2222222222

Risk Insider: Nir Kossovsky

Wells Fargo, Reputation and the Wisdom of Crowds

By: | October 24, 2016 • 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]

My firm relies on prediction markets to inform indices of reputation that provide a quantitative measure of governance, risk and compliance as perceived by stakeholders. We call them reputational value metrics.

In mid-2014, Wells Fargo’s metrics were getting notably more volatile, indicating that members of the crowds of Wells Fargo stakeholders, in their wisdom, were worried.

Advertisement




Between June and December 2014, Wells was losing in the courts in a number of mortgage-related matters, including additional lawsuits from home lending practices thought to have been settled in 2012; new suits for “equity stripping;” discrimination against pregnant applicants; federal insurance fraud and newly discovered compliance failures.

While publicly there was no mention of the underlying issue of the current reputation crisis, which stems from Wells Fargo’s aggressive cross-selling program, it is fair to speculate that many stakeholders were both experiencing and signaling discomfort with it.

Now, with the benefit of hindsight, there are three pieces of evidence pointing to the inevitability of this crisis.

Wells Fargo lost track of the financial importance (and therefore risk) of cross-selling, misunderstood reputation risk, and mismanaged risk management at the board level.

Disclosed in unusual detail in Wells Fargo’s 10Ks of 2013 and 2014–but not 2015-was the operational risk of…

…’cross-selling’ efforts to increase the number of products our customers buy from us …[which] is a key part of our growth strategy… [with the risk being that] we might not attain our goal of selling an average of eight products to each customer.

Wells Fargo thought reputation risk and adverse publicity could impair cross-selling. It did not appreciate that cross-selling could give rise to reputation risk, notwithstanding a scathing LA Times expose in December 2013.

The company’s blindness to the risk resulted from the distribution of risk oversight among board committees.

Wells Fargo lost track of the financial importance (and therefore risk) of cross-selling, misunderstood reputation risk, and mismanaged risk management at the board level.

At Wells Fargo, Reputation Risk is under the purview of the Corporate Responsibility Committee; Enterprise Risk is under a separate Risk Committee to whom the Chief Risk Officer is also attached; Ethics/Business Conduct Risk is under the Audit Committee, and Compensation Risk is under the purview of Human Resources Committee.

This means that the reputational crisis that emerged from Wells Fargo’s cross-selling strategy with inherent compensation risk, ethical risks and operational risks sprouted and blossomed under the watchful eyes of at least four separate board committees.

The tipping point came in early September 2016 in a public disclosure that the Consumer Financial Protection Bureau (CFPB), the Los Angeles City Attorney and the Office of the Comptroller of the Currency (OCC) fined the bank $185 million.

The regulators alleged that as the result of perverse incentives, unethical behaviors and ineffective operational oversight, more than 2 million bank accounts or credit cards were opened or applied for without customers’ knowledge or permission between May 2011 and July 2015.

The classical manifestations of a reputational crisis then materialized, as customers broke off relations, employees sued, customers sued, investors sued, the stock price fell at least 7 percent, executives lost their heads and the regulators piled on.

One wonders how many Wells Fargo board members are concerned about finding themselves testifying before one of the legislative body’s many oversight committees.

One way to communicate authentic rehabilitation is to share with its competitors its strategy for mitigating this “industry-wide” risk.

While damage to the personal reputations of John Stumpf and others may be permanent, companies have a way of recovering. Wells Fargo has acknowledged the error and within a week of the September reveal, terminated the cross-selling program.

The last and most critical steps are still to come. First, the company must streamline its risk oversight process to account for the interplay between operational risks, liquidity risks, and reputational risks.

Advertisement




To capture the benefits of improved governance, Wells Fargo then needs to communicate its changes to the many stakeholders that now view the bank with a jaundiced eye. One way to communicate authentic rehabilitation is to share with its competitors its strategy for mitigating this “industry-wide” risk.

Another way is to communicate to those who look for vulnerabilities in governance (read, activists) that third parties are attesting — dare I say warrantying — the new improved governance processes at Wells Fargo.

Unfortunately, odds are that Wells Fargo will follow a time-honored tradition of putting the cart before the horse by first engaging in an expensive communications campaign while hiring an expensive law firm to discover what went wrong.

Time will tell.

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

Advertisement




With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.

The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.

The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”

Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.

Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.

The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney

However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.

Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.

Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.

A Legislative Movement

Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”

Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.

Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.

The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust

It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.

Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.

Advertisement




So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.

The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.

These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.

Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.

That could destabilize social safety nets as well as shrink available workers’ comp premiums.

A New Classification

Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage.  Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.

The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.

What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.

There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.

Advertisement




Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.

Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”

A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.

The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]