The Wells Fargo Bank case and behavioral ethics

In 1170 King Henry II of England, unhappy with Archbishop Thomas Becket, asked of his knights: “Will no one rid me of the meddlesome priest?” Taking his words (the specifics of which have been the subject of historical dispute) as royal instruction, several of those knights assassinated the clergyman. Correctly or not, the story is often used as an example of how a powerful person can cause others to engage in wrongdoing without himself  being provably guilty.

Late last week, the Consumer Financial Protection Bureau and several other agencies announced a settlement involving Wells Fargo Bank arising from sales practices abuses  – a settlement which was condemned from many corners. As noted in the American Banker : “It’s become an all-too-familiar story – a big bank is caught doing something bad, it pays a fine, some lower-level employees are let go while higher-level executives appear to get off scot-free and no criminal charges are assessed. Wells Fargo became the latest example of that cycle this week, when it paid $190 million in fines and restitution after some 5,300 employees were caught opening more than 2 million unauthorized bank and credit card accounts.” The American Banker piece also reported: “Wells insisted the problems were not systemic.”

The notion that 5300 employees could be involved in this sort of wrongdoing but the problem not be systemic is laughable. Indeed, it calls to mind a classic Doonesbury strip about the trial of China’s “Gang of Four,” in which the defendants claimed that they had not committed mass murder but “34,375 unrelated acts of passion.”

The bank’s contention is also contradicted by this account from the Charlotte Observer (among others): “Julie Miller was working in Pennsylvania for Wachovia when Wells Fargo took over the Charlotte bank in 2008 and began changing more than the name on its branches. Miller said she watched with dismay as Wells Fargo increased her branch’s sales goals and lowered bonuses for meeting the new targets…That’s when she also started noticing Wells Fargo customers complaining they were being signed up for products they never asked for.”

The understanding that undue pressure can lead otherwise good people to engage in wrongdoing is, of course, common sense. It is also one of the central tenets of “behavioral ethics.” Indeed, in one landmark experiment from more than forty years ago, individuals put under time pressure were about six times more likely to engage in unethical conduct than were those not under such pressure. I should emphasize that behavioral ethics didn’t create this understanding of human nature. But it does prove the point with a force that anecdote cannot match.

To my mind, results such as these (of which there are many) must inform how we seek to promote lawful and ethical conduct in banks and indeed business organizations of all kinds. For the government, it means pursuing enforcement strategies based not only on direct involvement by executives in wrongdoing but those who use the modern day equivalent  of the indirect approach apparently taken by King Henry.  For companies it means doing the same when it comes to internal investigations and disciplinary decisions.

Finally, for companies faced with a scandal where there is a temptation to protect the executives, consider how the apparent Wells Fargo approach is likely to discourage employees from reporting wrongdoing internally.  And the related question for audit committees:  if your company takes this route and suggests that compliance is only for the “little people,” how can you meet your Caremark obligation to have an effective  whistleblower system?

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