LB5231-Corporate responsibility and governance

Question 1. “The first task says “investigate a recent case of corporate governance failure of your choice”.

The question asks student to explore a recent case where company’s governance practices failed and led to negative consequences. This involves selection of a recent case of corporate governance failure and analysis of factors which contributed to failure, and its immediate impact on stakeholders.

How to do: To answer this question accurately, follow below steps

Step 1: Selection of relevant case study

This is the first stage where you will need to choose “recent” case of corporate governance failure. Before selecting any recent case of corporate governance, it is advisable to gain clarity about what corporate governance is, in general. Corporate governance is basically the system of rules, practices and processes using which a company is directed and controlled (Chen, 2024). It involves balancing interests of company’s key stakeholders like shareholders, business partners, customers, management, suppliers, financiers, government and community.

Key elements of corporate governance include -

• Board structure -Composition, independence, level of expertise.
• Executive compensation - Alignment with performance and transparency.
• Stakeholder rights - Could be voting rights, access to information.
• Transparency and disclosure - Facilitation of accurate and timely. reporting.
• Risk management - Identification, assessment and mitigation of business risks.
• Ethical culture - Code of conduct (LondonTFE, 2017).

Step 2: Analyzing corporate governance failure

When analyzing any corporate governance failure, there are a few factors which needs to be considered, some of these factors are laid out below -

• Weak board oversight - It implies inadequate monitoring of management decisions.
• Lack of independence - Conflicts of interests amongst company board.
• Ethical lapses - It could be fraud, corruption and unethical behavior (CFO, 2020).
• Poor risk management - It implies inability to identify and manage risks
• Inadequate internal controls - Referred to inherent weaknesses in financial reporting and compliance
• Dominant CEO - State when excessive power concentrated in one individual.
• Short-term focus - Prioritizing short term gains over long term sustainability
• Culture of non-compliance - Disregard for company rules and regulations

Step 3: Selection of relevant case study

While selecting, make sure you use relevant keywords as it is explicitly mentioned in task file to research latest case, so make sure you select relevant cases of corporate governance failures like Volkswagen emission scandal, instead of those which happened years ago (like Enron corporate governance failure). For selection of relevant cases, you may consider use of below specified keywords -

• “Corporate governance failure” + “specify year”
• “Corporate governance scandal”
• “Ethical misconduct company”
• “Accounting fraud” + “industry sector”
• “Risk management failure” + Company size/industry
• “Board oversight failure”
• “ESG Failures (environmental, social, governance)”

Question: The question further states that “Utilize appropriate corporate governance theories and concepts to evaluate company's governance practices and their implications”

This question requires students to apply relevant corporate governance theories and concepts to evaluate governance practices of chosen company. This involves proper examination of relevant theories such as agency theory, stakeholder theory, stewardship theory, etc, and its implications on company’s performance and accountability.

How to do: To answer this, students are required to follow key three steps which are explained alongside relevant examples below.

Step 1: Conduct research corporate governance theories

At this stage, you will need to identify and select relevant corporate governance theories (some of which may include agency theory, stakeholder theory, stewardship theory). When discussing about theories, you must carefully assess which corporate governance theories are applicable to your chosen case scenario. And if certain theories do not apply to your chosen case context, provide thorough explanation of why they are not relevant rather than simply omitting them without justification.

How to do: To assess relevance of corporate governance theories to chosen scenario, follow below steps,

• Identify relevant corporate governance theories like agency theory, stewardship theory, stakeholder theory or resource dependency theory.
• Understand each theory to assess its relevance in chosen case scenario.
• Examine specific governance issues, challenges and stakeholders involved in case scenario.
• Match chosen theories to case, explaining how each theory might explain or resolve identified governance issue.
• If theory does not apply, provide justification why it is not relevant.
• Summarize how selected theory could help understanding governance failures or successes in case study.

Step 2: Analyze governance practices

During this stage, you will need to evaluate governance practices of the selected business, you must clearly outline how governance practices of chosen business led to or contributed towards governance failure, and its ultimate impact on stakeholders. You need to address discussion points here, by covering aspects like how challenges in company typically arose from inadequate governance practices. Some common examples of factors which may have contributed to the issues in analysis may include – lack of board oversight, ethical lapses or poor decision-making.

How to do: To analyze governance practices and its implications on selected business, consider following below steps -

• Identify governance practices, structure including board position, executive roles and decision making processes at chosen company
• Examine its policies related to risk management, compliance and controls
• Assess governance practices which may have contributed to the issue
• Consider factors like lack of board oversight, ethical lapses while answering
• Identify instances from case context where board failed to address critical issues
• Describe how internal problems like ethical lapses affected stakeholder trust and company’s position

Step 3: Construct your argument

Here, you need to provide your standpoint highlighting significance of corporate governance in businesses.

How to do: To enhance credibility of your response, consider taking evidence from your case study and relevant theories (which were shortlisted above) to further support your argument. Make sure to cover both positive and negative aspects of governance. Since it is clearly mentioned that ‘illustrate your points with examples from your selected case’, so make sure to take case study examples from chosen organization itself, DO NOT add examples from other case studies.

Drafting essay format

Now it’s time to structure your essay form, you can follow below specified format structure

How to do: Follow below steps for understanding essay format

• Introduction | Simply introduce the case study and outline thesis statement
• Body Paragraphs | Cover following aspects in proper flow
  • Provide background details of chosen case scenario
  • Discuss relevant corporate governance theories
  • Analyze organization’s practices and key failures
  • Provide case study examples from chosen case scenario
  • Address discussion points in a systematic way
• Conclusion | You need to summarize key findings here and reinforce your stance on corporate governance importance in businesses

Introduction

Corporate governance issues are a recurring issue indeed in the business world, which often results in significant financial losses, damaged business reputation and legal consequences for companies and their stakeholders. These failures typically occur when company management and board fails to uphold their ethical and legal responsibilities, and this is what subsequently results in poor decision making and lack of accountability. Some factors which result in corporate governance failures include inadequate oversight, ineffective risk management and misaligned incentives which prioritize personal gains over long-term organizational goals. The report presented below will focus on one such company named Silicon Valley Bank (SVB) which reported a corporate governance failure in march 2023. It is a recent example of corporate governance failure and the essay presented below is aimed to analyzing corporate failures which led to the collapse of SVB, from the lens of different corporate governance theories and concepts.

Background: Silicon Valley Bank collapse

SVB, trading as Silicon Valley Bank, is widely known for its extensive support of tech startups and venture capitalists. This banking institution has been operational since 1983 and had grown to become one of the largest banks operational in United States. This banking institution had assets of worth $209 billion in December 2022. At the time of its collapse (which was in march 10, 2023), it was the 14th largest bank in the US (Gobler, 2024). However, its collapse on march 10, 2023 marked the third largest bank failure in US history. Company faced a massive bank run with $42 billion in withdrawals, on march 9, 2023, it was after a significant drop of stock price was noted i.e. 60% (Naveed et al., 2024). The immediate cause of this company failure was bank run, as immediately after SVB made its official announcement regarding $1.75 billion capital raising on march 8, its customers became alarmed that SVB was short on capital. Consequently, customers started panicking and withdrew their money in waves. Apparently, the rising interests is the reason as to why SVB lost its significant investments in long-term securities and this is what eventually resulted in unrealized losses and liquidity crisis situation. According to (Gobler, 2024), the bank’s failure came as a result of diverse range of factors, which include its investment losing value and its depositors withdrawing large amounts of money. Eventually, SVB was seized by the California Department of Financial protection and innovation. This action was taken primarily to protect depositors and to further stabilize the financial system. The business model of Silicon Valley bank was heavily dependent on deposits attained from tech startups and venture capitalists (Gompers, 2023). This heavy concentration in merely one industry is what truly made the bank highly vulnerable to economic downturns and changes in the tech sector. Also, it is important to note that as interest rates soared, bank’s management did not realize the changes, occurring to external factors (inflationary pressures), this inability of the bank to diversity its investments, or manage its liquidity risks efficiently, is also one of the key reasons, which led to a severe crisis.

Corporate governance theories & concepts

There are several corporate governance theories and concepts which are relevant to gain better understanding of SVB’s corporate governance failure. One corporate governance theory which can be applied to SVB case is agency theory. In general, this theory focuses on relationship between shareholders and managers (agents). In given scenario of Silicon Valley Bank, it can be noted that company management failed to manage risks effectively, instead they took calculative risk and discarded the need for diversification of investments and heavily concentrated in a single sector, which eventually resulted in liquidity crisis situation (Marks, 2023). Inability of management to address risks proactively is what led to an agency problem. Also, it is worth noting that bank’s executives were incentivized to grow the bank rapidly, perhaps, this is also a reason why management took risky investment decisions (S. Barr, 2023). Another relevant theory is stewardship theory which generally posits that managers (company managers) are stewards of the company, and they must act in best interest of the company (S. Barr, 2023). However, in case of Silicon Valley Bank, it can be noted that company management did not act in best interests of the bank, as it failed to diversify investments and manage liquidity risks effectively. This inability of company management to act as responsible stewards of shareholder and depositor assets, is what largely contributed to SVB’s failure. Here, it is important to note that while stewardship theory is generally applicable to SVB case, but its wider relevance might be limited in certain aspects. This is because, the Silicon Valley bank case scenario is more directly related to inadequate risk management and misaligned financial incentives rather than lack of stewardship in particular. Another theory which can be used to understand governance failures at SVB is stakeholder theory. This theory emphasizes on the significance of considering interests of key stakeholders. SVB’s collapse affected different stakeholder groups include company shareholders, depositors, employees and broader tech community. SVB’s failure to manage its risk effectively put the entire tech ecosystem at risk.

Corporate governance practices violated

To prevent corporate governance failure in business, there are several governance practices that company must follow. For one, there must be a strong board of directors which provides independent oversight of management decisions, to make sure that management decisions fully align with broader business goals, long-term interests and ethical standards (Pounds, 2022). Business must have adequate internal controls in place for identifying and mitigating potential risks. Effective risk management primarily involves identifying risks, assessing and mitigating risks so as to maintain company reputation, financial performance and due compliance with relevant regulatory laws and provisions. Also, a business must have robust internal controls in place to ensure accurate as well as timely reporting of financial performance and due compliance of business with relevant laws and regulations. Not just this, but also, company management must promote strong ethical culture, as it is important for guiding company staff behavior and for preventing ethical lapses which otherwise damage company position and reputation in the market (Pounds, 2022).

However, in context of Silicon Valley Bank, it can be noted that company management did not fully incorporate above defined governance practices, and this is what eventually resulted in its collapse in march 2023. Apparently, bank’s investments which were highly concentrated in long-term securities, lost its value when interests rates rose, and this is what led to unrealized business losses. Lack of diversification is what exposed SVB to market risks and greatly reduced its ability to respond to changing economic conditions. SVB also failed to effectively manage its liquidity risks, and this was the main reason behind its failures (Rossi, 2023). From this, it can be anticipated that bank’s risk management practices were insufficient as it failed to address rapid changes in market conditions and depositor behavior. Also, company executive’s focus on rapid business growth and high returns is what encouraged management to proceed with risky decisions, prioritizing short term gains over long term stability. This misaligned incentive is what encouraged company management to take on excessive calculated risk without adequately considering potential implications in the aftermath.

Moving on, talking about my instance, robust corporate governance is undeniably crucial for achieving stability and long-term business success. The SVB collapse serve as a stark reminder of devastating implications that companies may have to face with inadequate corporate governance. From this, significance of corporate governance can be understood as it can help businesses develop a framework to ensure that company operates ethically, transparently and to increase value for shareholders. Further, in an online publication by (Yang, 2023) authors assert that corporate governance is also important because it can help to develop trust, reputation and long term business sustainability. In a similar publication by (Board, 2023) authors contemplated that the significance of corporate governance lies in its ability to promote and maintain integrity, accountability and transparency throughout business.

To sum up, the Silicon Valley Bank’s collapse was not just a result in unforeseen market events, but it was an implication of deeply rooted inadequacies in its corporate governance practices. The array of issues that company faced like inability to manage liquidity risks, handle interest rate risks, lack of diversification and, diversity its deposit base stemmed from its failure of governance at management and board levels. This particular case highlights the empirical need of corporate governance, and effective board oversight in a business.

References

• Board. (2023, September 27). Importance of Corporate Governance in Modern Business. IDeals Board. https://idealsboard.com/importance-of-corporate-governance/
• Gobler, E. (2024, February 27). What Happened to Silicon Valley Bank? Investopedia. https://www.investopedia.com/what-happened-to-silicon-valley-bank-7368676
• Gompers, P. (2023, March 17). Silicon Valley Bank’s Focus on Startups Was a Double-Edged Sword. Harvard Business Review. https://hbr.org/2023/03/silicon-valley-banks-focus-on-startups-was-a-double-edged-sword
• Marks, H. (2023, April 17). Lessons from Silicon Valley Bank. OAKTREE. https://www.oaktreecapital.com/insights/memo/lessons-from-silicon-valley-bank
• Naveed, M., Ali, S., Gubareva, M., & Omri, A. (2024). When giants fall: Tracing the ripple effects of Silicon Valley Bank (SVB) collapse on global financial markets. Research in International Business and Finance, 67(102160), 102160. https://doi.org/10.1016/j.ribaf.2023.102160
• Pounds, R. (2022). The role of the board of directors in corporate governance | diligent | diligent corporation. Diligent Corporation. https://www.diligent.com/resources/blog/the-role-of-the-board-of-directors-in-corporate-governance
• Rossi, C. (2023, March 14). Silicon Valley Bank: A Failure in Risk Management. Www.garp.org. https://www.garp.org/risk-intelligence/market/silicon-valley-bank-031423
• S. Barr, M. (2023). Re: Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank. https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf
• CFO. (2020, February 23). Most common reasons for corporate governance failure. The CFO. https://the-cfo.io/2020/02/23/most-common-reasons-for-corporate-governance-failure/
• Chen, J. (2024, September 12). Corporate Governance: Definition, Principles, Models, and Examples. Investopedia. https://www.investopedia.com/terms/c/corporategovernance.asp LondonTFE. (2017, December 14). https://www.londontfe.com/blog/eight-elements-of-good-corporate-governance.
• Professional Training Courses | London Training Excellence; LondonTFE. https://www.londontfe.com/blog/eight-elements-of-good-corporate-governance?srsltid=AfmBOorOWw1iRakJVZZRY9SlsWu-aFCiFyFA94dXwd8s42-C9t8sItir
• Santos, C. (2016, October 17). VW Emissions and the 3 Factors That Drive Ethical Breakdown | Darden Ideas to Action. Darden Ideas to Action. https://ideas.darden.virginia.edu/vw-emissions-and-the-3-factors-that-drive-ethical-breakdown
• Stakeholder Theory. (2024). Stakeholder Theory. Stakeholdertheory.org. http://stakeholdertheory.org/about/