E.VERY BUSINESS The cycle, as he runs out of breath, reveals problems that seem obvious in retrospect. Twenty years ago, when the stock markets collapsed, accounting frauds came to light at Enron, an energy trading company, and WorldCom, a telecommunications company. Less spectacular were the revelations that many companies made compromises or behaved inconsiderately. The actions of the gigantic bosses who ruled General Electric and Vivendi, a French media group, eventually hampered them for decades. After 2008, it was revealed that Wall Street Emperors wore no clothes, and Lehman Brothers, Merrill Lynch, and others collapsed under the weight of huge losses – and their bosses’ huge egos.
It is not easy to guess where tomorrow’s warning might lie. However, investors looking to avoid explosions should pay special attention to the stocks, companies, and bosses that epitomize today’s boom. One area of financial risk is to thrive High Yield Bond Market where the underwriting standards have slipped. In the corporate world, the tech industry is the prime candidate for a government fire.
One reason is the persistent exuberance for anything that has to do with a touch of technology. The recession caused by Covid-19 was a hammer blow to many parts of the global economy. However, a side effect of the pandemic has been to speed up Silicon Valley and its various offshoots, and to reinforce an already unprecedented bull run. All kinds of sins, from questionable accountability to bossy executive behavior, tend to be overlooked in good times. As Warren Buffett famously noted, only when the tide is out can you see who has swum naked.
Another reason to watch tech is the abundant funding of risky ventures. Desperate investors for returns have shoveled money into high-valued companies whose prospects are far from proven. Didi Chuxing, a Chinese ride-hailing company, could have a valuation of over 100 billion in an upcoming stock sale SPACs, which are publicly traded cash pots intended for merger with private companies.
The final reason to watch out for tech companies is because of their bosses. Dotcoms and their corporate cousins are often still run by their founders. Many of them have a controlling stake thanks to increased voting rights. These entrepreneurs tend to have a messianic confidence in their own abilities and assets to match. The intoxicating potion of control, wealth, and confidence can lead bosses to put all criticism aside and view rules as things for others.
One company that highlights all of these concerns is SoftBank. The world’s largest technology investor with a market value of over $ 120 billion has been instrumental in fueling today’s exuberance. Some of his bets, including Didi and Coupang, a South Korean e-commerce champion, have been huge hits. Not only does the Japanese firm back some hits and their inevitable share of duds, but it’s also mired in firms like Greensill, a UK lender who collapsed earlier this year; WeWork, a troubled office company; and Wirecard, a fraudulent German fintech company.
That begs questions how SoftBank itself runs. Despite being a tentacle outfit, the company can best be thought of as the Masa show, where all of the big decisions are made by its founder and boss Son Masayoshi. That includes how tons of capital are allocated – the company currently spends over $ 200 million a week helping businesses.
Risk control in the company is incomplete. His internal hedge fund, once known as the “Nasdaq Whale,” upset the markets last year, berserking stocks of various companies. The company has transformed so many times that analysts admit they struggle to understand what is going on. Transactions between the company, its funds, its executives and its affiliates can create a risk of conflicts of interest.
SoftBank is not alone. There is certainly questionable corporate governance in other tech companies as well. The disclosure is patchy at best. The big tech companies are far less demanding than the big banks: Facebook’s annual report is 129 pages, compared to 398 for JPMorgan Chase. This week, executives at Lordstown Motors, an electric vehicle startup, resigned after the company provided inaccurate information. These two-tier participation structures often allow high-ranking founders to retain control.
In the tech space, activist investors have relatively little leverage. Their arrival would help improve corporate governance standards by putting management under more rigorous scrutiny (like Elliott at SoftBank). In their absence, conventional shareholders and creditors should be vigilant. At low tide – as it will one day – the investors who paid the most attention during the dizzying days of the boom are rewarded. ■
This article appeared in the Leaders section of the print edition under the heading “The Benefits of Foresight”