When the Silicon Valley Bank collapsed on March 10 2023, it was not a household name. The bank, largely focussed on venture capital firms and tech startups, was however the 16th largest bank in the US. As higher interest rates made debt funding expensive and wobbly equity markets largely shut down the IPO (Initial Public Offering) market, SVB clients had little choice but to deplete their working capital and start withdrawing bank deposits to meet cash obligations. As the solvency of the bank became threatened, it was forced to sell off parts of its portfolio of debt securities, which after a year of rising interest rates was heavily under water. The bank realised a $1.8bn loss which it tried to fill by selling new stock. But as its equity price dropped sharply, the stock sale was dropped. Clients, now nervous, started withdrawing cash. As it became clear that no alternative funding was available, the bank went into receivership. The collapse raises concerns for the survivability of many of its tech startup clients who have lost access to their deposit accounts and face defaulting on their obligations, not least salary payments to their employees.
The problem seems to have been poor risk management. The bank had a disproportionally large deposit base relative to its loan book and therefore invested heavily in traded securities such as government and mortgage bonds – and seemingly without hedging the resulting interest rate risk (due to longer duration on the investment portfolio relative to the deposit base).
One critique aimed at SVB is that the bank seems to have had too little focus on the business of running a bank and too great focus on such matters as climate change (it recently pledged $5bn to sustainable finance), LGBTQ issues and other social aims. SVB was well known for its interest in helping minorities and women, with the funding it provided to ‘underrepresented entrepreneurs’ being a source of pride for employees. A quick browse of their Twitter feed does reveal a seeming preoccupation with such issues. Jay Ershap, a chief risk officer based in London who describes herself as a queer person of colour, has been singled out as an example of someone who seemingly spent a lot of resources on other matters than traditional banking business.
These days, such focus on stakeholder as opposed to shareholder value is referred to as ESG – Environmental, Social and Corporate Governance. A corporation, traditionally seen to be serving the interest of the owners (shareholders) and judged on its ability to create economic value, is increasingly being evaluated on the basis of its perceived positive impact on its environment. ESG is now weaved into the fabric of contemporary capitalism. Commercials are not focussing on the product but rather on projecting an image of social responsibility. Hardly a single corporate board member or fund manager will show up at Davos without the briefcase full of social and environmental credentials. Proponents claim that a focus on ESG can be beneficial for the company’s bottom line: motivated staff, waste reduction, focus on the long term. The positive impact on the image of the company is of course also obvious and virtue signalling is no small part of ESG. But as SVB shows, it is not as simple as that. Was the woke staff perhaps preoccupied with other priorities than running a bank? We do not know the whole story yet, but it may be that the bank, by choosing customers, employees and engagements on the basis of other factors than economic merit, ended up doing a tremendous disservice to the communities it claimed to be championing and put at risk the very survival of some of its clients.
Business should certainly care for their communities and a concern for the larger impact of its operations should be applauded. Scrutiny from stakeholders serve to hold business to account and the focus on ESG is an institutionalisation of such scrutiny. This is good. But when it comes at the expense of keeping the eye on the ball and running a profitable business, it compromises the fundamental tenet of capitalism: that companies, by adding economic value through the production process, benefits not only their shareholders, but society at large. This model has served humanity better than any ESG policy. The business of business is making money. We forget this at our peril.