run-on-the-bankCorporate culture is singular to companies. Yet it also varies from industry to industry. I have been considering why the Wells Fargo scandal has engendered such public outrage. You could consider many factors, such as the abysmal leadership of both the bank’s Chief Executive Officer (CEO), John Stumpf, to the anemic performance of the company’s Board of Directors. Yet many other companies have engaged in far worse conduct, such as the General Motors (GM) ignition-switch scandal, where there were actual deaths. Even the recent pharmaceutical pricing scandals involving Valeant, Mylan Labs and even Martin Shkreli did not engender the public outrage where both Houses of Congress, on both sides of the aisles, castigated CEO Stumpf during his Congressional testimony.

I think a key difference that the company seemed to have long forgotten is that a bank’s reputation is built on something far different than almost any other commercial endeavor, it is built on trust. People trust that their money will be there when they go to take it out. From the earliest days of banking in the west, banks succeeded because people believed their money was safe. One need only consider the run on the bank scene from Walt Disney’s film version of Mary Poppins.

Jon Henley, writing in an article in The Guardian, entitled “Show us the money”, described the scene as follows. Mr. Banks son, “Michael, understandably reluctant to entrust his precious tuppence-worth of pocket money to a baritone banker with full backing orchestra, protests, prompting the other customers in the bank to take fright and frantically begin withdrawing their lives’ savings. This in turn forces the Dawes, Tomes, Mousely, Grubbs Fidelity Fiduciary Bank to temporarily suspend trading. The children’s unfortunate father, who – perhaps tellingly – is called Mr Banks, faces disciplinary action and is eventually fired for triggering the first run on the bank since 1773.”

If you want a more tangible recent example of why banks are built of trust, consider that in his first 100 days, one of the key elements of Roosevelt’s New Deal was to declare a ‘bank holiday’. When the banks reopened Congress had passed the Emergency Banking Act, combined with the “Federal Reserve’s commitment to supply unlimited amounts of currency to reopened banks, created de facto 100 percent deposit insurance”. This restored American confidence that they could get their money when they demanded it.

One might think we have progressed from 1890s England or even the 1930s Great Depression in America. Banks and banking have certainly changed. Before the scandal which befell it, Wells Fargo was worth some $240bn, which is certainly a far stretch from the publics idea of a neighborhood bank, it is a worldwide financial services organization. Yet many people still ascribe the values of our parents and great-parents to what we think a bank should be and how it should conduct itself. This seems to be a lesson which was long-lost on Wells Fargo senior executives and its Board of Directors.

While most of the commentary has focused on CEO Stumpf and his attempts to blame the Wells Fargo culture on the ‘rogue 5300’ employees who were fired for falsely creating customer accounts, the Board also has a role to blame in all of this. For instance, what exactly was the Board of Directors doing other than awarding massive bonuses to both Stumpf and the former head of the consumer banking unit where the fraud occurred, Carrie Tolstedt?

Jaclyn Jaeger, in an article in Compliance Week entitled “Board Checklist: What Every Director Should Know”, reported on a panel discussion at the Association of Corporate Counsel’s Annual Meeting, which included Amy Hutchens, who suggested four areas of inquiry a Board of Directors should ask of the company’s Chief Compliance Officer (CCO). One of those areas was culture.

This area of inquiry should focus on the culture of the organization regarding compliance. Board members should have an understanding of what message is being communicated not only from senior management but also middle management. Equally important, the Board needs to understand what message is being heard at the lowest levels within the company. Some of the questions a Board should ask in the area of culture are:

  • How does the board know (how does company measure) the cultural integrity of the organization?
  • How it is culture communicated across the organization?
  • How are employees at the lowest level of the company what message is being perceived on ethics and compliance?
  • When was the last time the company measured its ethical culture?
  • Is it time to survey or re-survey the company on culture?
  • If the company has grown through acquisition, when and how are you going to send the message to unify that culture?
  • What message would the board like to send on culture and even ethics and compliance?

Imagine if Wells Fargo had made inquiries into the fraudulent accounts and financial products which were created by employees. When CEO Stumpf testified before Congress he told the Board about the issue in 2014. Of course the Los Angeles Times had broken the story publicly in 2013 and we know that Wells Fargo had been aware of the problem as far back as 2009. What questions did the Board ask the CEO when he made the Board aware of the problem? Did the Board make an inquiry with the CCO? Who at the company is charged with keeping tabs on the bank’s culture? With the mantra of “Eight is great!” for product marketing requirements, the culture was seemingly overwhelmed by the mandate to sell, sell, sell.

Just as Volkswagen (VW) seemed to forget that as a German auto manufacturer, it stood for quality; just as Valeant and Mylan Labs forgot that as pharmaceutical companies, they stood for making the public healthier; Wells Fargo forgot that the banking business is based on trust. It may well be a long time before anyone trusts Wells Fargo again.

 

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

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