And over the last 5 years employees of Wells Fargo bank, which incidentally was named the best bank in the USA in 2015, have opened more than 1.5 million unauthorized deposit accounts and issued more than 500,000 unauthorized credit card applications.
This wide scale fraud on customers stemmed from an aggressive cross selling sales ideology lead by Wells Fargo’s CEO whose mantra was “eight is great” meaning the goal was to get eight products into the hands of each customer bank. But as employees struggled to meet demanding quotas and satisfy even more demanding managers they began to cut corners and opened deposit accounts and credit cards for unsuspecting customers.
This scandal was uncovered not by the bank’s internal audit department or by a whistleblower (that’s another story) but by investigative journalists. And the response from Wells Fargo management? They sacked around 5,300 employees who had been involved in the schemes, announced the abolition of sales goals in its retail banking business starting from 2017 and paid $185m in fines to city and federal regulators. Meanwhile, the executive who ran the unit responsible for the millions of fake accounts recently retired having received an estimated $125m in payments from the bank.
It wasn’t until a public outcry that the Wells Fargo board took some action against the senior executives responsible but even this was nominal – the CEO who has earned $83m over the last three years will forego $41m in unvested stock and the department unit head will forego $19m leaving her a measly $106m!
Australian banks have been caught up in a number of well-publicised scandals including investment advice and insurance. We regularly hear of the pressure bank staff are under to meet sales targets and although punishments like spanking and mass sackings have not been inflicted upon Australian bank staff, they like the customers have also suffered from poor judgement and decisions made by their leaders.
At the risk of stating the obvious, the problem is not employee misconduct. The problem is the executives who have created and perpetuated a culture that places their own and their banks short term financial interests ahead of those of other stakeholders. This extends to the board members who have countenanced this.
The newly appointed RBA Governor Philip Lowe recently bemoaned the direction banking has taken in recent years noting that “historically banking, has been a profession — a profession of stewardship, custodians, service, advisory, counsellor. It is not a marketing or product-distribution business, banking is a profession.”
He added, “if there was one thing that I could focus on and it’s not my responsibility, it’s not the Reserve Bank’s responsibility, is making sure the remuneration structures within financial institutions promote behaviour that benefits not just an institution but its client.”
The remuneration debate should not start with incentives paid to tellers or financial advisors. Westpac’s Brian Hartzer has just announced the removal of all product related sales incentives for tellers and NAB has committed to moving away from performance based pay for customers service and support staff. But changing the way staff are remunerated might change their behaviour but it won’t win back the trust banks have lost. Nor will forcing banks to separate their wealth and banking divisions.
What would start to change the way the community thinks about banks is CEOs showing real leadership when it comes to executive remuneration. And here we are not just talking about CEOs but also the executives below the CEOs. Take CBA for example, last year Ian Narev was paid $12.3m whilst the average pay of his eleven direct reports was $3.65m. Incidentally the RBA Governor is paid a tad over $1m pa. In addition to their big salaries, bank execs hold shares and performance rights which in most cases are worth millions of $s. And its not just what they get paid whilst at the bank, its also what they get when they leave. For instance, Andrew Thorburn’s direct reports at NAB have termination clauses in their contracts guaranteeing them average payouts in excess of $500k.
It is galling that bank executives can be paid so handsomely when the bank has not performed. ANZ’s Mike Smith was paid $88m over his eight year reign during which ANZ was the worst performing big four bank. Its share price went backwards by 10 per cent over this period.
It is equally galling that bank executives receive generous exit arrangements and then the bank underperforms. Gail Kelly took home $11.8m in her last four months at Westpac on top of $55m in shares and since her departure in November 2014, Westpac’s share price has fallen 7 per cent.
Where are the Boards?
What do the boards of banks have to say about this or are they too part of the problem? Bank chairmen are paid around $1m pa and non-executive directors receive around $350k pa plus income from the other directorships and roles they all hold.
CBA’s Harrison Young is the exception. He is the only one of the 32 big four bank non-executive directors to hold no other directorships. Mr Young is well regarded for his strong public statements on banking culture and ethics. One of his many thought provoking statements concerns bankers pay… “compensating bankers so well that the most ambitious people in the world want to be bankers probably means that the wrong people will run a lot of banks.”
What should be done & who is going to do it?
Self-regulation is the preferred starting point for reform but most Australians seem to have concluded that the banks alone cannot be trusted to fix the problems. Many go as far as to say a Royal Commission is needed and while I can understand their angst I don’t believe this is the most efficient solution for reforming the industry.
This week’s parliamentary inquiry sessions represent an opportunity for bank leaders and politicians to lift the standard of debate and understanding of the complexities involved in an industry that is so central to the nation’s success. Based on yesterday’s session with CBA, it appears these “grillings” will be nothing more than a political show trial where a handful of politicians try to give defensive bank leaders the rounds of the kitchen over bank profits, blah blah. It might suit the political aspirations of politicians to continue to engage in one of Australia’s favourite pastimes but it does nothing to make our banking system safer and fairer for all concerned. Governments cant legislate to improve trust in our banks, that can only be initiated by the banks themselves and this will require bank leaders to make some meaningful commitments to change and then most importantly walking the talk.
Here are six suggestions the bank CEOs might want to consider:
1. Announce an immediate and meaningful pay cut. A freeze is not a pay cut.
2. Get rid of bonuses for senior executives at least for the foreseeable future to see what if any impact this has. It is interesting to note that John Cryan, CEO of the beleaguered Deutsche Bank, noted “I will not work any harder or any less hard in any year, in any day, because someone is going to pay me more or less.” He candidly stated that “many bankers still get paid too much for what they do and still believe they should be paid entrepreneurial wages for turning up to work with a regular salary, a pension and probably a healthcare scheme and playing with other people’s money.” Only time will tell what price John Cryan pays for the failures within Deutsche Bank.
3. Implement policies that enable clawbacks of bonuses and payouts when there is legacy underperformance.
4. Greater encouragement and protection for whistleblowers. Whilst progress has been made in encouraging and supporting whistleblowers, we still have a long way to go.
5. Be totally frank about the inherent conflict between meeting the needs of shareholders, customers and employees. Brian Hartzer says “we create value for Westpac when we help customers create value for themselves, that’s why I believe that over the long term, there is no gap between the interest of Westpac and the interest of our customers”. But as John Maynard Keynes famously said “in the long run we are all dead” and how many bank execs last the distance anyway? The community believes banks are run by people who put profits ahead of all else but the public also understands the inherent difficulty in trying to satisfy multiple stakeholders. The real challenge for the banks is getting the balance right and as Andrew Thorburn astutely observed “if we don’t achieve the balance, the potential impacts are extremely serious.”
6. Boards need to do more in setting the standards. To date they have not done enough. The standard you walk past is the standard you accept. A good starting point might be appointing more directors like CBA’s Harrison Young.
Reproduced with permission.
