{"id":9951,"date":"2023-05-17T11:13:41","date_gmt":"2023-05-17T15:13:41","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/corporate-and-executive-consequences-for-bad-behavior-must-be-higher\/"},"modified":"2023-05-17T11:13:42","modified_gmt":"2023-05-17T15:13:42","slug":"corporate-and-executive-consequences-for-bad-behavior-must-be-higher","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=9951","title":{"rendered":"Corporate and executive consequences for bad behavior must be higher"},"content":{"rendered":"
\n

From long experience in and around business \u2014 in corporate management, running small operations, and studying and documenting the doings of companies \u2014 it has become clear to me that the way executives view the world is largely different from most individuals.<\/p>\n

It is this difference that explains the comings and goings of companies like Wells Fargo
\n WFC
\n <\/fbs-ticker>, which just agreed to another<\/em> billion-dollar payout, this time to shareholders who accused the business making misleading statements about statements to regulators, as ABC News and others reported.<\/p>\n

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Not to say that executives aren\u2019t human and don\u2019t have their own motivations aside from the good of companies. One important basis of marketing to a corporation, for example, is to remember that individuals have their own career interests. Sometimes decisions are taken to satisfy individuals\u2019 needs.<\/p>\n

But that can\u2019t exist solely in an organization where investors or owners keep an eye on their own financial interests. The questions of revenues and profits is always close to hand, and so are costs, all relative to one another. Sometimes companies do something that could get the business, executives, or investors in trouble, but where the consequences are in comparison light enough that they become a cost of doing business.<\/p>\n

People do this as well \u2014 paying for a babysitter to watch the kids so a parent can get an important project done in off hours, having a clearer come in before a party to straighten up and buy more time, letting a parking meter run out for convenience and then paying a ticket. All self-imposed penalties in the sense that you accept an additional cost to smooth out a day or make something possible. The difference between the average person and a corporation is the scale and, in some cases, maybe the willingness to break the law.<\/p>\n

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Take Wells Fargo again as a poster child for invoking regulatory action. Just a few touchpoints: the 2017 discovery of massive fraudulent account openings, overcharging of commercial customers that resulted in a settlement in 2021, another multi-billion fine in 2022.<\/p>\n

The Street pulled together some numbers that may or may not represent all the payments and fines add up on my calculator to $8.06 billion.<\/p>\n

How can any set of corporate executives allow this? Because it\u2019s in a bigger context of vast numbers. The initial discovery of massive fraud in accounts pointed to a start in 2002. Using data from S&P Global Market Intelligence, I added the net incomes \u2014 the term on an income statement for profits \u2014 from 2002 through 2022. The total: $297.02 billion. The $8.06 billion in fines and payments in lawsuits represents 2.7% of those profits.<\/p>\n

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The question that is next to impossible to answer from the outside is what the total net income would have been without those actions that caused regulatory and legal redress on one side and civil lawsuits on the other. So long as the additional net income was big enough in comparison to the fines, in one sense you could argue from a purely financial view that it was a profitable trade-off.<\/p>\n

Our legal and regulatory systems don\u2019t cope well with this issue. Numbers that are huge to the average person become almost meaningless to a company, and Wells Fargo, while extreme, isn\u2019t the only example, especially when you realize that companies may not be breaking any laws but instead taking a cheaper way out of a problem.<\/p>\n

In 2018 at another site, I explained why massive data leaks kept happening. One reason was, and is, that they can afford to lose customer data and protecting it adequately can be more expensive. Larry Ponemon, chairman of the Ponemon Institute, whose figures on data breaches are often quoted in the media, told me that the cost of a breach to big corporations \u201cis a rounding error\u201d and that a company bringing in between $100 million and $25 billion or more in annual revenue \u201cspends more money buying coffee for its office workers.” At the same time, the costs of improving cybersecurity would be significantly larger and insurance typically covers the losses.<\/p>\n

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Again, these are just examples. Environmental breaches, accounting manipulations, and other types of misfeasance, malfeasance, and nonfeasance can all play out along similar lines.<\/p>\n

There are multiple potential explanations of why the punishment rarely seems high enough to promote better behavior within industries. It may be that the public and elected officials overestimate the significance of fine amounts. What seems like a big number is, as Ponemon said, coffee money.<\/p>\n

Regulatory capture, described by the CFA Institute as \u201ca phenomenon that occurs when a regulatory agency that is created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate an industry or sector the agency is charged with regulating,\u201d could misdirect efforts and keep fines within a level that is considered acceptable within an industry.<\/p>\n

When it comes to shareholder lawsuits, like the one Wells Fargo just settled, there is also the possibility of the plaintiffs not thinking rationally, because the money to pay the fine comes out of the profits Wells Fargo makes, which are value that directly and indirectly benefits those shareholders. In other words, they\u2019re taking money out of one pocket and putting it into another. There could also be a cynical manipulation if only a relatively small group of shareholders participates rather than all, because that would concentrate and then reallocate value into the pockets of the plaintiffs.<\/p>\n

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Although corporations are legal entities \u2014 \u201cpeople,\u201d as many say in the wake of multiple Supreme Court decisions that go back to the opening of the 19th century \u2014 they aren\u2019t conscious individuals. Instead, they are directed by executives and boards. To really make companies act with greater care, the people who made the decisions should also pay a significant price. But while that happens at times \u2014 Enron, for example, or even Carrie Tolstedt, the former head of Wells Fargo\u2019s retail bank, who pleaded guilty in March to obstructing a bank examination and faces possible jail time, as Reuters and others reported \u2014 it is extremely rare.<\/p>\n

For example, after the 2008 Global Financial Crisis, while \u201cthe Securities and Exchange Commission has brought charges against more than 150 people and institutions, and won $2.68 billion in penalties,\u201d according to Frontline, the \u201cnumber of Wall Street executives prosecuted for fraud related to the financial meltdown that left 8.8 million Americans jobless and led to a $700 billion government bailout\u201d was zero.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

From long experience in and around business \u2014 in corporate management, running small operations, and studying and documenting the doings of companies \u2014 it has become clear to me that the way executives view the world is largely different from most individuals. It is this difference that explains the comings and goings of companies like […]<\/p>\n","protected":false},"author":1,"featured_media":9952,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-9951","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news","tag-featured"],"yoast_head":"\nCorporate and executive consequences for bad behavior must be higher | iFintechWorld<\/title>\n<meta name=\"description\" content=\"From long experience in and around business \u2014 in corporate management, running small operations, and studying and documenting the doings of companies \u2014 it\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=9951\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta 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