Silicon Valley Bank shocked investors and depositors last week by announcing a $2.25 billion capital raise to stabilize its balance sheet. The next day, its primarily venture capital tech customer base hurriedly withdrew a staggering $42 billion of cash deposits, leaving SVB in a negative liquidity position – not tenable for a bank.
As the news broke, pundits quickly pointed to the typical financial institution demise culprits – overly aggressive investments, interest rate spike quicksand, convoluted accounting and toothless regulators. While all likely contributed to SVB’s downfall, a closer look at its SEC filings reveals a massive risk management rhetoric-reality gap.
The sudden freefall is likely not a surprise the SVB board. In the past fifteen months, as top insiders cashed options and sold shares, SVB operated without a full-time chief risk officer and the number of board risk committee meetings more than doubled.
The board now faces the classic Watergate questions — what did they know and when did they know it? Their 2023 proxy holds some initial clues of a silent panic.
Above and beyond pay intrigue, proxy statements reveal much about corporate governance, oversight and priorities. For instance, the word “risk” appears 192 times in SVB’s 2023 proxy filing. That number’s high, but not surprising – it’s a bank that primarily concentrates on serving the volatile tech venture market.
Beyond the perfunctory risk verbiage, three disclosures show that risk clearly became a skyrocketing concern for the SVB board over the past year.
- Its 2023 proxy statement filing calls for seven of its eleven board members to serve on its risk committee, while no other committee consists of more than five directors. Its 2022 filing showed only six members on the committee with, oddly, no chair. Intriguingly, the risk committee excludes its most qualified director — Thomas King, a former Barclays investment banking CEO, who joined SVB’s board in 2022. He ostensibly has far greater substantive financial services experience than the committee comprised of a Napa vineyard owner, a retired healthcare CIO, a former U.S. Treasury undersecretary, venture capital partners and consulting firm heads.
- The risk committee met an unusually high 18 times in 2022. That’s an average of 1.5 times per month and more than twice the seven meetings held in 2021. The disclosure does not indicate if the meetings were timed evenly throughout the year or accelerated as financial woes worsened over time.
- Perhaps most troubling is that it seems SVB astonishingly operated much of 2022 without a chief risk officer. On January 4, 2023, SVB announced the hiring of Kim Olson as its CRO. The subsequently-released 2023 proxy statement filed in March reveals that SVB “initiated discussions with [Laura] Izurieta about a transition from the chief risk officer position in early 2022. Accordingly, the Company and Ms. Izurieta entered into a separation (without cause) agreement pursuant to which she ceased serving in her role as Chief Risk Officer as of April 29, 2022 and moved into a non-executive role focused on certain transition-related duties until October 1, 2022.” Did the risk committee think 18 meetings equate to a collective de facto CRO?
Such turmoil was no match for rising rates, portfolio strain and cash adequacy aims.
Road to ruin
The repeated interest rate hikes over the past year have dented bond portfolio values. Many banks, including SVB, designate such investments as “hold-to-maturity” which allows them to avoid “mark-to-market” accounting and conceal unrealized losses.
Such background bookkeeping machinations only come to light when high growth ventures face tepid IPO markets and must draw on deposits. Their cash needs force poorly-capitalized banks to sell loss-laden holdings to generate sufficient liquidity.
Undoubtedly, such valuation woes may have placed SVB in momentary paper default positions throughout the year. The board and c-suite likely hoped, against market forces, for stabilization of their high-risk business model. The eventual March 2023 capital raise announcement ended the financial stagecraft and triggered the collapse. Simply put, SVB leadership failed its fundamental stewardship responsibilities.
Exactly what was known and when it was known will come to light in time. As all is investigated, legitimate questions also swirl about CEO Greg Becker selling $3.6 million of SVB stock just days before the proxy filing and capital raise disclosure. Other insider trades show the current CFO and CMO selling shares too. What did these executives and others anticipate? When did the insider selling really begin?
According to CNBC, employee bonuses were paid hours before the FDIC seized control of the SVB — the same Friday depositors were pressed to make standard payrolls. On that day, CEO Greg Becker abdicated accountability in a two-minute video to employees claiming “he no longer made decisions at the 40-year-old bank.”
More details will emerge and countless inevitable scathing questions will forge forthcoming litigation discovery, congressional hearings and regulator inquiries.
When was the leadership team aware of the bank’s impeding peril? Did internal and external auditors sound alarms about valuation, liquidity and solvency? Did the long-serving CEO exercise undue sway over the board’s purported independent decisions? Did millions in bonus compensation, lucrative stock options and tech power circle elbow-rubbing make all of the above moot? Surely, there must be detailed board and committee minutes. If not, one of the many directors past retirement age, will talk.
Too often proxy statements are viewed as mundane, boilerplate regulatory filings to rubber-stamp c-suite pay and director renewal. These under-appreciated documents provide great insight into whether capable and courageous leadership is fit for what business complexity demands. Read insightfully and instinctively, they reveal much.
Unfortunately, calamities like the SVB collapse jeopardize financial markets and disclosure lags leave more questions than answers. As a minimum, boards in all sectors must boldly ask if their risk management approach is real or rhetoric.
After all, who’s ultimately responsible for what must go right?