- Luiza Coelho da Rocha
Corporate Crisis Management in the Age of Social Media: How FTX Missed its Chance
The collapse of FTX may seem to be a crypto story, but it is simply another tale about the risks of lax corporate culture and the importance of effective regulatory policy, whether it involves traditional financial instruments such as a stock or innovative ones such as a crypto token. Yet, FTX does more than just show how dangerous it is for businesses to conduct financial transactions without proper risk management and control systems in place; it also emphasizes the need for effective crisis management, especially in the age of social media.
Since its inception in 2018, FTX has quickly risen to become one of the world's largest centralized cryptocurrency exchanges, thanks to the support of some of the world's top investors and the unusual charisma of its CEO, MIT prodigy graduate Sam Bankman-Fried (commonly known as SBF).
In early November 2022, however, it all came crashing down after a news article cast doubt on the financial stability of Alameda, an associated entity that had invested heavily in FTT, a cryptocurrency developed by FTX. The release of Alameda's balance sheet sparked significant panic in the cryptocurrency community, with investors scrambling to withdraw their funds from FTX, which eventually led to SBF stepping down as company CEO and FTX filing for Chapter 11 bankruptcy. A month later, both criminal and SEC fraud charges were brought against top executives of FTX and Alameda for allegedly misappropriating customers’ funds.
One of the most remarkable aspects of this crisis, and almost as surprising as the alarming claims themselves, has been the lightning-fast pace at which it has unfolded. The market learned about FTX's liquidity issue, SBF resigned as CEO, and FTX filed for bankruptcy all within a span of 10 days. A month later, investors were receiving live updates as federal investigators charged SBF with securities fraud and other serious crimes.
To be sure, it is worth mentioning that FTX was missing fundamental aspects of sound corporate governance and practice that would have been essential in preventing the crisis from occurring in the first place. For example, the company did not keep books and records, a bizarre circumstance that led FTX’s new CEO, John Ray, to comment that he had never seen such a “complete absence of trustworthy financial information.” Similarly, the firm failed to maintain a board of directors and when urged to create one, former CEO, SBF, cursed the investor who made the suggestion. As some of the aforementioned investigations into FTX and Alameda stressed, the companies also had a complete disregard for any kind of risk management or compliance mechanism that prevented the comingling of funds between the companies. More alarming still was the company’s crisis reaction, notably SBF’s conduct as the face of FTX, demonstrating an astounding inability to deal with the catastrophic events professionally.
The Institute for Crisis Management defines crisis as “any issue, problem or disruption which triggers negative stakeholder reactions that can impact the organization’s reputation, business and financial strength.” Managing a crisis effectively requires open lines of communication between the company, its shareholders, and the broader public, but it all boils down to how managers properly address the issues because, at the end of the day, how a crisis is managed is more important than the crisis itself. Well-managed responses can mitigate the harmful effects, if not totally prevent them. Deutsche Bank's strategic plan to repair the bank's finances and reputation after a decade of scandals and significant losses is a prime and recent example, despite the fact that it has not been without its share of mishaps and lingering doubts. The company has shown its best results in the past decade, helping to regain some of its reputation.
Among the most important principles are responding in a way that accounts for the needs of all parties and stakeholders involved, using the situation to reaffirm the company's core values, and, in the case of financial institutions, working with the regulator rather than against them. These measures come together under a framework described in Thomas Cole and Paul Verbinnen’s book Collaborative Crisis Management as “reputation rehabilitation,” which involves five basic steps: recognize, recalibrate, repair, redirect, and reinvigorate.
First, management needs to recognize when the worst of a crisis is over so they can recalibrate by assessing the damage to the company's reputation and the efficacy of its recovery efforts across all its stakeholder groups. Then comes the repair work, which may include updating internal policies, introducing new training programs, or reorganizing the structure of the organization. Redirecting, the company taking actions to express change and progress, and reinvigorating, the company strengthening its fundamental values and connections that have been damaged, are the focus of steps four and five, respectively.
While an apology of any kind is better than none, top-level executives should avoid long, rambling remarks and instead stick to short, brief ones that show they realize the seriousness of the situation, feel genuine remorse, and are actively working to rectify the problem. As articulated by Cole and Verbinnen, “good apologies work when rare, appropriate, and when they reflect common sense.” In today's interconnected world, misinformation may spread like wildfire on online platforms. Hence, management should respond promptly and professionally on social media in addition to the usual rules of thumb in high-pressure environments.
FTX’s response missed if not all most of these key points. The company’s leadership did nothing to restore its image by following crisis management best practices. Letters sent by SBF to its investors and workers during the height of the crisis failed to provide sufficient clarity on the nature of the problem the firm was experiencing or adequately address the concerns of either group in a way that could be used as a foundation for the company’s eventual recovery. Moreover, no specific steps were taken to interact effectively with regulators and/or authorities, and no opportunities were used to restate core values directly to stakeholders, though it might be argued that FTXs genuinely lacked them to begin with. Instead, SBF's online stance in the wake of the collapse, whether in response to criticism or unfiltered tweeting, further angered regulators and prosecutors by highlighting the corporation and its managers' total disdain for fundamental crisis management protocols.
In conclusion, FTX may serve as a cautionary tale of how not to handle a company crisis. Given the company's preexisting shortcomings in corporate governance and risk management, it missed a golden opportunity to repair its damaged reputation and improve its organizational structure by failing to openly communicate with its constituents, revamp its internal policies, and collaborate with government regulators. Instead, it allowed a charismatic CEO to remain outspoken as a corporate spokesman despite the irreparable harm he was causing to the firm. The FTX saga has, so far, only served to increase skepticism of the cryptocurrency market, which has the potential to deprive investors of innovative and cost-effective financial options, rather than reassuring them that new financial transactions can be safe if done within ethical and professional boundaries.
Luiza Coelho da Rocha is an LL.M. candidate at NYU, where she also serves as a Graduate Editor for the NYU Journal of Law & Business and as the Brazilian Legal Society's Communications Officer. Before attending NYU, Luiza worked at a top boutique firm in Rio de Janeiro focusing on investment funds, securities law, and strategic corporate litigation. She is also a member of the Brazilian Bar Association's Capital Markets Commission.