Claudelle von Eck: When it comes to ethics, leaders need to put their money where their mouth is.
On 2 September, CFO South Africa hosted the 20th edition of its CFO Community Conversations. Leadership and ethics guru Claudelle von Eck shared research and stories of organisations who supposedly embodied an ethical culture but in reality were living a lie, using Wells Fargo as an example.
In 2016, a scandal broke around Wells Fargo cross-selling. According to Claudelle’s research, before the scandal, the company was seen as one of the best companies in the United States, with Fortune magazine praising the company for a “history of avoiding the rest of the industry’s dumbest mistakes”. The American Banker called Wells Fargo “the big bank least tarnished by the scandals and reputational crises”, and in 2013, the company’s chairman and CEO John Stumpf was named “banker of the year”. Carrie Tolstedt, who ran the company’s vast retail banking division, was named “most powerful woman in banking”.
“If you look at the governance systems they had in place, they ticked all the boxes, from an ethics hotline to training,” Claudelle said.
In 2013, rumours circulated that Wells Fargo employees in Southern California were engaging in “aggressive” tactics to meet their daily cross-selling targets. According to the Los Angeles Times, about 30 employees were fired for opening new accounts and issuing debit or credit cards without customer knowledge, in some cases by forging signatures.
In September 2016, Wells Fargo announced that it would pay $185 million to settle a lawsuit filed by regulators and the city and county of Los Angeles, admitting that employees had opened as many as 2 million accounts without customer authorisation over a five-year period.
While the actual amount in terms of the customers that had been defrauded was only $2.6 million, the fallout from the scandal was much worse, including:
- Significant reputational damage
- Board members lost their positions because of a lack of confidence by the investors
- The CEO had to step down and the head of the retail division had resigned (both walking away with lots of money, which added to the reputational damage the bank suffered)
- The Federal Reserve Bank took the unprecedented action of placing a strict limit on the company’s asset size, forbidding it from growing past the $1.95 trillion in assets it had at year-end until it demonstrated an improvement in controls
- The bank had to agree with a $1 billion settlement with the Consumer Financial Protection Bureau and the Office of the Controller of the Currency to resolve auto and mortgage lending violations
- It agreed to pay $480 million to settle a securities class action lawsuit over cross-selling
“The company settled with 50 state attorneys general to resolve civil claims for cross-selling, auto lending and mortgage lending violations, and agreed to pay $575 million,” Claudelle explained.
To understand how this happened, Claudelle explained how the leaders had contributed to the fallout:
- The CEO didn’t want to receive any bad news and avoided conflict; didn’t appreciate the scope and scale of sales practices violations, and minimised the problem to the board.
- The head of retail didn’t want to hear that there was something improper in relation to their activities and how they’ve been leading in relation to the performance indicators that they’ve given the staff. She “resisted and rejected the near-unanimous view of senior regional bank leaders that the sales goals were unreasonable and led to negative outcomes and improper behaviour”.
- The CFO refuted criticism of the company’s sales system.
- The senior management and the board of directors struggled to find a balance between recognising the severity of the bank’s infractions, admitting fault, and convincing the public that the problem was contained.
- Management itself: The performance scorecards created pressure and what the investigation showed was that the employees did not so much commit the fraud because they wanted to gain more money, but because they feared being penalised for failing to meet goals, even in situations where these goals were unreasonably high.
- Risk was decentralised. Internal audit did not investigate the root cause of unethical practices that had been brought to the fore.
- The board said they were misinformed and weren’t asking the difficult questions.
Claudelle said that similar events have played out in South Africa in recent years, where admitting fault is not something that the leadership easily does, which creates further reputational damage. “So clearly, if you look at all the role players, everyone in the leadership played a role in the problem.”
Another factor that often contributes to a lack of ethics in the workplace is the lack of communication around ethics to the lower level employees. “We make the assumption that when we use the term ethics everyone understands it the same way,” Claudelle said. “We need to ensure that what we are saying is understood the way we want it to be understood.”
But ensuring ethical behaviour down the line also requires more than communication, leaders need to put their money where their mouth is by acting visibly ethically. “You may find that you have top leadership feel that they are saying the right things, but they’re not looking at how leaders at other levels are walking the talk. So people see a disconnect in their behaviour.”
Leaders need to ensure that they are making a concerted and conscious effort to explore ethical implications and the impact of decisions before making them.
Hatch Africa CFO Craig Sumption believes the key to leaders setting an example is for organisations to ensure they build a robust, mature executive team. “You need to be able to have those tough discussions from time to time, without it being accusatory. In too many organisations, things get swept under the carpet because people don’t want to talk about them. That’s when everyone becomes subtly complicit in the process by not saying what they should be because they’re too scared to say something.”
The attendees agreed that the only way to foster an ethical culture is to ensure that employees feel safe and that they trust their leadership.
Adcock Ingram CFO Dorette Neethling said that in order to gain that trust, leaders need to encourage employees to speak up without being victimised afterwards. “If they’re allowed to speak up and raise concerns you create trust that leads to ethical behaviour.”
For DHL Express CFO Craig Henery, one-on-one conversations with all my staff, on an ongoing basis, help to build that relationship of trust and openness. “If there is an issue or concern they feel comfortable to come to come to you and confide in you.”
Dorette explained that organisations need to be very careful of leaders that rule by fear, as employees tend to then rather hide things.
Claudelle agreed, saying that leaders need to hold each other accountable. “When you have a big organisation with various divisions you can find that in some of those divisions there is openness, but in another division there is a climate of fear because of the leaders. When leaders from other divisions see this culture of fear develop, they need to put pressure on that leader to change their behaviour or leave the organisation.”
In a situation in which there is fear in the organisation or when leaders are not mature enough to deal with a whistleblower, hotlines become essential. “If leaders don’t deal with a whistleblower properly, they sometimes expose the whistleblower and that whistleblower ends up paying very dearly for it,” she explained.
