Questions for Boards and Management
On April 10, 2017 Wells Fargo released the independent directors’ report on sales practices at its community bank. While the report covers familiar elements of the widely-publicized accounts-creation problems at the bank, it also takes an inside look at the organization to determine what caused the problems in the first place and what allowed them to persist for years before last fall’s regulatory enforcement actions. The report cites the following as principal causes:
- a distortion of the sales culture and performance management and incentive compensation system combined with aggressive sales management and too much autonomy of business unit leaders from corporate executives;
- a former CEO who relied excessively on decades of past success and positive customer survey results and was too slow in addressing the problem and perceiving the substantial reputational risk;
- control functions that were decentralized, reported and deferred to the business and missed the opportunities to analyze, size and escalate the problem; and
- incomplete and inaccurate reporting to the board so that the board did not know that 5300 employees had been terminated for sales practice violations until the information was made public.
In light of the significant disclosures in the report, there is an opportunity for management teams and boards to reflect on their own situations. The report contains lessons for companies in all industries, not just financial services. For those who use the release of the investigation report as the catalyst to explore their own processes and procedures, the following questions for management and the board may be helpful.
For Management Teams
- Organizational Design
- Do we have the appropriate internal reporting structure for functions like risk, human resources and legal and a process to report any material issues to the board?
- Regardless of our structure, do we have a free flow of feedback so that problems are surfaced and solved quickly?
- Do we resist sharing complete information with “corporate” functions or massage the information that is shared?
- Tone at the Top
- As everyone realizes, value statements and guidelines alone do not create an ethical culture. Have we allowed strong financial results to cloud our view of poor leadership?
- Do we rely on a single metric, like the employee survey, or do we look at multiple metrics to determine how well a good “tone at the top” permeates our company?
- What metrics have we chosen as indicators of “tone at the top”?
- Are we appreciative when employees describe problems and concerns or do we discount them, explain them away or delay making changes?
- How do we know that our whistleblower process is an effective method for surfacing issues?
- How well do we train managers at all levels for setting an appropriate “tone at the top”?
- Is there an actual or perceived punitive repercussion to sharing negative information?
- Reputational Risk
- Do we see defects in our processes from our customers’ point of view?
- Is the language we use to describe a problem the same language our customers or the press would use, or do we use softer language that might result in our de-prioritizing a problem?
- Is a one percent error rate acceptable when it means that a very large number of customers have been affected?
- Do we accept a financially immaterial defect without considering the reputational harm to us?
- Connecting the Dots
- Do we address a specific problem as a stand-alone, or do we look to see if there are broader trends, root causes or similar situations elsewhere in the organization?
- Do we have the systems and data to see the problems and recognize patterns over time?
- Whose responsibility is it to gather and make use of that trend information on a regular basis?
- Do we know how frequently we act on it?
- Fixing Problems
- Once we’ve identified a problem, how quickly do we fix it or create a remediation plan?
- Does line management sponsor the remediation and fund the necessary efforts?
- Are there some issues that linger because only a small number of customers or employees complain and the costs to fix the defect are perceived to be greater than the benefit?
- Do our executives have meaningful compliance/control goals?
- Are the compliance incentives built into our compensation programs adequate?
- Sales Incentives
- Do we utilize specific sales incentives too broadly?
- Are we satisfied with the percentage of an employee’s compensation that is a sales incentive?
- Do we review what percentage of employees and groups meets their incentive goals?
- Have we received information from employees that sales incentives are unachievable?
- How would we respond to information that only half of employees meet their sales incentive goals?
- Do we have effective ways to get feedback on whether goals are incenting the wrong behavior?
- Do we know how many employees are disciplined or terminated for “gaming” the sales incentive system?
- To whom is information regarding employee discipline and termination elevated?
- Is our scorecard balanced to consider customer impacts as well as revenue?
For Boards of Directors
A board might begin by asking for management’s assessment and recommendations coming out of the Wells Fargo investigation report. In addition to reviewing and discussing those responses, the board might raise additional topics in executive sessions of the full board or the relevant committees or as part of the annual evaluation process. Board chairs and heads of committees might consider leading the discussions themselves or may wish to use a moderated discussion facilitated by an executive such as the general counsel, the chief risk officer, or the head of human resources. What’s important is selecting an approach that fits the board culture and creates an atmosphere of candor and self-reflection. Here are a few topics that might be relevant:
- Separate Board Chair
- Is there a separate board chair? If not, should there be a change?
- Clear Responsibility
- Who has responsibility for ethics and integrity?
- Is it a committee or the whole board?
- Does the Board have sufficient information on customer relationships, including customer complaints?
- Do the Audit Committee and the Board get enough information on hotline calls and whistleblower investigations?
- How should the Board assess and monitor the company’s compliance culture?
- Does it make sense to have risk oversight as part of the Audit Committee charter or is there a need for a separate risk committee?
- If there is a separate risk committee, how is risk oversight allocated and information shared between the committees?
- Management Accountability
- Who reports to the board on compliance and risk issues?
- Is it the control groups or the business leaders?
- Are the reports to the board and the relevant committees detailed enough for the board to assess the scope and pace of the company’s efforts and track whether timelines and milestones are being met?
- If the board believes that compliance projects are languishing, how successful has it been in getting management to accelerate progress?
- Does the board get enough information on whether the CEO or direct reports are strong ethical leaders?
- Does the board get sufficient information about the business?
- How and when is this information provided?
- If the board is dissatisfied with a leader’s performance, how receptive is the CEO to the board’s feedback?
- Is there enough “teeth” in the compliance and leadership goals of the senior executives?
- Is the oversight of compliance risk management below the senior executives sufficiently rigorous?
- Would information on reasons for employee terminations and employee turnover be useful to that oversight?
- Will any compensation clawback apply in cases where executive actions cause substantial reputational harm?
A company’s commitment to an ethical culture and a board’s commitment to strong risk management oversight are complementary and mutually reinforcing. No single exercise or effort by either management or the board will be sufficient in itself. However, a willingness to self-assess and enhance before problems surface will undoubtedly advance both culture and oversight.
 For reference, according to the Spencer Stuart Board Index, 27% of S&P 500 boards had an independent chair in 2016, up from 21% in 2011, but a 2% decline from 2015.