Boards and executives across industry sectors can gain valuable lessons on the oversight of enterprise risk from what the Federal Reserve has described as a “textbook case of mismanagement’ by leadership at Silicon Valley Bank.
- The board and management failed to effectively oversee the risks inherent in SVB’s business model and balance sheet strategies.
- The incentive compensation payable to SVB’s senior management was tied to short-term earnings and equity returns and did not include risk metrics. This gave managers a financial incentive to focus on short- term profit over sound risk management. Certainly, these and other identified risks arose from a highly complex business model operating within a vulnerable environment within which federal supervision and regulation was admittedly flawed. Yet this litany of risks reflects a series of fundamental risk oversight themes that are broadly applicable across industry sectors:
3. Boards will be expected to exercise heightened oversight of management, the business model and internal controls during periods of rapid growth and economic volatility. 6. The structure and content of executive incentive compensation arrangements often have significant regulatory, compliance and oversight implications and benefit from legal review and board monitoring.
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