Mark Koscinski decision analysis, NFP

SBF, FTX and NFPs

FTX, SBF, and NFPs

Unless you are living in a bubble, you know all about the crash and bankruptcy of FTX, Sam Bankman-Fried (known as SBF), and “effective altruism”.  What can NFP managers learn from this sad episode? Without going into all of the intricacies of this case, here are some takeaways for managers of any organization:

  • Beware of Groupthink.  One of the venture capitalists (Anthony Scaramucci, briefly Donald Trump’s communications director) was asked why the due diligence on FTX did not catch the alleged fraud. His answer was very revealing.  First, FTX was a real business, unlike that of Bernie Madoff.  His contention was that the subsequent operation of the business was the genesis of the fraud. Fair enough.  But again, why didn’t the investigation of the business disclose any red flags?  The venture capitalist’s answer:  Groupthink.  Paraphrasing, he said everyone who looked at the enterprise, including the lawyers and the accountants conducting the due diligence, wanted to see a good business.  NFP managers, beware of groupthink.  Make sure you get diverse opinions before you make a critical decision. Tolerate opinions different from your own. Even outlandish points of view may sharpen your thinking supporting  your decision.
  • Beware of the Halo Effect. The halo effect occurs when your positive feelings about someone or something overflows into another, often unconnected area. For instance FTX used some influential figures such as Shaquille O’Neal and Tom Brady as spokespeople. Their knowledge of cryptocurrency might be questionable, but their star power brought a lot of positive publicity to FTX.  Some of them are now being sued by investors. Additionally, SBF was a big contributor to political causes.  We are all prone to the influence of the halo effect.  How should NFP managers deal with it?  Slow down to analyze before making a decision.  Be aware of your intuition. A big decision or a big investment requires a lot of thought and analysis.  Don’t shortcut it because of someone’s halo.  
  • Risk Management is essential! Risk is the obverse side of the return coin. SBF’s significant other, who managed some of the FTX funds, basically admitted there were no risk management controls in place.   This is a stunning revelation from a financial organization.  Scaramucci said the rising interest rate environment was the cause of the FTX collapse.  There are many risks any enterprise incurs (such as hazard risk, credit risk, economic downturn, etc.) but any financial organization should be keenly aware of this risk. Small NFPs don’t necessarily have to worry about such things as bond duration and asset liability management, but a good risk control management program is essential to any enterprise.  Catalog the risks your organization is facing and design an effective risk control program. 

Don’t abandon technology and cryptocurrency because of this disaster. Cryptocurrency may not be forever, but it will be around for at least a while. Your NFP might consider taking cryptocurrency as a donation. Many major companies allow customers to pay their bills with cryptocurrency already.  Make contributing easy for your donors.  Don’t make them convert their crypto-assets to cash before they donate it to you.  NFPs will often accept all kinds of assets, including real and tangible property.  Why not crypto? Continue to monitor developments in this field. Be on the lookout for opportunities for donors to send your organization cryptocurrency.   To do this you will need to have at least a rudimentary understanding of the crypto-world.

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Diversity and Inclusion in NFP Management

We have long known diversity and inclusion in NFP management are moral and ethical imperatives. Recent studies have also shown powerful decision science reasons why they are important.  Professor Daniel O’Connor and I had the pleasure of being faculty advisors to Delia Geyer, who completed her senior thesis in economics with honors at Moravian College in 2021. Delia’s topic was the CEO Pay Ratio, a topic germane to publicly traded companies. As part of her project, Delia also analyzed how certain social justice aspects affected the Pay Ratio, and indirectly corporate management.  Her findings on this topic are just as relevant to NFP organizations as they are to large public companies. Delia wrote::

“McKinsey and Company (2020) found companies with the greatest ethnic diversity on executive teams outperformed those with the least by 36% in profitability. They also found companies with more than 30% women on their executive teams were more likely to outperform those with fewer women on their teams (McKinsey and Company, 2020). Another study found Fortune 500 firms with the highest percentage of women on their boards outperform those with the lowest (Women on Corporate Boards (n.d.)). Companies with higher than average diversity percentages of their management teams report higher revenue levels than companies with less diverse management teams (Lorenzo, et al., 2021).” (Geyer, 2021, unpublished thesis, quoted with permission).

Why is this so? Several reasons come to mind.  James Surowiecki,in his bestselling book the Wisdom of the Crowds, noted that more information brought to bear on a situation results in better decisions but only if  the information from each source is independent from other sources. Having a diverse board and management helps ensure many independent viewpoints and information are considered in the decision making process.  

Another reason why diversity is important on the board is it minimizes the possibility of groupthink.  This phenomenon occurs when members of a group place harmony and agreement ahead of good decision making.  In such a situation, issues and information  are not adequately explored and silence is often taken as agreement. One cause of groupthink is a highly cohesive (read “non diverse”) decision making group.  A more diverse board will bring more and varied opinions to the fore, resulting in better decisions.  Diverse opinions are important, even if they only force the majority of the board and management to sharpen their reasoning about why their proposed decision is correct. 

NFP management take heed.  Diversity and inclusion initiatives are not only the right thing to do, but will also improve the operation of your organization!