• Erika Eliasson-Norris, Founder and CEO at Beyond Governance


• 24.05.2023 02:45 pm
#fintech #banking

The collapse of Silicon Valley Bank (SVB) has brought to light the importance of good governance and the devastating impact on all stakeholders when it goes wrong, particularly the public. Sadly, fintech is a high-risk sector for governance failings. This is due to their typically rapid growth, management’s misunderstanding of governance (it builds efficiency and long-term sustainability not bureaucracy), and leaving governance framework considerations too late, leading to a disconnection between governance and the embedded culture of the organisation. Governance failings typically lead to the decimation of the board’s reputation as a collective as well as for each individual director too, not to mention the impact on the organisation, if it indeed survives.

There are a number of lessons to learn from the collapse of SVB but three important governance matters specifically relate to fintech companies 1) the board composition, 2) the quality of risk management, and 3) regulatory compliance and ethical standards.

Board composition

The composition of the board is the single most influential factor in the long-term viability of a business. Putting the wrong people on the board or being forced to give board positions away as a favour can destabilise this key decision-making body and make it ineffectual. A well-composed board will have several distinct roles typically including the CEO, CFO and potentially a COO. The role of Chair and CEO will be held by different individuals and the Chair will typically be an independent Non-Executive Director. If one person occupies both the CEO and Chair roles this creates a concentration of power that threatens the ability of the other board members to constructively challenge leading to poorer decision-making.

In addition to the Chair, there will be a majority of Non-Executive Directors on the board who will constructively challenge the executive team. If directors hold multiple directorships the company appointing them will need to ensure they can commit sufficient time to their duties. More progressive boards may also have key stakeholder representation on the board (aside from investors), for instance, employee representation.

Above all else cognitive diversity, or diversity of thought, should be a key focus. The reason for this is that a board with diverse thinking will be better equipped to outperform its competitors, challenge the executives, mitigate risk and bring fresh thinking to discussions. This is less likely to occur with directors who attended the same schools, grew up in the same socioeconomic neighbourhoods and have similar work experiences. It’s not clever to have a stable of high-profile directors who duplicate experience and perspectives, the only thing it increases is the number of coffee cups needed at board meetings and often slows down decision-making.

Risk Management

Effective risk management is crucial for fintech too as they are exposed to a wide range of risks, including credit, strategic, operational, and cybersecurity risks. These risks can have significant consequences for the business, including reputational damage, financial losses, and regulatory action.

To address this, risk management processes must identify, assess, and mitigate risks. A risk register is a good starting point which, when drafted, will be regularly reviewed by the board of directors and other internal management. A vital part of the risk register process is the development of contingency plans to mitigate the impact of risks materialising. Businesses that have a clear, effective risk mitigation strategy will benefit from increased confidence and be able to move more quickly.

For fintech in particular, a key area of focus should be cybersecurity risk given the sensitivity of the data being handled. Fintechs should implement cybersecurity controls to protect customer data and ensure they are compliant with data protection regulations. This includes implementing access controls, encrypting sensitive data, and regularly testing cybersecurity defences. Additionally, risks associated with technological change and adoption is key and will need clear mitigation and escalation processes around decision-making in this area so as not to expose the business to unnecessary risk.

Regulatory compliance and ethical standards

Finally, but in no way less important, regulatory compliance and ethical standards are an essential aspects of any financial institution, and fintechs are no exception. There are various regulations to comply with including anti-money laundering laws, know-your-customer (KYC) requirements, and data protection laws. Failure to comply with these regulations can lead to significant legal and financial consequences.

Fintechs must also be aware of the regulatory environment in which they operate. The regulatory environment for fintechs is constantly evolving, and it is essential to keep up to date with any changes that may impact the business. Fintechs must also consider their ethical standards. The financial services industry has faced significant criticism in recent years, and fintechs must ensure that they operate with integrity and transparency. This includes treating customers fairly, disclosing fees and charges upfront, and ensuring that products and services are suitable for the target market.

Fintechs should also consider the ESG (Environment, Social and Governance) impact of their business. For example, fintechs that offer loans should ensure that they lend responsibly and do not contribute to unsustainable levels of debt. Consideration should also be given to a business’s carbon footprint and implementation of strategies to reduce environmental impact.

Finally, fintechs should establish a culture of ethical behaviour, with clear policies and procedures in place to guide employee conduct, a key element of governance. There should also be transparency on the business’s governance practices and disclosure of information about their ownership structure, board composition, and executive compensation.

In conclusion, the collapse of SVB has brought into sharp focus the importance of governance for fintechs. Fintechs should focus on their board composition, risk management practices and regulatory compliance and ethical standards to ensure the longevity of the business and the realisation of increased value upon sale or floatation on a regulated market.