Auburn professors say Silicon Valley Bank’s collapse is a lesson in failed ESG
Following the collapse of Silicon Valley Bank, two faculty at Auburn’s Harbert College of Business argue that while blame is being cast, there is the risk of missing out on a critical opportunity to address the systemic failure of the Environmental, Social and Governance, or ESG, ideals and practices SVB so proudly professed to advance. Further, they explain how that “empty language” ultimately became the straw that broke the camel's back.
Linda Ferrell, the Globe Life Professor of Marketing, and O.C. Ferrell, the James T. Pursell, Sr. Eminent Scholar in Ethics and director of the Center for Ethical Organizational Cultures at Auburn, point to SVB’s emphasis on the Social in ESG at the expense of the Governance — which includes critical ethical components — as the ultimate cause of SVB’s “sudden” collapse.
Can you explain what ESG is, why it matters and what the E, S and G look like in a well-managed, ethical organizational culture?
O.C. Ferrell: ESG is a widely accepted index used to evaluate an organization’s environmental, social and governance policies and practices. Companies — especially publicly held companies — are held to account by shareholders, bondholders, partners, government agencies, customers and others based on their ESG “score” as reported on a regular basis.
In the case of a bank like SVB, environmental issues are much less of a concern for stakeholders, so we can effectively set this component aside here — it simply had little to no impact on either their performance or reputation.
Linda Ferrell: That leaves social and governance — and therein lies the problem. It appears from our preliminary research that of these two, SVB was much more concerned with social aspects such as diversity and inclusion than governance. A closer look also reveals that poor decisions made in addressing each of these two aspects of ESG were inextricably intertwined to such an extent that the mistakes made in one amplified the negative impacts of the other, compounding to effectively cause the inevitable failure of the bank itself.
Can you further detail that for us?
Linda Ferrell: Sure. Let’s begin with the Board of Directors. SVB promoted the diversity of its board in its 2022 proxy statement, noting that 45% of its board are women in addition to “one black,” “one LGBTQ+” and “two veterans.” This would appear to be, at first glance, a good thing.
Yet, this seemingly diverse board was out of step with most boards in Silicon Valley — or elsewhere for that matter — in terms of, among other things, the ages of its members. Only one independent director was under 60, while the oldest was 78. That doesn’t seem to jibe with the young, entrepreneurial customer based they served let alone with an industry-standard retirement age of 72 for board members.
The very composition of the board shows that there was not an experiential, educational or philosophical diversity in perspectives. The diversity they implemented was based on demographics, not experience or knowledge.
Moreover, it is astounding that diversity, equity and inclusion (DEI) seemed to be such a be-all, end-all criteria in selecting the directors nominated by the company for election by shareholders. Where was the level of scrutiny — let alone common sense — to nominate a diverse set of board members who also brought with them a deep understanding of the financial services industry? In fact, the board member with the most relevant banking experience only joined the board in September 2022.
These were the directors who were supposed to oversee SVB’s operations and prevent the kind of catastrophic errors and mismanagement of risk that brought them down. It’s clear they failed miserably.
O.C. Ferrell This failure is even worse when you simply ask the question: “Couldn’t SVB management have found an equally diverse set of board nominees who also brought with them the broad range of financial, oversight and regulatory experience the job requires?” The answer is “of course they could have.”
Think about it — SVB literally sits smack dab in the middle of what many believe to be the most robust collection of minds on the planet. They are surrounded by legions of successful innovators, entrepreneurs and financiers — businessmen and businesswomen with a breadth and depth of acumen not found anywhere else in the world. The success of these individuals more often than not came with a healthy dose of failure along the way, too — lessons learned from mistakes they’d made that could prove extremely valuable in providing independent oversight and governance for other companies. Opportunity lost.
You both seem to be saying that the problem with the board’s failure to provide the governance a bank of SVB’s size and influence needed actually began with the director nomination process, that when push came to shove, those nominated weren’t equipped to offer management, shareholders, bondholders and depositors the very governance they were elected to provide?
Linda Ferrell: That’s exactly right. And we’ll see if the board will be held accountable for their governance malfeasance — reports are that lawsuits against the board are expected, if not already being readied for filing. We’re not lawyers, but it is hard for us to imagine how “Don’t blame me, I didn’t have enough financial or regulatory experience in banking to know any better” would be a very strong defense for anyone agreeing to serve as the accountable agent for overseeing a large financial services organization.
I served on a public company board myself for more than four years. When I came on, I was told that if I saw anything happening within the organization that I had any concerns about whatsoever that I could engage guidance from outside legal, accounting or other experts to help inform me. While I was elected because of my experience in marketing and ethics, we all worked together as a group to provide oversight and hold management responsible for their decisions and actions regardless of our individual areas of professional expertise.
O.C. Ferrell We also have to remember that many shareholders simply do not cast their votes on board nominations or any other management proposals requiring shareholder approval. According to ProxyPulse, a collaboration between Broadridge and PricewaterhouseCoopers that serves as a barometer of shareholder voting trends, only 28% of individual investors voted their shares in 2020 vs. 92% of institutional investors. That puts the responsibility for electing most boards in the hands of well-connected, allegedly well-informed financial industry professionals.
And we all can see how that turned out for SVB.
But the failure of SVB’s management to nominate qualified board members is really just the tip of the iceberg — the lapse of ethical behavior at SVB appears to have run deep throughout the entire organization.
Are you talking about the policies and procedures governing not only senior management but also the ethical behavior of employees at SVB?
Linda Ferrell: Yes, and we can start with what SVB stipulated in their own words in their 2019 Code of Conduct — the latest version we can find — when it comes to insider trading:
“Any SVB employee in possession of ‘material inside information’ about SVB or another Company must not trade in or recommend the purchase or sale of the stock or other securities of SVB or that Company, as applicable, until the information is made available to the public. Inside information includes any information, written or oral, that has not been previously disclosed to the general public.”
It has been widely reported that some members of management, certain directors and others “in the know” sold millions of dollars in SVB stock in the weeks before big depositors quickly withdrew tens of billions in assets from the bank. These individuals and firms may very well have benefitted from inside, non-public knowledge of the bank’s frailty in making their decisions to liquidate all or large portions of their holdings. That sounds like a textbook case of insider trading, punishable by large fines and significant jail time.
But a code of conduct involves much more than refraining from insider trading. O.C. and I collaborated with our colleague Debbie Thome LeClair in our 1998 paper The Federal Sentencing Guidelines for Organizations: A Framework for Ethical Compliance to lay out what a legitimate, robust due diligence ethics and compliance program should incorporate. We concluded that “an effective compliance program is more a process and commitment than a specific blueprint for conduct,” a core tenant of corporate behavior that still holds to this day.
It is clear that SVB’s compliance program was neither a real process nor a true commitment.
O.C. Ferrell: We also found that SVB’s Code of Ethics for Principal Executive Officers and Senior Financial Officer, as required by Sarbanes-Oxley (section 406), provides no meaningful guidance to executive financial officers — let alone rank and file employees — related to relevant risks and behaviors. Theirs was window dressing at best.
Specifically, the SVB Code of Ethics focuses almost exclusively on human resources risks, vs. other, more prevalent and impending risks facing the bank. While many believe that banks do not need an internal code, program or ethical culture because they are already so heavily regulated, this case presents a front-and-center argument for an ethical organizational culture, regardless of the industry and perceived government oversight that might exist.
You mention that SVB’s ethical organizational culture was sorely lacking, perhaps even non-existent. Where does that assessment come from?
O.C. Ferrell: An ethical organizational culture is built, in large part, on the alignment of what a company says and what they do. Do they walk-the-walk or just talk-the-talk? Again, we need look no further than their own words as laid out in what SVB claimed to be their values:
- We start with empathy for others.
Rushing to cash out via insider stock sales and pulling deposits before those who were not yet informed of the bank’s liquidity problems shows little, if any, “empathy for others.”
- We speak and act with integrity.
It is hard to conceive of a scenario where the actions of either members of senior management or the board can be described as acting with “integrity.”
- We embrace diverse perspectives.
As we noted, SVB’s definition of “diverse” was merely demographic and not based on a diversity of perspective, experience or expertise.
- We take responsibility.
The jury is still out on this one, but the company’s track record so far is suspect. We’ll see how actual juries judge their behavior.
- We keep learning and improving.
It is fair to say at this point “that ship has sailed.”
Linda Ferrell: We need to remember that ESG initiatives mean nothing if the bank’s fundamental business model is flawed, mismanaged or corrupt. SVB’s overbalanced focus on social issues begs the question: where was the fiduciary responsibility to manage the company in best interests of its stakeholders?
The interesting thing with SVB is that they operated according to a very successful business model for decades. They played key roles in the success of many now-iconic companies that were little more than an idea or a dream when SVB extended them the financial support and expertise they couldn’t get anywhere else. Their demonstrated confidence in the prospects of the start-ups and emerging companies that helped fuel their own growth was returned in kind as many of their clients and customers prospered.
So, what went wrong in recent years to change that impressive legacy?
O.C. Ferrell: They seemed to have lost their way, driven by the lure of unprecedented growth. Surrounded by companies whose value can double, triple and even multiply 10 times over within a single year, it appears they forgot that they were a multibillion-dollar bank, not a young start-up. That goes beyond mismanagement of financial risks by the board.
Linda Ferrell: Take the company’s Marketing and Communications, for example. The leadership of this critical function seems to have changed a number of times over the past few years, with core principles left unaddressed or poorly managed just when they needed to be strong and steady. Where was the strategic planning necessary to support the rapid intake of deposits that grew from $40 billion to over $200 billion virtually overnight?
More to the point, where was the robust crisis communications plan and diligent market monitoring system one would expect from such a large and essential financial organization? Perhaps the fact that SVB was operating without a risk management officer since April 2022 had something to do with it. Nevertheless, where were the S.W.O.T. analyses that would have identified the strengths, weaknesses, opportunities and threats facing the bank in light of the rapid growth and economic uncertainty they faced during the past five years or so? Did they have a crisis plan? Was it updated regularly to accommodate the broadly projected rise in interest rates and corresponding changes in bond yields? If so, were their findings and recommendations taken seriously by management or the board?
How can one find answers to these questions?
Linda Ferrell: There’s no requirement to make a detailed crisis communications plan public. But we don’t have to look any further than the press release put out by the company that prompted the immediate, tumultuous run on deposits that did them in to see that, if they did have a crisis plan, it was either woefully insufficient or ignored. Maybe both.
Fast Company called it “the worst press release of all time…250 words of mind-numbing financial jargon – written for underwriters and no one else on the planet — followed by ‘oh by the way, we lost 2 billion dollars.’” It didn’t follow industry standard news release format and even contained a grammatical error any entry-level PR staffer would have caught.
O.C. Ferrell: This is inexcusable, really. A legitimate crisis communications plan would have already had news release templates and language drafted to handle predictable scenarios like this one – all fully vetted and proofed by legal, accounting and senior management. It would have included quotes from the CEO, CFO and chairman of the board — all in sync with the calming messaging that the severity of the moves being made were warranted.
In the end, it all came down to a massive, systemic failure of competence and ethics on so many levels. They didn’t adequately plan for the challenges inherent in rapid growth, didn’t put the right players on their executive team or board of directors, didn’t recognize the value of an ethical organizational culture. The list goes on and on.
The implications of this monumental set of failures will be studied for years to come — at least we hope so.
About the faculty experts:
O.C. Ferrell is the James T. Pursell, Sr. Eminent Scholar in Ethics at Auburn University’s Harbert College of Business. In addition to his teaching, research and textbooks, Ferrell is the director of the Center for Ethical Organizational Cultures. Ferrell has served as an expert witness is some high-profile ethics, legal and marketing cases. He is a former president of the Academy of Marketing Science and former president of the Academic Council of the American Marketing Association.
Linda Ferrell is the Globe Life Professor of Marketing at Auburn University’s Harbert College of Business. She has served on a publicly traded corporate board for over 4 years. Ferrell has also served as an expert in ethics and legal disputes and has co-authored 6 textbooks. She is a former president of the Academy of Marketing Science. Ferrell also serves on the board of the Responsible Research in Business & Management.
Linda Ferrell is a Roth Family Professor of Marketing and Business Ethics in the Department of Marketing in the Harbert College of Business at Auburn University.
O.C. Ferrell is the James T. Pursell Sr. Eminent Scholar in Ethics and director of the Center for Ethical Organizational Cultures at Auburn.
To arrange an interview with our experts, contact Preston Sparks, director of university communications services, at email@example.com.
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