From the FTX bankruptcy and downfall of crypto “rock star” Sam Bankman-Fried to the chaos at Twitter, it has not been an excellent week for the geniuses of capitalism. Elon Musk’s abrupt and in some cases already reversed decisions since taking on the social media company back up his contention that to this point his tenure “is not boring,” but in addition expose the form of corporate governance issues which can be too often repeated to the detriment of shareholders.
“Undoubtedly, Sam Bankman-Fried is a genius,” said Yale School of Management leadership guru Jeffrey Sonnenfeld in an interview with CNBC’s “Taking Stock” on Thursday. “But what’s hard is that anyone has to give you the option to placed on the brakes on them and ask them questions. But once they develop one in every of these emperor-for-life models … you then really haven’t got accountability,” Sonnenfeld said.
Few would doubt the genius of Elon Musk, or Mark Zuckerberg, for that matter, but few would put them in the identical class with many corporations which have failed spectacularly, though Sonnenfeld says they share the link of being allowed to operate without enough corporate oversight.
“It is not crazy to speak about Theranos, or WeWork, Groupon, MySpace, WebMD, or Naptster – so many corporations that fall off the cliff because they did not have proper governance, they didn’t work out, how do you get one of the best of a genius?” Sonnenfeld said.
Within the case of Bankman-Fried, who stepped down from his CEO role at FTX as the corporate filed for Chapter 11 bankruptcy on Friday, Sonnenfeld pointed to the dearth of a board that ought to have been asking tough questions.
Tom Williams | CQ-Roll Call, Inc. | Getty Images
But boards are sometimes unable to administer genius, Sonnenfeld said. Zuckerberg is one other example. When Meta, formerly Facebook, announced it could be shifting its focus to the metaverse last yr, Sonnenfeld said his board members were essentially powerless. Meta laid off 11,000 of its employees this week and announced a hiring freeze because it has faced declining revenue and increased spending on a metaverse bet that Zuckerberg has said may not repay for a decade.
Tesla shares haven’t been immune from Musk’s Twitter takeover, with the stock plummeting this week after Musk told Twitter employees on Thursday he sold Tesla stock to “save” the social network. One Wall Street analyst decided that Twitter is now a business risk to Tesla and yanked the stock from a best picks list.
Musk (though not Tesla’s founder) and Zuckerberg oversaw the creation of two trillion-dollar corporations, though each have now lost that market-cap status in stock declines attributable to quite a lot of aspects — from macroeconomic conditions to sector-specific risks, a market valuation reset for prime growth corporations, and in addition leadership decisions.
Market research shows that founders is usually a financial risk to company value over time. Founder-led corporations have been found to outperform those with non-founder leaders in early yr, in line with a study from the Harvard Business Review that examined the financial performance of greater than 2,000 public businesses, but virtually no difference appears three years after the corporate’s IPO. After this time, the study found that founder-CEOs “actually start detracting from firm value.”
Major players in Elon Musk’s Twitter deal, including Fidelity Investments, Brookfield Asset Management and former Twitter CEO and co-founder Jack Dorsey, didn’t sit on the corporate’s board or have a voice throughout the transaction, Sonnenfeld said, which gave the deal no oversight. Musk is now splitting his time between six separate corporations: Tesla, SpaceX, SolarCity/Tesla Energy, Twitter, Neuralink and The Boring Company.
Firms led by lone geniuses need strong governance at first. Sonnenfeld says having built-in checks and balances and a board that has field expertise in addition to the power to look at out for mission creep is critical to allowing these businesses to operate with less risk of costly blunders.
Tesla and Meta governance scores inside ESG rankings have long reflected this risk.
That does not imply the market doesn’t need geniuses.
“Sure, we’re higher off with Elon Musk on this world as we’re higher off with Mark Zuckerberg,” Sonnenfeld said. “But they can not be alone.”
Through the recent issues, these under-fire leaders have been critical of themselves.
FTX’s Sam Bankman-Fried tweeted Thursday morning that he’s “sorry,” admitting that he “f—ed up” and “must have done higher.”
Zuckerberg said of the mass layoffs at Meta in a press release equal parts apology and unintended restatement of the governance problem, “I take full responsibility for this decision. I’m the founder and CEO, I’m answerable for the health of our company, for our direction, and for deciding how we execute that, including things like this, and this was ultimately my call.”
Musk tweeted, “Please note that Twitter will do a number of dumb things in coming months.”
But whether an apology or an admission from genius that it too could be dumb occasionally, Sonnenfeld says these leaders could be higher off letting others do the criticizing — much sooner, and far more often.
“They must be managed, they must be guided they usually must have a board that may help get one of the best out of themselves and never allow them to develop this imperial sense of invincibility,” he said.