There is an adage that "it's better to ask forgiveness than it is to get permission." In the world of corporate misconduct, it seems that there is even less need to beg forgiveness these days as the government scales back how much it will police companies that appear to have violated the law.
There may be no better recent example of how a corporate culture devolved into an almost preternatural focus on expanding the bottom line at the expense of customers and the law than Wells Fargo. [Full disclosure: My home mortgage is with the bank.]
In April, a report of an internal investigation into how the bank opened more than two million bogus customer accounts blamed leadership in its community banking division, saying that it "resisted and impeded outside scrutiny and oversight" while the former chief executive "failed to appreciate the seriousness of the problem." Wells Fargo recently disclosed that further investigation "may lead to a significant increase" in the number of unauthorized accounts, meaning that the problem may go far deeper than first thought.
If Wells Fargo hoped that the bogus accounts issue was its only problem, it was sadly mistaken.
The investigation also unearthed problems at its Merchant Services subsidiary that processed credit card transactions in which smaller companies may have been overcharged. A report on CNN about a recent lawsuit accusing the bank of breaching its agreements quoted an anonymous former employee of the bank who said, "We used to be told to go out and club the baby seals: mom-pop-shops that had no legal support" — a "customer-be-damned" attitude to increase revenue.
The New York Times reported that Wells Fargo is facing new questions about failing to refund insurance payments to borrowers who repaid their car loans early, and that it forced some to take unneeded collision insurance that pushed more than 250,000 borrowers into delinquency, including 25,000 whose cars were repossessed improperly. A statement from a bank spokeswoman said, "If we find customer impacts, we will make customers whole" — a way of asking forgiveness rather than permission.
In its most recent quarterly report, Wells Fargo disclosed that it increased its estimate of the costs from legal claims to about $3.3 billion. Yet, for all the issues the bank has faced, the only regulatory action against it has been a $185 million settlement with the Consumer Financial Protection Bureau, its lead regulator, the Office of the Comptroller of the Currency, and the Los Angeles City Attorney.
A review of the Corporate Prosecution Registry maintained by the University of Virginia Law Library does not show Wells Fargo being the defendant in a criminal prosecution. It did settle a civil suit filed by the Justice Department in 2016 by paying $1.2 billion and admitted improperly certifying mortgages to obtain insurance from the Federal Housing Administration.
The bank has not been the subject of an enforcement action by the Securities and Exchange Commission over its disclosure or accounting practices, although last year its investment bank was sued, accused of fraudrelated to a bond underwriting in Rhode Island.
Will Wells Fargo be held to account for the many ways in which it mistreated its customers? The prospect of governmental action appears to be diminishing, and any fines it might face are likely to be at the low end of the scale based on recent enforcement trends since the start of the administration of President Trump.
Penalties imposed by financial regulators so far in 2017 are much lower than for the comparable period last year, according to The Wall Street Journal. That may be a reflection of the end of the financial crisis cases, but the new chairman of the Securities and Exchange Commission, Jay Clayton, stated during his confirmation hearing that "shareholders do bear those costs and we have to keep that in mind."
A report issued by the Environmental Integrity Project last week shows that federal environmental enforcement has also dropped, with fewer lawsuits against companies and a 60 percent drop in civil penalties during the first six months of the new administration.
Even private litigation by consumers against corporations would be substantially reduced under a bill passed by the House in March. One part in the legislation would require each member of a class action to show the same injuries as all others before a federal court can certify it to proceed, severely limiting the number of such cases when the harm may not be the same to all.
The flow of information about potential problems in banks will be curtailed under new regulatory guidance from the Federal Reserve, which oversees the largest banks. To ease the burden on the board of directors, the Fed would no longer require that the findings of a supervisory examination of the bank be given to the directors, and instead management would be responsible for passing along information about those matters that affect corporate governance.
Of course, the proposal is offered as a major benefit to corporate boards, with the Fed asserting that it will "improve corporate governance overall, increase efficiency, support greater accountability, and promote compliance with laws and regulations." Directors would still be "responsible for holding senior management accountable for remediating supervisory findings," although they might not be aware of them.
One of the basic requirements of corporate governance is the "Caremark duty" imposed on directors, named for an opinion from the Delaware Chancery Court in 1996. A board must put in place reporting systems to ensure that sufficient information reaches the directors to enable them to oversee the company and, when necessary, deal with problems. That duty does not permit delegating oversight responsibility to management, and directors should not just sit back and wait for information to pop to the surface.
A problem in holding individuals accountable for misconduct in an organization is the disconnect between the actual decisions and those charged with overseeing the company, so that executives and corporate boards usually plead ignorance about an issue until it is too late. As Gretchen Morgenson pointed out in her Fair Game column about the Fed's proposal, "reducing the information flow between bank boards and their examiners just doesn't seem smart."
Government regulation and enforcement can be a ham-fisted way of ensuring corporate compliance, so decreased regulation and lower penalties do not necessarily mean there will be an uptick in the number of violations. But if the regulatory environment sends the message that there will be few consequences for misconduct, then there may be little need to even seek forgiveness when there is a reduced prospect of being caught and punished.