> While the explanation satisfied the company’s board, which did not formally investigate, it did not answer all the questions the incident raised.
I struggle to understand how these board members think they’re fulfilling their duties. When you learn management is committing crimes in order to raise funds it doesn’t seem reasonable to then take management’s explanation at face value after they’ve been caught.
Counter-intuitively, the board is fulfilling the duty of loyalty by protecting the business. Matt Levine puts it well [1] -
What if this had worked? What if Goldman hadn’t noticed anything unusual and had coughed up the $40 million? Wouldn’t Goldman have been embarrassed when this story came out? Well, no, because this story never would have come out! [...] Once you’ve been tricked into investing in a high-flying startup, the only rational move is to hope that they succeed, clean up their act and go public at a higher valuation. You’d never go around saying “we were tricked”; that just destroys value.
Similarly, if you are an investor and board member of a hot startup, and you find out that the co-founder impersonated a customer to try to trick someone into investing, what are your incentives? If you make a big deal about it and throw around words like “fraud,” it will be hard for the startup ever to raise money again, which might make your own investment worthless. If you say, meh, unfortunate one-time event, no harm no foul, then maybe the company’s vision will end up working out and you’ll be able to sell at a profit. If you invest in a startup you are buying an option; your goal, as a board member, is not to extinguish the option value too soon. Just, you know, let it ride, see where this goes.
I think it's important to remember that some (most?) of what Levine writes is tongue-in-cheek. There Levine discusses the practical consequences and board's incentives but in no way is he saying the board has fulfilled their legal obligations. Not even facetiously.
Absolutely! It's a humorous take but still presents an excellent way to frame the situation through the lens of perverse incentives of board members of a private company in a smoke-and-mirrors industry such as media.
I struggle to understand how these board members think they’re fulfilling their duties. When you learn management is committing crimes in order to raise funds it doesn’t seem reasonable to then take management’s explanation at face value after they’ve been caught.