A report by the independent Wells Fargo & Co. board of directors in the wake of the bank’s customer account scandal is a roadmap for corporate directors, investors, and other stakeholders seeking to strengthen board governance and improve a company’s ethical culture.
1. The board’s role in general business literature is currently defined as oversight, which is too passive. If it is overseeing a crisis but not acting, no one’s interests are served beyond the individual board members who still receive income and retain their position. The board’s role is to help the company. What is it to help the company do? Survive as long as its mission is viable. The board serves the organization.
2. Board members have their own inherent conflicts. They receive pay and perhaps some reputational boost from serving on corporate boards. When they find their own performance lacking, as this report suggests, what should they do? They could clawback their own pay over the years in question. When nonprofit organizations suffer scandal that harms the organization’s reputation significantly, the executive directors are fired and I have also seen an entire nonprofit board dismiss itself, sacrificing talent and historical perspective of the current members in favor of a clean slate for the organization with fresh membership. If corporate boards don’t consider similar action in similar circumstances, perhaps regulators will.
3. Ethics has a metrics complex. Executives cite inability to measure ethics as a reason not to invest in it. Compliance suffers no such issue. There are plenty of discrete measures in the Wells Fargo story — the $60 million spent centralizing the corporate risk function, which did not result in identifying the problem before business results suffered and the brand was severely damaged. Plus, the millions of dollars in outside consultants, which did not prompt the real changes management needed to take. There are more. The financial damages Wells Fargo can tally right now should be enough to make the case that ethics impact business results. Certainly if the company does not exist at some point in the future, the results are in. Why wait? Ethics and compliance are not the same. Companies need to invest in both.
4. Abraham Maslow matters. His time-tested hierarchy of needs is as helpful in business as it is in understanding human security in the world generally. At Wells, we see workers whose very livelihood is threatened behaving badly in mass numbers. More hopefully, some who were threatened stepped forward anyway. But their actions did not register because above them on the corporate food chain were executives with similar insecurities and overconfidence biases. Companies that can uncouple unemployment risk from business practices achieve better outcomes.
5. Star performers need special attention. They don’t benefit from the traditional praise and raise kind of attention. Healthy checks and balances help stars stay aloft. Solid mentorship and creating mechanisms for others to challenge long-time stars from a safe harbor are good places to start. There are too many stories about missteps by those in leadership roles who initially make incredible contributions. Those people must own their failures, but the systems they operate in contribute to them.
6. There is such a thing as ethical systems design. At Wells, a 10-fold increase in account sales over four years was followed by a seven-year decline in those accounts being funded (meaning they were not used, a signal that they were perhaps not wanted). Yet after that 11-year stretch, the board’s risk committee could not define sales-practice integrity as a concern. What are people being motivated to do by the reward systems in place and what have they got to lose if they don’t succeed? Design principles should be used.
7. Crunch the numbers, then act. Data told Wells Fargo it had a problem, but analysis paralysis ran amuck. Even if they ignored it, the Los Angeles Times reporter who broke this story in 2013 did not. This could have been the first clue even if all the other data was dismissed. Yet that 2013 story did not lead to change.
8. The CEO is a company’s chief ethics officer. If he is not willing to invest in basic actions (one model for ethical leadership action can be found here) to signal what is right and good in his organization, no one else is going to be able to do it effectively either, even — or perhaps especially — his loyal lieutenants.
9. Tone at the top really comes from the board. Boards play a significant role in creating ethical cultures (check the current sentencing guidelines if you disagree.) Boards can tie compensation to ethical behavior, alter compensation to align executive and employee interests in shared goals, and acknowledge the impact employees have on reputational risk and brand management. There are tools (we have one at the Markkula Center for Applied Ethics) to assess culture. Boards have no excuse for not doing so, and much can be learned from this practice.
10. Board committees are a being tested as a governance mechanism. At Wells, the audit committee missed this scandal. So did the risk and the compensation committees. There is a breach of the duty of disclosure, that rests on those managers who led the bank into this mess. But there is a built-in bias of groupthink to current board structures and a tendency to skip vetting committee work with rigor. What happened at Wells underscores the need for board diversity in every dimension — ethnicity and gender, yes, but also station in life, past professional experience (someone who had been an internal auditor in a previous life could have made a difference here), willingness to rock boats. Change the group, change the think.
Governance is a key tool of strategy. More and more companies recognize this and are acting on it. For Wells, updating its mission and refreshing the board leadership are good next steps to consider.
The marketplace is more likely to act on values than it might have in the past. Some of this is the influence of millennials, some of it is new business metrics like ESG measures that give us another lens through which to view corporate performance, measuring elements including impact on the environment, organizational sustainability and governance practices.
Ethics is a bona-fide business risk and a separate business function from compliance. Ethics is a CEO and board responsibility, while compliance is typically led by the general counsel’s office. Systems should be evaluated for behavior they motivate and altered if the wrong actions are encouraged by the rewards in place.
Culture is not an amorphous concept with no connection to results or returns. Just as personal character is revealed in crises, so, too, is authentic corporate culture.