Executives love to extol the virtues of their corporate culture, announcing to the world how the enterprise is more than just seeking the last dollar of profits. But several incidents in recent weeks make it clear that all too often, companies have a hard time acting ethically when that gets in the way of making more money.
Striking this balance could soon become even more challenging, as the prospect of less government enforcement might encourage management to test the limits of acceptable behaviour. Wells Fargo released a report detailing an investigation into the sales practices that led employees to open bogus accounts to meet aggressive sales targets. The report noted that the leaders of its community bank division “distorted the sales model and performance management system, fostering an atmosphere that prompted low quality sales and improper and unethical behaviour”.
Using customer information to open fictitious accounts would certainly seem to qualify as something more than “low quality sales”. Yet when the Los Angeles city attorney sued Wells Fargo in 2015 over the accounts, its chief executive, John Stumpf, wrote in an email, “Did some do things wrong — you bet and that is called life. This is not systemic.”
When called before the House Financial Services Committee in 2016 after the bank settled charges by paying $185 million, Stumpf maintained that nothing was really wrong. In a statement, he proclaimed that “wrongful sales practice behaviour goes entirely against our values, ethics and culture,” while shifting the blame to lower-level employees.
But the new report took a less sanguine view of Stumpf’s leadership, using the typically restrained language of corporate investigations to note that he “failed to appreciate the seriousness of the problem and the substantial reputational risk to Wells Fargo.”
The bank will claw back an additional $75 million in compensation from him and the former head of community banking. That sounds like a lot of money, yet Wells Fargo’s executives were richly rewarded for years, and the report largely exonerates current leadership. Nor did this problem suddenly emerge.
There were indications years earlier that employees were acting improperly to meet sales targets, though nothing was ever done to address the issue until regulators finally took action. As much as Wells Fargo might vow to change its culture, the pressure to deliver results may be enough to prevent any real change.
Clawing back a bit of compensation from former executives is unlikely to deter this type of misconduct in the future.
It is not clear that sacking people makes a difference, either. On April 11, KPMG announced that it had fired five partners and an employee who received confidential information about impending inspections by the Public Company Accounting Oversight Board, the main regulator for accounting firms. The information gave the firm advance notice to clean up any potential flaws in audits it conducted at companies that would be targeted, which might help improve an auditing record that has been hardly stellar the last two years.
An editorial in “The New York Times” pointed out that “the proper response to fearing a bad grade is to improve performance, not succumb to the lure of cheating on the test.”
Among those terminated was the head of KPMG’s audit practice in the US, a crucial position to ensure that it meets the high standards of the profession. These were not lower-level employees caught cheating, which might have allowed KPMG to claim the misconduct was traceable to mere “rogue” employees.
Pinning the blame for bad behaviour on others is common practice in the corporate world. That was the explanation offered by Volkswagen’s chief executive in the immediate aftermath of revelations that the company used defeat devices to evade emissions standards — it was just a few rogue engineers behind the scandal.
We now know that senior management knew of Volkswagen’s cheating for years. Companies and the Justice Department often refer to the “tone at the top” as a way to develop a good corporate culture. Barclays Bank will need to figure out how the actions of its chief executive, James E. Staley, will affect its culture as it deals with the revelation that British authorities are investigating him for trying to unmask the identity of an anonymous whistle-blower.
Staley’s actions raise troubling questions about whether the bank’s leadership reflects a “do as I say, not as I do” mentality.
Beyond the tone set by current management, it will require those with ultimate ownership of the company to decide how its culture will develop — and how much corporate profits will drive that decision. And, of course, there is the recent incident on a United Airlines flight, when a passenger was forcibly removed because his seat was needed for company employees. Several apologies have since been offered, but the initial response of United’s chief executive was to defend what happened, including a description of it as “reaccommodating” the person.
Subsequent corporate promises not to violently remove a paying customer sitting in an assigned seat hardly show any significant change in United’s attitude.
How corporate misdeeds come to light can seem almost random, sometimes depending on whether there is a damning video or someone willing to come forward to blow the whistle on misconduct. Yet the government plays an important role in policing corporate misconduct by uncovering violations, like those involving financial firms, and prosecuting others when necessary.
But whether the federal government will continue to investigate corporate wrongdoing is an open question. Recent memorandums issued by Jeff Sessions, the attorney-general, require federal prosecutors to focus more on combating violent crime and immigration offences.
With looming cuts to the Justice Department’s budget, it is fair to infer that investigations of white-collar crimes, especially those involving corporations, will diminish over the next few years as resources are put toward higher priorities. The Securities and Exchange Commission may also recede from focusing on corporate violations.
The incoming chairman, Jay Clayton, has questioned whether companies should face large fines when shareholders ultimately pay the price for corporate penalties. Instead, he argues that greater attention should be paid to pursuing individuals in a corporation who are responsible its misconduct.
One potential problem with that approach is that executives are rarely involved in day-to-day decisions that can result in liability, so aiming at middle managers is unlikely to have any real effect on changing a corporate culture.
Warren E. Buffett once said, “It takes 20 years to build a reputation and five minutes to ruin it.” Let me offer a corollary to that: It takes five minutes for the true nature of a corporate culture to emerge, and 20 years to change it.
Whether there will an impetus to make those changes, especially when it can hurt profitability in the short term, remains to be seen.
— New York Times News Service
