The recent collapse of Silicon Valley Bank (SVB) has highlighted the crucial role of good governance for fintech companies. Unfortunately, governance failures are a common risk in this sector, due to their rapid growth, a lack of understanding of governance, and delayed consideration of governance frameworks. Such failures can devastate all stakeholders, including the public, and harm a company's reputation, as well as the individual directors involved.
There are three governance matters that fintech companies should prioritize to learn from SVB's collapse: board composition, risk management, and regulatory compliance and ethical standards.
The composition of a board is crucial for a business's long-term success. Appointing inappropriate individuals or awarding board positions as favours can destabilize this vital decision-making body and render it ineffective. Ideally, a well-structured board will consist of various roles, such as the CEO, CFO, and potentially a COO. It's important to have separate individuals serving as Chair and CEO, with the Chair being an independent Non-Executive Director. Otherwise, a concentration of power can emerge, hindering constructive challenges from other board members and leading to poorer decision-making.
Along with the Chair, a majority of Non-Executive Directors should sit on the board to provide constructive challenges to the executive team. If directors hold multiple directorships, the company appointing them must ensure they can commit adequate time to their duties. Additionally, progressive boards may include key stakeholder representation, such as employee representation, besides investors.
Above all, cognitive diversity, or diversity of thought, should be a primary focus. A board with a range of perspectives will outperform its competitors, challenge executives, manage risks, and bring fresh ideas to discussions. Appointing directors who share similar backgrounds, such as attending the same schools, growing up in similar socioeconomic neighbourhoods, or having comparable work experiences, will not bring about this cognitive diversity. Having a group of high-profile directors with duplicated experiences and viewpoints only increases the number of covers at a board dinner and often slows down decision-making.
Fintechs must also prioritise effective risk management as they face a broad range of risks, such as credit, strategic, operational, and cybersecurity risks, which can severely impact their reputation, finances, and regulatory compliance.
To combat these risks, fintechs must establish risk management protocols that identify, evaluate, and mitigate risks. One approach is to create a risk register, which should be regularly reviewed by the board and management team. Developing contingency plans is also critical for reducing the impact of any potential risks. Businesses with a robust risk management strategy can boost their confidence and agility.
In particular, fintechs should concentrate on cybersecurity risks due to the sensitive data they handle. To safeguard customer data and meet data protection regulations, fintechs must implement cybersecurity controls like access controls, encryption of sensitive data, and regular cybersecurity testing. Furthermore, managing risks related to technological change and adoption requires clear mitigation and escalation processes to prevent unnecessary exposure to risk.
Regulatory compliance and ethical standards
Last but certainly not least, fintechs must prioritise regulatory compliance and ethical standards, which are integral components of any financial institution. Fintechs must comply with a variety of regulations, such as anti-money laundering laws, KYC requirements, and data protection laws. Failure to comply with these regulations can result in significant legal and financial ramifications.
Furthermore, fintechs must stay informed about the ever-evolving regulatory landscape in which they operate. They must also uphold ethical standards and operate with integrity and transparency. This includes treating customers fairly, being upfront about fees and charges, and ensuring that products and services are suitable for their target market.
Fintechs should also consider their ESG impact and strive to be responsible lenders that don't contribute to unsustainable levels of debt. Strategies should be implemented to reduce their environmental impact and carbon footprint.
Lastly, fintechs should establish a culture of ethical behaviour, with clearly defined policies and procedures to guide employee conduct. Transparency about the business's governance practices, ownership structure, board composition, and executive compensation is also essential.
To sum up, the failure of SVB highlights the critical role of governance in the success of fintechs. To achieve lasting business success and to increase value fintechs should prioritise their board composition, risk management processes, and adherence to regulatory compliance and ethical standards.