54. Michael Peregrine on fiduciary duty and the impact SVB may have on the boardroom

Michael Peregrine advises boards of directors on matters of sensitivity and controversy, often in connection with corporate and fiduciary crises. In this episode we discuss examples of such including Silicon Valley Bank and the board’s role, board diversity, the danger of deference to strong CEOs and the challenges that AI raises for boards.

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Big Ideas/Thoughts/Quotes:

The reason I refer to matters I work on as sensitive is because they sometimes bridge the gap from pure legal issues to moral and ethical issues for which there's a gray area, and they often require a substantial amount of courage for the full board to address them and they are perhaps the most explosive in the sense that they typically involve people of goodwill and faith,

As an example, sometimes a very successful CEO is just unable to make the shift to what I would call the modern board management dynamic with respect to engaging boards, or particularly in supporting corporate compliance…it's a situation where a CEO is just reluctant to acknowledge the full scope of the board's duties and responsibilities, just doesn't get it, and therefore is in direct conflict with the obligations of the board to engage in fiduciary responsible activity.

Silicon Valley Bank

When you have any kind of collapse in the banking industry, in the financial industry, where consumers are hurt directly, you're going to have everybody piling on.

“I think the  Silicon Valley Bank situation is going to continue to be in the forefront for all kinds of directors because it deals with the failure of a heavily regulated industry with sophisticated issues involved, but very basic concerns about how people did their jobs.”

 

“I think there is a risk that it will cause board members to over-engage if they feel that they're in situations where management has not done enough to inform them or advise them or keep them in the loop.”

That, of course, leads to micromanagement, which is not good for the company as a whole. I kind of see it, and I see a pullback by the board in terms of reliance on management and taking more on at the board level. And while that's understandable, I don't think that's good in the long term.

JA: It seems like had both management and board been doing what we all think of as their job here, this would not have happened.  It's probably not necessary to clamp down and scrutinize more closely. The question is, why didn't they scrutinize at all? Why didn't they have a chief risk officer? Why didn't they do a lot of things to maybe hold this very, very aggressive and active CEO more accountable for what he was doing?

MP: I think there's a great likelihood that the Fed will control the dialogue…”We gave them all the information they had. We can't hold their hand." And the question was, "What did you do with the information?" I think it will focus on the extent of information that the board and management knew or should have known from the Fed's review.

“If I'm a chief risk officer of an organization, I'm going to assume that my compensation will increase dramatically.”

I think another question could be, "Well, did the board actually have the competency necessary to do the analysis? Was there a situation where they lack subject matter experts?"

JA: It's not just a lack of a chief risk officer in just any sector or organization. It's a chief risk officer in one of the most highly regulated industries in the world, so not having one under those circumstances - that's something on which people will focus and I think that’s appropriate.

 

Criticism of SBV Board Diversity

JA: You said the criticism may be unfair, and I'm going to just say it's way more than unfair, it's completely, in my view, misplaced. Two things: one, diversity of perspective does mean you're a better board, but it doesn't necessarily mean you're going to be a better board unless the underlying skills and experiences of those members are the right ones. That's always been true, so whether you have a diverse gender, racial, ethnic, geographic, age - whatever that diversity is - that is probably a good thing, but it only matters if the underlying group of skills together is what is needed for this company.

Impact of the pandemic on the boardroom

Generally speaking, over the last couple of years, I've seen the pandemic issue affecting industries in two ways. One is that I think for a period of three years boards have been reluctant to lean in on management because they felt in 2021, and to a certain extent in 2022, "You guys have your hands full. We're going to lean off.  We're going to let you run it. We're not going to beat on you. We're going to ease back on the throttle and let you get the ship back in the right course." 

Now, Boards are seeking to reclaim their lost authority, and CEOs are not so willing to give it up. I think that is an aspect of the pandemic which is important to consider and important for boards to confront that issue with management.

Deference to the “Messianic CEO”

MP: SVB also raises the question of the obligation of the board when you have the Messianic CEO, there can be so much belief in that person that there's excessive reliance or excessive deference to that CEO when the board feels that that person has the magic beans to do the job. 

 

JA: Michael, that's a cult, that's not a board. If you want to join a cult, good luck. But if you want to be on a board being mesmerized by the CEO is not an excuse. It's never excuse. If you're going to do that, get off the board and go join a cult.

AI

I  think that the gap between a board’s awareness and their ability to do their job in terms of oversight of organizational commitment to AI and , ultimately. risk is huge.  I were in a board of an organization in an industry where there were tremendous AI advancements, I would be concerned.

In my view, it's really the Wild West if you're a board member trying to manage the organization's use of AI.