The downfall of Silicon Valley Bank (SVB) serves as a stark reminder of the crucial role governance plays in maintaining a thriving, responsible business, especially in the high-stakes world of fintech. While it’s a domain known for its rapid evolution and innovative breakthroughs, the collapse of SVB throws into sharp relief the perils of governance failures, impacting not just the board’s reputation, but also causing untold harm to stakeholders, and most critically, the general public at large.
Fintech, with its rapid growth, is an area where governance lapses can creep in unnoticed due to frequent misunderstandings around the concept of governance itself. It is not about creating cumbersome bureaucracies but is instead a tool for building efficiency and long-term sustainability. Ignoring governance frameworks until it’s too late can lead to a chasm between governance and an organisation’s ingrained culture – a chasm that can cost an organisation its survival.
The SVB debacle provides three cardinal lessons for fintech companies in governance by highlighting three key areas: board composition, risk management quality, and regulatory compliance with an emphasis on ethical standards.
Board Composition: The Power Balance
The composition of a board can be the linchpin of a company’s long-term viability. Appointing the wrong individuals or succumbing to pressure to give board positions as favours can lead to an unstable and ineffective decision-making body. A balanced board typically includes diverse roles such as the CEO and CFO, and a Chair – the latter being an independent Non-Executive Director who is distinct from the CEO. This separation curbs a concentration of power and promotes a healthier environment for constructive challenge, thereby leading to more informed decision-making.
In this vein, a board should have a majority of Non-Executive Directors, alongside potential stakeholder representation, ensuring a broad spectrum of views. The key is to promote cognitive diversity, thereby equipping the board to outperform competitors, challenge executives, mitigate risks, and breathe fresh life into discussions.
Risk Management: The Safety Net
Fintech companies need to prioritise risk management due to their exposure to a vast gamut of risks including credit, strategic, operational, and cybersecurity. An effective risk management process identifies, assesses, and mitigates these risks. Employing a risk register is a wise first step. It should be regularly reviewed by the board of directors and other internal management, with a keen focus on developing contingency plans to cushion the blow of risks that could come to fruition. For fintechs, the spotlight should shine particularly brightly on cybersecurity risks due to the sensitive data they handle. Robust cybersecurity controls, clear mitigation processes, and keeping pace with technological changes are essential for risk-proofing a fintech operation.
Regulatory Compliance and Ethical Standards: The Moral Compass
Compliance with regulations such as anti-money laundering laws, know your client (KYC) requirements, and data protection laws, along with maintaining high ethical standards, are essential for fintech firms. They must keep abreast of the constantly changing regulatory environment and ensure they operate with utmost integrity and transparency. Adopting fair business practices, maintaining transparency about fees and charges, and ensuring product suitability for the target market is non-negotiable.
Beyond compliance, fintechs should also be mindful of their ESG impact, lending responsibly, reducing their environmental footprint, and promoting a culture of ethical behaviour to name but a few areas. Transparency in governance practices, ownership structure, board composition, and executive compensation is paramount too.
“Getting it right” held immense importance for all stakeholders of SVB, as its failures have had a significant impact on everyone. Prospective investors carefully examine the fintech’s governance and risk management practices before committing funds. The mind of an investor can be put at ease through a well-structured board, comprising industry experts and independent directors which will therein foster effective oversight and strategic direction. Customers prioritise trust and reliability in fintech services, relying on regulatory compliance and robust risk management for data security and industry best practice. Partners and suppliers seek assurance of responsible operations and compliance with laws, trusting a stable board and risk management practices. Additionally adhering to regulations is vital to maintain a valid operating license and satisfy regulators, who scrutinise compliance efforts. Strong corporate governance and ethical standards attract talented employees too, benefiting the company’s growth. All the above areas being part of a strong governance framework.
In light of the SVB catastrophe, the importance of governance for fintech firms stands magnified. An unerring focus on board composition, risk management practices, and regulatory compliance bolstered by ethical standards can be the cornerstone of longevity, enhancing value for stakeholders and paving the path for a successful market debut.
Erika founded Beyond Governance having fast-tracked her career to become one of the UK’s youngest FTSE 250 board governance advisers at 32. She was Group Company Secretary at Low & Bonar plc (FTSE SmallCap engineering company) and prior to that Group Company Secretary at The Restaurant Group plc (FTSE 250 hospitality company). Previously she worked at InterContinental Hotels Group plc (FTSE 100 dual-listed in New York), Premier Foods plc (FTSE 250), ICAP plc (FTSE100 financial services) and KPMG.