Edward Albee died last week. To my mind he was right up there with Arthur Miller and August Wilson as one of America’s greatest playwrights of the second half of the 20th century. His works were known, as noted in his New York Times (NYT) obituary, as “psychologically astute and piercing dramas explored the contentiousness of intimacy, the gap between self-delusion and truth and the roiling desperation beneath the facade of contemporary”. I would simply call them gut-wrenching. After the first time I saw Who’s Afraid of Virginia Woolf I recall leaving the theater feeling as if I had been psychologically worked over with a wet mop. It was certainly the last time I saw one of his works for weekday entertainment, at least seeing one of his play’s on Friday or Saturday night gave me a day to work off the psychic hangover.
I thought Albee and his type of works would make a very good introduction to a multipart series I will be writing about the Wells Fargo cultural miasma which led to the recent $185MM fines levied by Consumer Finance Protection Board (CFPB) ($100 million), the largest in the agency’s short history. Another $85 million was tacked on by paying $35 million to the Office of the Comptroller of the Currency and $50 million to the City and County of Los Angeles. The total fines were assessed based upon the bank’s conduct of opening over 2 million bank and credit card accounts, usually without customers’ knowledge.
The fraud was all domestic so there were no Foreign Corrupt Practices Act (FCPA) violations. However, the actions which led to this record breaking fine, the actions of Wells Fargo during the violations and thereafter may well be one of the best teaching moments for any FCPA compliance practitioner around a variety of issues related to FCPA compliance. Today I want to look at the sales strategy and compensation structure which led to the scandal.
The sales strategy under which Wells Fargo came to such grief is simple and even benign, cross-selling of products. As noted by Rachel Louise Ensign, writing in a Wall Street Journal (WSJ) article entitled “Banks Simple Strategy Gets Tangled”, “the concept sounds simple enough. If a customer has a checking account, why not sell him a mortgage, wealth management services and credit card as well?” She went on to write, “with banks becoming larger over the past two decades, cross-selling has become a mantra.” You can also think of the cross-selling McDonalds engages in every time you buy a Big Mac when the representative asks you “Would you like french fries with that?”
Yet there are other reasons for engaging in this type of business practice. Each and every time a company has a touchpoint, particularly a commercial touchpoint with a business, it strengthens the relationship. According to Gary Silverman, writing in the Financial Times (FT) in an article entitled “John Stumpf, the Labrador of Main Street” , Wells Fargo’s Chief Executive Officer (CEO) “Mr Stumpf’s take on traditional Wells teaching was to promote deeper, more frequent contact with the people it serves. “If there’s one word to describe this company, it’s ‘relationship,’” he told the Financial Times in May. “What we’re trying to do is make sure that every team member, in every interaction with a customer, gets it right. If we don’t get it right, we try to make it right, really quickly.””
So what starts off as a legitimate, legal and beneficial business strategy becomes not only high risk but illegal because of the manner in which Wells Fargo administered its approach to cross-selling. As with any sales initiative, if a company wants to push it, it will set up incentives for the sales team to engage in such behavior. This can be done by increasing commissions around the service or product being emphasized, such as the banks products. Ensign noted, “Banks have tried to create incentives for cross-selling.” At some banks, “Branch employees can get bonuses—sometimes 10% or more of their salaries—when they sell additional products.” Companies can also increase sales by making clear that you will be evaluated on how much you sell a product or service. In other words, whether you receive a bonus, pay raise or even keep your job will be evaluated, in some part, on how much you cross-sell.
You can even have a hybrid of the above, which may be the worst of all worlds. At Wells Fargo, employees were evaluated for continuing employment by supervisors on cross-selling. Yet they did not receive the same financial incentives to make such cross-selling. Branch managers and supervisors could receive bonuses of up to $10,000 per month for meeting cross-selling quotas when employees who hit their monthly quotas, received, in addition to continued employment, $25 gift cards.
Last week Richard Bistrong wrote a piece in the FCPA Blog, entitled “Wells Fargo stretch goals brought out the sandbaggers”, in which he discussed stretch incentives as a process that could lend itself to abuse. While there will always be a dynamic tension between operations, in the form of the sales force, to lower sales projections so that goals set can be more easily met (called: sandbagging) and the corporate office, which wants to set higher goals to generate more overall revenue, I do not think that the Wells Fargo matter is one of such sandbagging.
I think the Wells Fargo case is broader with multiple corporate failures. Emily Glazer and Christina Rexrode, in a WSJ article entitled “Wells Boss Says Staff at Fault for Scams”, wrote of one former employee who said, “a former Wells Fargo teller in Pennsylvania, said of responsibility for the sales tactics, “It was all management: their boss, then their boss, then their boss.” Ms. Bhowmick took early retirement from the bank in 2014 at age 58. “They are putting pressure on employees, and it’s sad,” Ms. Bhowmick added. “People need their jobs.”” When you put people’s job on the line, they will usually do whatever it takes to keep it.
The learning point for this blog post is risk assessment and risk management. If you put a selling system in place that says if you do not meet your quotas, you are history; that is the message your employees will take home. It really does not matter what the CEO says the culture is or what he or she aspires it to be. Do I think CEO Stumpf ordered this draconian a system from on high? Not much chance of that as he was quoted, by Glazer and Rexrode, as saying “the bank doesn’t want a dime of income that’s not properly earned.”
This is why a risk assessment must look beyond simply what is being sold to how it is being sold. Tomorrow we will consider the culture of Wells Fargo and how you, as compliance practitioner, might use the bank’s failing to improve your own corporate culture.
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© Thomas R. Fox, 2016