“There was no incentive to do bad things.”
With this short statement,
“Everything we do is built on trust.” So begins Wells Fargo’s vision and values statement, featured prominently on its website. It goes on to characterize the firm’s culture: a “pattern of thinking and acting with the customer in mind … the habit of doing the right things, and doing things right.”
That’s the tone from the top. And in an interview with the Wall Street Journal, Mr. Stumpf took cover behind this lofty language and sought to paint recent problems at his firm as being limited to a small group of rogue employees whose misdeeds landed him in the crosshairs of regulators, prosecutors and the Senate Banking Committee. "If they’re not going to do the thing that we ask them to do— put customers first, honor our vision and values — I don’t want them here,” he said.
We don’t doubt Mr. Stumpf’s sincerity. But, our experience working in senior policy-making roles in the financial sector and investigating malfeasance at large organizations across the globe, suggests that Mr. Stumpf’s employees were doing precisely the things that they were asked to do by management – even if such asking was tacit, or implicit in shared group norms.
Prosecutors will look closely for evidence of any formally sanctioned incentives “to do bad things” at Wells Fargo. While such evidence may or may not be found, it is already abundantly clear that informal incentives were at play, shaping employee behavior predictably.
This is the “tone from the middle.” It is here that greater attention is warranted – and where many company leaders fail to look closely enough. Because events in the financial sector have such broad impact on society, as seen during the financial crisis, it is all the more incumbent that bank leaders consider tone from the middle far more conscientiously.
“Context drives conduct,” the NY Fed’s Bill Dudley rightly asserts. And while this is true at every company, banks appear to struggle with this behavioral dynamic with a particular intensity.
Consider: a recent study found that bankers – when primed to think of themselves as bankers – engaged in markedly increased levels of cheating. This “identity priming” phenomenon appears unique to those in banking. Plumbers don’t cheat more when primed to think of themselves as plumbers. Nor do teachers, doctors, lawyers or people in any other profession that the study’s authors examined. Bankers consistently do.
“Our results thus suggest that the prevailing business culture in the banking industry weakens and undermines the honesty norm,” the authors conclude starkly. While clearly a generalization, the tone from the middle in banking seems to drive just the sort of problems that now bedevil Wells Fargo. It’s “the barrel” that shapes “the apples,” and Mr. Strumpf should embrace this fact.
Human nature is such that we are persistently incentivized to indulge our baser instincts in ways large and small, formal and informal, consciously and not so. Students are incentivized to cheat on tests in order to “earn” a better grade. Dieters are incentivized to cheat when offered chocolate cake. And so on. There is no shortage of incentives to engage in poor behavior.
The salient question is, therefore: why do we not do so? And the answer illustrates the informal incentives established by tone from the middle.
For humans, most social of all animals, group acceptance is perhaps the greatest informal incentive going. To win it, we’re prompted by evolution to mimic our peers’ behavior – and to refrain from doing anything they’re unlikely to approve.
Consider your own experience with driving. If the limit is 45 mph but a majority of drivers around you are doing 55 mph, you will almost certainly drive somewhere between about 52 and 58 mph. The posted speed limit represents the tone from the top. But the tone from the middle prevails.
The tone from the middle is a firm’s culture. When thousands of Wells Fargo employees engage, fairly openly, in illicit behavior – acts that some referred to overtly in emails as “sandbagging” – it is hard not to conclude that management at the bank failed to curb a culture of contempt: for customers, for the law and, ultimately, for shareholders.
As legislators, regulators, prosecutors and executives at Wells Fargo seek to determine how such broad misconduct occurred, the tone from the middle should occupy their focus.
Stephen Scott, a former congressional investigator and operational risk consultant, is the founder of Starling Trust Sciences. Jeffrey Kupfer, a former U.S. Treasury official, is a co-founder of Starling.
