(First published on LinkedIn)

I finally watched The Big Short, which left me disturbed if not utterly depressed.

For those of us whose business it is to espouse the merits of an ethical corporate culture, the story is even more disconcerting.

The character Mark Baum – a hedge fund manager who bet against the banks during the housing bubble – summed up the message near the end:

We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball… What bothers me isn’t that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and shortsighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did.

The movie blamed Wall Street for the crisis. In real life, a lot of parties were to blame: individuals, mortgage lenders, investment advisors, ratings agencies, Wall Street, the government, the Federal Reserve Bank. Some even blame a regulation from the 1930s.

Guilty or not, millions have paid the price – by losing their homes, jobs, investments, retirement savings.

But not everyone. According to an article in the New York Times, nine banks that received government bailout money gave out $32.6 billion in bonuses for 2008, despite losing $81 billion in the crisis.

For this group, the lesson may be that duplicitous – if not outright fraudulent – schemes that contribute to economic collapse may just be the normal course of business for amassing personal wealth, to be repeated when the next opportunity presents itself.

Scarier yet, others may learn from them.

Which begs the question: what if our belief that unethical behavior will lead to eventual demise is simply not true?

(First published on LinkedIn)

Who knew that last year’s summer blockbuster Jurassic World could be an allegory for business ethics?

If you haven’t seen it, I’m not spoiling anything by saying that it’s about a theme park whose main attractions are dinosaurs engineered in a lab. Predictably, things run amok and important lessons are learned.

In the movie, in an attempt to satisfy shareholders amid dwindling attendance, the CEO tasks his chief scientist to create something that would wow visitors. When he delivers, quite disastrously, the CEO is dismayed by the methods he used.

In a crucial scene, the CEO confronts the scientist on creating the creature that ends up on a killing spree and threatens the lives of 20,000+ visitors:

CEO: Who authorized you to do this?

Scientist: You did. “Bigger”, “Scarier”… “Cooler” I believe is the word that you used in your memo… You cannot have an animal with exaggerated predator features without the corresponding behavioral traits.

CEO: What you’re doing here… What you have done… The Board will shut down this park, seize your work, everything you’ve built…

Scientist: All of this exists because of me. If I don’t innovate, somebody else will.

CEO: You are to cease all activities here immediately.

Scientist: … but we are doing what we have done from the beginning… you didn’t ask for reality. You asked for more teeth.

CEO: I never asked for a monster!

Here are some lessons I got out of it:

1. Empower employees, but don’t turn a blind eye. Management has to make sure that anything done to achieve company goals must be ethical and law-abiding.
2. Beware of creating a culture that values profit above all else. Business decisions must take into account their impact on people, the community and the environment, not just the balance sheet.
3. One ethical lapse could lead to the creation of a monster. One lapse, when tacitly tolerated, could lead to others to one day become a monster issue. By then there’s no turning back and no way to control it.
4. When hell breaks loose, the real victims are often innocent bystanders. Innocent people the world over have lost retirement savings, been sickened by pollution, or been injured by shoddy products when business decisions prioritize profit above humanity.

So, a simple piece of business advice taken from Jurassic World: “Don’t create a monster, and don’t let anyone else do it either.”

 

(First published on LinkedIn)

At first glance, it looks as though Wells Fargo and the two responsible executives are getting their day of judgment.

The bank is paying $185 million to settle charges for the 2 million fraudulent customer accounts. CEO John Stumpf is forfeiting $41 million in compensation and the head of the guilty division is giving up $19 million of stock awards plus $34 million of unexercised options. A group of former employees are suing the company for $2.6 billion and the state of California just suspended much of its business with the bank.

But who really suffers once the dust settles?

Not CEO John Stumpf

Sure, forgoing $41 million seems like harsh punishment, especially to the average lead teller who makes $30,000 per year here in Charlotte. But that’s only 16.5% of the total amount Stumpf could walk away with if he left the bank tomorrow because of the 5.5 million shares of Wells Fargo stock he already owns (at $45/share). As for the compensation he received for years to award his performance WHILE the fraud was happening? Well he gets to keep that.

Did I mention that Stumpf sits at the head of the Board of Directors that approves his own compensation?

Not Carrie Tolstedt, the Head of the Guilty Division

Even after forfeiting $19 million, she could still walk away from the mess with $77 million.

But the Shareholders

Only a minority of shareholders includes culpable company executives. All other shareholders – both sophisticated investors like Warren Buffet and average hardworking 401(k) contributors and everyone else in between – get to foot the bill for whatever penalty is levied or settlement is reached. Wells Fargo stock is already down by $5 since the scandal hit, and there’s no telling how it’d do as the situation continues to unfold.

And the Average Employee

Wells Fargo employs 265,000 employees, I have no doubt that the vast majority of whom are upstanding individuals, including many of my friends who work for the company. Inevitably, as the company sinks funds into fighting lawsuits while trying to keep its stock price afloat, it’d have to tighten its belt in other areas. Which means layoffs. Good employees end up losing their jobs, and those who keep their jobs get to do all the extra work left behind, for no additional pay.

And the Employees Who Were Fired

When an employee gets fired, he walks away with $0. Which is INFINITELY worse than the $250 million that Stumpf could walk away with, both mathematically and experientially. Being fired inevitably makes it harder to find another job. Multiply that by 5,300, then again by the number of family members affected, plus the ones who got fired for blowing the whistle, and the economic impact this has on the economy can be exponential.

If this sounds like a rant, it is.

For those who wish to read more:

http://www.npr.org/sections/thetwo-way/2016/09/28/495843612/california-imposes-sweeping-sanctions-on-wells-fargo-amid-scandal

http://money.cnn.com/2016/09/27/investing/wells-fargo-ceo-clawback-john-stumpf-tolstedt/index.html

http://www.npr.org/sections/thetwo-way/2016/09/26/495454165/ex-wells-fargo-employees-sue-allege-they-were-punished-for-not-breaking-law