When we look for the causes of a disaster, we are comforted by big structural answers.
When Silicon Valley Bank (SVB) collapsed, there were a lot of big structural factors to point to: It was a victim of global economic trends, not equipped to handle a high-interest-rate world. It was not protected by US banking regulations, which don’t require insurance on deposits over $250,000. The centuries old psychology of bank runs is as dangerous now as ever.
But big structures don’t give the full picture. The structures of individual organisations matter too. If we want to understand why SVB in particular was vulnerable to high interest-rates, weak regulations, and the psychology of bank runs, we need to look inside the organisation. Here we give our executive search perspective on the Silicon Valley Bank
In two key areas, we think that paying more attention to getting the right candidates at the right time could have put SVB on a more secure footing. First, we look at a candidate selection problem: the CEO. Second, we look at a selection process problem: the CRO.
Greg Becker, the CEO of SVB, has come in for a lot of criticism. Qualities that used to seem positive, have been reinterpreted.
His bright outlook on the business’ prospects – “our crystal ball is a little clearer” – looks naive. His focus on tech startups (at one point, 50% of US tech and life sciences startups banked with SVB) looks narrow and short-sighted. What once looked like a strong network in venture capital, now seems to tech journalist John Naughton like worship of founders and “slavish” attention to their requests.
But those attributes were no surprise for SVB, they selected for them when they hired Greg Becker. Becker joined SVB in the 1990s, and had been CEO since 2011. He started as a loan officer, only his second job out of university. In his public statements, he often stressed the uniqueness of SVB and his role there. He told Bloomberg’s Masters in Business podcast:
“We’ve learned to do start-up banking really well, and safely, but in a way that would be hard for other people to do it.”
In a 2019 interview he said he had:
“The coolest banking job in entire the world”
But it is hard to take comparative claims like those seriously (especially the one about safety) from a CEO with barely any experience outside his own company as a benchmark.
In a 2015 study of CEO selection processes, Steuer, Abell & Wynn characterise the process as a conservative one. No board wants to make a risky appointment and a candidate with deep in-company and in-industry knowledge can seem like a safe, ‘conservative’ choice. But this type of candidate poses real risks too, as SVB’s experience shows.
Specific expertise needs to be paired with a breadth of experience. In one of the interviews conducted by Steuer, Abell, and Wynn, a headhunter describes how the ideal career path for a potential CEO should be “moving them around, giving them some experience in Asia, making sure that a functional person’s got a general management role.”
Some cultures recognise this more than others. In a comparative study of international management cultures, Davoine and Schmidt (2022) observed that French CEO’s and Directors are typically generalists, only loosely tied to one sector or industry. They have typically worked abroad, or in both the public and private sectors. They can think more flexibly and resist group pressure because they have seen many different ways of doing business and worked with a wider range of colleagues.
In our searches, we pair the search for relevant experience, with attention to breadth of experience. Has the candidate demonstrated success in several companies, countries, or functions? We also consider exposure to best-practice environments: has the candidate worked in an organisation known for reliability, thoroughness, or operational excellence?
Some movement in a career also provides exposure, another factor we consider. Has the candidate had an easy ride, or have they had to deal with a sector that is struggling? Have they dealt with a business in need of change or transformation? Again, if they haven’t shown that, there’s a risk to placing that person in the top job.
Filling an executive position with the wrong candidate is bad, but worse is not filling the position at all. SVB spent eight months without a Chief Risk Officer (CRO). The bank’s former CRO, Laura Izurieta, had left the company in April 2022. Her replacement, Kim Olson, did not start work until January 2023.
Due to the bank’s failure, this period with no CRO is now a focus of legal investigations. But, even under less dramatic circumstances, timing is key to executive placements.
Not every company has a CRO and not every company needs one (Karanja and Rosso, 2017). But, in a study of which companies do appoint CROs, Pagach and Warr found that CRO roles often emerged in businesses where CEOs have strong incentives for dangerous risk taking.
At SVB, the CEO had those strong risk taking incentives. In Becker’s own words:
“The biggest challenge… is to understand what start-ups are going after. It’s very easy to say no, it’s very easy to list all the challenges and reasons why something may not work, it’s much more difficult to be that optimistic point of view and just say ‘what if…’
The problem with the missing CRO at SVB is part of a broader issue in how companies structure their management teams. In a study of how CRO roles are created, Bridget Hutter and Michael Power find that CROs share important characteristics with roles like CFO, COO, and CIO.
These jobs are usually created to deal with a function that was once distributed across various executives, but was not getting enough attention from them. By giving one person full responsibility for that function, the company frees up time for the management team to focus on their core tasks, while also bringing on board a specialist in the form of the CRO (or CIO or COO).
The downside is that the CEO and other executives will then pay less attention to that task, because it is someone else’s job. Once a C-Level role has been created for a specific domain, it is important to keep it filled, as other executives will be unwilling or unable to fulfil those responsibilities. If the role remains unfilled, small problems in that area can quickly grow and get out of hand.
We know that when there is big structural change in the economy, on average, some companies will thrive and others will fail. But it is also important to understand which ones fail. Looking at SVB’s internal organization, we can see key failures in how it selected executives which contributed to its downfall.
First, they relied on a CEO with very narrow experience, who couldn’t see his business from the outside. The problem probably wasn’t only Greg Becker. Mistakes in hiring are often repeated and can create an organization-wide weaknesses. A CEO with wider experience and more independence from SVB’s internal culture might have seen problems on the horizon and acted in time.
Second, SVB created a key position of responsibility in the CRO and then failed to fill that position. Again, the failure with a C-level role, may indicate wider organizational weaknesses when it came to filling roles on time. With a CRO in place over the critical period leading up to the bank’s failure, there would have been an authoritative voice to highlight the dangers in SVB’s investment strategy as interest rates rose and venture capital firms spent less.
By learning from SVB’s mistakes, business leaders can plan appropriately and protect their organisations from changes in the global economy. Our key takeaways are to be wary of ‘safe’ but narrow leadership, seek executives with an outside perspective, and keep key positions filled.
See more insights from Career Openers Executive Search.
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