A New Era of Accountability May Be Upon Us
In the late summer and fall of 2019, Americans got to witness the business catastrophe that was WeWork. From a peak valuation of $40 Billion, the company — today — is worth a little less than $1 Billion. Ironically, the founder behind WeWork who presided over that precipitous loss in value was never charged with any crimes and may now be worth more personally than the WeWork corporation.
Prior to that, the high profile rise and fall of Elizabeth Holmes at Theranos, resulted in charges of fraud by 2018 with a conviction and sentence of 11 years in prison. One she is appealing while she continues to live on an estate reported to cost $13,000 in monthly upkeep and, reportedly, may have tried to flee the country to avoid serving time in prison.
In 2022, the world watched as crypto space was rocked by FTX’s $51 Billion “collapse in collateral.” And now Sam Bankman-Fried is under house arrest as he waits for his day in court.
All of this harkens back to the Enron Scandal in the early 2000s. At the time, Enron was the 7th largest firm in the United States — and six time winner of Fortune’s most innovative firm award. Within the span of months the company was reduced to bankruptcy. The financial losses and impact to hard-working employees and small investors who had a significant amount of personal savings wrapped up in the company is hard to measure. Enron Shareholders lost $74 Billion in the four years before the company’s bankruptcy with an estimated $40 Billion to $45 Billion being lost as a direct result of the fraud committed by company leaders.
2022 was a turning point year for the markets as investors pushed back after rising inflation, aggressive policy by the U.S. Federal Reserve, and a slew of very high profile activists investors demanding changes at some of the most respected brands. Disney, Google, Tesla, Amazon, and Salesforce — to name a few — have seen significant dips in valuations and increased pressure. In the case of Salesforce, activist investors threaten to dismantle the company by divesting in acquisitions. Acquisitions that — arguably — are the reason why Salesforce was rewarded by the financial markets between 2013 and 2021.
Most notably, early 2023 has given the world one of the most shocking revelations. The UK government has announced the creation of an independent regulator which, once codified into law, would give the regulator significant powers over the English Premier League. The Premier League, as it is known, is arguably the most successful and recognizable brand in world football. It’s financial success only rivaled by the quality of talent it attracts and the international fan base. This coming on the heels of pushing out Russian Oligarchs in the aftermath of Russia’s invasion of the Ukraine.
What does this all mean?
For too long a lack of regulation, unchecked growth and prosperity in financial markets and/or realms of business (such as football), and economic stability has given few people a reason to raise the issue of accountability. Wealth and power was amassed by a small group of individuals in the decade since the 2008 real estate crash. In that time, little to no emphasis was placed on governance and, more importantly, accountability. While a few become incredibly wealthy, the average person did better. This equilibrium allowed for the irrational exuberance of crypto growth, Tesla’s valuations, technology explosions that saw the expansion of social media, and the restructuring of how Americans consumed entertainment.
Our impression is that the UK football regulation, activist investors taking a stake in Salesforce, and the emphasis of financial markets on profitability over growth are all signs that greater accountability will be required of business driven by governments, investors, and society as a whole. Inequality may be the real existential threat to developed economies. BlackRock’s own 2023 outlook talks about the “Great Moderation,” — the period that includes the last forty years which saw, “largely stable activity and inflation” — being a thing of the past. That the near term future will be notable because of greater economic and market volatility. BlackRock points out that “Central banks are deliberately causing recessions by overtightening policy to try to rein in inflation.”
Volatility stresses the businesses and industries that are not disciplined. Companies with poor governance and oversight will only feel greater pressure. Requiring greater accountability. By way of example BlackRock owns a $35 Billion stake in Tesla. Over the span of the last 12 months, Tesla experienced a 70% fluctuation in stock price. That fluctuation equates to $24 Billion of BlackRock’s investment. With all the reported emphasis on Tesla’s mercurial CEO and the distractions caused by the Twitter buyout, Institutional investors — like BlackRock — are going to need greater accountability from the boards and leaders of the companies in which they have a significant stake.
Leading Accountability
Where will this begin? The Sarbanes Oxley Act (SOX) was born out of the rampant fraud and corruption exhibited during the Enron scandal. But it barely scratches the surface when it comes to holding companies accountable. Accountability will not simply be about clean and accurate financial statements. It will be about business strategy, operational excellence, and the ability to do business in a fair and ethical way.
Accountability will come from good governance driven by boards and the Internal Audit teams that derive their mandates from those boards. The intervention into the Premier League by the UK government is only the start of where this can and, most likely, will go. While the U.S. Congress may be slow to move given the partisan, and seemingly anti-democratic stance of at least one of the political parties, we should expect that the markets themselves — driven by large institutional investors — may begin to shape what accountability may look like through the rest of this decade.
Boards have an obligation to step up and be leaders in this area. If not, they may find themselves increasingly the target of litigation, regulation, and bad press. Something nobody wants to see.
Internal Audit Next Founding Team