“You know, Mrs. Buckman, you need a license to buy a dog, to drive a car — hell, you even need a license to catch a fish.” – Keanu Reeves’ character Tod in Parenthood
As described in the prior post, Wells Fargo has admitted to widespread fraudulent account opening. This practice was systemic and was a function of a high stakes sales culture that pressured employees to open accounts which was linked to compensation and even firings. This actions went on for years (and is still going on, albeit at a lower rate) and has damaged the company in many ways. It has put at risk its reputation as well as its relationship with customers, employees and regulators. The costs are mounting. Wells Fargo has paid already $185mm in fines and more costs await, including a recent lawsuit by fired employees asking for $2.6B. The crisis has also knocked $25B off the market value of stock (nearly $2.5B of that loss will be attributed to Buffet’s Berkshire Hathaway - not good times for Mr. Buffet). The affair has also called into question the performance of CEO John Stumpf, other senior leaders in the firm and the board of directors whose actions, or in this case, inaction, are the subject of this post.
Called out by the recent bad press and bad congressional hearing, the board has acted in a typical “better late than never” fashion. It announced that the company would claw back $41mm from Mr. Stumpf, who would also forego his 2016 bonus and salary during the investigation. Carrie Tolstedt, who ran retail banking, will be “retiring” immediately (or as Donald Trump would say, “You’re Fired”) and will forfeit $19 million in stock and certain retirement goodies. Before we call Jerry Lewis to start planning a telethon for these poor souls, let me remind you that Mr. Stumpf still has over $200mm in stock to go with his $19mm comp for last year, and Ms. Tolstedt still has over $100mm in stock to go with her $27mm of compensation the last three years.
Gretchen Morgenson of the New York Times wrote an excellent article that said that the Wells Fargo board has “disappointed” with respect to the three most important duties of a board:
- to assess the risks inherent in the company’s business and handle them before they develop into a crisis
- to dispense compensation that does not encourage bad behavior
- to monitor a company’s culture, from top to bottom
I think thatthe word “disappointed” is a polite understatement. And as Ms. Morgenson points out, this happened under the watch of two members of the board who are former consumer banking regulators. And the rest of the board members — certainly no slouches themselves — are top executives, government officials, academics, etc. They are diverse by gender and ethnicity. So how did this happen?
This is how it happened. In just about every fortune 500 board, the board members are more in the “board seat retention business” than they are in the business of managing a company. Mr. Stumpf is the chairman of the board and also the CEO, which he has been since 2007. Since boards get elected every year, the chairman/CEO is instrumental in deciding who gets a board seat and who gets put up for re-election. But why hanker for a board seat with its agita and potential liability? Because it is VERY LUCRATIVE. Last year, directors at Wells Fargo earned between $279K and 402K. That is not a typo. Let me put it this way. Board members show to meetings about 4 times per year, do another say 40 hours of work outside of the board meetings and voila — each one of them makes more than 98% of Americans. Or to put it another way, you would need to invest $21mm in 10 year treasury bonds to kick off that type of income. And if you serve on one board, you are all the more qualified to serve on the next board, making even more money (and even more hobnobbing).
So now you are a board member and the chairman, who is also the CEO, presents on corporate culture and fraudulent behavior and the plan to manage it and also presents compensation parameters. Are you going to take him on and kill the golden goose? Maybe, but you would have to think long and hard about it.
And what if you came from academia, for example, and you were not well versed in how corporate cultures worked? So not only would that compensation be a meaningful part of your overall annual take home pay, you might not even have the experience or skills to properly evaluate what may be critical decisions for the company. Now, by no means do I want to pick on academics, as it occurs to me that there are some very qualified academic board members who can run circles around some of the ex-CEOs who sit on many boards. But you get the idea.
Is there a solution? Of course there is. The question is whether the members of America’s corporate and academic communities possess the leadership and/or will to get to the solution. It is here that I am going call out the academic world to play not just a role in the advocacy of a solution, but to be part of creating it. In fact, I recently had lunch with a very impressive dean of a major law school and maybe, just maybe, he can help take this on.
This is my proposal:
- Reform Board Compensation. Nobody should be taking a board seat to get rich. So how much should a board member be paid? Board members on our hypothetical board would be paid no more than $100,000 annually— half of which would be paid in cash and the other half in stock that vests over the course of 5 years from the date of issuance. All shares should be subject to claw back as part of board member liability.
- Separate Chairman and CEO Positions: The chairman would be independent and run the board. In this way no CEO has too much power.
- Professionalize the Position of Board Member: As the opening quote to this post suggests, one needs a license to do some of the most mundane and ordinary activities, but hey — anyone can be a board member. This should not be the case. And, to ensure that this is never the case, I propose that each outside board member (in other words, board members who are not part of the management of the company) would be a “certified independent board director” ("CIBD"). The CIBD would be trained and licensed via a curriculum certified by the SEC that would include everything from accounting to ethics.
I cannot promise that the foregoing slate of reforms would have prevented the Wells Fargo mess, but I can promise that it would have been less likely to happen. So to all you law and business school deans, many of whom sit on boards themselves, how about it?