Corporate boards are mastering the lessons learned from the SVP collapse.
The underlying causes that contributed to the Silicon Valley Bank failure are still being investigated. Whether, and if to what extent, corporate leadership was complicit in the collapse will similarly take time to confirm. But there’s enough known right now to inform corporate board practices across industry sectors, not just those in banking and finance.
The fundamental take-away is that the SVB failure will likely accelerate the shift to closer board oversight of management and operations that is already taking root amidst evolving governance principles and Delaware law. This may ultimately lead to tension in the board/management dynamic, with concerns for possible reactive micro-management by directors.
The SVB debacle’s “big picture” board lessons are the byproduct of both macro and micro factors.
The Macro Factors:
Economic Volatility. A major bank failure is inherently destabilizing to the business community. It injects a level of volatility and systemic insecurity that will prompt directors to exercise heightened attention to recessionary risks and closer interaction with CFOs. Impressed with caution and focused on financial stability, boards will be in a “both hands on the wheel” mode for the foreseeable future.
Board Oversight. The collapse of a financial institution unfailingly prompts “Where was the board” calls from shareholder interests, legislators, regulators and the media, amongst others. Already sensitized to board oversight responsibilities from recent Delaware court decisions, directors are likely to “lean in” much more closely on the activities of management in order to satisfy expectations and reduce their individual liability profile.
Speed of Technology. One of the reported SVB contributing factors was the split-second speed with which news of the pending collapse spread, and with which customers were able to withdraw their funds-thus accelerating the collapse before the bank could complete its reorganization plan. This offers directors a “teaching moment” on how technology may narrow the time frame in which they must receive and react to critical operational information.. It is a reminder that directorship is a 24/7 responsibility.
Individual Accountability. The Biden Administration has called for new laws to strengthen the FDIC’s authority to penalize executives of failed banks (including monetary fines, compensation clawbacks; industry job bans). Many executives, regardless of industry sector, will perceive this as a “pitchfork” response to a complex problem; as political grandstanding that places them at increased personal risk. Boards will need to reassure senior executives who fear exposure to individual accountability arising from the normal conduct of their jobs.
Rumsfeldian Risks. The extraordinary unpredictability of a major bank failure may prompt boards to revisit the relevance of Donald Rumsfeld’s famous series of risk-related “knowns and unknowns.” Was the SVB failure a “known known” (a traditional risk); a “known unknown” (a risk the board knows that it does not know); or an “unknown unknown” (a risk of which no reasonable person could be expected to be aware)? And what to do about it?
The Micro Factors:
Warning Signs: SVB’s problematic business and governance practices had been identified by the Federal Reserve well before the bank’s collapse. Was bank leadership was responsive to the Fed’s concerns? The bank was also without a chief risk officer for much of 2022 into 2023; should that have been a cause for leadership alarm? Prompted as well by recent Delaware law decisions, boards will be increasingly sensitive to circumstances that may constitute “yellow flags” and “red flags” of organizational risk.
Meeting Formalities. The SVB board’s alleged reliance on “virtual” board meetings has come under criticism; that the process does not lend itself to the level of constructive skepticism and inquisitiveness that are hallmarks of effective oversight. Despite Zoom’s general acceptance across industry sectors, and lenient laws governing the holding of virtual meetings, these and similar criticisms may prompt a speedier return to more traditional board meeting practices, with less use of remote engagement.
Board Composition. SVB’s board composition has been the subject of close scrutiny, especially for placing what has been described as “diversity” and political associations ahead of specific banking industry expertise. These criticisms—whether valid or not—may encourage nominating committees to place greater focus on industry expertise and less focus on directors with ESG related expertise-especially those who are unable to make the connection between ESG and business strategy.
DEI-Hushing. Allegations that blamed SVB’s collapse on its environmentally and socially conscious investments have been widely debunked. Nevertheless, these allegations have arisen in the context of increased public circumspection about the true organizational value of ESG focused strategies and investments. As one observer alleged, ”Everyone knew it was the go-to bank for woke CEOs.” As a result, boards may seek more “time and space” from the SVB calamity before enhancing commitments to socially responsible investing and similar efforts.
Work from Home Culture. SVB’s enthusiastic embrace of remote working has been heavily criticized, especially with respect to its extension to the senior executive leadership team and the bank’s acknowledgement that it had negative performance effects. Although remote work arrangements are rarely the cause of performance issues, the SVP results may influence other companies in seeking an end to remote work arrangements.
The collapse of Silicon Valley Bank, and its collateral impact, is consistent with the most significant financial disasters of the 21st century. The ultimate causes that led to its collapse, and individual accountability for those causes, will by determined after years of investigation, litigation, hearings and legislation.
But corporate boards across industry sectors are already reaching their own conclusions with respect to those causes and are taking corrective measures. In the short term at least, these conclusions may lead to a retrenchment from pandemic-era practices and a return to more traditional board style. The board/management dynamic will be best served if both constituencies “stand in each other’s shoes” for awhile, and better understand their respective views on the lessons of SVB.
