Honestly, I didn’t want to write about FTX. I don’t understand cryptocurrency in the least and “FTX fatigue” is setting in with everyone. However, news about the company’s inner workings (or more accurately, the stark absence thereof) made me realize it is an important ESG story that may be less obvious than other aspects.
I’ve pulled a number interesting relevant bits from The Hill’s article published yesterday:
“FTX’s lack of adequate record-keeping helped lay the groundwork for its collapse, [John J. Ray III, a veteran of corporate bankruptcies appointed as the new CEO] said, and has made it incredibly difficult to figure out the company’s total assets and outstanding debts…
FTX did not have a formal accounting department, Ray explained, despite the billions of dollars in customer money it was responsible for protecting. He added that FTX leaders used Slack, an online messaging system, to handle invoices …
FTX lacked basic controls any major company would impose to protect customer money, uphold terms of service and ensure FTX executives were not abusing their power…
FTX did not have a board of directors…
FTX used Alameda [FTX’s crypto trading arm] to collect customer money. FTX leaders would then use that money to fund Alameda’s operations or even their own personal investments, [Ray] explained, violating their pledges to customers and investors in both firms.
‘In one instance, [Bankman-Fried] signed as both the issuer of the loan and the recipient of the loan,’ Ray said. Ray added that FTX executives had ‘unlimited ability’ to borrow or take customer funds ‘and deploy them for their own use,’ taking more than $1 billion for their own use.
… millions of dollars in assets from FTX were moved after he and the company filed bankruptcy on Nov. 11… allow[ing] roughly 1,500 Bahamas-based FTX customers to withdraw a total of roughly $100 million one day before the company filed for bankruptcy within the U.S.”
So… wow. But how does this relate to ESG? I think this is a stark example that governance is not some ethereal, generalized concept or administrative burden. It is (or should be) a set of concrete operating and oversight processes with real responsibilities and accountability. Absent them, fraud will almost certainly take hold – especially when there is a lot of money or downside risk at stake. I’ve written about this a few times previously – such as here and here.
What This Means
Governance procedures and implementation should correlate to the subject matter(s) intended to be controlled. For FTX, those include accounting systems, fiduciary controls, expense/loan approval controls and even the foundation of establishing a board of directors. Governance of environmental and social risks also needs to connect to the technical topics relevant to the company, such as:
- Environmental risk assessment
- Corporate risk management
- Communications of environmental and social issues to external parties
- E & S data management, validation and disclosure
- Supply chain/vendor management
- Technical subject matters such as climate, water use, international ESG standards, DEI, human rights, etc
- Corporate culture, ethics and implementation of internal controls
- Third party verification processes
These aren’t the only E & S aspects that need corporate governance structures, and companies don’t need to establish separate E & S governance systems. But where E & S oversight, accountability and controls are missing, problems are almost certain to develop given the high level of importance placed on ESG matters by regulators, customers, investors and ratings organizations.
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