How Not To Grow Revenues-A Lesson From Wells Fargo

[vc_row][vc_column width=”2/3″][vc_column_text]In case you missed it, the United States provided yet another wonderful case study in bad corporate governance in the Wells Fargo case this past September.

On September 8th 2016, Wells Fargo Bank was fined $185 million (Kes 18.5 billion) by regulators after it was found that more than 2 million bank accounts and credit cards had been opened or applied for without customers’ knowledge or permission between May 2011 and July 2015. Employees had been opening and funding accounts in order to satisfy sales goals and earn financial rewards under the bank’s incentive-compensation program.” Dice it or slice it, this was a fraud of monumental proportions that had to have been known from the top. Or was it known? Well, John Stumpf was not trying to take one for the team. Following the termination of about 5,300 employees (about 1% of the workforce) in relation to the allegations, the champion stallion appeared on television on September 13th 2016 quite unapologetic. “I think the best thing I could do right now is lead this company, and lead this company forward,” in response to calls for his resignation. Stumpf was acting straight out of the African leadership playbook titled “Id Rather Die Than Resign.”

A week later, Stumpf met the inimitable Massachusetts Senator Elizabeth Warren. Ms. Warren had done her homework extremely well and in 17 short minutes excoriated the bank CEO. I’ve extracted the first painful minutes here:
Warren: Thank you, Mr. Chairman. Mr. Stumpf, Wells Fargo’s vision and values statement, which you frequently cite says: “We believe in values lived not phrases memorized. If you want to find out how strong a company’s ethics are, don’t listen to what its people say, watch what they do.” So, let’s do that. Since this massive years-long scam came to light, you have said repeatedly: “I am accountable.” But what have you actually done to hold yourself accountable? Have you resigned as CEO or chairman of Wells Fargo?
Stumpf: The board, I serve —
Warren: Have you resigned?
Stumpf: No, I have not.
Warren: Alright. Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?
Stumpf: Well, first of all, this was by 1 percent of our people.
Warren: That’s not my question. This is about responsibility. Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?
Stumpf: The board will take care of that.
Warren: Have you returned one nickel of the money you earned while this scam was going on?
Stumpf: And the board will do —
Warren: I will take that as a no, then.

Two things to note here: First of all is how Stumpf was trying to bring in his board of directors as the reason why he was not resigning. We will never know if his board quite frankly wanted him gone by this time but couldn’t get garner the guts to ask him to leave, after all he was both Chairman and CEO. Secondly, he also laid the decision to pay back his past bonuses squarely on the board’s hands. Under Warren’s probing eye, he was not trying to take the flak for not paying back unfairly earned bonuses. On this one, he was going to go down with his board. Having seen how Wall Street executives had walked away with a slap on the wrists following the global financial crisis of 2008, Warren went for the jugular:
Warren: OK, so you haven’t resigned, you haven’t returned a single nickel of your personal earnings, you haven’t fired a single senior executive. Instead evidently your definition of “accountable” is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership.

Stumpf, who had probably had the best legal brains prepare him for the Senate hearing, had even been trained on the classic “I don’t recall” technique for any questions whose answers might lead to self incrimination. But Warren was in no mood to take prisoners and gave the classic ultimatum.
“You know, here is what really gets me about this, Mr. Stumpf. If one of your tellers took a handful of $20 bills out of the cash drawer, they probably would be looking at criminal charges for theft.
They could end up in prison. But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multi-million dollar bonuses and you went on television to blame thousands of $12 an hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability. You should resign.
You should give back the money that you took while this scam was going on and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission. This just isn’t right. A cashier who steals a handful of twenties is held accountable. But Wall Street executives who almost never hold themselves accountable. Not now, and not in 2008 when they crushed the worldwide economy. The only way that Wall Street will change is if executives face jail time when they preside over massive frauds. We need tough new laws to hold corporate executives personally accountable and we need tough prosecutors who have the courage to go after people at the top. Until then, it will be business as usual. ”
It is noteworthy that it is not only Kenya that is struggling to get corrupt practices actively prosecuted, especially those perpetuated by “untouchables”. And after that lacerating and very public questioning, the bank’s independent directors announced on September 27th that Stumpf would not be receiving $41 million (Kes 4.1 billion) of promised compensation while they launched an independent investigation. Clearly, being thrown under Stumpf’s bus was not what they had signed up for and necessary action was taken.

John Stumpf threw in the towel and finally resigned on October 12th 2016 from the Wells Fargo Board and also stepped down from Chevron Corp and Target Corp on October 19th 2016 where he served as a non-executive director. An honorable action that was a day long and a dollar short.
[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

Our Banks Are Laundering Corruption Proceeds

A man walked into a Swiss bank and whispered to the manager “I want to open a bank account with 2 million dollars.” The Swiss manager answered, “You can say it louder, after all, in our bank poverty is not a crime.”

As the sun set on the month of March 2015, there was cause for much reflection by the various civil servants who found themselves on the “List of Shame” that read like a who’s who in Kenya’s enterprising and highly lucrative public service. I can only imagine how many folks in the civil service girdled their loins in preparation for battle as they poured over the list with bleary eyes that were bloodshot with the previous night’s spiritual indulgence, fervent in the hope that their names didn’t appear.

Well, there were no public gasps of shock or righteous indignation; Kenyans have truly become immune to lists of shame. As a Nigerian friend recently told me, it only makes news in Nigeria when a public official has stolen over $100 million – Kshs 91 billion . Anything beneath that is deemed verily normal. However, there seemed be a lot of skepticism as to what the definition of “stepping aside” truly meant and whether it would conform to the Kenyan precedent of lying low like an envelope for three to four months followed by a quiet slinking back into office under the cover of media darkness.

Good people, we are talking about hundreds, nay, billions of shillings that have been corruptly acquired. This is not an amount that can fit into your Little Red suit pocket, or tied into the corner knot of Mama Mboga’s khanga. These funds have to be moving within and around the Kenyan banking sector. Yes, the banking sector that has remained grossly silent and unapologetically mum about the billions in liability windfalls that have dropped miraculously from the sky. Picture this scene: Mr X has been banking at Bank Y for the last 10 years. His account turnover is about an average of Kshs 250,000 on a monthly basis. The account suddenly begins receiving deposits and withdrawals ranging from Kshs 20 to 100 million, which moves his average monthly turnover to about Kshs 50 million. The Anti Money Laundering officer, usually a skinny, bespectacled recent university graduate, flags these movements to his boss the Compliance Manager. The Compliance Manager flags it to his boss, the Risk Director. The Risk Director walks over to the Retail Director and shows him the transactions as he’s a smart chap who doesn’t want to put anything in writing, just yet. The Retail Director, who is royally chuffed that his liability targets are constantly met since his team’s successful senior civil servant recruitment drive last year, rubbishes the report and dares the Risk Director to take it higher, “Weeeh, even the Managing Director knows we have these accounts, can’t you see how they are helping our deposits to grow?” The Retail Director has been considering opening a branch for High Net Worth Individuals on the 10th floor of a new building in Westlands with a dedicated high speed lift from the basement, primarily to enable senior civil servants come and go easily without being noticed.

This scene is quite likely replicated across some of Kenya’s banks today that have “flexible” anti-money laundering (AML) rules and ill defined Know Your Customer (KYC) policies. Because if you Know Your Customer as per the Central Bank of Kenya guidelines, you should know your customer’s source of funds and be in a position to flag suspicious inordinate account activity on a real time basis; technically. The Central Bank inspectors who come round every so often, should also be able to pick up on this activity since they have access to the exception reports on account turnovers; technically. But does this happen? Let’s take a look at how developed markets penalize offending banks. In July 2013, Europe’s largest bank HSBC was accused of failing to monitor more than $670 billion in wire transfers and more than $9.4 billion in purchases of US dollars from HSBC Mexico, American prosecutors said. The bank was criminally charged with failing to maintain an effective anti-money laundering program, failing to conduct due diligence amongst other charges. Bloomberg Business reported that court filings by the US government indicated that lack of proper controls allowed the Sinaloa drug cartel in Mexico and the Norte del Valle cartel in Colombia to move more than $881 million through HSBC’s American unit from 2006 to 2010. HSBC was fined over $1.8 billion in penalties as a result.

Along more familiar bank territory, Standard Chartered agreed to pay $300 million to New York’s top banking regulator for failing to improve its money laundering controls, reported the BBC in August 2014. The Bank was also banned from accepting new dollar clearing accounts without the state’s approval. The penalty arose from a clear lack of learning as the bank had its AML problems identified in 2012 which had still not been fixed by 2014. The 2012 problems had led to the bank being penalized $340 million for allegedly hiding $250 billion worth of transactions with the highly sanctioned country of Iran. The banking regulator required that an independent monitor be installed at the bank and the monitor discovered that Standard Chartered had failed to detect a large number of potentially high-risk transactions.

At the risk of sounding judgmental, it’s quite likely that the banks in Kenya operating under international jurisdictions are applying their KYC and AML screws very tightly on what are termed as Politically Exposed Persons (PEPs) for no other reason than to avoid international notoriety of “chicken-gate” proportions. Actually, the corruption proceeds are more likely to be found in some of our local banks, mingling merrily amongst the hard earned proceeds of sweat generating wananchi.

Poor senior civil servants don’t exist in Kenya. They bank alongside the wealthy, productive citizens of this beloved country. Our banking industry knows them quite well.

[email protected]
Twitter: @carolmusyoka

Outsourcing the Government

The National Assembly today voted unanimously for the bill to outsource the oversight and representative role of parliament to a leading international audit firm CWP. The same bill also outsources the role of government ministries to Dineshco, a Business Processing Outsourcing company in Madras, India. The extraordinary bill was the brainchild of the Member of Parliament for a previously unheard of constituency in Kwale county, long known to have harboured desires for secession anyway. “Since Pwani cannot leave Kenya, the next best thing is for the government to leave us, and for us parliamentarians to leave ourselves,” said the diminutive and often vituperative MP.

The quotation above sounds like a ridiculous headline story in a freakish nightmare movie. But is it preposterous to think of outsourcing as the solution to the chasmic corruption in the executive and the cataclysmic rent seeking in the institution that is supposed to keep the executive in check, namely parliament? Think about it for a River Road minute. We find a company that is willing to run our government ministries and ensure that efficient service delivery is procured for the ultimate customer: the mwananchi. We pay the company a percentage of the national budget. The company then delivers proficient services in health, education, tourism, environment etc. procuring supplies from the least cost provider and leveraging on economies of scale just from ordering in bulk across the ministries. We throw out the Cabinet Secretaries, Principal Secretaries and the entire civil service. We will have a President who will be the head of the country in as much as the non-executive chairman of a private sector corporate is the ceremonial head of the institution.
The President is actively encouraged to visit schools and hospitals and take appropriate kissing baby pictures for the media.

We then turn our attention to parliament. We throw them all out. We hire an audit firm to provide monitoring and oversight over the company running the executive. We keep 47 senators who will represent the counties and meet the audit firm once a quarter to receive a report on what the company running the executive is doing. We allow the senators to ask questions relating to services that are being provided to their counties. The senators never meet the company. They only engage through the auditors. We actively encourage the senators to visit schools and hospitals in their counties and take appropriate kissing baby pictures for the media.

Kenya has now hardwired corruption both in its institutions and in its collective DNA. We have to reboot. But we have to outsource management of our institutions away while we reboot. The idea of outsourcing everything, while extreme, has been undertaken in smaller measures elsewhere that are worthy of mention.

The Financial Times, in its March 23rd 2015 edition ran a story headlined: UK government outsourcing raises questions over pay. It turns out that the coalition government in the UK has outsourced GBP 88 billion worth of contracts to the private sector. The FT also reports that more than 2,800 top-grade engineers – who service military equipment including aircraft at the Defence Ministry’s Defence Support Group – are expected to lose the right to their civil service terms on April 1st 2015 after the agency was sold for GBP 140M to the outsourcing company, Babcock. The FT article also cites the example of the Lincolnshire Police Force where the G4S security company manages a number of back office functions. G4S staff now supports police officers in the logistics and administration surrounding arrests, which frees up more expensive police resources to remain in front line roles.

A November 2014 article in The Economist also sheds some light on government outsourcing. Titled Government outsourcing: Nobody said it was easy, the article mentions that the two big private-prison firms in the United States, Corrections Corporation of America and GEO Group, have delighted shareholders with an average annualized return since 2004 of 18.5%. The main cause is America’s bloated justice system, which locks up more people than in other rich countries. An American online magazine published by GOVERNING, ran an interesting article on the pros and cons of privatizing government functions in December 2010.

An interesting excerpt is as follows: “This past March, for example, New Jersey Gov. Chris Christie created the state Privatization Task Force to review privatization opportunities within state government and identify barriers. In its research, the task force not only identified estimated annual savings from privatization totaling more than $210 million, but also found several examples of successful efforts in other states. As former mayor of Philadelphia, Pennsylvania Gov. Ed Rendell saved $275 million by privatizing 49 city services. Chicago has privatized more than 40 city services. Since 2005, it has generated more than $3 billion in upfront payments from private-sector leases of city assets. “Sterile philosophical debates about ‘public versus private’ are often detached from the day-to-day world of public management,” the New Jersey Privatization Task Force reported. “Over the last several decades, in governments at all levels throughout the world, the public sector’s role has increasingly evolved from direct service provider to that of an indirect provider or broker of services; governments are relying far more on networks of public, private and nonprofit organizations to deliver services.”
The report took careful note of another key factor: The states most successful in privatization created a permanent, centralized entity to manage and oversee the operation, from project analysis and vendor selection to contracting and procurement. For governments that forgo due diligence, choose ill-equipped contractors and fail to monitor progress, however, outsourcing deals can turn into costly disasters.”

All these stories are of course ringed by spectacular failures as in any industry. But they demonstrate a willingness to look externally for solutions when no internal ones are forthcoming or viable. We are collectively sick as a nation, perhaps it’s time to give others a chance to cure us from the corruption malaise that bedevils us.

[email protected]
Twitter: @carolmusyoka