It took a seemingly long time for the board of Wells Fargo, a US Bank, to act on the cross-selling scandal. When they did, they first fell short of what was expected. The board initially meted out a strong rebuke to its Chairman and Chief Executive Officer John Stumpf, but did not sack him. The bank announced Stumpf had agreed to forgo all unvested equity awarded to him, worth some $41 million (an action first proposed by Stumpf himself) and not take his 2016 bonus. He was not to be paid a salary during an independent board investigation into the cross-selling scandal and he was to recuse himself from all deliberations related to this issue. The criticism continued to mount and five weeks after the scandal erupted, Stumpf stepped down.
Cross-selling has been integral to Wells Fargo’s success. In fact, retail banks globally, including in India, benchmark their performance on cross-selling to Wells Fargo. But slowly the practices became aggressive, spread across branches, leading to Wells Fargo’s opening some two million potentially fake bank and credit card accounts. It now appears this was first spotted as early as 2011 and widely reported within the bank since 2013, but was allowed to simmer — resulting in more than 5,300 employees being sacked. Clearly the problem was systemic.
Wells Fargo is just one of the handful of companies that has clawed back compensation. Clawback refers to taking back compensation linked to profit that is derived from illegal activity. Admittedly, clawback from an existing employee is easier than from someone who has left the company, which needs the courts to get involved. The management’s initial reaction, rather than facing up to its mistakes, was to push the problem down to the rank and file. When heat started to build, the board felt that the clawback in compensation will help put the problems behind. But given that the problem had spread across the length and breadth of the bank, meant otherwise. The senior management finally shouldered the blame. As Lucy Kellaway of Financial Times put it: “If one employee offends against the bank’s vision and values it’s their fault. If 5,300 do, it’s the bank’s.”
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While the Wells Fargo cross-selling abuse is dominating headlines these days, the Volkswagen emission scandal roiled the company around this time last year. Volkswagen had programmed its diesel vehicles to “cheat” on the emission tests. About 11 million cars were “fitted with the defeat device”, spewing noxious fumes into the atmosphere.
What followed after the scandal surfaced is similar to the script we have seen play out in Wells. Martin Winterkorn, the CEO, initially attributed wrongdoing to a handful of his juniors, and only after the scale became apparent — and the share price lost over 30 per cent of its value — that he resigned as the CEO.
Again, like in the case of Wells, this scandal had been fermenting for a while. European researchers had spotted this discrepancy as early as 2011, but were brushed aside as being technical glitches.
While the unanswered question in both these examples is what the board knew and when, these episodes bring to focus corporate culture — something that (Indian) boards should pay attention to. This includes the impact the incentive structure might have on corporate culture.
The financial crisis highlighted the importance of the incentive structure. Before the financial crisis, swathes of traders shared immediately in profits, for putting in place structures that would take years to pay out. This prompted risk-taking behaviour that finally led to the blowout. Incentive structures must have a healthy mix which rewards not just the short-term, but also long-term thinking. A clawback need not be off the table, but being difficult to enforce, the Reserve Bank of India’s solution of putting in place a staggered pay structure, where a portion of the incentive is paid after a fixed time frame, is worth emulating.
In the case of Wells, the pressure to cross-sell was so severe, that the employees resorted to unethical behaviour. For Volkswagen, the dynamics were different. The company needed to replace ageing factories if it did not find the right engine, which put huge pressure on the engineers to design fuel-efficient, low-emission engines. In both companies, the corporate culture allowed — and possibly promoted — such egregious behaviour, by letting performance targets reign supreme.
Suffice to say, risks no longer reside on the balance sheet — they can come from the sovereign (for example, Brexit), market, social media, supply chain… just about anywhere, and also employees. In times of uncertainty, it is corporate culture that protects the organisation. What are the value systems that the company encourages and equally discourages?
While as a concept, corporate culture is amorphous, employee behaviour plays an important role in enhancing business performance, ensuring regulatory and process compliance and protecting the company’s reputation. Admittedly, the tone and tenor is set at the top. But what happens outside the C-Suite, is just as important as what happens within.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
