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Lila MacLellan

A prominent investor once advised Sam Bankman-Fried’s FTX to form a board

Sam Bankman-Fried (Credit: Getty Images—Eva Marie Uzcategui/Bloomberg)

Not everyone bought into the FTX story.

On the All-In podcast this week, investor Chamath Palihapitiya said he had doubts about FTX, the once high-flying crypto exchange, and its 30-year-old CEO, Sam Bankman-Fried, who founded the Bahamas-based company in 2019.

Bankman-Fried pitched Palihapitiya’s firm Social Capital last year, the venture capitalist explained. Upon performing due diligence, the VC firm contacted FTX to share its suggestions in a two-page deck. Putting together a board was its first recommendation out of three.

“The person that worked [at FTX] called us back and literally—I’m not kidding you—said, ‘Go fuck yourself,’” Palihapitiya recounted.

He took the hint. But, stunningly, the fact that FTX had no real board, despite hitting a $26 billion valuation earlier this year, didn’t deter a long list of FOMO-driven marquee investors. When FTX entered its death spiral, taking the $1.9 billion raised with it, the exchange’s “directors” consisted of Bankman-Fried and two FTX employees—and they didn’t hold meetings. (A lawyer was on the board in 2021 but was reportedly replaced.) FTX did not respond to a request for comment.

Now that Bankman-Fried’s empire has unraveled, it’s hard not to wonder whether a working board would have made a difference. Assuming Bankman-Fried was merely a well-meaning but unseasoned CEO, as he would like the world to believe, would a board of seasoned professionals have spotted the red flags the young entrepreneur says he missed? Or if Bankman-Fried had sought to mislead a hypothetical board, would competent directors have seen through the ruse?

There’s no saying for sure, of course. After all, many leaders who reported to boards have mismanaged funds or defrauded investors. Still, Peter Gleason, head of the National Association of Corporate Directors (NACD), optimistically argues that private companies that install independent board members early in their lifespan are more likely to avoid disasters. (U.S. private companies are legally required to have a board when they incorporate, but it can consist of one or two people, depending on the jurisdiction, and there is no requirement that directors be independent. In Antiqua and Barbuda, where FTX was incorporated, companies must have at least one director.)

Outsiders bring strong, diverse opinions on issues “that may start to shift the tide,” even when a CEO owns most of the company, Gleason says. While they can’t always enforce decisions or spark radical change, their guidance can meaningfully influence a company’s trajectory, depending on a CEO’s willingness to listen.

Chief executives who don’t engage with boards baffle Gleason. “How many jobs in your career do you have 10 or 12 advisors to help you succeed?” he asks.

As things stand, about half of private company boards have independent members, according to NACD data published in 2021. Some CEOs resist adding independent directors, fearing they’ll slow down decision-making, says Gleason. Ironically, that’s also why they’re useful, acting as a speed bump when an executive team wants to charge ahead with a risky new initiative. But most anti-board holdouts are company founders seeking to retain their totalitarian grip on power. It’s unsettling to be in a position where they could one day be fired from the company they started, Gleason notes.

Jamaal Glenn, a venture capitalist who teaches marketing and public relations at New York University and the City University of New York, views the inclination to work with insiders as all too human. He still pushes startups to appoint independent directors as soon as they've raised institutional investments. Instead, chief executives too often build “CEO-fiefdoms” and surround themselves with yes-men, he says. 

"Companies should start thinking about boards as soon as they raise their first round of institutional capital, and they should start thinking about independent directors shortly after," he suggests. Directors can share their expertise to scale the company and apply good corporate governance.

Looking ahead, Glenn doesn’t expect investors will frequently run into CEOs who refuse to appoint independent directors or add VCs to the boardroom. And the economic downturn has made raising capital harder than when Bankman-Fried was making the rounds, meaning investors should be able to leverage their power and insist on more corporate controls.

Although Glenn doesn’t believe regulators should mandate that private boards include independent directors, he would like to see institutional investors and banks band together and nudge private companies to add outsiders to their boardrooms. “Let’s call it marketplace incentivization or coercion,” he says. Market players already use their influence to all but require boards to diversify and adopt ESG goals.

That’s not to say policymakers won’t play a role in the crypto sector. Like many, Bruce Kogut, a professor of leadership and ethics at Columbia Business School, expects the Securities and Exchange Commission to get serious about regulating digital currencies.

Concerning corporate governance at private companies, he says the FTX saga reflects a repeated problem in the startup ecosystem: Investors are too ready to forego basic business practices if they believe they’re onto the next big thing. The FTX debacle may now prompt “the bigger kids in Silicon Valley to rethink the philosophy that founders are gods, and the best thing to do is give them money and let them steer,” he says.

John Ray III, the restructuring expert who has stepped in as FTX’s caretaker CEO, has already taken steps to put in more controls. One of his first moves? Appointing five independent directors.

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