“They were warned,” said the director of a large REIT when asked if the Silicon Valley Bank board had failed in its duty. “They were warned and did little about it. Bottom line: the SVB board completely failed their main duty: risk management.”
Judging from the overwhelming response our March 20-23 poll received, he’s not the only one who feels that way: Three-quarters of the 181 directors surveyed earlier this week agreed that the SVB board had failed the company.
But even in front of such compelling data and obvious oversight misses, directors say it’s also not that clear-cut either.
“Though the failure raises a lot of questions about what risk oversight looked like on a normal basis at both board and management levels, failure of the bank alone isn’t necessarily an indication that the board failed in its risk oversight responsibility. It sounds like concerns were expressed, at least to management, about the possibility of risk strengthening opportunities,” said one director participating in our poll.
“The speed with which they went down is very troubling, but I believe [it’s] more of the impact of social media than anything else,” said another board member.
One big question to arise from the poll was: What is the board’s role in risk management? How far are directors expected to go?
“Is it the board’s responsibility to ensure there is a good match between assets and liabilities?” asked the director of a large utilities company, echoing others who raised the question of how deep should a board really go into risk management.
Virgil Roberts, chair emeritus at Broadway Federal Bank, says the answer, in this case, is simple. “The board should have been aware of the impact of a rising rate environment on the bank’s investment portfolio and should have taken steps to avoid a liquidity crisis,” he said.
Jeffrey Grube, a director on the board of S&T Bancorp, agrees: “With no downside interest rate possibility, all of the risk was in increases. This was obvious, and the board missed it,” he said.
“The decline of SVB’s bond portfolio was over a period of 6+ months, so there is no excuse that the board had not enough time to assess and report their risk position,” said S. Ari Papoulias, director and audit committee member at United-Guardian, adding to the argument that the board failed in its duty.
But while many of the directors polled seemed to agree on that event, oversight of risk in general is still a tricky space, said Latha Ramchand, the executive vice chancellor and provost at the University of Missouri and a director on the board of Insperity. “It is not always clear who is ultimately responsible: boards, auditors, regulators, shareholders,” she said. In this case, “they are all responsible.”
For now, though, some directors said there are still too many unanswered questions to assign blame.
“What did the board know? What questions did they ask? The board should have to answer as to the steps it took to ensure that management was putting in place the appropriate safeguards,” said an audit committee chair in the healthcare sector.
So, what next? Was SVB and Signature an isolated incident that will come and go? The response to that may not be that simple either, directors say.
Eighty-two percent said they expect the failure of SVB and Signature Bank to ripple through the banking system, though 54 percent of those said they expect the consequences to be isolated to certain smaller banks and lenders.
Still, nearly 30 percent said they anticipate that the banking system will be affected “significantly” by the events—from restricted access to capital to tighter regulations. Only 9 percent expect the crisis to expand beyond the banking sector to the financial system as a whole—the same proportion who don’t expect any further consequences than what we’ve already seen.
RISK OVERSIGHT PRACTICES
Asked about their own risk oversight process, most directors seem confident in their ability to protect the company.
A whopping 96 percent said the full board (47 percent), a committee (17 percent) or a combination of the full board and committees (33 percent) regularly discusses the risks that can arise from the deteriorating health of key suppliers and partners, such as banks and lenders—and 94 percent said they also discuss ‘worst case scenarios’ with management and the adjustments that would need to be made if conditions shifted suddenly.
Meanwhile, the SVB saga may have prompted a reexamining of the skill sets around the table. For the most part, directors said they were highly confident their board had sufficient financial (89 percent), legal and compliance (73 percent), and customer (71 percent) risk-related skill sets to confront—and hopefully prevent—a crisis, but expertise in cyber, IT and third-party risk, however, remains sparse. Only 28 percent, 26 percent and 26 percent, respectively, said they were highly confident that their board has adequate risk management skills in those areas, though some of the directors responding noted that a more moderate level of confidence in these sectors is best, as the issues are constantly evolving and complacency can quickly turn into a vulnerability.
In the end, the SVB failure has raised important questions for boards.
“SVB highlights a level of due diligence and complacency that is good to understand and learn from…. I expect many best practices will evolve for both management and boards that, in the end, will improve risk management practices for treasury, customers and suppliers,” said one of the directors.
About Corporate Board Member
Corporate Board Member, a division of Chief Executive Group, has been the market leader in board education for 20 years. The quarterly publication provides public company board members, CEOs, general counsel and corporate secretaries decision-making tools to address the wide range of corporate governance, risk oversight and shareholder engagement issues facing their boards. Corporate Board Member further extends its thought leadership through online resources, webinars, timely research, conferences and peer-driven roundtables. The company maintains the most comprehensive database of directors and officers of publicly traded companies listed with NYSE, NYSE Amex and Nasdaq.