Professionals cannot operate with a singular mindset; they must see their whole ecosystem and how they affect it. Similarly, organisations are part of a bigger ecosystem and contribute to the degree to which it is functional.
In the last number of years, we have seen a significant increase in focus on the role of auditors and their complicity in the never-ending corporate failures. To the discerning observer, it is however clear that the question ‘where were the auditors?’ has funnelled society’s attention through a narrow lens that has led to a disproportionate apportionment of blame. What is lost in our tendency to be happy with finding a scapegoat and seeing that the culprit punished, is that we become blind to the role other culprits have played. Sometimes this one-dimensional view is created deliberately to deflect attention and those who should be woke and recognise the deflection, like the media, get swept away in the current. To understand why we remain vulnerable to corporate failures we must look through multiple lenses that include the full landscape of the governance ecosystem.
An ecosystem is a network of interconnecting and interacting parts. In the context of governance, to ensure a strong ecosystem, there must be a deep understanding of who all the role-players are and how they affect each other. Ecosystems are complex, interdependent, and certainly not linear. Herein lies the challenge. The role-players themselves must understand how they are connected to the others and how the dynamics and interactions among them play out. This includes understanding that you cannot single out one role-player in an interconnected system and place all the blame on the one without highlighting the accountability of the others. Systems in which the negative effects of some role-players go unnoticed are prone to remain dysfunctional and become timebombs.
To illustrate my point, I will use Wells Fargo as an example of how a host of role-players contributed to the scandal. It shocked society primarily because the bank had previously been classified as one of the best-governed organisations in the US. Wells Fargo is one of the few recent examples where insight was made possible through a publicly available report based on an investigation commissioned by the bank’s board. Organisations often tend to guard those internal reports like hawks, hiding the full scope of the systemic breakdown.
Wells Fargo had all the right elements in place that you would expect in a functioning governance system. Fortune magazine praised Wells Fargo for ‘a history of avoiding the rest of the industry’s dumbest mistakes’. American Banker called Wells Fargo ‘the big bank least tarnished by the scandals and reputational crises’. Wells Fargo ranked 7th on Barron’s 2015 list of the most respected companies and it has been listed among Gallup’s great places to work for multiple years, with employee engagement scores in the top quintile of US companies.
The bank had maintained an ethics programme, employee handbooks explicitly stated that splitting a customer deposit and opening multiple accounts to increase incentive compensation is a sales violation, as well as a whistleblower hotline, and the senior management incentive systems had protections consistent with best practices. However, when news of the scandal broke in 2016, the bank was accused of cross-selling, violating the basic ethics of a banking institution.
It is not a good governance structure that makes the ecosystem functional, but the behaviour of those to whom the roles have been allocated. Even with strong governance structures in place, nobody recognised the systemic nature of the problem that was a timebomb waiting to go off and nobody took adequate steps to defuse the bomb. The end result was that the fallout cost Wells Fargo not only significant reputational damage, but it had to fork out millions to settle lawsuits and civil claims and a $1-billion settlement with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency.
Who should be held accountable? The initial scapegoat was 30 employees who were fired, and then thousands that followed. Eventually some boards lost their positions due to a vote of no confidence by investors, the CEO had to step down and the head of division went on retirement (with a nice golden handshake). But what about the rest of the role-players?
The players in the ecosystem
- Senior management and the board of directors struggled to find a balance between recognising the severity of the bank’s infractions, admitting fault, and convincing the public that the problem was contained.
- The board claimed that they were misinformed. It is unclear whether they interrogated the reports given to them well enough, especially in the light of the fact that this was a significant industry-related risk.
- The audit, risk and HR committees received submissions that did not raise integrity concerns. However, previous committee materials for the audit committee did reference sales conduct or ‘gaming’ issues.
- The chief executive officer did not appreciate the scope and scale of sales practices violations and then minimised and understated the problem to the board.
- The chief financial officer refuted criticism of the bank’s sales system.
- The chief operations officer did not view sales practices or compensation issues as falling within her area of responsibility. She viewed sales gaming as a small, contained and known problem.
- The head of retail was obsessed with controlling negative information about the bank and she rejected the view of senior regional bank leaders that the sales goals were unreasonable and led to negative outcomes and improper behaviour.
- The legal department did not connect the dots of sales integrity issues they had to deal with to a systemic breakdown.
- Human resources had relevant data but did not connect the dots on sales practice issues.
- Operational management published performance scorecards that created pressure on employees to sell unwanted or unneeded products to customers and to open unauthorised accounts. They also tolerated low-quality accounts and saw them as a necessary by-product of a sales-driven organisation.
- Risk management was decentralised, which created a disconnect between the central chief risk officer and group risk leaders.
- Internal audit did not investigate the root cause of unethical practices. They felt it was the responsibility of management and risk to evaluate the operation of incentive compensation plan design in practice. Internal audit’s methodology for testing culture was not systematic enough and they rated culture as ‘strong’ in 2013 and ‘satisfactory’ in 2015.
- Internal investigations raised the red flag when they noticed an increase in integrity cases. A task force was created to investigate sales integrity. A report was prepared in 2004 highlighting that employees felt that they could not meet sales goals without gaming the system, that employees cheat because they fear losing their jobs if they do not meet their performance expectations, and that Wells Fargo had been losing unemployment insurance cases with judges making disparaging remarks about the sales incentive system. The report warned of reputational risk and recommended that the bank reduce or eliminate sales goals for employees. The report was handed to senior managers, but there is no evidence that it was escalated further. The head of investigations did not include root causes of sales integrity in subsequent reports stating that he had repeatedly raised the concerns, but the issues were not addressed. He gave up.
- Employees feared being penalised for failing to meet unreasonably high goals but opted to cheat to keep their jobs instead of sounding the alarm bell.
The role-players in the ecosystem not mentioned in the published report commissioned by the board were:
- The external auditors who had served Wells Fargo for more than 85 years and knew about the illegal activities but did not think they were that big of a deal. They blessed Wells Fargo with a clean audit opinion and found that the bank had maintained effective internal controls.
- The shareholders initially re-elected all 15 board members, who ran unopposed after the scandal came to light.
- The regulators imposed hefty fines, but lingering questions remain about their supervisory role in the context that the industry was constantly dealing with lawsuits, and in the light of the disparaging remarks of judges in court judgments.
- Professional bodies have an important role in protecting the interest of the public. A number of professional bodies would have been affected. It is unclear whether any of the professionals were held accountable by their respective professional bodies.
Other external stakeholders and the broader public are part of the ecosystem and should be asking for better regulation and accountability when they become aware of loopholes.
It is clear from the Wells Fargo case that dysfunctional ecosystems are timebombs waiting to explode. There was hardly a role-player in this ecosystem that did not contribute to the building of the timebomb. What is clear, though, is that accountability cannot only knock on one door and that culture should be high up on the board’s agenda.
References are available on request
Dr Claudelle von Eck is the founder of Brave Inflexions. She is an experienced Executive and Non-executive Director and has served on numerous international and local oversight bodies and committees