By Erika Eliasson-Noris from Beyond Governance.
The failure of Silicon Valley Bank (SVB) has emphasized the need for strong governance in the fast-paced and high-risk world of fintech. The rapid growth and innovative nature of fintech can hide the dangers of inadequate governance, leading to potentially devastating consequences for all stakeholders, including the public.
The fast growth of fintech often results in a misunderstanding of governance, seen as bureaucratic rather than a crucial element for efficiency and long-term resilience. Neglecting governance becomes apparent when the framework does not align with the organization’s culture, leading to catastrophic outcomes. In light of the SVB downfall, three key governance aspects emerge as vital for fintech companies: board composition, risk management, and regulatory compliance combined with ethical conduct.
Board Composition: Fostering Stability
The long-term success of any fintech company relies on the makeup of its board. Inappropriate appointments or succumbing to external pressures can lead to destabilized decision-making. An effective board should include a mix of roles including an independent Chair separate from the CEO, preventing an unhealthy concentration of power and fostering constructive debate for informed decision-making.
The board should ideally include a majority of Non-Executive Directors and representation from key stakeholder groups, ensuring a variety of perspectives. Emphasizing cognitive diversity can provide the board with a competitive edge, enabling it to challenge executives, mitigate risks, and inject innovative thought into discussions.
Risk Management: Guiding Through Challenges
For fintech companies, effective risk management is crucial due to their exposure to various risks such as credit, strategic, operational, and cybersecurity risks. Establishing a comprehensive risk management process that identifies, evaluates, and mitigates these risks, and formulating contingency plans are practical steps for managing potential risks.
Fintech firms, dealing with sensitive data, should prioritize cybersecurity risk and implement stringent controls. A clear mitigation process, along with staying abreast of technological changes, is vital for safeguarding the business against unnecessary risk.
Regulatory Compliance and Ethical Standards: Building Trust
Compliance with regulations such as anti-money laundering laws, know your client (KYC) requirements, and data protection laws, combined with high ethical standards, is essential for fintech firms. Operating with integrity and transparency and staying informed about the evolving regulatory environment is fundamental. Emphasizing fair business practices, transparent fees and charges, and responsible lending practices enhances trust with customers and stakeholders.
Fintech firms should also consider their environmental impact, cultivating a culture of ethical behavior, and being transparent about their governance practices to enhance trust.
The Significance of Strong Governance
The importance of strong governance resonates across all stakeholders in light of SVB’s failure. Prospective investors, customers, partners, suppliers, regulators, and employees all seek assurance of responsible operations and a robust governance framework. Focusing on areas of board composition, risk management, and regulatory compliance underpinned by ethical standards allows fintech firms to build resilience, optimize stakeholder value, and establish a strong foundation for success in the market.
About the author
Erika founded Beyond Governance and gained experience in the UK’s FTSE 250 board governance at a young age. She held positions at several prominent companies before establishing Beyond Governance.
