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.

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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.

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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

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The Profession

For This Pharmaceutical Risk Director, Managing Risk Means Being Part of the Mission to Save Lives

Meet Eric Dobkin, director, insurance and risk management, for Merck & Co. Inc.
By: | September 28, 2018 • 5 min read

R&I: What was your first job?
My first job out of undergrad was as an actuarial trainee at Chubb.I was a math major in school, and I think the options for a math major coming out are either a teacher or an actuary, right? Anyway, I was really happy when the opportunity at Chubb presented itself. Fantastic company. I learned a lot there.

R&I: How did you come to work in risk management?
After I went back to get my MBA, I decided I wanted to work in corporate finance. When I was interviewing, one of the opportunities was with Merck. I really liked their mission, and things worked out. Given my background, they thought a good starting job would be in Merck’s risk management group. I started there, rotated through other areas within Merck finance but ultimately came back to the Insurance & Risk Management group. I guess I’m just one of those people who enjoy this type of work.

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R&I: What is risk management doing right?
I think the community is doing a good job of promoting education, sharing ideas and advancing knowledge. Opportunities like this help make us all better business partners. We can take these ideas and translate them into actionable solutions to help our companies.

R&I: What could the risk management community be doing a better job of?
I think we have made good advancements in articulating the value proposition of investing in risk management, but much more can be done. Sometimes there is such a focus on delivering immediate value, such as cost savings, that risk management does not get appropriate attention (until something happens). We need to develop better tools that can reinforce that risk management is value-creating and good for operational efficiency, customers and shareholders.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?
I’d actually say there hasn’t been as much change as I would have hoped. I think the industry speaks about innovation more often than it does it. To be fair, at Merck we do have key partners that are innovators, but some in the industry are less enthusiastic to consider new approaches. I think there is a real need to find new and relevant solutions for large, complex risks.

R&I: What emerging commercial risk most concerns you?
Cyber risk. While it’s not emerging anymore, it’s evolving, dynamic and deserves the attention it gets. Merck was an early adopter of risk transfer solutions for cyber risk, and we continue to see insurance as an important component of the overall cyber risk management framework. From my perspective, this risk, more than any other, demands continuous forward-thinking to ensure we evolve solutions.

R&I: What’s the biggest challenge you’ve faced in your career?
Sticking with the cyber theme, I’d say navigating through a cyber incident is right up there. In June 2017, Merck experienced a network cyber attack that led to a disruption of its worldwide operations, including manufacturing, research and sales. It was a very challenging environment. And managing the insurance claim that resulted has been extremely complex. But at the same time, I have learned a tremendous amount in terms of how to think about the risk, enterprise resiliency and how to manage through a cyber incident.

R&I: What advice might you give to students or other aspiring risk managers?
Have strong intellectual curiosity. Always be willing to listen and learn. Ask “why?” We deal with a lot of ambiguity in our business, and the more you seek to understand, the better you will be able to apply those learnings toward developing solutions that meet the evolving risk landscape and needs of the business.

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R&I: What role does technology play in your company’s approach to risk management?
We’re continuing to look for ways to apply technology. For example, being able to extract and leverage data that resides in our systems to evaluate risk, drive efficiencies and make things like property-value reporting easier. We’re also looking to utilize data visualization tools to help gain insights into our risks.

R&I: What are your goals for the next five to 10 years of your career?
I think, at this time, I would like to continue to learn and grow in the type of work I do and broaden my scope of responsibilities. There are many opportunities to deliver value. I want to continue to focus on becoming a stronger business partner and help enable growth.

R&I: What is your favorite book or movie?
I’d say right now Star Wars is top on my list. It has been magical re-watching and re-living the series I watched as a kid through the eyes of my children.

R&I: What is the riskiest activity you ever engaged in? When I was about 15, I went to a New York Rangers versus Philadelphia Flyers game at the Philadelphia Spectrum. I wore my Rangers jersey. I would not do that again.

Eric Dobkin, director, insurance & risk management, Merck & Co. Inc

R&I: What is it about this work you find most fulfilling or rewarding?
I am passionate about Merck’s mission of saving and improving lives. “Inventing for Life” is Merck’s tagline. It’s funny, but most people don’t associate “inventing” with medicine. But Merck has been inventing medicines and vaccines for many of the world’s most challenging diseases for a long time. It’s amazing to think the products we make can help people fight terrible diseases like cancer. Whatever little bit I can do to help advance that mission is very fulfilling and rewarding.

R&I: What do your friends and family think you do?
Ha! My kids think I make medicine. I guess they think that because I work for Merck. I suppose if even in a small way I can contribute to Merck’s mission of saving and improving lives, I am good with that. &




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]