Wells Fargo scandal highlights failure to hold corporations accountable

Is corporate accountability, like virginity past the age of 16, a dead letter? Unfortunately, based on the latest banking shenanigans, the answer seems to be yes.

On Sept. 8, Wells Fargo, the country’s third largest bank with $1.9 trillion in assets, which has portrayed itself as a bank for Main Street, became the latest to experience a major scandal after it agreed to pay $185 million in fines over the “widespread illegal practice” of opening unwanted accounts to meet sales targets and reap compensation incentives.

Fines included $100 million to the Consumer Financial Protection Bureau, $35 million to the Office of the Comptroller of the Currency and $50 million to the city and county of Los Angeles. Put in context, these fines amount to a rounding error for WFC, which earned $5.6 billion just in the second quarter this year.

The firm also agreed to pay $5 million to customers who incurred fees on the ghost accounts. That works out to an average of about $25 per customer.

As usual, the firm did not admit wrongdoing, despite acknowledging that it has fired roughly 5,300 employees, or about 1 percent of its workforce, over the past five years for fraudulently opening up to 2 million fake fee-generating accounts for products like credit and debit cards, checking and savings accounts for unsuspecting customers. By creating these sham accounts, the firm ripped off customers, who paid overdraft and late fees on credit cards and deposits they

An aggressive sales culture that includes cross-selling, or getting customers to open multiple deposit, mortgage, and investment accounts, has been a hallmark of WFC’s strategy for years. The bank explicitly cites it as a key strategic goal in its 2015 Annual Report. The policy once again proves that you get the behavior you reward.

You don’t need a PhD to know that other “too big to fail” banks are likely engaging in the same aggressive sales practices to make their numbers. After all, it is the promise of increased pay that keeps the engine running.

The bank said of its settlement: “Wells Fargo reached these agreements consistent with our commitment to customers and in the interests of putting this matter behind us.”

But the executive in charge of WFC’s community banking operations made $9 million in total compensation last year and was set to walk away with an even bigger payday when she retired at age 56 at the end of the year. Her payout had been pegged at $124.6 million in a mixture of shares, options, and restricted stock. But the firm’s board of directors under pressure from lawmakers and others said this week she will forfeit $19 million of her stock awards immediately.

Also, the board announced that WFC Chairman and CEO John Stumpf, who has led the bank since 2007 and made $19.3 million in 2015, will forfeit $41 million in stock awards and be ineligible for a bonus this year. He has defended the bank’s cross selling strategy, saying it promotes “deep relationships” and helps customers. He had turned away calls for a claw back of executive compensation when testifying before the Senate last week punting to the board.

While investor support of Wells Fargo continues to deteriorate, Warren Buffet, the bank’s biggest shareholder with 10 percent of its stock, has stayed mum on the scandal.

For all the media attention given to accountability abuses and the continuing debate over whether regulators are doing enough to hold firms accountable, the American public has grown numb to scandalous behavior in the financial community and knows the government won’t punish the perpetrators.

Not all employees are subject to the same standard. Once again, senior executives are granted greater latitude to violate the rules; none of them have lost their jobs. Sadly, it is a truism that accountability rolls downhill in the corporate hierarchy. It’s all very now.

Originally Published: Sep 30, 2016

‘Too big to fail’ GM already has

General Motors waited more than a decade to recall 1.6 million defective Chevy Cobalts, Saturns and Pontiac G-Ss with faulty ignition switches that could cut off engine power and electrical systems, disabling the air bag and leaving occupants vulnerable to serious injury. Thus far, the defect has been linked to 13 deaths.

GM’s corporate delinquency and callous disregard for persistent quality control problems are so disturbing that many find it difficult to reconcile them with company leaders’ constant claims that the company has a different organizational culture than the one that was in place when these lapses occurred. GM has reinvented itself, the story goes, and now builds the safest and best cars in the world.

The coming months will tell us a lot about whether those claims are just talking points or if new CEO Mary T. Barra, a 33-year veteran of the company, has truly transformed GM.

Last month Barra told a congressional hearing about the overhaul of GM’s corporate culture. These days, “creating a new culture” is one of the phrases CEOs need to wield to make their way in corporate America. The new CEO is going to push middle management and old timers to think and act differently, shedding its hidebound culture and putting the customer first.

After dominating the U.S. car market for most of the 20th century, the glory days of GM and the American auto industry began to unravel in the early 1970s. GM, for example, had a majority of the U.S. market in 1962 and was the undisputed leader in global car sales between 1931 and 2008. By 2009, this great American icon’s market share had fallen to less than 20 percent.

One reason GM and other American automakers lost their way is because senior management built strategies around the flawed assumptions that oil would be readily available and cheap, and American drivers would continue to buy large vehicles. Given their inflated cost structures, these were the only vehicles American car manufacturers could sell at a profit. On average, GM spent about $1,600 per car more than their foreign counterparts on pension, health, life insurance and other worker and retiree benefits.

The 2008 financial crisis hit the industry hard. U.S. auto sales declined by 18 percent from 16.1 million units in 2007 to 13.2 million units in 2008. Meanwhile, the price of a gallon of gas rose to over $4 in the summer of2008, up from about $2 in 2005. In 2009, the credit crisis, coupled with an already-declining market share, redundant product offerings, huge legacy costs and customer perceptions of poor quality pushed GM into bankruptcy court protection.

By handing GM close to $58 billion under the Troubled Asset Relief Program, the feds became the company’s de facto owner. Washington provided additional help by waiving the payment of $45.4  billion in taxes on future company profits, offering a $7,500 tax credit to consumers who bought the Chevy Volt, the Cash for Clunkers program, and an exemption from product liability on cars sold before the bailout.

In November 2010, GM returned to private ownership by launching a successful initial public offering.

But just as people have distinct personalities, so too do organizations. Transformation takes time.  Culture is the product of the firm’s organizational structure, the system used to reward senior management and motivate and shape employee behavior. Old loyalties, behaviors and identities are hard to change. They produce a massive amount of inertia which has to be overcome.

Does Mary Barra’s long tenure at GM doom her to repeat past strategies and traditions such as the slow response to safety issues? Can a company lifer drive the kind of major change Ford saw after it recruited Alan Mulally from Boeing in 2006 and he pulled the company back from the brink of collapse just two years later?

General Motors again faces the risk of years of costly litigation and a significant loss of brand equity and market share. Hey, no problem. GM is too big to fail.

originally published: May 3, 2014