Canada’s largest cryptocurrency corporate failure can provide some important lessons for UK employers – and Human Resources professionals in particular… Steve Herbert, Head of Benefits Strategy at Howden Employee Benefits, discusses the lessons
In the world of business – and indeed life – we can often learn important lessons by looking at the mistakes made by others. And I can think of few better examples of how not to run a business than the increasingly well documented failure of Canada’s largest cryptocurrency exchange, QuadrigaCX.
Cryptocurrency may not mean much to you (nor did it to me), but I guess most people would at least recognise the term “bitcoin”. Bitcoin (so Google tells us) is:
“a type of digital currency in which a record of transactions is maintained and new units of currency are generated by the computational solution of mathematical problems, and which operates independently of a central bank.”
Bitcoin can be used for digital transactions, and a market for exchanging traditional money for bitcoin has grown up over the last decade. This exchange of currency is the business that QuadrigaCX were undertaking. Successfully. At one point they claimed to undertake 80% of such transactions in Canada each year.
That was until the end of 2018, when their young and charismatic founder and Chief Executive – Gerald Cotton – died unexpectedly whilst on honeymoon in India. This was kept rather quiet for some weeks, but eventually an announcement was made by the company regarding their CEO’s death. The story thereafter becomes increasingly sensational, and with a developing plot-line worthy of a holiday paperback thriller. If you want the fuller story then I would suggest you listen to the BBC Radio 4 “File on 4” program which was broadcast on Sunday 17th March.
Lessons to be learned?
In this article we will focus on the facts as they were still being represented and reported in February 2019. This is because the story at that point provides some useful lessons for us all.
So in February the world was officially told that the company was being passed onto Cotton’s widow, Jennifer Robertson, who reportedly had no prior knowledge in the cryptocurrency sector, or in the running of QuadrigaCX.
Following Ms Robertson’s appointment it became clear that the only person able to unlock the digital currency in the exchange had been Cotton himself via his personal laptop and passwords/passcodes known by no one else. This, in effect, meant that more than 115,000 investors had lost access to over £100 million of their money.
It also became apparent that in the final few months of his life Cotton had been effectively working entirely alone at executive level, following the departure of other senior management figures over the previous few months and years.
Now it doesn’t take a genius to spot some of the flaws in the above corporate structure. But for the sake of clarity I’m going to highlight the two items that are screaming out to be commented on anyway:
Issue 1: Corporate Governance & Reputational Damage
It is apparent that allowing one person to effectively manage and control all the key aspects of the business invited disaster and demonstrated no practical corporate governance at all.
Even if the funds lost could eventually be located, unlocked, and distributed, the reputational damage to the company would still be devastating. It is unlikely that any financial institution would be able to survive such a calamity.
Issue 2: Succession Planning
It is also clear that no thought had been given to what would happen in the event of Cotton’s death (or indeed any illness or injury that prevented him from carrying out his job). Without this the company was always exposed to a significant risk around the individual.
Just as importantly, the passing of ownership post-Cotton’s death to someone without the requisite skills to run the organisation was (again) always likely to result in major problems fairly rapidly.
So, regardless of some of the more sensational issues of this particular story, there was much that could have been done to avoid the problems at an early stage.
What’s this got to do with Human Resources (HR)?
The key to this story (or at least the early part of the tale) might well be the Human Resources function. The internet definition of “HR Department” can be a useful starting point here. Our good friend Google tells us;
“In a company or other organisation, the HR department is the department with responsibility for the recruiting, training, and welfare of the staff.”
That’s a fairly good summary of how most organisations – and even some HR professionals – view Human Resources. Essentially this positioning places the HR function as one of reaction rather than a valid stakeholder at a senior level.
But imagine how different things might have turned out for QuadrigaCX if they had embraced a strong HR function with a seat at board level meetings?
A good HR Director would surely have identified the key person and shareholder protection risks inherent in the set-up, and could (with expert advice and assistance) have probably found insurance-based solutions to resolve these risks. Likewise the Governance risks could have been mitigated via new executive-level recruitment and better reporting.
Had these functions been put in place then the loss of so much money by so many people might have been avoided, as might the job losses for the lower pay-scale employees at QuadrigaCX.
The above outcomes do of course assume that the financial losses were accidental but, regardless of the circumstances, it is clear that a strong HR function might have spotted the issues in advance and could have taken some preventative or corrective action accordingly.
The point I am seeking to make is that HR can and should be more than a reactive function and force at any employer, yet for most SME’s (and even some larger employers) in the UK there is still a very long way to go here.
I live in hope that one day soon we will find the Google definition of HR being updated and more relevant to the job that needs to be done. Something along the following lines would be good:
“In a company or other organisation, the HR department is the department with responsibility for the recruiting, training, and welfare of all staff including those at the executive level.
The HR department also helps identify and resolve any employee related corporate and governance risks to protect the wider organisation.”
Steve Herbert is Head of Benefits Strategy at Howden Employee Benefits