return-of-moneyWe are in October and I am looking forward to my annual exploration of classic monster movies beginning this coming Friday. This year I decided to go back to the roots by watching the 30s and 40s classic Universal monster movies involving the king of the monsters – Frankenstein. While I have thoroughly enjoyed re-watching all the old classics again (and again) about the best my wife can say is that thankfully in only comes one month a year.

I thought about criminal history whilst reading about the clawbacks ordered by the Wells Fargo Board of Directors of $41 million from current Chief Executive Officer (CEO) John Stumpf and $19MM in unvested stock awards from the now retired former head of the consumer banking group, Carrie Tolstedt. Most people wondered why it took the Wells Fargo Board so long to administer this obvious sanction. Indeed, Gillian Tett, writing in the Financial Times (FT) in a Comment piece entitled “Clawbacks emerge as a vital weapon in finance, wrote, “In some respects this seems like too little, too late. The board only imposed this clawback after five Democrat senators wrote a letter to the bank complaining about the issue — and Mr Stumpf delivered a truly dreadful performance in a Congressional committee. It would have been far more commendable if the Wells board had acted before it was pushed.” Gretchen Morgenson, writing in the Fair Game column in the New York Times (NYT) in an article entitled “Executive Pay Clawbacks Are Gratifying, but Not Particularly Effective”, said, “But the move came almost three years after the improprieties came to light — and should serve as Exhibit A for the shortcomings in these pay recovery programs.”

Other than agreeing that the Wells Fargo Board was a day late (if not a dollar short) in requiring clawbacks, the writers very much diverged on the effect of this action they perceived on banks specifically and in the wider business market in general. Tett said this action may well be seen in the future as a “watershed moment” as it marks “the first time that a board has imposed a tangible clawback of this size, let alone against a chief executive.”

Morgenson wrote such actions have been rare and may well continue to be rare in the future. The main reason is that executive compensation “policies are written to cover only a portion of an executive’s pay.” She quoted James F. Reda, managing director of executive compensation consulting at Arthur J. Gallagher & Company, for the following ““Clawbacks extending to all types of compensation are uncommon. They typically only apply to the cash portion and only to the top executives.”” Moreover, she noted, “recoveries are generally restricted to cases in which accounting improprieties are significant enough to force a company to restate its results. Or a company will require clawbacks only if the pay was based on inaccurate financial disclosures. Wells Fargo’s policy contained both of these stipulations, neither of which applied to the account-opening scandal. Instead, the board apparently relied on a third policy” and “That policy covers actions that harm the bank’s reputation.”

Morgenson provided a couple of other reasons Boards rarely order clawbacks. The first is the Board has to find there was misconduct and then determine that the misconduct was material. She cited, “Steven A. Bank, a law professor at the University of California, Los Angeles, and an expert on executive pay, said he was unsurprised that clawbacks are so rare. One major reason, he said, is that corporate directors are typically given enormous leeway in deciding when to pursue them. Unless they are forced to do something, they probably won’t.”

As to the second “element of discretion inherent in clawback programs relates to the board’s judgment over whether any wrongdoing has a material impact on the company. This concept of materiality is famously subjective, giving directors lots of room to determine that improper activities were not in fact meaningful enough to recover pay”. She cited to George S. Georgiev, an assistant professor at Emory University Law School, who said, “The nebulous nature of materiality is a problem in these matters.”

Further, Boards are more accustomed to awarding pay and not taking it away. Finally, there is simply the question of whether the Board members were equipped to perform the job duties of Board member. Morgenson wrote, “corporate directors tend to weigh them in a narrow, rules-based way when they should instead take a broader, more common-sense view.” She quoted Frederick E. Rowe Jr., chairman of Greenbrier Partners, a money management firm in Dallas, for the following, ““directors ought to know bad behavior when they see it. It all comes down to this: Are you doing something to the customer or for the customer?” That seems a pretty simple question. Too bad the Wells Fargo board didn’t think to ask it.”

Yet changes may well be coming. Tett wrote that the Securities and Exchange Commission (SEC) has proposed new regulations which would require companies to institute policies requiring senior executives to pay back incentive compensation which was “erroneously awarded” but these regulations are still two years out from taking effect. But with Congressmen from both parties howling at Wells Fargo, it may well be this remedy is made more forceful by the SEC in response to concerns from Congress.

Tett also had the fascinating idea which should drive abject fear into the heart of any banker. It was that Deutsche Bank could raise $1.5bn of the amount it needs to settle with the US government by recouping “currently unvested compensation awarded to [its] bankers, and cancelled 2016 bonuses.” Now that might well generate enough fear into bankers’ hearts that they might actually follow the law. It might even be appropriate for this scary month of October.


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

© Thomas R. Fox, 2016

neville-marrierSir Neville Marriner died on Sunday. For any aficionado of classical music, Marriner’s contribution to the genre was immense, having founded the chamber orchestra, Academy of St. Martin’s in the Fields in 1958. The group was named for a church in central London where it held its early public performances. According to his obituary in the New York Times, the “group’s recording of Vivaldi’s The Four Seasons was a best seller in 1969, as was its soundtrack to Amadeus, the hit 1984 film about the life of Mozart, which sold more than 6.5 million copies, reached No. 1 on the Billboard classical albums chart and won a Grammy.”

However, Sir Neville was not just a prolific musician as “he also figured prominently in debates over how music from the early modern period — such as the work of Mozart, Bach and Handel — should be played in the present day. He advocated smaller, more agile groups for early music, and he remained committed to playing that repertoire with modern instruments, even as an insurgent movement urged a return to instruments and styles that had been in use in the 17th and 18th centuries.” He “dismissed the insurgents as “the open-toed-sandals and brown-bread set””. “The New York Times music critic John Rockwell wrote in 1987 that Mr. Marriner was “our most stylish conductor of what might be called the centrist early-music movement.””

I thought about his glorious recorded version of The Four Seasons when I read an Op-Ed piece in the Wall Street Journal (WSJ), entitled “The Culture Ate Our Corporate Reputation”, by Lou Gerstner, a former chairman and Chief Executive Officer (CEO) of IBM and RJR Nabisco. He had some very interesting views on what went wrong at Wells Fargo and indeed a wide variety of other companies which have sustained compliance failures. Initially, he noted, “This is not the first time I have seen corporate leaders blame a flaw in the “culture” for major shortfalls in their company’s performance. I believe this represents a serious misunderstanding of how institutional culture is created and the role it plays in defining corporate behavior.”

The problem is not the do what I say, not what I do problem that bedevils many parents but rather problem is “cu Rather it is a derivative. It forms as a result of signals employees get from the corporate processes that structure their work priorities”. This is directly translated into compensation as Gerstner says it “is one of the most important of these processes. If the reward system pays a premium for one kind of behavior, that’s what will determine employee behavior—regardless of the words enshrined in the value statement.”

Gerstner cautions, “If the financial-reporting system focuses entirely on short-term operating results, that’s what will get priority from employees. If you want employees to care a lot about customers, then customer-satisfaction data should get as prominent a place in the reporting system as sales and profit.” He concludes this section by asking the question, “Is it the leaders in meeting financial targets—or is it those who raise concerns regarding marketing programs that give priority to corporate goals at the expense of true customer needs?”

In the area of senior management communications to the troops, Gerstner mandates that not only does the appropriate ‘tone at the top’ have to be set by the CEO, it must be reinforced, followed and not denigrated or changed. He cited to the following example to illustrate this final point, “All too often, the CEO in his or her state-of-the-union address in January will proclaim a commitment to investing in the future, seizing new growth opportunities and accelerating R&D expenditures. And then six weeks later in the middle of February comes a memo from the chief financial officer stating that first-quarter budgets are running behind and all discretionary expenditures are to be put on hold and all new hiring is to be suspended. Now which of those communications do you believe shapes employees’ view of what really matters and, therefore, what they see as the true cultural priorities of their company?”

Another area Gerstner mentioned, yet which is rarely discussed by a Chief Compliance Officer (CCO) or compliance practitioner, is budgeting. Gerstner asks how often “sincere expressions of commitment” to compliance are washed aside when there is a monetary request to follow through with a new technology, risk assessment, gap analysis of internal controls or other compliance related expenditure. He writes, “The budget process is almost as powerful as the compensation process in shaping corporate culture.”

Gerstner believes it is “the cumulative effect of all of these processes: compensation, performance measurement, recognition, etc. that shape what we describe as corporate culture.” He challenges “any CEO who wants to understand the real culture in his or her company: Do not look at the value statement in the new employee handbook. Go deep and understand what each process in the company is telling employees is important. Again, people do not do what you expect but what you inspect.”

For Wells Fargo, it certainly inspected the number of sales made by its employees of banking products and services. “Eight is Great!” was the corporate mantra for the number of products each customer was required to hold with the bank. Employees were measured on it for bonuses, raises, job security; as often as four times per day when their managers would ask them how many sales calls they had made that day.

Gerstner concluded his article with “Don’t misconstrue my message: Creating expectations and communicating goals is a worthy and important responsibility of corporate leaders. But if these are not followed up on by a comprehensive and continual assessment of the alignment of all major corporate processes with those goals, the leaders will be listening to the sound of one hand clapping.”

Compliance professionals would do well to heed this warning. While you are at it, sit down and put on a CD or better yet full album recording of Sir Neville Marriner leading the Academy of St. Martin in the Fields through the glory of Vivaldi’s Four Seasons.

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

© Thomas R. Fox, 2016

Show notes for this week’s edition:

  1. Week long series on Well’s Fargo scandal, click here for Part I, Part II, Part III, Part IV and Part V.
  2. Christina Muehl’s two part series on Corruption, Crime and Compliance on Third Party management of contract extensions and contract termination.
  3. ‘Fat Leonard’ US Navy procurement scandal update. Two defendants ordered extradited from Singapore to the US to stand trial, as reported on the FCPA Blog.
  4. Nu Skin FCPA enforcement action for illegal charitable donation. SEC Cease and Desist Order.
  5. Highlight’s of Jay Rosen’s Weekend Update.
  6. Tom and Jay’s prediction of the Texans v. Patriots Thursday night game.
  7. Update on SCCE 2016 Compliance and Ethics Institute presentations and information. For information on 2016, CEI click here.
  8. FCPA Compliance Report-Episode 279, interview with Adam Turteltaub on SCCE 2016 Compliance and Ethics Institute.

jack-bennyThief (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.