The Ethical Barometer

Blog post by Dave McClure, founder and now former CEO of 500 Startups, a Silicon Valley incubator. The post was made after the company confirmed his resignation as CEO. Mr. McClure went on to explain that he made advances to “multiple women in work-related situations, where it was clearly inappropriate.” The woman upon whom the advances were made were entrepreneurs in need of financial support for their fledgling companies.

As more situations rise to the surface across Silicon Valley it has become clear that the culture of the high-tech field is one of the casting couch. To get ahead, women had to tolerate propositions, advances, and worse. As one Silicon Valley capital firm phrased it, “This is not just a case of a few bad actors. This is not something that is fixable with a pledge or a new policy. This is a culture that has been allowed to fester and to rot by enablers who refused to intervene when they witnessed inexcusable behavior or went to great lengths to avoid seeing it.”

Take iconic CEOs, phenomenal financial performance, perks, perception of goodness (Seven Signs) you create one heck of a yeehaw culture that is going to harm many. Too bad the remedy is ousting rogues instead of changing the culture.

A potential juror during voir dire in the jury trial (for securities fraud) of Martin Shkreli.

Other potential jurors, who were struck one-by-one, did not have much better to say, even after the judge reminded the potential jurors that the trial was not related to Mr.Shkreli’s role as CEO of Turing Pharmaceuticals and his role in increasing the prices of certain drugs by, oh, 4,984%. Here is a sampling:

“He is the face of corporate greed in America.”
“You’d have to convince me he is innocent.”
“Who does that? A person who puts profit above everything else.”
“The most hated man in America.”
“I honestly don’t think I can be impartial.”

The judge reminded the panel of potential jurors about the presumption of innocence. But, jurors were not buying this justice stuff. One responded, “I understand that, but everything I’ve seen. . . ”

The judge interrupted him mid-sentence and had to hold a side bar because the defense raised the legitimate point that the jurors who were being excused for cause were tainting the remainder of the pool with their comments.

Sixty-nine jurors were dismissed — dozens for cause. Forty potential jurors return today for further screening. The judge has asked for 100 more for the panel. A defendant so notorious that you cannot bring together an unbiased panel. You may have crossed a few ethical lines when you can’t find a juror with an open mind about you.

Travis Kalanick, Founder and Former CEO, Uber. Hmmmm.

Uber was a Schumpeterian success. The creative destruction of the cab/Lincoln Town car transportation model. Independent contractors driving folks around in their own cars on their own schedules. Uber was hip, groovy, defiant, and the company the sophisticated opted to use for their transportation needs. Uber was the world’s most valuable start-up.

Then came the problems with alleged sexual harassment the corporate level. Then there was the failure to investigate properly the rape of a passenger by an Uber driver in India. Then came the accusations of theft of the driverless technology. Then Pittsburgh felt Uber was not delivering on its end of what was supposed to be a mutually beneficial relationship in that city. Then came accusations of an atmosphere of sexual harassment at the company. The came the suit by the Indian rape victim, a suit that names executives for alleged failures and lapses in security checks and their handling of the investigation. Then came the reality: accusations that Uber just treats everyone badly. With the CEO on indefinite leave, a committee of 14 executives, including HR and legal, will now run the company. And Ariana Huffington will no longer be the only woman on Uber’s board. Uber now has a second woman on board, as it were, Wan Ling Martello, former CFO on Nestle and Exec VP of Asia Zone. Ms. Huffington, at an all-hands meeting for the company, lectured on the importance of women on company boards, “When there’s one woman on the board, it’s much more likely that there will be a second woman on board.” Matt Jarzemsky, “Billionaire in Hot Water Over Uber Gaffe,” Wall Street Journal, June 16, 2017, p. B6. After Ms. Huffington offered that thought, David Bonderman, an Uber board member, billionaire, and chairman of private equity firm, TPG, quipped, “Actually, what it shows is that it’s much more likely to be more talking.” Now, that right there is a gaffe worthy of Uber’s string of gaffes. Mr. Bonderman has apologized and resigned from the Uber board.

Uber has a big-time culture problem on so many layers and in so many layers. The change needed is not likely to come from a 14-member committee as CEO or the addition of one woman to its board. The bad decisions and worse attempts at fixes keep piling up. Is there anyone at Uber with a lick of common sense? Bright technical minds, great entrepreneurial spirit, and the maturity of the Goonies Go to Animal House.

Scott Thompsett, lawyer for Louisville head basketball coach, Rick Pitino, handling Mr. Pitino’s appeal of NCAA sanctions against him for the former director of operations providing strippers and prostitutes to basketball recruits in the basketball dorm on the campus.

Actually, having read the report, the Barometer found quite a few things that the NCAA identified:

1. Don’t hire as your director of operations one of your former basketball players who spent one year in the pros. One of the guys was supervising the guys.
2. Make sure that all the administrative paperwork is completed for recruits (especially those who are minors) staying overnight in the basketball dorm.
3. A basketball dorm built in memory of your brother-in-law (who died in the 9-11 attacks) is a wonderful gesture, but a basketball dorm (Minardi Hall) without some non-basketball supervision is a risky proposition.
4. Following up on cash disbursements in $200 increments might have given a few clues about the night activities for recruits in the basketball dorm.
5. Do a little surprise visit to the basketball format night and see what’s up. Over four years of these activities, you’re bound to pick up a few clues.
6. Check the security cameras and card entry records — who was coming in and out of the dorm at night? Those guests can be problematic.

In other words, like an executive in today’s world, one cannot delegate and then say, “I knew nothing.” Delegate, but monitor, and do the monitoring through procedures and surprise visits. Behave as parents of teenagers: Come home early and unannounced. You never know what you will find. But, you are always better off finding it than hoping all is well.

New York Times, June 16, 2017, p. A24. Now there’s a headline. The headline refers to the ethics committee of the New York State Assembly. And it only took 12 senators being convicted of crimes and a host of various and sundry scandals that make Chicago look angelic to dust off the cobwebs.

The committee is off to a good start. Enough senators on the committee voted to end stipend payments (“Lulus” as they are called and have been paid to senators of the opposite party in order to obtain their support for power retention. They are bonuses the senators receive for, well, who knows?). Even Charles Rangel, he of tax questions and rent issues, has decried lulus as immoral. However, one of the senators on ethics committee came back and said he needed to change his vote. Rusty, indeed! Rusty presumes that there were once skills in place. The Barometer is not so sure.

Goldman Sachs fund managers did not hesitate when a brokerage firm offered to sell them Venezuelan bonds for pennies on the dollar. Why not hop in and help fund a government that has left its people without food, toilet paper, and life’s basics? It never occurred to them that a decision to buy $2.8 Venezuelan bonds might result in some blowback and should have probably gone through the firm’s standards committee. That committee was created post-2008 so that senior management could take a look at investments that were shaky financially or socially. Goldman CEO, Lloyd Blankfein, trains employees on the importance of Goldman’s public perception, “Everyone has to have big eyes, big ears, know what’s going on around them, and be policeman for the organization.. At the end of the day, we only have one reputation.”

All good platitudes, especially the addition of the worn phrase, “at the end of the day.” Repeat them all you can and all you want, but the phrases cannot compete with what you reward and pay structure. A money manager cannot be swayed by such when he is offered bonds for pennies on the dollar. It’s what money managers do under current incentive and performance standards. Employees sit through the Blankfein lectures on reputation being the end-all and the cynical money managers do what they do best — buy low, cash in high. The training only makes them more cynical, which is why it did not dawn on them to seek approval. They buy cheap; it’s what they do. Goldman has a long way to go before its culture gives money managers the freedom to question reputational soundness of a bond investment in some bad actors. Set up standards committees, let your CEO do the training. ‘Tis all for naught if the culture is driven by results.

For endangering the welfare of a child, the former president, a senior vice president, and athletic director were sentenced by a Pennsylvania judge to a minimum of two months in prison, with varying additional confinement time among the three, fines, and probation for two years. A jury convicted the men of failing to report to law enforcement officials that they had received a report that former assistant football coach, Jerry Sandusky, had molested a child in the shower. The three had offered a defense that they were not told that the episode was “overtly sexual.”

Hmmm. An assistant coach naked with a young boy in the football program’s showers should have at least raised a risk management issue and additional action. As a result of their inaction, Mr. Sandusky moved along assaulting other minor boys, and was convicted in 2012 of 65 counts of sexual abuse.
her Penn State casep — long before Judge Boccabella uttered the same phrase in handing down the sentences. To quote Judge Boccabella, “Why no one made a phone call to police is beyond me.”

The Barometer, having studied these cases for years understands why three bright people who have been called good people made such a decision. They framed the issue the way that they did because they existed in a culture that rewarded them for preserving Penn State’s football program and its reputation. They framed the issue within their sense of loyalty to an assistant coach and a desire to not cause trouble for Mr. Sandusky (their e-mails referred to their decision to just talk with him as the “humane” thing to do). The three men framed the issue as doing their job to protect Penn State and being noble(humane) in their treatment of a friend. Poor framing leads to really bad decisions, and this one was a doozy. Begin any decision with a basic question, “Is what we’re about to do legal?” If the answer is no, stop there! There just isn’t much room for conscientious objection when it comes to reporting statutes. If a child has been hurt, molested, or injured, you report. They did not, and thereby defeated the very purpose of child-reporting statutes — other children became victims.

Mr. Schultz said at his sentencing, “It sickens me to think that I might have played a part in children’s suffering.” Mr. Spanier said, “I deeply regret that I did not intervene far more carefully.” Truth be told, Mr. Spanier did not intervene at all. And Mr. Schultz didn’t just play a part — he enabled the molestation of young boys because he skirted his legal duty. Thus we end this tale of woe with 4 people in jail, victims sentenced to physical harm, emotional trauma, and a lifetime of psychological burdens, and a school that will carry some tarnish for decades to come. In the words of Shakespeare, “All are punished.”

From Wells Fargo’s mission statement in 2012. They did indeed get the revenue growth — on the retail side, Wells sold its retail customers an average of 5.9 products each. Wells led the industry in that per customer figure. However, given what happened at the bank, it is not clear that all Wells customers were aware that they had purchased 5.9 products. One of the drawbacks to cross-selling.

In the aftermath of the fake accounts scandal at Wells Fargo, Wells Fargo lost 429 (3%) of its its brokers from its brokerage arm. As its rivals are cutting back on signing bonuses for the long time industry practice of poaching through those bonuses, Wells Fargo is sweetening the pot it offers brokers. When brokers leave one bank, they are likely to bring about 80% of their clients with them. That’s a nice slice of revenue increase. Wells is offering a recruitment bonus of as much as three times the annual revenue the brokers generate in their first year. The Department of Labor had issued all banks warnings that the three times amount being paid would result in problems with brokers acting in the best interests of their clients. So, Wells structured their three-times bonus (much higher than the 2.5 times the other industry players had gone with to avoid the DOL conflict) in the form of loans. The poached brokers are paid in the form of loans forgiven, the longer the broker stays at Wells. To get out from under the loans, the brokers must stay and continue to produce the revenue figure agreed upon at their signings. Okay, so more pressure, higher incentives, and nowhere to go with the loan handcuffs. Sounds as if Wells learned its lesson from the 2.3 million fake accounts created by the now-terminated 5,300 employees. Be careful what and how you incentivize. You will get the numbers; they just might not be real.

Citigroup has agreed to pay $97.4 million to end the inquiry of the U.S. Justice Department into the money-laundering that was occurring through the bank’s facilities at Banamex. The bank has already paid $140 million to FDIC as a fine for its oversight failures on Banamex. There will be no criminal charges, Banamex will be closed by June 30th, and Citigroup walks away with many lessons for prevention in the future

Lesson 1 Investigate your own flags.
From 2007-2012, Banamex USA generated 18,000 internal alerts on suspicious transactions. For some perspective, that was 18,000 alerts out of 30 million fund transfers to Mexico. However, Citigroup only conducted 10 investigations.
Lesson 2 Check your staffing levels.
Despite the volume of transactions, there were only two employees assigned to review the Banamex transactions.
Lesson 3 Listen to employees.
Employees were raising questions about suspicious transactions, but the Bank took no action and no additional staff members were added.
Lesson 4 Believe your own metrics.
Most of these transfers are transfer to family members and involve only one or two regular transfers. However, data analysis showed that one person in Mexico received 1,400 transfers from 950 senders who lived across 40 different states. The numbers and sources were screaming, “Intervention!”
Granted the $97 million in fines pales in comparison to the billions made on the transactions, but the operation is now shut down. Sometimes behaviors, while profitable, kill the golden goose.

John McFarlane, chairman of Barclay’s Bank on the Board’s position on retaining James E. Staley (Jes) as the bank’s third CEO since 2012, when the bank’s LIBOR rate-fixing scandal became public. Mr. Staley tried to obtain the identity of an employee-whistleblower. No word on what he planned to do once he had the employee’s identity. Recall that one of the problems with the bank was the failure of anyone to report the long running rate-fixing issues. The retention of Mr. Staley should go a long way in encouraging employees to report issues. Exemplary.

New York City Mayor Bill de Blasio defending his embattled jails chief. Actually, Mayor, the car issue arose because the guy spent 90 days out of the state last year — the car was just how he got there. Bad judgment is bad judgment, and there is plenty more on the table besides the car. Eavesdropping on investigators. Treatment of prisoners. The misuse of the car is something we all understand from our own workplaces. You know you can’t do it. And we would all be fired for that offense alone. Perhaps we and our employers are so concerned is that there is liability exposure when employees take off on unauthorized trips. Check with the risk department on that one.