This update on the Wells Fargo sales scandle is a great example of how executives set the “tone” of an organization. Unfortunately, in this case the “tone” was that sales were more important than ethics.
WSJ, 9/1/17
” Wells Fargo WFC -0.56% & Co. said its sales-practices scandal was far broader than it had previously acknowledged, ensuring that the bank will continue to face scrutiny about a problem that has weighed on it for nearly a year.”
Heiang Cheung says
I feel like for the finance industry it will always be driven by sales over ethics or what should be done. The housing crisis just happened before this because of the same reason. If they can’t learn from one of largest recession in our history how can they? The fact is that people who run these giant organizations don’t have any serious accountability. The worst that usually happens are they lose their job or the company have to pay a huge fine. Until people are sent to prison I don’t think this type of mentality will change. How could you change the tone of an organization that is controlled by shareholders and all the shareholders want is higher EPS every quarter? Just a thought.
Paul R Needle says
Ethics certainly plaid a part in the Wells Fargo case as well as the financial crises. However, Im not sure it’s fair to say that all financial institutions will favor sales over ethics or even the majority. Its bad a bad business decision to ignore ethics as Wells Fargo is realizing noew. Financial institutions are held to extremely high regulatory standards. Where gross negligence occurs people do go to jail. Also EPS is a a measure for all public companies not just the FI’s. Ethics is a very difficult thing to implement and Wells Fargo was certainly in the wrong. One way that a company can implement ethics and culture is through the HR department. By having ethics aligned in performance goals the HR department can help develop an ethics focused culture with periodic reviews. It’s obvious that the Wells Fargo executives did not integrate ethics appropriately in the performance structure of the company. It’s hard to believe they didn’t know numbers were getting fixed and it’s frustrating to say the least. I just find it difficult to paint all financial institutions as having no ethics.
Vince Kelly says
In addition to an example of setting an (unethical) ‘Tone from the Top’, I think this also could be looked at as a tale of effective versus ineffective incident response and crisis management, (per the IBIT Report from week 2).
Effective Incident Response and Crisis Management Example:
Article from Crisis in Communications Strategies
Analysis
Case Study: The Johnson & Johnson Tylenol Crisis
https://www.ou.edu/deptcomm/dodjcc/groups/02C2/Johnson%20&%20Johnson.htm
Before the crisis, Tylenol was the most successful over-the-counter product in the US and accounted for 19% of J&J corporate profits”
October 1982
Someone replaced Tylenol capsules with cyanide-laced capsules, resealed the bottles and then placed them back on the store shelf. Seven people died. How J&J handled the crisis and its results became a textbook case study of effective crisis management because J&J acted quickly, decisively and in an extremely transparent manner.
As a result, according to the article;
“Today Johnson & Johnson has completely recovered its market share lost during the crisis. The organization was able to reestablish the Tylenol brand name as one to the must trusted over-the-counter consumer products in American. Johnson & Johnson’s handing of the Tylenol crisis is clearly the example other companies should follow if the find themselves on the brink of losing everything. “
Ineffective Incident Response and Crisis Management Example:
From
Wells Fargo now says 3.5 million affected by sales scandal
NEW YORK — Aug 31, 2017, 9:09 AM ET
http://abcnews.go.com/Business/wireStory/wells-fargo-now-35-million-impacted-sales-scandal-49536803
Wells Fargo is now saying 3.5 million customers were affected by its fake accounts scandal, a dramatic increase from the 2.1 million accounts it originally estimated.
After the bank acknowledged in September 2016 that its employees opened 2.1 million accounts without getting customers’ permission, news reports showed that problems at Wells started before 2011, when Wells said the issue began.
The bank then agreed to look for fake accounts going back to 2009.
Wells plans to give an additional $2.8 million in refunds to the affected customers.
Separately, Wells also found 528,000 customers were signed up for online bill pay when they did not ask for it. The bank will give $910,000 in refunds to those customers.
Results as a result of Wells Fargo mismanagement:
From:
Reuters
TIMELINE-Unraveling of Wells Fargo sales scandal
https://www.reuters.com/article/wells-fargo-accounts/timeline-unraveling-of-wells-fargo-sales-scandal-idUSL4N1LJ06R
Sept. 2016: $185 million settlement and $5M in penalties with regulators to atone for the sales abuses.
Sept. 2016: Bank eliminates product sales goals in retail division.
Sept 2016: Carrie Tolstedt, head of the retail division at the center of the sales scandal, leaves ahead of her scheduled retirement on Dec. 31; gets no severance or equity awards.
October 2016: John Stumpf, the company’s chief executive when the scandal broke, announced his retirement in October 2016, following weeks of intense public pressure. Stumpf is forced to give up equity awards worth $41 million and salary.
Oct 2016: Reports 3.7 percent drop in Q3 profit as it sets aside funds for potential legal costs.
Oct. 2016: Appoints new members to its operating committee, and leaders for consumer lending and wholesale banking.
Jan 2017: Q4 profit falls 6.4 percent; says still analyzing whether additional unauthorized accounts were opened in 2009 and 2010.
Feb 2017: Terminates employment of four current and former managers in Community Bank division due to the sales practices. Says none will receive a 2016 bonus and each will forfeit all outstanding equity awards and stock options.
March 2017: Says no 2016 cash bonuses for eight senior executives, including CEO Sloan and CFO John Shrewsberry; reduces three-year equity awards made in 2014 by up to 50 pct for the executives
April 2017: Shareholders rebuke the bank at the annual meeting; offer scant support for a dozen directors, including chairman
July 2017: The Federal Reserve is prepared to act against the directors of Wells Fargo if an investigation deems it appropriate, Chair Janet Yellen said while testifying before the Senate Banking Committee
July 2017: Q2 revenue misses estimates; bank indicates costs may remain elevated in the near term
According to the article, even though the scandal was uncovered nearly one year ago, Wells Fargo has fired senior managers, changed pay incentives for branch staff, separated the role of chairman and chief executive and STILL faces probes from federal, state and local government agencies, including the U.S. Department of Justice, as well as a number of private lawsuits, according to regulatory filings.
Richard Flanagan says
Vince – Very true, we will cover incident recovery and crisis management later in the semester. As you say, they haven’t done a very good job of it. For this week, the learning I want everyone to take away is that a company’s policies and procedures should not just be window dressing. The theoretical basis is that policies and procedures are there to guide employees to acting in the way management expects. Where management is just talking the talk, bad things can happen. The truly sad part of the Wells Fargo story is that the board was not very active in addressing the problems and yet, they all stayed on the board. Makes you wonder if our whole model of corporate governance really works anymore.
Vince Kelly says
understood (and agree). the penalty for ‘talking the talk’ but not ‘walking the walk’ can be severe – in Wells Fargo’s case, it caused massive upheavals and dislocations to employees and the business and there is apparently still no end in sight
….even though the scandal was uncovered nearly one year ago, Wells Fargo has fired senior managers, changed pay incentives for branch staff, separated the role of chairman and chief executive and STILL faces probes from federal, state and local government agencies, including the U.S. Department of Justice, as well as a number of private lawsuits, according to regulatory filings
Pascal Allison says
It is understandable that the essence of most businesses is to maximize profit while employees want their salaries and incentives to look good, but what and how the profit and incentives are gathered play a vital role in realizing those corporate goals. Some actions come with risks. If those risks are not treated with care or mitigated, it will cost expense to increase, reputation, etc.
Wells Fargo had a system in place to safeguard their asset, but to what extent were they implementing the policy and not just driven by profit or incentives. Board of Directors, CEO, and Managers needed to set the path and monitor for implementation and execution.
The case with HBO, on August 17, 2017, a cyber attack on HBO twitter account was successful. Attackers claimed to be testing HBO security. HBO got security in place, but need to test and upgrade their security to safeguard their assets. It is costly and time-consuming, but ethically it right to do. HBO claimed to have fixed it after the penetration. They should be proactive; it might cost more to fix than to prevent. Besides, reputation is on the line.
If there is a policy on testing and monitoring they need to ensure the execution.
http://www.foxnews.com/entertainment/2017/08/17/hbos-twitter-accounts-hacked-in-latest-cyberattack.html