This week, financial markets were astounded with SVB’s collapse. Formerly the 16th largest bank in the US, a favorite of VC firms, and a bank with a strong push towards sustainability. Within all the chaos, ESG critics could not wait to blame SVB’s gender diverse and fully independent board of what happened. But is this fair?
There is no doubt that non-financial risks have taken a good share of many boards’ time in recent years. Having said that, ESG management strategies vary so much from one company to the next, that it is impossible to say if this played a role in what happened. All-male boards and non-independent boards have been behind many scandals before, so assuming this is all because of sustainability interests is clearly shortsighted. Nevertheless, there are a few ESG lessons we can all learn from this. The top 3 for us are:
- Having a CRO, or a senior person with enough time for final risk oversight, and fully committed to your business, makes sense. This is not only true for banks, but for all companies.
- The board and board committees should be diverse, yes. There are proven benefits in this. But they should also have people that can understand the business (even if their understanding comes from different fields, they should be able to speak the business’s language). A risk committee for a bank with a majority of people who have never seen in real life what drives banks to problems is not very effective. Training may cover some of the gaps, but make sure there is always relevant experience in the mix. To the extent that SVB, or any company for that matter, filled board seats to signal diversity values at the cost of quality people, they undermined good governance.
- We are true believers that ESG is good for business for many reasons, but in some cases, it can make key people in organization distracted from the core business. ESG strategies should never overwhelm core strategies. It is crucial to strike a balance between ESG goals and the company’s core business priorities, such as profitability and shareholder value. We make sure this happens with all the clients we work with (as it is the only way sustainability strategies are truly sustainable).
Hindsight is 20/20, no doubt. The number of factors that intervened in what happened in SVB is most likely longer than what you can count with one hand. Let’s not oversimplify by just assigning blame to a group of people. Let’s instead learn what we can and keep working on improving both financial and non-financial disclosure and practices ahead. This example does show the danger of blindly following ESG metrics – some people game the system to simply do well on the metrics, while harming the company.
I hope you found this interesting. As usual, if there is anything we can help you with, or if there is an ESG topic you would like to know more about, please let us know.
CEO, Miranda ESG
Contacts at Miranda Partners