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Risk Insider: Nir Kossovsky

How Many Blows to the Head Can Wells Fargo Take?

By: | August 22, 2017 • 3 min read
Nir Kossovsky is the Chief Executive Officer of Steel City Re. He has been developing solutions for measuring, managing, monetizing, and transferring risks to intangible assets since 1997. He is also a published author, and can be reached at [email protected]

Medical science — and the NFL — have now come to recognize that repeated blows to the head, like those commonly suffered by football players, lead to a form of brain damage known as Cumulative Traumatic Encephalopathy or CTE.  It took years to acknowledge despite mounting evidence, at least partly because addressing the issue would require significant action and a change in culture throughout the league.

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There are several parallels that can be drawn between the current reputational crisis at Wells Fargo and the CTE crisis faced by the NFL.

First, a scandal involving phony accounts, followed by CEO and board departures. Now another scandal involving charges for insurance on auto loans — this one on the watch of the company’s new leadership. It’s a general rule of thumb that corporate reputations recover from crises more easily than do the reputations of individuals, but still, how much pounding can one brand take?

Just as the NFL has tried to do a better job of protecting players, employing technology in an effort to produce better helmets and seeking to alter player behavior through penalties and fines, Wells Fargo has tried to correct course through the appointment of new leadership and the promise of greater transparency and accountability.  But just as the NFL’s early refusals to acknowledge the CTE problem damaged its credibility, Wells Fargo’s inability to execute on its course correction — even with new leadership in place — has put the bank in a very deep credibility and reputational hole.

Reputation is essentially a product of stakeholder expectations. A reputational crisis occurs when stakeholders are angry over a failure to meet those expectations.  Credibility, integrity and reliability are values that stakeholders in any organization normally believe they can take for granted.

The personal reputations of the individuals in leadership are far more fragile. When their reputations sink, they lose their executive positions, their board seats and their compensation.

After years of denials and foot dragging at the NFL over CTE, the burden of convincing the public that they are serious about addressing it has become far greater than it would have been if they’d taken more of a leadership role in solving the problem when it first became known.

That leadership would have meant adopting many of the practices they ultimately adopted — changing rules on tackling and hits, imposing penalties and fines for violating those rules and using technology to develop better helmets. Immediate action would have delivered a simple-to-understand and completely credible message to NFL’s stakeholders that they were serious about protecting the players, and the reputations of both the teams and the league. Delaying in the face of mounting evidence caused lasting damage to the league’s credibility and reputation.

As for banks such as Wells Fargo, such leadership would have been a combination of better governance and internal controls to mitigate unauthorized “contacts” and the use of insurance solutions that act as third-party warranties and form the basis for a defense for the bank’s leadership in the event of inadvertent “contact.”

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How would such insurances be structured? Just as medical science has allowed us to understand the nature of CTE better, new algorithms now allow us to predict and measure reputational damage at corporations. We now know that each new reputational crisis at Wells Fargo makes the hole much deeper and the climb-out much steeper. Repeated blows to its reputation will eventually cause its stock price to suffer the financial equivalent of dementia.

In all likelihood, Wells Fargo will power through this crisis as other large, well known corporate brands have done in similar situations. With strong leadership in place and the significant marketing and other resources they can deploy — if it avoids further missteps — the company can chart a course toward reputational recovery.

The personal reputations of the individuals in leadership are far more fragile.  When their reputations sink, they lose their executive positions, their board seats and their compensation.

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The R&I Editorial Team can be reached at [email protected]