SVB’s Failure Reminds Boards To Prioritize Risk Management

Coverage last week of Silicon Valley Bank’s collapse included numerous reports pointing to a host of contributing factors, including rising interest rates, aggressive investment strategies, lax regulations, flawed accounting and so on. Unfortunately, corporate boards don’t always get to use what might be legitimate reasons for their company’s difficult circumstances as an excuse for not being prepared or for not taking appropriate actions to prevent disaster. The board members of Silicon Valley Bank now have the second-largest bank failure in US history on their resume.

This is a reminder to all directors that lack of attention to risk management and oversight can sink a company and ruin careers. Is your board properly positioned to deal with the evolving risks in your industry?

• Is there enough risk management experience on your board?  News reports appear to show that the SVB board knew that risk management was important, but still operated its risk committee with no chairperson and fewer members than specified in its proxy statement. Additionally, a former bank CEO on the board did not serve on the risk committee. Correcting these errors could have made a difference.

An evaluation of director skill sets and experience might in order. Does your board have directors who have helped a company survive crisis situations? Do any of your board members have previous experience sitting on a risk committee or serving as a chief risk officer? If not, you may need to recruit a director with risk management credentials. Having the right people on the board to ask critical questions about management’s strategies can help mitigate risk. Directors with risk management experience can also play a role in developing risk-avoidance strategies that can save time and money. Such directors may also be able to suggest ways to capitalize on market conditions that present significant risks to the company.

• Does your board discuss ‘worst case scenarios’ with management? Over the last 16 months, analysts have been warning that inflation, interest rate hikes and recession fears could pose significant challenges for companies in all sectors. If your board has not listed the potential risks that could emanate from these and other market conditions along with strategies to counteract any potentially negative outcomes, you may be leaving your company vulnerable.

While no one wants to talk about their company going under, in many ways, risk management requires that companies do just that. By mapping out the greatest, most ‘unimaginable’ risks to your company, you can then craft competent defenses against those risks.

Boards must also be willing to question management about the wisdom of its plans. Has management accounted for all that could go wrong? What adjustments will be made if conditions shift quickly? What is the company risking by following this business strategy? How does the health and success of key suppliers and partners impact the risks involved with managements’ business strategy? These and many more uncomfortable questions must be raised when properly conducting risk management.

• Has your board approved strong compliance measures and governance risk controls?  Talking about risk is essential but the company must also have firm policies and controls in place to make sure that all employees adhere to risk mitigation measures that have been approved. Regular updates and reviews of internal controls are necessary to ensure that they effectively identify and mitigate risks as intended. The board must make sure that all governance risk controls are safeguard the future of the organization.