Insight

What Were They Thinking?

What Were They Thinking?
JF

James Friedman

December 23, 2016 12:00 AM

Former U.S. Supreme Court Chief Justice Earl Warren used to say, “I always turn to the sports pages first, which records people’s accomplishments. The front page has nothing but man’s failures.”

This is true today more than ever. What were the boards of some large U.S. banking and manufacturing businesses thinking when they hired their CEOs? Where did these guys come from? Supposedly smart, talented, extremely well educated, and paid more money than their colleagues could ever hope to earn, they resorted to cheating—or at least created an environment where cheating for reward was possible. The ramifications to their companies, employees, customers, and industries are devastating. The monetary damages from shareholder and customer class actions and government penalties will be enormous, to say nothing of the long-term brand damage. Where were those directors in overseeing the policies and management of those companies?

But who in the banking industry really believed that, after Dodd–Frank, volume-based incentives would ever again make sense in banking? Yet six years later, we have sophisticated U.S. banks still incentivizing employees on a volume basis for opening fictitious deposit accounts and credit cards, and perhaps for originating loans for the sake of volume—the exact problem that led to the Recession in 2008 and the passage of Dodd–Frank, with its incentive compensation risktaking restrictions.

Six year later, we have sophisticated U.S. banks still incentivizing employees on a volume basis for opening fictitious deposit accounts and credit cards.

There’s no doubt that banking has become a very difficult business. Gone are the days of lending it out at six percent, taking it in at three percent, and being on the first tee by 3:00 p.m. As interest margins remain compressed and regulatory and operating expenses climb, banking becomes more of a public utility, expected to provide basic financial services within a very harsh regulatory environment and against difficult competitors and unregulated alternatives. Meaningful opportunity for revenue growth is limited. That, of course, does not justify unethical—and perhaps criminal—conduct in the hope of increasing revenue and return to shareholders, including management and director shareholders. It is really just evidence of laziness and arrogance. All businesses face challenges in a rapidly changing world of high economic expectations, but truly successful companies are smart, innovative, and focused on the best interests of their customers. They realize that profit evolves from the satisfaction of their customers. If you provide something customers need and want, you succeed. Customers do not need unauthorized accounts and credit cards. How could such an approach advance the interests of customers or the bank?

So how do I financially incentivize bank employees to sell services? Quality and desirable services are the first premise—if I don’t have what my customers need and cannot provide it at a reasonable price, I cannot succeed. But I can create incentives that have a volume aspect if I add a quality requirement to earn the incentive. Accounts, loans, credit cards, etc., have to be outstanding for some minimal period of time and be used by the customer in a way that illustrates that this arrangement is beneficial to the customer and profitable to the bank. Banking is a relationship sport, and incentives should relate to the development of the quality of that relationship over some basic time frame, not just to the generation of raw numbers. Only after that quality is achieved should the incentive be paid. If banking is treated as a commodity business, we may only need one bank.

Earl Warren also said, “I hate banks. They do nothing positive for anybody except take care of themselves. They’re first in with their fees and first out when there’s trouble.” That generalization is not the case with all banks, of course, but it is a common belief. The industry now has to work that much harder in this difficult environment to convince their customers that they are in it to serve them.

Related Articles

Basel III and New Challenges for Lending to Commercial Developments


by Mark K. Googins and Douglas F. Britton

Basel III

Too Good to Fail


by Best Lawyers

Sandro Abegglen discusses new regulations after financial crises, corruption, and more.

An Interview With Niederer Kraft Frey

Return the Favor When Bidding


by Denys Myrgorodskiy

Denys Myrgorodskiy, the managing partner of Dynasty Law Firm, looks at the process of withdrawing insolvent banks from the market in Ukraine and its potential consequences.

New Bank Fraud Laws in Ukraine

The Great Reckoning


by John Ettorre

Eight years after the financial crisis, aftereffects continue to ripple through the financial sector.

The Great Reckoning

Fluctuations within Fraud, White-Collar Sentencing


by Evelina Burnett

White-Collar Sentencing

An Imprudent Customer and His Money Reunited: Fos Imposes A New Duty On Banks To Prevent Fraud


by Michael Chaaya

"The Financial Ombudsman Service Australia (FOS) issued a Determination whereby a bank had to reimburse a customer for money sent to an offshore ‘boiler room’ known to the bank to be a scam."

Preventing Financial Fraud

Trending Articles

Presenting The Best Lawyers in Australia™ 2025


by Best Lawyers

Best Lawyers is proud to present The Best Lawyers in Australia for 2025, marking the 17th consecutive year of Best Lawyers awards in Australia.

Australia flag over outline of country

How To Find A Pro Bono Lawyer


by Best Lawyers

Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.

Hands joined around a table with phone, paper, pen and glasses

How Palworld Is Testing the Limits of Nintendo’s Legal Power


by Gregory Sirico

Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.

Animated figures with guns stand on top of creatures

Announcing The Best Lawyers in New Zealand™ 2025 Awards


by Best Lawyers

Best Lawyers is announcing the 16th edition of The Best Lawyers in New Zealand for 2025, including individual Best Lawyers and "Lawyer of the Year" awards.

New Zealand flag over image of country outline

Announcing The Best Lawyers in Japan™ 2025


by Best Lawyers

For a milestone 15th edition, Best Lawyers is proud to announce The Best Lawyers in Japan.

Japan flag over outline of country

The Best Lawyers in Singapore™ 2025 Edition


by Best Lawyers

For 2025, Best Lawyers presents the most esteemed awards for lawyers and law firms in Singapore.

Singapore flag over outline of country

How Much Is a Lawyer Consultation Fee?


by Best Lawyers

Best Lawyers breaks down the key differences between consultation and retainer fees when hiring an attorney, a crucial first step in the legal process.

Client consulting with lawyer wearing a suit

Presenting the 2024 Best Lawyers Employment and Workers’ Compensation Legal Guide


by Best Lawyers

The 2024 Best Lawyers Employment and Workers' Compensation Legal Guide provides exclusive access to all Best Lawyers awards in related practice areas. Read below and explore the legal guide.

Illustration of several men and women in shades of orange and teal

Things to Do Before a Car Accident Happens to You


by Ellie Shaffer

In a car accident, certain things are beyond the point of no return, while some are well within an individual's control. Here's how to stay legally prepared.

Car dashcam recording street ahead

Combating Nuclear Verdicts: Empirically Supported Strategies to Deflate the Effects of Anchoring Bias


by Sloan L. Abernathy

Sometimes a verdict can be the difference between amicability and nuclear level developments. But what is anchoring bias and how can strategy combat this?

Lawyer speaking in courtroom with crowd and judge in the foreground

Attacked From All Sides: What Is Happening in the World of Restrictive Covenants?


by Christine Bestor Townsend

One employment lawyer explains how companies can navigate challenges of federal and state governmental scrutiny on restrictive covenant agreements.

Illustration of two men pulling on string with blue door between them

The Push and Pitfalls of New York’s Attempt to Expand Wrongful Death Recovery


by Elizabeth M. Midgley and V. Christopher Potenza

The New York State Legislature recently went about updating certain wrongful death provisions and how they can be carried out in the future. Here's the latest.

Red tape blocking off a section of street

Georgia Proposes Law Requiring Parental Consent for Minors on Social Media


by Gregory Sirico

With data collection on the rise, Georgia lawmakers are currently petitioning for Senate Bill 351, which would require a user's age before social media use.

Teenager with hood on using phone as notifications pop up

Colorado Attorney General Calls For Cannabis Reclassification


by Gregory Sirico

In this article, Best Lawyers highlights a recent call to action by the Colorado state attorney general, requesting a full drug reclassification of cannabis.

Cannabis buds sitting on a checkerboard tabletop

6 Ways a Lawyer Can Help You With Your Medical Malpractice Claim


by Adam Malone

If you believe you have a medical malpractice claim, contact an experienced medical malpractice lawyer. Read on to learn how they can help with your claim.

Doctor in white lab coat showing x-ray to patient in blue scrubs

An Employer’s Guidebook to Responding to Online Harassment


by Belle Harris and Brent Siler

Navigating online defamation against your business requires strategic responses. Two employment lawyers guide how to leverage contracts, understand social media limitations and the risks of legal action.

Image of person pushing giant phone with mouth and words coming out