It was nice to get away over the end of year holidays. Even though I am retired, it still seemed like a break from routine, and that is always welcome. Of course, time does not stop, and there are inevitable surprises. Some personal (a broken pipe) and some general. I would not have guessed that two of the more interesting surprises would involve the corporate world. (Of course, if I could have guessed they would not have been surprises).
First there was the meltdown of Southwest Airlines. This one hit close to home since my mother-in-law was supposed to fly back to Indianapolis via Southwest on December 27. That flight, along with thousands of others, were cancelled, with no prospect of a rebooking for close to a week. For her it was not a major inconvenience since she had no pressing need to get home, and was staying with her daughter, my sister-in-law. However, for many others – stuck at airports, needing to get back to work, staying in hotels – it was a fiasco.
The other corporate news was the continuing saga of the collapse of FTX, the cryptocurrency exchange platform, along with arrest of its chief executive, Sam Bankman-Fried, who has been charged with multiple counts of fraud. Two former FTX executives have already plead guilty, and are cooperating with authorities, so there is not a lot of doubt where Bankman-Fried will end up. Too bad Bernie Madoff has left us. They could have shared a cell.
Having spent most of my career working in corporate America, these events fascinate me, though for different reasons. The Southwest debacle appears to have been caused by the airline’s failure to invest in an updated scheduling system, leaving it unable to react to the massive storm that spread across the northern part of the country. The FTX meltdown seemingly arose from a lack of oversight which opened the door for malfeasance.
Southwest was a classic corporate failure, generally emanating from the conflicting goals of planning for long term success – which requires the outlay of significant cash – and providing investors with the immediate returns they demand. CEO’s cringe at the prospect of standing in front of investors trying to justify low quarterly earnings, knowing that explanations of expensive technological upgrades will not go down well. It is easier to live with old systems, which generally work, and hope that a snowmageddon, literal or metaphorical, doesn’t hit. It appears that Southwest lost that bet.
No one who has done time in a corporation can be shocked at Southwest’s actions or inactions, as the case may be. We know that while corporations want to appear to the world as Stark Industries, innovators with endless creative drive, they are more in the realm of Scrooge McDuck, hoarding wealth while expending as little as humanly possible, except for executive compensation. Good times or bad, budgets will have to be cut and employee bonus pools limited for the common good. Is it any wonder that in such an atmosphere major expenditures are perennially delayed?
Corporate veterans also know that airline CEOs around the country are letting out a long sigh of relief, because this could have happened to any one of them. When, in 2008, ACE competitor AIG tanked due to investments in subprime mortgages, we all knew that we had dodged that bullet not because of C-Suite insight, but because management had not thought of going that route. Similarly, I have no doubt that all airlines cut corners, delay upgrades and pander to short term gains, just like Southwest. The question is can they stay one step ahead of disaster. Only time will tell.
FTX is a different animal. By all accounts the Bahama based company had little oversight. The current FTX administrator, John Ray III, who supervised the liquidation of Enron, described FTX as having an unprecedented failure of corporate controls, resulting in a complete absence of trustworthy financial information. It’s many investors were, in essence, flying blind.
It would be easy here to jump on the bandwagon claiming that I knew Bitcoin was rotten from the start, patting myself on the back for my wise investment strategies, but that would be disingenuous. I am the first to admit that I have never understood cryptocurrency. I like to believe that I could have grasped it by perusing the inevitable “Bitcoin for Dummies”, but it never seemed worth the time. Laziness saved me from ever seriously considering diving in.
Even if I had, the lack of oversight would hopefully have scared me off. Throughout my career, I have listened to business people decrying regulation, intimating that if only government would get out of their way they could really shine. Yet time and time again we have seen deregulation lead to corporate collapse, requiring significant pubic bailouts. It is not a coincidence that the Saving and Loan scandals of the 1980’s and the sub-prime mortgage recession of the 1980’s both came after a significant decrease in government supervision of the impacted sectors.
There is no doubt a balance that needs to be struck between governmental oversight and business operations. But it is foolish to think that businesses will properly govern themselves absent big brother. It’s not that companies are inherently evil. It’s just that there are so many opportunities to compromise on sound governance that the temptations are too great. Not only are the corporate earnings at stake, but so are individual careers. It is just too easy to rationalize cutting a corner here or rounding a number there.
Business oriented media does nothing to make up for a lack of oversight. Everyone thinks of business journals as hard hitting and practical, but often they are just People for the corporate set. Magazines and news shows did piece after piece on Bankman-Fried, lauding his entrepreneurial spirit and bold innovations, all without researching whether there was beef in the burger. As Paul Krugman said, discussing Enron, “Whom the gods destroy, they first put on the cover of Businessweek”.
Unfortunately, there are no great lessons to be learned from Southwest or FTX. Even if you devote all your spare time to researching companies you are unlikely to foresee snowmageddons or fiscal fraud, while branding yourself as someone no one wants to talk to at parties. It is just a risk we all take living in a world where we must rely on so much that is beyond our control or comprehension. Welcome to the modern world.
FTX used Quick Books…incomprehensible!
Sam was able to obtain investors wearing a tee shirt that looked like it should be headed to Good Will Thrift Store and with hair that looked like he just woke up – imagine anyone else not his gender or ethnicity being able to do the same.
Against the backdrop of recent governmental failures and bungling, I fear that corporate failures like Southwest and FTX signal a larger, more systemic failure across all segments of society. Gone are the days when American ingenuity and precision dominated world markets. We’re still in the fight, but not in the lead.
Having worked 3 decades as a corporate attorney in the drug industry … I am a big fan of government regulation! Never thought I’d be in that camp….
Same as the insurance industry. The more I saw, the more I thought the oversight was justifiable.