The cult of the star business leader is dangerous
The writer is assistant lecturer at William & Mary and author of the forthcoming book “The Confidence Map”
With All Attention on Sam Bankman-Fried and the Crypto Collapse of the dayit’s as if the crowd misses the big picture.
If we step back and look at major organizational collapses over the past five years, they are different from other collapses. When the dot.com and real estate bubbles burst, we witnessed the failure of institutions, which then led to a crisis of confidence in their leaders.
Enron’s demise devastated Ken Lay and Jeffrey Skilling, while WorldCom’s failure upset Bernie Ebbers. In 2008, bank failures led to the ousting of bank CEOs. We witnessed a “Lehman moment” rather than a “Final Fuld”.
But in this cycle we see the downfall of oversized dream sellers – a collection of Harold Hills straight out of the 1960s film The Music Man – whose personal meltdowns take institutions down with them. (Think Adam Neumann, Markus Braun, Trevor Milton, Lex Greensill, Bill Hwang, Do Kwon and now Bankman-Fried.)
In all cases, attention turned first to the outlandish promises and audacious overstepping of a single individual, then to the perilous financial consequences for their organizations. It was the flaws of a bold name atop the marquee that brought the whole show to a close.
In an age awash with business strategies and “move fast and break things” social media influencers, I guess our fascination with the C-suite’s disruptive storytellers shouldn’t be so surprising. Today’s technology and free access to capital has allowed individuals to become huge stars like never before.
With this oversized overnight success, however, came a series of shortcomings that are only now being revealed.
First, these people tend to rule without the usual checks and balances. Ownership or highly concentrated ownership, presumed genius or outright aggressiveness, they are masters of the art.
Second, blind loyalty was anything but a requirement—on the part of employees, capital providers, and customers. Hindsight was non-existent and skeptics were ridiculed for their disbelief.
Third, these people were surrounded by loyal and adoring fans. Rock musicians have never had it so good.
On the surface, it all seemed unstoppable. Founders and CEOs seemed to wield power like autocrats or cult leaders.
The challenge with cults, however, is that they foster environments of conformity, not trust. Only the leader has certainty and control. Everyone else is helpless. Moreover, any certainty that exists results from obedience to this individual.
Provided the rewards of compliance and loyalty are high – and the penalty for non-compliance is particularly harsh – such an environment can be easily maintained.
However, problems quickly arise when these factors are reversed. Extreme power is either absolute or non-existent. The environments of helplessness and certainty are inherently binary. There is no middle ground. And in this context, a collapse of trust is coming quickly.
The failures we have seen have been treated by investors as isolated cases of aberrant leadership. After the collapse of several cryptocurrency firms and the fall of Kwon and Terraform Labs earlier this year, Bankman-Fried has been equated with both JPMorgan and Warren Buffett. But the question is what happens when larger-than-life heroes come under the microscope. What if all we’ve seen so far was just the disappearance of the “subprime” characters from this saga?
And let’s be honest. It’s not like we’re running out of additional names. This is where the problem lies. Not only is the list of sellers particularly long this cycle, but it is also far-reaching. As we have already seen with crypto, the risk of contagion is far higher than popular industry adjectives such as “decentralized” would suggest.
What we are witnessing now with the failure of FTX is not a crypto crisis; it is a crisis of sectarian celebrity. The collapse of trust in emperors can bring down large empires in a flash. With so much tied to a small handful of star individuals in tech and finance, we could easily see the same SBF-FTX happening elsewhere.
Unlike in the past, what matters most today is not the strength of the balance sheet or the reputation of institutions, but the trust that the crowd places in a few high-profile figures. As these numbers disappear, so will the markets.
Like it or not, this time it’s personal.