Archive for the ‘Conflict of Interest’ category

The Week in Ethics: Wells Fargo’s Next Move? 10 Suggestions

September 22, 2016

Update: See my 12/10/16 Business Ethics column on Where Wells Fargo Goes From Here .

Update: In October 2016 Timothy Sloan replaced Chairman/CEO John Stumpf, becoming CEO and President. The chairman role was split and given to independent lead director Stephen Sanger.

Update: September 27, 2016: Wells Fargo Independent directors issued a statement  they will lead an investigation into “the bank’s retail sales practices and related matters” with the Board’s HR Committee and independent counsel. Chairman/CEO John Stumpf to forfeit $41 million unvested equity awards and “will forgo salary during the investigation.” The U.S. House Financial Services Committee will hold a hearing on bank’s “unauthorized customer accounts” on 12/29/16.

How will Wells Fargo resolve the ethical and culture issues it faces? And, how will it move beyond a poor showing at the Senate Banking Committee hearing and start to rebuild trust? First some background. Then 10 suggestions.

The best thing a CEO with strong convictions about the “rightness” of his/her own position can do when embroiled in a crisis is to spend time with trusted sources (inside or outside their company) who see things very differently. Being open to these viewpoints and questions iphone-pictures2-222and multiple perspectives raised make it harder for  CEOs to stay wedded to their position. However, once a CEO is under fire the temptation to stick with like-minded people can increase. What’s lost then is stimulation to think deeply about different aspects of an issue to gain new insights and awareness that enable developing alternatives legitimately aligned with values. Being stuck in “rightness” can lead to error blindness, a term popularized by Kathryn Schulz  who points out, “Trusting too much in feeling you are on the right side of anything is dangerous.”

It can lead to decisions that put a CEO on the defensive in front of a U.S. Senate hearing, as John Stumpf Chairman and CEO of Wells Fargo experienced September 20, 2016 testifying before the U.S. Senate Committee on Banking, Housing & Urban Affairs.

Stumpf was questioned about the bank’s unauthorized accounts and allegations of a pressure-cooker sales culture which became public in 2013 (Los Angeles Times story) and continued. Wells Fargo has fired 5,300 employees, paid a fine, faces an investigation into its sales practices by New York and California federal prosecutors and can anticipate an upcoming hearing by the U.S. House Financial Services Committee in addition to follow up from the Senate Banking Committee. Earlier this month The U.S. Consumer Financial Protection Bureau filed a consent order outlining findings of the bank’s “improper sales practices”from 2011 to 2016.

A few days before the Senate hearing Stumpf, in an interview, disputed Wells Fargo has a culture problem. He maintained that stance with Senate committee members, while indicating changes the Bank planned to make. However, the bipartisan committee was united in criticism that Stumpf, the Board and senior leadership hadn’t gone far enough, fast enough and weren’t showing accountability. From the Republican Committee chair to Democratic challengers, Senators didn’t buy that the bank’s culture isn’t an issue.

Where does this leave Wells Fargo? Anyone who has been through corporate crises — as I and many others have — knows that criticism from outsiders is hard to take. However, there are huge pitfalls if Mr. Stumpf stays locked in the “rightness”of his position (in spite of his 30 plus years service at Wells Fargo, presiding over several of its acquisitions and knowing his industry and company better than outsiders).

His performance at the Senate hearing this week indicates his time has been spent with legal and public relations teams and like-minded insiders. Getting out of a crisis, turning around a culture and re-earning political and public trust, doesn’t happen by working harder with the same mindset. (The much touted definition of insanity is doing the same thing over and over and expecting different results.)

I’ve limited myself to 10 suggestions for Wells Fargo to support the start of a turnaround:

  1. The board should appoint a new chairman — an independent director — separating the role from the CEO for many reasons including signaling stronger board governance.
  2. The board should immediately decide about claw backs related to compensation of former head of community banking Carrie Tolstedt, Stumpf and any others. As part of re-earning trust, all their actions should be transparent and well communicated.
  3. The board should direct Stumpf and his team to meet with Wells Fargo’s ethics and compliance teams and risk officers to discuss/evaluate ethics, compliance and risk operations for strengths, weaknesses and safeguards to better integrate sales and all business strategies with corporate values and prepare a report for the board.
  4. The compliance and ethics leaders (and C-suite leader to whom they ultimately report) should initiate meetings with leaders of the Ethics & Compliance Initiative and the Society of Corporate Compliance and Ethics to address best practices, implementation challenges and examples where ethics and compliance leaders weigh in on business strategy discussions in sales and all areas.
  5. The board and senior management should identify outside experts to discuss how to  realign authentically culture around values. A place to start is the nearby Markkula Center for Applied Ethics.
  6. Stumpf and his management team should become acquainted with Margaret Wheatley’s concept of self seal (the rightness of one’s position), Kathryn Schulz’ TED Talk (error blindness) and Margaret Heffernan’s  Willful Blindness for starters. These are lenses that encourage conscious and unconscious unethical behavior.
  7.  A cross-functional team of senior leaders with ethics and compliance leaders should review the company’s five primary values; for each, identify five or six specific expected behaviors to be incorporated into company policy and discussed in ethics training and performance reviews. Currently, the values are too abstract.
  8. Under the value “Ethics” the company says “We strive to be recognized by our stakeholders as setting the standard among the world’s great companies for integrity and principled performance. “This should become a business objective with Board and CEO focus to keep this commitment at the center of the turnaround’s activities.
  9. At the upcoming House Financial Services Committee hearing, Stumpf and those testifying can start rebuilding trust by being fully prepared to answer questions directly and completely, having with them information relevant to committee questions. Stumpf should also make himself available to Senate Banking Committee leadership to make sure information provided since that hearing addressed open questions.
  10. Trust is a relationship where “integrity” and “principled performance” are realities, not marketing slogans. In relationships with employees, customers, customers affected by unethical actions, employees pressured by aggressive sales tactics, Wells Fargo leaders have to admit what went wrong and make systemic changes. A start is to amend the vision statement that says “We want to satisfy our customers’ financial needs and help them succeed financially” and add “in ways that build lasting relationships of trust and integrity.”The Week in EthicsGael O’Brien, September 22, 2016Gael O’Brien is The Ethics Coach columnist  for Entrepreneur Magazine. She is also a columnist for Business Ethics Magazine where her September column is “One man’s Leadership Toward a Goal: ‘The Great Mission of Business Ethics.'”

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The Week in Ethics: Goldman Sachs’ 2012 Problem with Culture

March 22, 2012

The love-hate relationship with Wall Street is complicated.

Great returns on investments are one side; examples of fraud, greed or throwing shareholders or clients “under the bus”  on the other. The global meltdown’s post traumatic stress and after shocks continue; ongoing investigations try to determine blame.

A firm’s culture and leadership are critical success factors in navigating challenges and avoiding loss of trust and reputation; or…they explain why it falls into difficulty.

Goldman Sachs continues in the hot seat. Included in recent developments are lawsuits, a Manhattan district attorney subpoena, a Financial Industry Regulatory Authority claim filed this week, insider trading investigation and an SEC probe for civil action.

On March 15, 2012 Greg Smith, an executive director and head of U.S. equity derivatives in Europe, Middle East and Africa for Goldman, resigned; expressing his reasons in a New York Times Op-Ed, he called the firm’s culture “toxic.” (Update: see his October 21, 2012 interview on 60 Minutes.)

He said Goldman was “still focused on making money over clients’ best interests. His message was that  the SEC investigation, Congressional hearings, the firm’s “rigorous self-examination” and efforts to restore reputation and  trust (see previous columns) have not moved the firm away from the attitudes that helped create the climate for the economic meltdown in 2008.

Goldman CEO Lloyd Blankfein and President Gary Cohn responded in an employee memo published on the firm website. Smith’s assertions, they said, do not “reflect our values, our culture and how the vast majority of Goldman Sachs think about the firm and the work it does on behalf of our clients.”  They pointed to favorable employee surveys as evidence. “We wanted to remind you,” the memo says, “what we, as a firm–individually and collectively– think about Goldman Sachs and our client-driven culture.”

The memo boasts that in March 2012 Goldman Sachs was named one of the best places to work in the United Kingdom, where Smith resided, and ranked highest in financial services firms for the third year in a row.

I’m reminded of the admonition (espoused by Kathryn Schulz) that “trusting too much in feeling you are on the right side of anything can be dangerous.”  It can lead to error blindness. When applied to Goldman Sachs, it suggests that believing in one’s own exceptionality can create blinders, screening out evidence to the contrary.

There is a danger when Goldman invokes its culture as some kind of shield. Culture is organic; shaped perhaps by a legacy, but defined by the mirror of the present, how we are doing things. The reflection others see is not who you were, or believe yourself to be.

Goldman’s self-examination in 2010 resulted in a review of its legendary business standards and practices; its report released in early January 2011 acknowledged that in a survey of clients, clients said “in some circumstances the firm weighs its interests and short-term incentives too heavily.”

While integrity, transparency, and addressing conflicts of interest were part of the self-review, Smith’s Op-Ed said nothing had changed in Goldman’s culture.

This was also the conclusion of Money and Power: How Goldman Sachs Came To Rule The World (2011) by William Cohan.

Cohan cites several critics who saw a pattern of Goldman putting its own interests ahead of clients, particularly in its evolution from a partnership to a corporation, from banking to trading, from longer- term to short-term gains as the firm became more aggressive in risk taking. Over the last 143 years, Goldman has become a mark to market firm involved in investment banking, securities, and investment management with 30,000 employees in 75 offices around the world.

The organization and its culture are complex.

Goldman’s challenge is the same as any company’s who has said all the right things in a code, brought it out to define who they are in meetings, but not known how to live it when the code and a business model are at logger heads.

Reputation and trust depend on the ability to integrate the code and the business model; to struggle with both until they are aligned and reflect how business is done.

That is the most enduring way for Goldman Sachs to strengthen its culture and stay out of the hot seat.

Gael O’Brien      March 21, 2012

The Week in Ethics

Gael O’Brien is also a columnist for Business Ethics Magazine; her February 2012 column includes an interview with Gallup Chairman Jim Clifton on how managers impact culture.

American Apparel and the Ethics of a Sexually Charged Workplace

March 13, 2011

Update October 1,2014: American Apparel has appointed a new interim CEO and CFO with turnaround and restructuring expertise in specialty retail.

Update July 26, 2014: American Apparel appointed a new board without Dov Charney on it. He was ousted last month as CEO, see “American Apparel: Sex, Power and Terrible Corporate Governance.”

Update:  On March 21, 2012 New York Supreme Court Justice Bernadette Bayne ruled that the sexual  harassment lawsuit filed by Irene Morales should be heard in arbitration, not open court.

Update: March 28, 2011, Justice Bernadette Bayne held a hearing March 25, 2011 with counsel from both sides in the sexual harassment suit, Morales v. American Apparel. Judge Bayne initially indicated the case should go to arbitration and later said she’d review the additional documents. She gave no indication when she’d rule if the case can go to trial. On March 23,  Apparel chairman and CEO Dov Charney was hit with the second sexual harassment suit this month. Kimbra Lo, 19, a former sales associate, alleges she was sexually assaulted when she went to Charney’s LA home seeking to be rehired as a model and photographer.  Both Lo and Morales went on the Today Show to talk about their lawsuits. The company contends the relationships were consensual.

American Apparel finds itself once again in a familiar place — sued again for sexual harassment and creating a hostile work environment, because of the vulnerability its CEO’s philosophy of sexual freedom in the workplace creates for the publicly held company.

In discussing a 2006 sexual harassment suit, founder, chairman and CEO Dov Charney expressed the belief that consensual sexual relationships in the workplace were appropriate: “I think it’s a First Amendment right to pursue one’s affection for another human being.”

Last week, Irene Morales, 20, sued Charney, 42, American Apparel, and its directors for about $250 million, alleging Charney forced her into sex acts when she was 18 and an employee. The company has accused Morales of extortion. A lawyer for the company dismissed the allegations, saying when Morales left the company and accepted severance, she signed a statement saying she had no claims against the company and agreed that any future claims would be addressed by confidential arbitration.  A judge has halted Morales’ suit until March 25, pending a decision on whether it should go to arbitration or trial.

Notwithstanding the distinction of being dubbed “American Apparel’s chief lawsuit officer,” Charney is a complex figure. His website, filled with photos of him and provocative shots he took of the company’s young models, tells the story of his immigrant family, religion, creating the company as a teenager, philosophy on sexual freedom, and politics. Passionate about immigration reform, proud his clothing is “made in America,” he pays his 10,000 workers – well above garment industry rate.

Charney owns 51.8 percent of the company and the board has thus far apparently gone along with his philosophy of sexual freedom. However, the company is no longer on solid financial footing.  Blame the recession or other factors, but it appears that sexy marketing isn’t selling American Apparel the way it did several years ago; stock prices have been dropping.

Among the questions Dov Charney’s philosophy raises is whether there really can be consensual sex in a workplace if both parties aren’t equal in status, salary and intention?

Is the term a delusion if one of the parties is the CEO? For example, how can both parties freely accept responsibility for the consequences of a relationship when one party has power over the other’s salary, promotion, or keeping the job?

If tone at the top encourages workplace sexual expression, what are the constraints to protect employees? American Apparels’ ethics policy talks about “promoting ethical conduct, including the handling of actual or apparent conflicts of interest between personal and professional relationships.”

So who decides if a conflict of interest has occurred between personal and professional relationships and if harm was done in a fleeting or more sustained expression of sexual interest? What about harm to bystanders who just want to do their job and are made uncomfortable by sexual innuendo and graphic language?

If you were doing a cost/benefit analysis of sexual drama (which is an inevitable byproduct of a sexually charged workplace) would the benefits come out ahead if everyone affected got to weigh in?

In interviews, Charney has tied the importance of sexual energy to creative energy on which he says the fashion industry depends. No argument about the value of released endorphins.

Interesting to note that many leaders have championed endorphin highs to stimulate creativity. Among dozens of examples, they set aside areas for ping pong, volleyball, or fitness equipment, or hold events recognizing employee achievements – few, if any of which, have resulted in litigation and loss of company and CEO reputation.

Every leader gets to figure out if what she or he is doing is working and what to change (before a board answers that question for him or her). Charney enjoyed the reputation as a wunderkind. Now the company is in a different phase facing financial and strategic challenges, as well as another lawsuit about its culture.

The irony of sexual freedom in the workplace is that it is about power, not romance. It often ends up exploiting those most vulnerable – the way, for example, immigrants have often been treated in some workplaces; it also gives ammunition to those who, seeing where a company has made itself most vulnerable, move in for their own kill.

Gael O’Brien     March 12, 2011

The Week in Ethics

Gael O’Brien is also a columnist for Business Ethics Magazine.

The Inside Job and the Ethics of the 2008 Economic Crisis

October 18, 2010

The stuff of crises — arrogance, greed, unacknowledged conflicts of interest, unethical behavior, lack of transparency, failed leadership, and insufficient  accountability – fueled “an industry out of control” according to Charles Ferguson’s documentary Inside Job which chronicles the 2008 economic meltdown.

While of course we know the outcome of the unfolding events Ferguson describes, his interviews with many of the players in the crisis provide additional insight into the larger question of how could so many very bright people be involved in a failure so huge? The film shows the consequences when thought capital is wrapped around the dogged pursuit of an ideology, in this case deregulation, so that conflicting data or opposing viewpoints are not allowed to interfere.

The band of men from Ivy League economics departments wielded a lot of power in the 30-year push for deregulation. They served as consultants to the industry and were selected for significant regulatory or White House advisor positions. Ferguson raises questions about their objectivity as scholars, as well as whether their integrity was compromised by conflicts of interest and accepting fees from Wall Street, or to testify before Congress, or as expert witnesses.

His interview with Frederic Mishkin, Alfred Lerner Professor of Banking and Financial Institutions at Columbia Business School, is one of the most revealing in the documentary. The video clip above addresses his co-authorship of a report called “Financial Stability in Iceland,” how he could have written such a positive report right before the collapse, whether he had disclosed payment of $124,000 by Iceland’s Chamber of Commerce to write it, and changes made in his resume altering the title of the report to read “Financial Instability in Iceland.”

Ferguson asked Mishkin how as a governor of the Board of Governors of the Federal Reserve System from 2006 to 2008, he and the other governors hadn’t seen the meltdown coming and done something about it. There was no real answer to that. Ferguson pursues why Mishkin resigned in August 2008 with six years remaining on his term to return to Columbia. Mishkin replied that he needed to revise his textbook, an excuse that seemed to insult the intelligence of the movie audience snickering around me. So much for building trust.

Scott Talbott, chief lobbyist for the Financial Services Roundtable, which lobbies on behalf of the top 100 banks, and credit card, insurance and financial services companies, — including many of the bailed-out banks – parried Ferguson’s pointed questions, indicating he was pleased with the considerable influence his group wielded in Congress, because that is the way it works.

The ethics policy of the Roundtable, which members are asked to sign, indicates members are expected to set the highest ethical standards for the industry. “Fairness and Respect,”  is one of the principles: “we will treat people with respect and prohibit practices that do not provide a benefit to our customers or have the effect of taking unfair advantage of our customers….” I wonder if Countrywide had any problems signing their agreement with the policy when they were a member of the Roundtable? Former CEO Angelo Mozilo just settled a fraud suit with the SEC.

The predatory lending practices of Countrywide and other mortgage companies in the sub-prime business highlight an almost sociopathic disregard for customers that seem a hallmark of the meltdown. From Lehman to Goldman Sachs customers were objectified, not real flesh and blood, the way a hit and run driver leaves the scene telling himself he didn’t really hit anything.

So where do we go from here?

Ferguson sees business as usual, nothing really having changed to restore the trust that was broken. Crimes were committed and no one has yet gone to jail.

Arrogance, greed, conflicts of interest, unethical behavior, lack of transparency, failed leadership, and no accountability are the antithesis of a model for sustainable business success.

Companies on Wall Street have a higher burden of proof in the business of restoring trust. No question it is complicated. It gets to the heart of what a company really stands for, whether, for example, when addressing business strategy ethical liability will be put on the table for discussion along with legal liability.

It is a slow process to change a culture. It will depend on whether companies consider sustainable business success worth the effort.

For a look at the tentacles of the 2008 economic meltdown, see The Week in Ethics:Gordon Gekko, Trust, and Corporate Culture published 2/29/12

Gael O’Brien   October 18, 2010

The Week in Ethics

The Week in Ethics: The Ethics of Conscience

October 6, 2010

Lately in various places there has been a discussion about who is, or should be, the conscience of the company.  A panel of public relations (PR) academics and practitioners discussed recently the merits of whether the PR function represented the company conscience.

I remember a discussion several years ago between a PR vice president and a general counsel in which both purported to act as the company conscience in an environment in which top management didn’t seem to have that issue on their radar. The company benefited because there were two sets of radar scanning for potential problems from different vantage points.

Clearly an organization needs people willing to step up to the plate and hold the organization accountable to a higher standard, based on the organization’s stated values, and on an individual’s moral compass or ethical leadership.

However, public relations leaders cannot fill the role of ethics officers. The PR role is focused on the strategic positioning of the organization, getting the best sound bite, persuading media and stakeholders about the rightness of an organization’s position. PR people may have the personal commitment to take on the issue of the organization doing no harm and counsel the CEO on doing the “right thing” in a situation where the organization is being held accountable, but they are not trained to do the jobs of ethics officers. There is also the potential of conflicts of interest based on how the two job descriptions play out.

It also may be that a legal counsel charged with defending and protecting the organization may have a conflict of interest when the duties to protect clash with the duties to be transparent and accountable.

So, if the CEO isn’t stepping up to be accountable as the conscience of the company, the PR person and the general counsel may have conflicts of interest, and the board talks in terms of risk management, but not conscience, who fills that void? Well a recent column in Fast Company points to the obvious, that a company doesn’t have a conscience but people do.

With all due respect to whistle blowers, there is a stage before the crisis when gaps in what the company is doing or how it is presenting itself don’t ring true to an employee or a supervisor who is willing to engage, and ask clarifying questions.

The fact is that the conscience of a company is not a rarefied role. It is held by the CEO, the board of directors, the legal department, PR, design, engineering, manufacturing, Corporate Social Responsibility, sustainability, human resources, the ethics office, a line worker, a new employee, or anyone.

It is about asking questions, trying to integrate information, and looking for the alignment around what the company says it stands for compared to what it does.

The corporate conscience was dormant at BP, Goldman Sachs, Toyota, Lehman Brothers and at many other scenes of crisis where leadership wasn’t engaged around questions of “do no harm” and self-interest and greed prevailed.

The conscience of the company is about trying to understand disconnects, and raising questions designed to get at what the company really is willing to stand for. It is about curiosity, courage, and conviction. It is a shared role, a collaborative endeavor, which asks of those listening how to create a better organization, one that is more authentic and real, in service to a company’s mission and values.

Gael O’Brien, October 5, 2010

The Week in Ethics