposed to unacceptable levels of risk or non-compliance.

Best-practice governance is as important during boom times as when a company is navigating headwinds and facing an uncertain future. There needs to be a diversity of people around the table to ensure all angles and potential outcomes are considered and analysed. Diverse boards have been shown to deliver better outcomes than homogenous ones, especially over risk.

And the relationship between a board’s chair and CEO or founder is also important because it can significantly influence a company’s chances of success or failure. And here it’s imperative to have that appropriate tension between the board and CEO, or board and manager.

And be warned: it would be a mistake to dismiss FTX and Twitter as weird snapshots of American culture and think they would never happen in New Zealand. While we may not have the same high-profile companies and larger-than-life chairs as we often see in the US, the risks remain the same. Governance can never be asleep at the wheel.

These international stories are cautionary tales we need to pay close attention to. US First Lady Eleanor Roosevelt was right when she advised us: “Learn from the mistakes of others. You can’t live long enough to make them all yourself.” 

This article was originally published by NBR

About the author

KP is the Chief Executive of the Institute of Directors. She is a qualified lawyer and a Distinguished Fellow of the Human Resources Institute of New Zealand, Co-deputy Chair of the Global Network of Directors Institutes (GNDI), Chair of the Brian Picot Ethical Leadership advisory board and was previously Chair of the Wellington Homeless Women’s Trust.  With extensive governance and leadership experience, she is actively involved in community initiatives.

A strong advocate of diversity, KP was also a founding member of Global Women’s ‘Champions for Change’, a group of senior executives and directors who commit to diversity in the workplace, and a founding member of WiSPA, an organisation promoting women in sport, and mentors a number of business leaders.