Give shareholders more say in picking directors

The recent Wells Fargo fraud scandal over its sales practices has once again placed corporate governance in the public eye. While the firm has agreed to pay $185 million in fines for opening 1.5 million bank accounts and 565,000 credit card accounts without customer’s permission over the past five years, it has not admitted misconduct in committing fraud against its own customers.

The notion of accountability is becoming an endangered species. One of the reasons is how common it is for a single person to serve as CEO and chair a corporation’s board of directors.

Last week with public criticism spreading, class-action shareholder lawsuits, a U.S. Labor Department review, moves by California and Illinois to stop doing business with the firm and bipartisan pressure from lawmakers, the board of directors of Wells Fargo, the country’s third largest bank, finally took action. They announced that Chairman and CEO John Stumpf would forfeit about $41 million stock awards, forego his salary during the inquiry, and receive no bonus for 2016.

They also announced the immediate retirement of Ms. Carrie L. Tolstedt, the former senior executive vice president of community banking who ran the unit where the bogus customer accounts were created. She will forfeit $19 million in stock grants and receive neither a bonus this year nor a severance package. Tolstedt should still be able to squeak by; she made $9 million in total compensation and her accumulated stock is supposedly worth over $100 million. If one is going to hell, then best to go first-class.

Then this past Wednesday, John Stumpf abruptly announced his retirement.

Corporate boards are supposed to be the centerpiece of corporate governance. Holding both roles creates an inherent conflict of interest. For instance, key among the board’s roles is selecting, overseeing, and evaluating the CEO. How can that happen when the CEO heads the board?

In the United States, it is estimated that half of public companies have one person serve as both CEO and chairman. Boards need real independence to exercise real oversight and that starts with the chairman. There could be no better time to get real and make a case for unbundling the two positions.

In recent years, public confidence in board independence has been undermined by an array of scandals, fraud, accounting restatements, backdating options, and CEO compensation abuses. These issues have highlighted the need for boards to be fully independent and free of conflicts to protect shareholder interests.

For this reason, the separation of the chairman position from that of CEO job is the model of corporate governance in most European countries. More than 90 percent of the Financial Times Stock Exchange 100 companies have long had distinct roles for the CEO and the chairman. The goal is to keep the two roles separate in the interests of proper and strong oversight of corporate activities including the firm’s culture, CEO evaluation and compensation, not to mention keeping the CEO’s XXL ego in check.

Boards of directors are designed to represent shareholders and provide a critical check and balance on corporate management. Still, it must be acknowledged that board directors have little individual accountability to shareholders because the latter have little influence on who serves on corporate boards.

Prior to the annual shareholders’ meeting the board proposes a slate of nominees. Board candidates are typically nominated not by shareholders but by the board. When new members join, they are joining a board with already established norms.

Instead of merely being able to vote for or against directors nominated by the board’s nominating committee, the time has come to allow shareholders to nominate board members.

The recent Wells Fargo scandal is just the latest reminder that splitting the roles of CEO and chairman of the board is the place to begin the development of independent boards that will produce better oversight, checks and balances, transparency, and disclosure through adequate independence of boards of directors.

Originally Published: Oct 14, 2016

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