The seismic collapse of Silicon Valley Bank (SVB) has shone a piercing spotlight on the integral role governance plays in shaping the trajectory of businesses in the volatile fintech landscape. This dynamic sector, famed for its rapid growth and ground-breaking solutions, is susceptible to governance slip-ups that can cause incalculable harm to the business’s reputation, its stakeholders, and the wider public.
Given the whirlwind pace of growth characteristic of fintech, it is easy to misunderstand governance as a bureaucratic hurdle, rather than a lynchpin for creating efficiency and ensuring sustainable growth. When the creation of governance frameworks is relegated to the backburner, a dangerous gap can arise between the governance system and the organisation’s culture, leading to dire consequences.
Three fundamental governance facets stand out from the SVB saga, providing valuable lessons for fintech companies: effective board composition, robust risk management, and diligent regulatory compliance married with ethical standards.
Also read: What is Corporate Governance and Why is it Vital for Business Success?
Board Composition: Crafting a Resilient Foundation
The composition of the board is a primary determinant of a fintech’s long-term survival. Ill-considered appointments or board positions given out as favours can lead to a rocky, ineffective decision-making body. An optimally composed board would typically include diverse roles such as the CEO and CFO, and importantly, an independent Chair who is not the CEO as well as a number of independent non-executive directors to balance out the executive directors. This ensures a balance of power, fostering an environment conducive to healthy debate and informed decision-making.
Inclusion of a majority of Non-Executive Directors and potential stakeholder representation on the board can provide a wider spectrum of perspectives too. Promoting cognitive diversity is essential, as a board that reflects diverse thinking is better equipped to outsmart competitors, challenge executives, mitigate risks, and stimulate innovative ideas.
Risk Management: Safeguarding Against Uncertainty
Effective risk management is non-negotiable for fintech companies due to their exposure to various risks such as credit, strategic, operational, and cybersecurity risks. A sound risk management system that identifies, assesses, and mitigates these risks is imperative. Employing a risk register, reviewed regularly by the board and internal management, alongside the development of contingency plans, is a prudent move.
Cybersecurity risk should be given heightened attention by fintechs due to the sensitive data they process. Implementing stringent cybersecurity controls, maintaining clear mitigation procedures, and staying abreast of technological changes are essential to guard the business against taking on unnecesary risks.
Regulatory Compliance and Ethical Standards: Building Trust and Integrity
Compliance with regulatory requirements, such as anti-money laundering laws, Know Your Client (KYC) regulations, and data protection laws, together with adherence to high ethical standards, is crucial for fintech firms. They must stay informed about the evolving regulatory landscape and ensure they operate with integrity and transparency.
Fintechs need to ensure fair business practices, transparent fee structures, and alignment of products with the needs of their target market. They should also consider their ESG impact, promoting responsible lending, managing their carbon footprint, and fostering an ethical work culture to name but a few areas. Clear and transparent communication about their governance practices, ownership structure, board composition, and executive remuneration further enhances trustworthiness.
Who cares about getting it right?
Every stakeholder of SVB has had something to say about its failure as it has affected them all. As such they all have a vested interest in getting it right on a ongoing basis.
Potential investors, whether they are venture capitalists, private equity firms, or institutional investors, closely scrutinise a fintech’s governance and risk management practices before committing their funds. A strong board composition with relevant industry expertise and independent directors demonstrates effective oversight and strategic guidance, increasing investor confidence.
Customers of fintech services want to know that the company they are dealing with is trustworthy and reliable. A fintech with a strong emphasis on regulatory compliance and risk management is more likely to protect customer data and adhere to industry best practices, enhancing its reputation and customer trust.
Collaborating with fintech companies, as suppliers do, requires a certain level of assurance that the company operates responsibly and complies with relevant laws and regulations. A strong board and risk management practices give partners and suppliers confidence in the fintech’s stability and reliability.
When operating in highly regulated industries, and adherence to regulatory requirements is critical for maintaining a valid operating license and avoiding potential fines or sanctions. Regulators closely monitor a fintech’s compliance efforts and board governance to ensure consumer protection and market stability.
Talented employees are more likely to be attracted to a company that demonstrates a commitment to strong corporate governance, risk management, and ethical standards. A well-composed board can also offer valuable guidance and mentorship to the company’s management team, fostering a positive work environment.
Conclusion
In conclusion, the SVB downfall offers a sobering lesson on the critical role of governance in fintech. By concentrating on board composition, risk management practices, and regulatory compliance coupled with ethical standards, fintech companies can ensure their longevity, augment stakeholder value, and secure a successful presence in the market.
