Board strategy should strike a balance between short-term disruption and long-term transformation.

The banking industry continues to be in a state of crisis. The latest inflection point was the seizure of First Republic Bank by regulators and the sale of its assets to JPMorgan Chase Bank. We spoke with David Garfield, global head of industries of AlixPartners LLP, to get his views on what directors can learn from the well-publicized banking struggles, especially those of Silicon Valley Bank and First Republic Bank. He discussed the need for detailed contingency planning, the importance of proper board composition and the benefit of directors staying up to speed on technology. 

Directors & Boards: What lessons can boards learn from what happened to Silicon Valley Bank, and what continues to happen to banks like Signature Bank and First Republic Bank?
David Garfield: One of the biggest lessons from Silicon Valley Bank’s (SVB’s) and First Republic’s failure is that boards need to be even more proactive in terms of contingency planning — traditional methods are no longer sufficient.

In the past, many boards would rely on simple “tabletop exercises.” They would identify a specific type of risk, like a cybersecurity breach, and talk through the steps the company would take to address the risk.

This approach is too narrow and static — typically dealing with one risk, at one moment in time. In today’s world, contingency planning needs to be more holistic and dynamic — addressing several factors simultaneously, in conditions that change quickly.

This is what happened at SVB and First Republic. The boards looked at traditional stress tests related to rising rates. But they weren’t adequately prepared for the rapid escalation and integration of risks related to rates, asset sales and redemptions.

DB: What sort of contingency planning should boards be doing to prepare for incidents such as this and other risks that challenge their particular companies and industries? 
DG: Contingency planning should be scenario-based and digitally amplified. Scenario-based planning involves identifying and addressing a full range of risk factors. For example, if a geopolitical event disrupts a set of trade routes:

• How will the company maintain a steady source of raw materials?
• What adjustments must be made to the company’s operations?
• Who is communicating with key customers? 

Digitally amplified planning recognizes that, in today’s world, an initial crisis can grow and expand exponentially as a result of technology and other network effects. For example, at SVB, the initial run on the bank accelerated dramatically as customers’ emails, texts and posts multiplied. Boards need to think and be prepared to act in a fast-forward manner. There is less time to deliberate and more urgency to act.

Also, boards need to make sure that contingency planning strikes a balance between addressing shorter-term disruptions and longer-term transformations. For example, in the automotive industry, a shorter-term disruption might be something like a major supplier going bankrupt. A longer-term transformational risk might be “What happens if battery costs come down two or three times as fast as anticipated?”

DB: Thinking more broadly about the composition of boards, where do you see gaps, and where do you see boards whose composition works well?
DG: Historically, boards have looked for a combination of industry experience and functional skills, such as finance and accounting. There are clear gaps with this model. First, this is not a broad enough skill range for today’s complex and continuously disrupted environment.

This is a common mistake we see in boards — adhering to old notions of composition and narrow responsibilities, and not including a more dynamic, diverse and wide-ranging set of skills and experience.
 
Diversity, of course, takes all forms. In addition to gender, race, ethnicity and other important dimensions, there is diversity of thought. Boards need directors who not only represent differing perspectives, but who can frame issues and pose questions in differing ways to help get the best outcomes.

In terms of industry experience, a slightly counterintuitive point is that boards need expertise from outside the company’s industry, as well as inside. Some of the most successful business strategies come from applying lessons learned in one industry to another.
Importantly, boards need some deep operational expertise. Historically, many boards were stacked with “strategic thinkers.” Today, boards need to balance “big picture” perspective with operational insight. Boards need to be able to assess management’s longer run plans and, at the same time, understand and gauge progress on critical change initiatives — like building supply chain resiliency or enabling electronic commerce.

Our latest annual Disruption Index found that 98% of executives are changing their business models now or expect to change over the next three years. Examples include retailers that are transforming from brick-and-mortar and e-commerce to true omnichannel companies or energy providers that are transitioning to renewable sources. Boards have a critical role to play in evaluating the soundness of multiyear transformation programs and the success of the leadership team.

DB: What do you believe it takes for a board to be effective? 
DG: Broadly speaking, a board needs three things to be effective.

First, a board needs the right people:

• Individuals with the right experiences, skills and judgment to play the role of director effectively
• A diverse group, representing a full range of backgrounds and perspectives
• Independent, objective and balanced thinkers.

Second, a board needs the right dynamics. This aspect is often overlooked. Many companies focus on assembling a board of individual all-stars when there is an even higher level of performance: an all-star team. Directors need to be able to draw on one another’s strengths, work productively in committee structures, and strike the right balance of “demanding” and “enabling” management. They also need to work with management to establish the right processes and disciplines for information exchange and decisions.

Also, a board needs to stay focused on the role of governance and respect management’s role of running the business. Excellent boards add tremendous value by asking deeply insightful and well-informed questions. They provide critical input and feedback without dictating to management. They critically assess and constructively challenge strategic plans and initiatives without dipping into executive decision-making and execution.

DB: Across industries, companies are making big investments in technology — in areas such as analytics and artificial intelligence. How tech-savvy do boards need to be, and how do they achieve this?
DG: Technology is a major business disruptor across all industries. Historically, many boards relied on one or two “tech experts” to provide much of the input and feedback on technology-related matters. However, technology has become so pervasive that this old way of operating is no longer sufficient. Today, while directors don’t all need to be digitally fluent, they do need to be digitally conversational — able to engage on technology topics and ask the right questions.

Technology is weaving itself into business models at an incredible pace and boards need to keep up. In some cases, this may mean tapping into continuing education or conducting “deep dives” on key topics with relevant members of the management team.

Our annual Disruption Index found that 87% of CEOs and senior executives say their company has the resources needed to invest in new technology and digital solutions, but 66% say their board of directors often impedes the process of deploying them. Directors need to be able to assess the risks and threats associated with new technologies, and they also need to be able to help management grasp the opportunities.