Should we believe the performance narratives top executives present? Whose responsibility is it to identify and correct corporate wrongdoing? Can repeat-offender businesses be successfully rehabilitated?
These and other questions were part of a recent panel discussion sponsored by the Stanford Graduate School of Business’s Corporations and Society Initiative. Professor Anat R. Admati, the initiative’s faculty director, moderated.
“Successful business leaders often set lofty goals,” Admati said as part of the introduction. “But we want them to maintain a culture of honesty, without mistreating, deceiving, and harming.”
Three expert panelists discussed how businesses and their leaders may fail to meet that standard and what can be done about it: Fahmi Quadir, chief investment officer of Safkhet Capital, a New York City-based short-only hedge fund; Wall Street Journal reporter Emily Glazer, who covers Wells Fargo and JPMorgan Chase; and Jed S. Rakoff, a longtime federal judge in the U.S. District Court for the Southern District of New York and former federal prosecutor and white-collar defense lawyer.
The panelists agreed that the potential for U.S. corporate misbehavior remains high, and they offered insights on the full context for misconduct and practical advice for mitigation.
Get the Real Story
A big challenge in assessing corporate behavior is looking for darker issues past executives’ rosy narratives.
“It comes down to asking the right questions,” short seller Quadir said. She reviews balance sheets, for example, because earnings and other reports can be manipulated. “I also do real-life, shoe-leather-type field work,” such as engaging with customers and potential whistle-blowers and sharing what she finds with journalists and regulators.
Journalist Glazer agreed. “There are no stupid questions,” he said. “But I’m not doing my job if I’m just sitting in my office.” She gains vital, scoop-fueling information from shareholders, current and former employees, regulators, and others. She takes care to cultivate credible sources, as she did in her coverage of Wells Fargo’s 2016 sales-practices scandal: “They provide a gut-check.”
A Systemic Problem
Several systemic factors promote wrongdoing, including shifts in prosecution trends and cultures of denial and threat.
“The prosecution of corporate crime has deteriorated significantly in the U.S. over the last 20 years,” Judge Rakoff said. Before 2000, he pointed out, the Department of Justice strove to identify the highest-level individual perpetrators, resulting in successful prosecution of executives like Enron’s Jeff Skilling and WorldCom’s Bernard Ebbers.
But federal prosecutors shifted targets in the new millennium, opting to pursue companies rather than individuals, with the goal of changing corporate culture — think fines for businesses rather than jail time for executives. It hasn’t worked as hoped, Rakoff noted, pointing to research showing high rates of recidivism and little cultural change. Politics is partly to blame, he added. “The crime of even the lowest-level individual done for the corporation can be imputed to the corporation. So the company in a typical case is dead in the water and has to pay big fines. That’s politically attractive [for prosecutors].”
Beyond shifts in prosecution trends, companies are often unwilling to address problematic cultures or are even in denial about them. As Glazer described, “Amid the  scandal, Wells Fargo’s top executive said, ‘We do not have a culture problem — it’s just a certain part of the bank.’ From there we saw problem after problem [yielding multiple regulatory warnings].”
Quadir experienced a culture of denial and even threat firsthand when she attended a health care company’s secretive Investor Day. The CEO and other employees tried to intimidate and discredit her when they saw her recording the presentation: “Is it good character to be engaging in [such] attacks?” She pointed out that companies acting this way can be seen as hiding something from shareholders and regulators.
The panelists discussed the need for greater accountability system-wide.
“We are too dependent on CEO founders,” Quadir argued. “Probably due to the rise of Silicon Valley tech firms. We applaud such executives when they surround themselves with yes-men. There are no checks and balances. No one wants accountability.”
“When you surround yourself with the same people, you’re not getting a fresh perspective,” Glazer added, noting that nine Wells Fargo directors served between 5 and 15 years.
Part of the accountability problem, too, is diminished regulation. “Key organizations that protect the public are being disarmed,” Quadir said. “Regulators are under-resourced. It often takes years for them even to investigate. Investors aren’t holding corporations to account. The justice system isn’t, either.”
Outsourced Investigation and Compliance
When it comes to investigating and rectifying corporate wrongdoing, much of the work is now handled by third parties rather than federal agencies.
When prosecutors find a problem at a company, Rakoff said, “The company will have an outside counsel say [to prosecutors], ‘We are prepared to investigate. We will get you the answers.’ It’s very hard for the prosecutor to say no.” And instituting compliance measures that come out of such investigations typically involves outside parties — expensive ones. “All of this,” Rakoff said, “comes out of the pockets of the innocent shareholders.”
He noted evidence that all the effort generates little payoff: “Pfizer is the poster child here. The company went through four deferred prosecution agreements and broke each one. But the government was afraid to put it out of business, which would have been unfair to shareholders and employees.”
Still, there remain signs of hope.
For instance, after being fined by the Consumer Financial Protection Bureau for opening fraudulent accounts in customers’ names, Wells Fargo reexamined employee and leadership incentives carefully. “Wells Fargo has significantly changed how it compensates executives,” Glazer said. The company has instituted significant clawbacks and cuts to executive pay since the 2016 scandal. Since the sales-practices controversy, the bank “changed the way it acknowledges problems, comes forth with what it is or is not doing, and is trying to be more transparent,” she added.
“Regulators are still doing their jobs,” Glazer continued. “The amounts of fines — like Bank of America’s $16.65 billion [in 2014] or Wells Fargo’s $4 billion [over recent years] — really can dictate how much attention is given.”
Quadir pointed out the unpremeditated nature of some wrongdoing: “Not all companies that commit fraud are doing so intentionally. Sometimes, you’re between a rock and a hard place. So you’ll bring in outsiders to investigate and actually make that report public to your investors. It really comes down to transparency.”
Rakoff took a global perspective to provide further context: “American businesspeople as a whole are far more honest than in a great many countries.” He pointed out the endemic corruption observed in cases such as Brazilian energy giant Petrobras and its suppliers — “corrupt from top to bottom.”
He concluded, “As a whole we [Americans] have much to be proud of.”