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

Fluctuations within Fraud, White-Collar Sentencing


by Evelina Burnett

White-Collar Sentencing

The Great Reckoning


by John Ettorre

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

The Great Reckoning

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

2025 Best Lawyers Awards Announced: Honoring Outstanding Legal Professionals Across the U.S.


by Jennifer Verta

Introducing the 31st edition of The Best Lawyers in America and the fifth edition of Best Lawyers: Ones to Watch in America.

Digital map of the United States illuminated by numerous bright lights

Unveiling the 2025 Best Lawyers Awards Canada: Celebrating Legal Excellence


by Jennifer Verta

Presenting the 19th edition of The Best Lawyers in Canada and the 4th edition of Best Lawyers: Ones to Watch in Canada.

Digital map of Canadathis on illuminated by numerous bright lights

Legal Distinction on Display: 15th Edition of The Best Lawyers in France™


by Best Lawyers

The industry’s best lawyers and firms working in France are revealed in the newly released, comprehensive the 15th Edition of The Best Lawyers in France™.

French flag in front of country's outline

Announcing the 13th Edition of Best Lawyers Rankings in the United Kingdom


by Best Lawyers

Best Lawyers is proud to announce the newest edition of legal rankings in the United Kingdom, marking the 13th consecutive edition of awards in the country.

British flag in front of country's outline

Announcing the 16th Edition of the Best Lawyers in Germany Rankings


by Best Lawyers

Best Lawyers announces the 16th edition of The Best Lawyers in Germany™, featuring a unique set of rankings that highlights Germany's top legal talent.

German flag in front of country's outline

Prop 36 California 2024: California’s Path to Stricter Sentencing and Criminal Justice Reform


by Jennifer Verta

Explore how Prop 36 could shape California's sentencing laws and justice reform.

Illustrated Hands Breaking Chains Against a Bright Red Background

Celebrating Excellence in Law: 11th Edition of Best Lawyers in Italy™


by Best Lawyers

Best Lawyers announces the 11th edition of The Best Lawyers in Italy™, which features an elite list of awards showcasing Italy's current legal talent.

Italian flag in front of country's outline

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

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

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

Tampa Appeals Court ‘Sends Clear Message,” Ensuring School Tax Referendum Stays on Ballot


by Gregory Sirico

Hillsborough County's tax referendum is back on the 2024 ballot, promising $177 million for schools and empowering residents to decide the future of education.

Graduation cap in air surrounded by pencils and money

Find the Best Lawyers for Your Needs


by Jennifer Verta

Discover how Best Lawyers simplifies the attorney search process.

A focused woman with dark hair wearing a green top and beige blazer, working on a tablet in a dimly

Key Developments and Trends in U.S. Commercial Litigation


by Justin Smulison

Whether it's multibillion-dollar water cleanliness verdicts or college athletes vying for the right to compensation, the state of litigation remains strong.

Basketball sits in front of stacks of money

Is Premises Liability the Same as Negligence?


by Jeremy Wilson and Taylor Rodney Marks

In today's age, we are always on the move, often inhabiting spaces we don't own. But what happens when someone else's property injures you or someone you know?

A pair of silhouetted legs falling down a hole with yellow background

Woman on a Mission


by Rebecca Blackwell

Baker Botts partner and intellectual property chair Christa Brown-Sanford discusses how she juggles work, personal life, being a mentor and leadership duties.

Woman in green dress crossing her arms and posing for headshot

Best Lawyers Celebrates Women in the Law: Ninth Edition


by Alliccia Odeyemi

Released in both print and digital form, Best Lawyers Ninth Edition of Women in the Law features stories of inspiring leadership and timely legal issues.

Lawyer in green dress stands with hands on table and cityscape in background