What SVB's Board, and Most Boards, are Missing
However opportunistic the motivations, recent insinuations that the political leanings and diversity of Silicon Valley Bank’s board of directors contributed to poor oversight of the institution brighten the spotlight on a board’s role in today’s volatile economic and financial markets landscape.
As independent, trusted advisors to public companies for over two decades, we’ve helped boards and individual board members work through critical capital markets and communications issues. We continue to see one glaring hole in how boards are formed and how they function: a lack of exposure to the unfiltered views of the investors they are sworn to serve.
That gap is becoming more important because, while the job description of board director hasn’t really changed over time, a few important dynamics have. Investor sentiment changes more rapidly today. Narratives are harder to control. Board member liability and reputational risk have increased immeasurably. And the rise in both shareholder activism and corporate governance accountability has forced more board members to venture into the wild and engage with investors.
For all these reasons, the job of the board has gotten a lot tougher in recent years, and in fact, we have seen a general improvement in overall board quality. Largely gone are the days of the celebrity boards domineering CEOs would recruit to maintain control of corporate decision-making (see: Theranos). Boards today are more independent and diverse in structure, qualifications and backgrounds (not just from a DEI perspective).
However, it’s also fair to say that most boards are an amalgam that ultimately reflects how a company wants to be seen. When you hear someone say a company has a “great board,” they’re more likely referring to the “wow” factor than a deep stable of grizzled corporate vets guiding management through rough seas. So, the realities of board composition against today’s market backdrop make it even more critical that they have access to unfiltered views.
The uncomfortable truth about boards is that, because they’re not on site every day looking over the CEO’s shoulder they need to rely on representations of management, their own diligence in pushing management, and legal and financial advisors to do their jobs. This construct creates the risk of an echo chamber where confirmation bias can trump critical thinking. Consider for instance that some advisors are not always independent. They might have business objectives and, therefore, higher fees (e.g., advocating for an acquisition) riding on the advice they provide. Additionally, executive management is both informing the board but also seeking to secure support for desired strategic or financial initiatives. This is how businesses function, of course, but a CEO/director’s deep intel about company operations puts them at a distinct advantage over the rest of the board.
All of this reveals what we believe is a major blind spot, and that’s a lack of uncompromised access to the perspective of public equity investors. Investors are the hardest constituency for a management team to persuade and win over. They are trained to be skeptics and often identify potential problems before the C-suite notices them. Boards today must have one or more “financial experts,” but they’re not required to have investor experience. When the board asks how the markets might respond to a given issue, the investor’s point of view is most often relayed by management itself, a board rep from a VC or PE firm, and/or an investment banker. These latter two constituencies do not speak regularly with public equity investors, at least not directly.
We have seen too many boards blessing strategic and financial decisions that they might not have had they truly understood equity market perception and risk. In SVB’s case, questions were being asked of management on earnings calls as far back as last fall about the value of their investment assets and how they were managing interest rate risk. While the board would have been well in the loop on SVB’s plans to raise capital ahead of its collapse, how well did the board understand how their shareholders viewed potential risks? And how might that understanding have influenced their counsel to management?
Our work as independent, trusted advisors to boards has told us this: when we bring the hard truths of investor sentiment into board deliberations -- in an uncompromised way -- it generates useful dialogue about the company’s positioning, decision-making, and long-term value creation thesis. We’ve seen directors with less exposure to investor thinking have aha moments when they hear this perspective unfiltered. And we’ve had some directors reach out to us directly for insight on how investors might react to issues they’re considering.
To be clear, we’re not advocating that company boards open the door to their investors; rather, we believe their performance can improve by including significant equity investing experience on the board and/or seeking knowledgeable counsel on the investor implications of key decisions from an independent expert.
Many boards don’t come face to face with unfiltered investor sentiment until it’s sitting across the table from them in the form of an activist publicly questioning their leadership. That’s often too late. And as we were reminded last week, a bank run is definitely too late. So why wait? Availing a board of regular, unfiltered insight into the thinking of the shareholders boards are sworn to serve would make every board better regardless of its ESG score.