The Fall of Silicon Valley Bank – Lessons for Corporate Directors

Silicon Valley Bank (SBV), a prominent lender to the technology industry collapsed in less than 2 days becoming the second largest bank failure in the history of the U.S. SBV’s bank run exceeded US$40 billion in less than 24 hours and management expected to lose over US$100 billion more in less than 48. ?

SBV failed because of a classic textbook case of mismanagement by the bank and the board of directors. Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable.

Following SBV’s failure, Board Members must place a particular focus on strengthening the effective and timely supervision and management of key businesses risks, including market and regulatory, and remember that in the context of a bank, their primary role is the protection of the entity’s depositors.

Key Lessons for Board Members:

1-?????Board Members must oversee leadership and keep them accountable – SBV’s business model was a risky business and should have been challenged by the Board – built around a highly concentrated customers’ base and liquidity and funding sources, SBV was more exposed than most banks to the risks of increasing interest rates. The reliance on uninsured deposits was also a big oversight.

2-?????Board Members must ensure companies’ key risks are properly assessed and managed and must instill a balanced risk culture. Supervision and risk management practices and standards must be intensified as firms grow in size and complexity, and an added focus must be placed on understanding and complying with regulatory requirements. Less conservative stress testing assumptions and multiple scenarios with respect to market conditions, clients and interest rates, coupled with well-defined contingency plans could have helped to reduce risks and avoid the bank run;

3-?????As evident as it sounds, Board Members must pay attention to Regulators’ Reports (and those of the Auditors) as they often highlight important risks, vulnerabilities, and compliance gaps, and must aim to address them quickly.

4-?????Board Members must stay humble about their ability to assess and identify new and emerging risks particularly in rapid-growth emerging business model, hire expert advice, and not give their egos a board seat.

5-?????Have and promote within the Board an assertive supervisory approach where issues and opinions are expressed openly and freely and build effective decision-making mechanisms to ensure problems are fixed quickly. Board members must guard against complacency and becoming “too accepting” as they look to achieve their own individual objectives or serve on the same entity's board for too long.

6-?????Compensation Packages must provide the right alignment and incentives to Board Members and Leadership. SBV’s compensation packages were tied to short-term earnings and equity return and did not include risk metrics thus giving incentives to focus on growth and short run profits above effective risk management and the entity’s long-term financial sustainability.

7-?????Succession Plans should be planned for key leadership positions – including, specifically for banks, the Chief Risk Officer (which took SVB’s over 6 months to replace!).

8-?????Board Members must promote regular self-evaluations and place a particular importance in Governance Committees that help regulate Leadership and the Board itself.

9-?????And finally, social media enabled depositors to instantly spread concerns about the bank run and fueled VC investors and technology firms to withdraw uninsured deposits in a coordinated manner at an unprecedented rate. The speed at which SBV collapsed has left experts questioning whether social media has opened entirely new risks in the world of finance. This and other emerging risks must be properly understood and managed by Corporate Directors.

The goal of this exercise was to learn the general lessons from this experience and to help Corporate Board Members’ responsible protection, effective oversight, and sound decision-making objectives across a wide range of potential risks.

Key lessons summarized here-in were drawn from a Board of Directors Learning Session organized by iDirectores that looked to share lessons learned and build knowledge amongst its members.

About iDirectores - iDirectores is a community of over 200 Latin American Board Directors, of which I am a proud Member, that aims to foster economic, social and business development in Latin America through better corporate decision making. www.idirectores.com