Thief (to Jack Benny): Look bud, I said your money or your life!
Jack Benny: (long pause) I’m thinking it over!
Jack Benny milked the above routine for years. I do not know when he first came up with it but it was just as funny in the 60s as when he became the World’s Stingiest Man. It was the timing of his response and his facial expression that sold the joke that he really was thinking it over. I thought about the Benny routine in the context of Wells Fargo’s toxic sales culture, which was basically sell or lose your job.
I want to end this week’s review of the Wells Fargo scandal by considering what is at issue and what is at stake in this imbroglio. Unlike a Foreign Corrupt Practices Act (FCPA) violation, Wells Fargo paid the relatively paltry amount of only $185 million in this round of fines and penalties. The bank may end up paying much more if other enforcement agencies move to fine the bank for its conduct. Yet here is the kicker, the profits generated by the bank opening some two million fraudulent accounts and products were in the neighborhood of $400,000. It is this final number that I find most stunning.
So let’s run the numbers. Here is a company with a market cap of $234 bn, that engages in fraud that generates it $400,000. Now consider the costs of that fraud to date, we have the initial $185 MM, then we have the reported $60 MM Wells Fargo paid in pre-settlement investigative costs, now add a further $50 MM, per their announcement earlier this month, for post-settlement remediation costs. So far the bank is up to $295 million in costs, fines and penalties. Add to that the $6bn in market cap the company lost since the announcement of the fine. This is where it stands now and it is certainly not going to get much better soon for the bank given its pathetic and even abysmal public response to-date.
Now consider the underlying cause of this stunning amount. It was simply cross-selling of products and services. There is nothing inherently evil, nefarious, bad or illegal in the cross-selling of financial institution products and services. Indeed, when my banker contacts me to tell me about a new product or service, I am always pleased with the touch of such personal service. I meet annually with her to go over my accounts, products and services my bank offers and at that time I also learn about what is newly available. Is she trying to sell me something or offer me a better banking experience? The answer is of course YES to both. But, that is how business is conducted; a seller has something a buyer wants or needs. It does not get more basic than that.
I have never worked in any business where there was not some pressure to perform. As an associate at a law firm, I was expected to bill hours, bill hours, and then bill hours. As a partner at a law firm, I was expected to bill hours and generate business for the firm so the associates could bill hours ad naseum. In every other business I have worked there was always pressure to sell. So it is not pressure to sell that is inherently evil, nefarious, bad or illegal.
It is only when the pressure to perform, whether to keep one’s job, make a salary or earn a bonus becomes so overarching that people engage in illegal conduct. Does anyone think Wells Fargo Chief Executive Officer (CEO) John Stumpf told Wells Fargo employees to create false accounts or saddle customers with products they neither needed or wanted to meet the self-styled motto of cross-selling the companies services and products, “Eight is Great!”? Of course he did not. Did Stumpf even say something along the lines of “Will no one rid me of this meddlesome priest”? Probably not. (At least, not that we know about as yet.)
There was something else going on at Wells Fargo and the most succinct single sentence on it was written by Duke Law School Professor Samuel W. Buell in an article for the online publication Slate, entitled “Prosecuting Wells Fargo Executives Won’t Solve Anything”. Buell said, “As is almost always true with big corporate scandals, the problem at Wells Fargo was not bad apples but a diseased orchard.” Put another way, the culture at the bank was so driven to cross-sell products and services that employees would do anything to meet that culture, specifically engaging in unethical and illegal conduct. Employees were rewarded for meeting that culture and punished for not meeting it. It was the culture of Wells Fargo that was rotten. That culture always starts at the top and that is what CEO Stumpf is guilty on; if not implementing such a sales culture, certainly facilitating it. (AKA eight is great!)
What can or should be done to Wells Fargo? From the regulatory perspective, the company will no doubt pay more fines and penalties. Certainly the bank’s costs in responding to such regulatory efforts will be much greater than its outlay to-date. Yet the current criminal law is not a place that is designed to punish a company that has a rotten culture. As much as Senator Elizabeth Warren may harangue that Stumpf should be criminally prosecuted, it simply is not going to happen. The prosecutions of senior executives in the Enron and Worldcom era involved C-Suite direct involvement in the accounting frauds perpetrated by those organizations. In the financial institution industry, one need only look back further to the savings and loans crisis from the late 1980s to see other types of fraud in the banking industry which did send bank executives to jail but in all those cases the executives engaged directly in the fraud.
Professor Buell believes, “the real reason criminal law has not delivered us from corporate troubles is that it does not have the capacity to do so.” Moreover, the very reasons that the corporate form was invented was to diffuse responsibility and liability. These underlying reasons were, of course, very different in the coffeehouses of 16th century London, where the main concerns were around trade across the globe and a structural entity which would limit losses of English shipping companies. Yet it is that structure which is still with us today.
Does all this mean we should just give up, as some have said, repeal such laws as the FCPA and simply admit that companies will always engage in bribery and corruption? I think the clear answer to repealing the FCPA and not continuing forward with the foremost piece of anti-corruption legislation is that it is not in the interest of the United States to do so. The FCPA was passed, in part, so that foreign purchasers would have confidence that they received the goods and services they contracted for and that US companies would be able to correctly state that bribery and corruption are antithetical to US law. While not foreseen in 1977, it now turns about out that commercial businesses engaging in bribery leads to corruption which has become one of the underlying causes of international terrorism, so for that reason alone aggressive enforcement under the FCPA must continue.
How does a company stop from finding itself in shoes of Wells Fargo going forward? The first thing the Board must do is make a clean sweep, as in sweep out the senior management which allowed the culture to come into being, festering until it affected the entire organization and even after being told about it, allowed it to continue. Is the Wells Fargo Board up to the task? Only time will tell on that score.
This is where compliance comes in, as compliance is that is the answer. The Chief Compliance Officer (CCO) must be given the resources and real authority in the company to ask questions when it is determined that employees broke the law in routine sales transactions. If the CEO will not concern him or herself with the culture of an organization, the Board of Directors must do. The leader should ask, “Are we doing everything alright?”. Even if a company is doing something wrong which is so financially insignificant to not even raise an eyebrow, if it is left to fester and grow the results can become catastrophic. If the $400,000 profit for the two million fraudulent accounts and services is correct that is just over $60,000 profits annualized. What is $60,000 annually to a $234 bn sized company – it is smaller than nothing.
Yet even at a $60 bn company, it turns out that something as simply selling banking products can get an organization into much trouble, cause hundreds of millions of dollars in fines, penalties and related costs and drive multi-billion losses in the capital markets. It was not that the bank was not vigilant as the bank first became aware of the conduct as early as 2009. However, someone at the organization has to care enough to stop illegal conduct before it moves to the scale it did at Wells Fargo. Why no one cared to do so will be something the Board of Directors and the shareholders of Wells Fargo will rue for years to come.
When a corporate culture is so toxic that if you do not meet unreasonable sales quotas, it really becomes your money or your (employment) life.
For a YouTube clip of the famous Jack Benny money or your life routine, click here.
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