According to the latest incident of the Silicon Valley Bank (SVB), one of America's top 20 commercial banks and an important lender for the startups has entered bankruptcy and was immediately shut down by the US government, has become a hot issue to discuss whether it might lead to another major financial crisis again.

Silicon Valley Bank (SVB) has a different business model from other banks. SVB primarily focuses on fundraising and lending to the startup companies in the US, and has become a key partner for many technology and healthcare companies. Over the past two years, the funding of the startups has been decreased continuously. Even many Venture Capital (VC) groups are also finding it’s harder to raise fund, and the cashflow of VC and startups which are the bank’s clients starting to deplete.

Therefore, they began to withdraw deposits to fund their businesses, then the problem of SVB has begun. When the bank's liquidity is insufficient, the bank needed to sell debt instruments or Treasury notes (US government bonds) that it has invested, when there was a large deposit base, in order to increase its liquidity. Since the Federal Reserve Bank has continuously increased interest rates to fight inflation, it resulted in the loss of sale in SVB's debt instruments or Treasury notes.

Therefore, it is necessary to find ways to raise funds or look for funds to compensate for the losses arising from the sale of assets which mostly are Treasury notes affected by higher interest rates. The news rushed the investors and bank’s customers to withdraw their deposits, known as the “Bank Run”, sending the SVB’s stock price pummeled to the lowest ever within a day on Thursday March 9, 2023. With a fall more than 60% and another drop in an off-market session before the trading was halted. However, the situation is still needed to be monitored including the root cause.

Considering from the information provided, You! as a director “What are the lessons learned for the board to perform effectively?” 

“Monitoring and Observing” are important skills for Board of Director

Before the incident, there were many warning signs that the Board should be able to monitor and notice such as the important figures that reflect the company's performance. For example, the deposits of specific customers is decreasing, the concerted withdrawals from the companies in last few years, and the regression period of the startups which is considered to be the bank main customers. Including the external situation that the Federal Reserve Bank has continuously increased the interest rates to fight inflation which may affect SVB operations. These are directly related to business that the Board should consistently monitor. Considering the disclosure of latest SVB annual report (Form 10-K), many issues have been already mentioned as risk factors for the company. There are many ways for the Board to monitor in order to keep up with the situations or business environment. The best way is to enquire the management to keep update and present to the Board the overall business situation, including the Board proactive questions to get more information and answer all doubtful issues. This will not only help the Board to understand business and be able to give advice to the management, it also encourages the management to think more thoughtfully and assess the situation more carefully.

Giving priority to “Warning Signs” (Red Flags)

In fact, the warning signs that may occur in some cases were classified as a fraud, which could be noticed from changing behavior, especially, from the executives or people with power over the transaction in the company. In the past, the investigation or further examination of many scandals, the warning signs were actually found before the situation has occurred. According to an in-depth source of Bloomberg shows that SVB CEO, Greg Becker sold 12,451 shares of SVB stock and options at an average price of about $285 or about $3.6 million on February 27, 2023. The situation was looked like to be a part of premeditated executive stock sale scheme known as the SEC's 10b5-1 rule that allows officers or directors of public companies to set aside stock trading futures to avoid allegations of insider trading, which Becker filed to the SEC on January 26, 2023, just six weeks before the bank failed. In fact, the situation like this used to happen from many scandals in the past as mentioned above. The Board should be cautious and monitor the warning signs which can be in any form such as lifestyle changes. The Board may initially consider the governance issues such as setting a policy on the use of insider information, and securities trading of directors, executives and employees that reflects greater transparency or specifying a Blackout Period for securities trading and strictly monitoring the practice. Assigning company secretary to support related matters, make a report on important issues as well as observing behavior of the boards themselves through the interaction with the management from time to time.

Having more involvement in setting the company's strategic direction

Many analysts have mentioned that the SVB was overly focused on niche customers. As a result, it was difficult to adjust its business when the situation has changed. Considering this matter, it is an important role for the current Board to involve the management in shaping the direction of the organization. The SVB only focused on startup companies and by not having other customers’ base. Once the startups has entered into regression, the companies then lacked of liquidity and led to the crisis. If the Board and management had seen the warning signs, they should be working together to set an appropriate organizational direction to be more efficient and discuss from time to time to keep up with the changing business context.

The SVB Board and management should discuss about their focusing on niche market which is very unique and if, the SVB intends to adjust or diversify its business, what would be more appropriate in that situation? The Board should provide new perspectives and challenge the management who have expertise or are used to traditional banking business. At the same time, the board should rely on management’s in-depth perspective on company’s ability and readiness to adjust the organizational direction. Therefore, discussion between the Board and management is important and considered as a good start of establishing organizational direction.

Having a good board composition is important but what more important is the directors fully perform their duties

It can’t be denied that a part of the board effectiveness is the board composition. The good board composition is not a fixed form. It depends on the context of an organization. According to the information of SVB’s website on March 12, 2023 and The Wall Street Journal revealed that SVB’s Board of Directors have12 directors consists of 9 independent Directors, 1 Independent Non-Executive Director, 1 Executive Director (Mr. Becker), and 1 with no specific information. In which, 7 are male directors, and 5 are female directors.

Considering the experience of SVB Board which is quite diverse and seems to be a good fit to the organization. The majority of the board have their working experience in financial business sector followed by technology business, then healthcare business, and the same of amount of Board in consulting and educational business.

However, according to information disclosed in The Wall Street Journal, at least 50% of SVB directors hold their directorships in more than 5 companies. In addition to holding positions as directors, a number of directors also hold management positions in their own companies and others as well. Moreover, SVB's Board of Directors also serves as SVB Financial Group's Board of Directors. Therefore, the issue arises whether these SVB’s directors whom majority are Independent Directors have enough time to perform their director duties. Especially with a large organization and with a business that is constantly changing its environment.

Many questions remain to be answered but these lessons learned should be a good thought for Board of Directors of each organization to review their performance. Including an in-depth analysis of their business’ environment. And the important lesson is Board effectiveness emerged when the Board of Directors works with the management more closely.

Source
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Tanakorn Pornratananukul
Vice President- Training and Facilitators
Thai Institute of Directors Association (IOD)