Reagan Was Right…Trust, But Verify

As directors think through the learnable takeaways from the collapse of SVB, there are a couple of very clear learnings for me, and I am sure for all of us.

We all need to spend more time on enterprise risk management.

Public companies are subject to significant regulation and, as such, do ERM risk reviews in their audit committee and look to management to propose mitigations for each risk.

Private companies are not subject to the same regulation and, as such, often do not do enterprise risk management exercises.

What we have seen in the last 5 years is an extraordinary increase in the frequency of major crises and risks actually happening.

The speed and velocity of how quickly the risk manifests itself into a major corporate problem (or even disaster) happens faster and faster. Social media is a huge contributor to over amplifying, contributing to and accelerating risk.

A Riskier Environment:

We have seen energy risks with Colonial Pipeline succumbing to a cyber-attack.

We have seen systemic operating risks with the FAA and Southwest Airlines systems fail, effectively , taking them out of operation.

We have seen “safe and well capitalized” banks shut down or be taken over in a matter of days.

Our ability to contain and deal with cyber can’t quite keep pace with the cyber criminals. For example, Dole the fruit manufacturing company, was breached in early February and is still offline and can’t get factories up and running at 100%. Most companies have very rusty business continuity and disaster recovery plans. Most companies are not ready with off-line, segregated back up systems to restore critical operations.

Social Media Can Accelerate Catastrophe:

The social media environment and the extraordinary viral velocity when something goes wrong is almost unstoppable. Reputational risks on lighting rod social issues such as #MeToo, Roe v. Wade, etc., are intense, polarizing, and unforgiving.

The old way of handling a crisis and dealing with social media has changed. When United Airlines had a passenger’s pet die on board, the CEO got on social media in a stiff and unempathetic manner which really fractured the brand’s relationship with its customers.

Company boards need to ensure their CEOs are developing their new muscle for instant social media responsiveness in an authentic and genuine way with the right balance of empathy and transparency.

Learnings From SVB’s Downfall:

When we look at the downfall of SVB, on Feb 22 there were red flags indicating that the market had lost confidence, including a dramatic increase in short interest in the stock, which are bets that the stock will go down.

As we do a forensic on SVB and try and take some learnable and actionable lessons away here is what comes to mind is it’s a multilevel catastrophe of missed opportunities:

  • The CEO missed, ignored or accepted their heavy concentration and long duration asset allocation.
  • The CFO, and likely the Treasurer as well, missed, ignored or accepted the vulnerability of asset duration / concentration.
  • The CEO and CFO allowed the Chief Risk Officer role to be vacant for 9 months.
  • The audit committee chair was not advised of or did not address the red flags.
  • The IR alerts on the significant short positions should have triggered some action by the bank earlier.
  • The CEO’s announcement of raising funds was mistimed and, by some accounts, suspicious and seems to have triggered bigger concern.

When you think of a Risk Officer role, it is very different in a bank than in other corporations. If you are in the pharmaceutical industry your risk officer looks at the safety of the product.

In an automobile company the risk officer again is focused on safety and continuity of manufacturing.

The focus of a bank’s risk officer is on managing an investment strategy and asset allocation that balances the profitability of the bank with the protection of its customers’ assets. Priority focus is the prudent risk mitigated investment positions of the bank’s assets. This is the key deliverable of the risk officer.

In GM what you make is cars, you need a manufacturing leader. It is almost as if you’re a GM and you have no one running manufacturing.

At SVB you are in the money business and your Chief Risk Officer is tasked with ensuring prudent asset allocation.

What Will We All Do Differently Going Forward?

I for one will look more closely at the number of financial institutions / banks my companies are using to make sure risk is distributed.

Most boards already look at where and how their capital is distributed, how much is in bonds, how much in short term instruments and the risk in each instruments duration. They also look at the relationship between the term of their assets and the term of their liabilities.  I am sure capital investment policies will get more scrutiny.

For me the biggest takeaway is we need to spend more time in our private and in public boards in doing a holistic enterprise risk review. We all need to consider doing an annual tabletop crises management review. We now understand that in all likelihood there will be more difficult challenges and issues with a shorter time fuse where rapid response time is needed.

We should consider doing more advanced planning anticipating we will all face more crises.

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