United CEO won't take chairman's seat as planned

Earlier this month, video footage from inside the cabin of an United Airlines' (UAL) plane went viral, with a reported 210 million views, much to the chagrin of the company's management and directors.

On Sunday, April 9th, four United crew members needed seats on Flight 3411 because they had to get to Louisville for another flight.  United gate personnel offered passengers up to $800 in compensation if they agreed to take a different plane to Louisville.  When no one voluntarily came forward, United selected four passengers at random. Three deplaned but the fourth, a man who said he was a doctor and needed to get home to treat patients the following day, refused.  Absent volunteers, the airline was forced into an "involuntary de-boarding situation", according to a spokesman.

Alerted by airline employees, three city aviation department security officers got on the plane. Two officers tried to reason with the man before a third came aboard and pointed at the man “basically saying, ‘Sir, you have to get off the plane,'” said Tyler Bridges, a passenger whose wife, Audra D. Bridges, posted a video on Facebook.  One of the security officers could be seen grabbing the screaming man from his window seat, across the armrest and dragging him down the aisle by his arms toward the front of the plane, amid shouts and pleas from fellow passengers.

The passenger, David Dao, 69, suffered a concussion, broken nose and damaged sinuses and lost two front teeth in the altercation.  After Dr. Dao was released from the hospital, his attorney said he was staying in a "secure" location.  What he might have needed protection from remains unclear.

Whatever happened to the friendly skies?

UAL CEO Oscar Munoz sent a letter to employees calling the flier "disruptive and belligerent" and commended the actions resulting in the passenger being forcibly removed.  Widely criticized for his initial responses, Mr. Munoz apparently reconsidered and subsequently apologized repeatedly for United's handling of the situation.  He said in a statement that this was “an upsetting event to all of us here at United.” “I apologize for having to re-accommodate these customers,” he continued. “Our team is moving with a sense of urgency to work with the authorities and conduct our own detailed review of what happened. We are also reaching out to this passenger to talk directly to him and further address and resolve this situation.”

The incident is under investigation by Congress and the Transportation Department and, in Asian countries, there have been calls online to boycott United.  The passenger also hired prominent personal injury attorney Thomas Demetrio, who negotiated an undisclosed settlement of the passenger-dragging incident.

On the heels of the United incident, Delta Airlines (DAL) beat its competitor to the punch by announcing a change in policy allowing its employees to offer customers up to $10,000 in compensation to give up seats on overbooked flights, aiming to avoid similar situations.  United followed suit not long thereafter.

Of course, no high-profile corporate blunder would be complete without the media putting a fine point on it, and with a flourish.  A Miami Herald headline blared, ‘On United, removing reluctant passengers will no longer be a drag’.  A Los Angeles Times columnist helpfully offered a style note:

Dragging a passenger from a plane isn’t “re-accommodating” him. It’s assault. Maybe not in a legal sense. But we all know what it means if it quacks like a duck.

From the other side of the country, the Miami Herald's Jim Morin, in his inimitable fashion, illustrated the point.

The ability of a CEO of a multinational corporation to exert control over and to take responsibility for rank-and-file employees, not to mention tangential personnel, dispersed across the globe is a debatable proposition.  In United's case, the company directly employs 82,000 people, the vast majority of whom work at 337 far-flung airports or on 4,500 daily flights.  But clearly, crisis management and deftly handling the fallout of the occasional international PR nightmare is a prominent part of the job description.  There seems to be discontentment on board on this score.

Under the corporate governance policies disclosed in UAL's proxy filed on April 21st, the offices of the Chairman of the Board and Chief Executive Officer may be combined or separated, in the Board's discretion.  Currently led by an independent Chairman, the Board believes "that separating the roles of Chief Executive Officer and Chairman of the Board is the most appropriate structure at this time.  Having an independent Chairman of the Board is a means to ensure that Mr. Munoz is able to more exclusively focus on his role as Chief Executive Officer and that an independent Chairman of the Board can effectively manage the relationship between the Board and the Chief Executive Officer."

Nevertheless, according to the terms of his employment agreement with UAL, signed late in 2015, Mr. Munoz was due to also assume the role of chairman in May of 2018.  Although some media outlets reported that United reverses plans to make Mr. Munoz chairman after passenger dragging scandal, according to the 8-K filed April 21st, the CEO "desires to remove the provisions in the Employment Agreement related to the future appointment of Executive as Chairman of the Board, and to leave future determinations related to the Chairman position to the discretion of the Board, and the Board is willing to agree to such change."

Despite having long sworn off airline industry investments, Warren Buffett, through his Berkshire Hathaway (BRK.A) purchased a stake in United Continental Holdings, among other carriers, late last year.  To the best of our knowledge, Mr. Buffett has not publicly weighed in on the incident, but it's likely viewed dimly for the carrier operating in a business in which competitors have lacked a durable competitive advantage “since the days of the Wright Brothers.”  On the other hand, Mr. Munoz's quick action, or about-face, would seem to heed Mr. Buffett's admonition that a CEO "should face up to a problem fast."

The market didn't appear overly concerned with the embarrassing incident and the ensuing firestorm, bidding UAL common up almost 1% over the previous NYSE close on the day after the event; the shares are down about the same to date.  Nonetheless, the carrier's hometown paper, the Chicago Tribune, opined that Mr. Munoz's public promise is worth quoting because United's success, and his job security, depend on whether flyers find it to be true: Every customer deserves to be treated with the highest levels of service and the deepest sense of dignity and respect.

Robert Stead

Other shoe drops on fmr WFC execs over sham-accounts scandal

Last week, Wells Fargo & Co. released the findings of an investigation into its retail banking sales practices conducted by the law firm Shearman & Sterling.  Predictably, out of the 110-page report, it was disclosure that the company would claw back another $75 million in compensation from two former top execs that grabbed the headlines.  Indeed, the lion's share of the blame was laid on the doorsteps of John Stumpf, the company's former CEO, and Carrie Tolstedt, former Executive Vice President and head of the community bank, WFC-speak for the branch network.  In some ways, in reaching its culmination, this saga has plodded along more slowly than a Wells Fargo stagecoach back in the day.

Back in December 2013 the Los Angeles Times ran a story detailing that "Wells Fargo's pressure-cooker sales culture comes at a cost."   The article pointed out that Wells Fargo & Co. was the nation's undisputed leader in selling add-on services to its customers. The giant San Francisco bank bragged in earnings reports to equity analysts of its prowess in "cross-selling" financial products such as checking and savings accounts, credit cards, mortgages and wealth management.  In addition to generating fees and profits, those services keep customers tied to the bank and less likely to jump to competitors.  In reporting a record $5.6 billion quarterly profit in October 2013, WFC said it averaged 6.15 financial products per household - nearly four times the industry average.  Independent bank consultant Michael Moebs declared that WFC "is a master at this" and that "no other bank can touch them."

But the costs were considerable.  To meet quotas, the article reported that employees have opened unneeded accounts for customers, ordered credit cards without customers' permission and forged client signatures on paperwork. Some employees pleaded with family members to open ghost accounts.  One former branch manager related that if they fell short of their sales quotas, she and her colleagues "we were constantly told we would end up working at McDonald's."  Per another unfavorable anecdote, a different former branch manager claimed that she had discovered that employees had talked a homeless woman into opening six checking and savings accounts with fees totaling $39 a month; she subsequently helped the woman close all but one account, which was needed for direct deposit of her Social Security disability benefits.

"I'm not aware of any overbearing sales culture," chief financial officer Timothy Sloan was quoted as saying.  Mr. Sloan succeeded Mr. Stumpf as CEO last October.

The story burst on the national scene on September 8, 2016 with the announcement that the Wells Fargo Bank subsidiary of WFC reached a settlement with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Office of the Los Angeles City Attorney, regarding allegations that "some of its retail customers received products and services they did not request."  The company stated that the amount of the settlements, which were fully accrued for at June 30, 2016, totaled $185 million, plus $5 million in customer remediation.  The bank acknowledged that since 2011 its employees opened as many as 1.5 million bank accounts and 565,000 credit card accounts that may not have been authorized by customers.

Days later, WFC's Independent Directors announced "initial steps" intended to promote accountability at the Company. Mr. Stumpf forfeited all of his outstanding unvested equity awards, valued at approximately $41 million based on the closing share price at the time, did not recieve a bonus for 2016 or his salary during the pendency of the investigation.  Ms. Tolstedt left the Company, forfeited all of her outstanding unvested equity awards, valued at approximately $19 million based on the closing share price that day, did not receive a bonus for 2016 and will not be paid severance or receive any retirement enhancements in connection with her separation from the Company.  She also agreed that she would not exercise her outstanding options during the pendency of the investigation.

Earlier this month, WFC's Human Resources Committee and its Independent Directors determined that the finding made by the Board last September that cause existed for terminating Tolstedt’s employment was appropriate, resulting in the forfeiture of her outstanding stock options awards with a current intrinsic value of approximately $47.3 million.  Adding the aforementioned $19 million, Ms.Tolstedt is out some $66 million to make amends for her role in the debacle.  On top of the $41 million of unvested equity awards forfeited last fall was another $47 million worth this month bringing Mr. Stumpf's total loss to $88 million.  One might say the buck stopped there.

"None of this can make either Mr. Stumpf and Ms. Tolstedt happy," mused the New York Times.  But by focusing on just two villains, the Times contends, the clawbacks divert attention from the full extent of the bank's activities.  More than 5,300 generally low-level Wells Fargo employees were fired during the scandal, implying that there were numerous enablers in the bank's chain of command beyond Mr. Stump, Ms. Tolstedt and four lower-level executives, who were fired in February.

Contrary to its talk about restoring trust and its reputation, the NYT editorial argues, Wells Fargo moved quickly to slam the courthouse door in the face of consumers wronged in the scandal.  When some of the customers tried to sue over the sham accounts, the bank blocked the cases by invoking mandatory arbitration clauses signed by the customers when they opened accounts at Wells Fargo to cover fraudulent accounts opened in their names without their consent. That the court accepted the argument did not sway the Times, to whom it merely shows Wells Fargo's willingness to hide behind an unjust arbitration system even as it professes to take responsibility of its actions.  To date, Wells Fargo has refunded $3.2 million in fees that were charged on sham accounts.

According to the editorial, private lawsuits, if allowed, could go a long way to ensuring such redress is in line with the harm done.  Drawing parallels with the 2008 financial crisis, the editorial then prods prosecutors at the Justice Department and the Securities and Exchange Commission to pursue individual wrongdoers, civilly or criminally, as the situation warrants, finally concluding that unless and until clawbacks are combined with private litigation and public prosecutions, misconduct and negligence will endure.

Unsurprisingly, despite its determined efforts to put the horse back in the barn by tracing the roots of the problem, shuffling management and taking punitive action, the board of directors does not come off unscathed. Proxy advisor Glass Lewis recommends to its institutional investor clients that six of Wells Fargo's fifteen board members, including all of those who served on the bank's risk committee, should not be re-elected.  Rival firm Institutional Shareholder Services calls for all 12 of the bank's incumbent directors to be removed, citing signs of "a sustained breakdown of risk oversight on the part of the board," a recommendation deemed "extreme and unprecedented" by the WFC board.

Officials of two large California public retirement systems, CalPERS and CalSTRS, announced their decisions to vote against nine of 15 Wells Fargo & Co directors up for election at the bank's annual meeting next week, citing the bank's phony-account scandal.

Perhaps it is premature to conclude that this affair is finally pulling in the station.  Case studies and maybe even a book or two will be written about this story at the crossroads of business management, corporate governance and crisis management.  Meantime, it seems only fitting that Warren Buffett, whose Berkshire Hathaway (BRK.A) is WFC's largest shareholder, has the last words on the subject, at least for now.  The lesson from former WFC CEO John Stumpf's handling of the situation is that: "One should face up to a problem fast.  ‘Get it right, get it fast, get it over.’"  He also shared the advice of his long-time business partner and Berkshire Vice Chairman Charlie Munger, who says 'an ounce of prevention is worth a ton of cure.'

Robert Stead

Nearing comfirmation, SEC chair nominee curbs...

his enthusiasm for Dodd-Frank curbs.

Sullivan & Cromwell partner Jay Clayton, President Trump's nominee to chair the US Securities and Exchange Commission is a step closer to winning confirmation.  With three Democrats crossing party lines, Sullivan & Cromwell partner Jay Clayton cleared the Senate Banking Committee Tuesday on a 15-8 vote to advance the nomination to the full Senate floor for a final vote on confirmation.  Senate Majority Leader Mitch McConnel (R-KY) has yet to schedule the final vote.

If confirmed, Clayton would be required to recuse himself for a year from matters involving Sullivan & Cromwell and companies he represented, such as Goldman Sachs Group Inc. and Pershing Square Capital Management.  Throughout his tenure, he also would be barred from weighing in on specific business deals or investigations he worked on as a private lawyer.  Mr. Clayton contended that his work for financial firms would be a strength should he win confirmation to lead Wall Street’s top regulator.

Senator Elizabeth Warren (D-MA), relentlessly one of the finance industry’s fiercest critics, said Clayton’s potential recusals could weaken SEC enforcement, if remaining commissioners are deadlocked on numerous cases off-limits to him. "The chair is often the deciding vote,” she said at the hearing. “Of course if the chair can’t vote and the remaining SEC commissioners split along party lines, then major enforcement actions don’t go forward and the serious wrongdoing can go unpunished.”

Meantime back at the office, Acting Chair Michael Piwowar has not merely been keeping the seat warm.  Pending the chair's confirmation, he instigated reconsideration of the CEO pay-ratio rule, which requires disclosure of CEO pay relative to the corporation's rank-and-file workers.  Some observers posit that this action signals that a Republican-led SEC aims to drop a series of unfinished Dodd-Frank pay mandates.  These include proposed rules designed to make it easier to determine whether top executives' compensation is aligned with the firm's financial performance and separate requirements that companies claw back, or revoke, some of their top officials' incentive pay if they have to restate financial results.

Not long after taking the reins, Mr. Pinowar also directed the staff to undertake reconsideration of the "conflict minerals" rule, which requires companies to report corporate use of minerals from war-torn regions in their supply chains.  Additionally, he scaled back the SEC enforcement unit's powers to initiate investigations and to issue subpoenas

In a letter dated march 29th, a group of Senate Banking Committee members asked SEC Inspector General Carl W. Hoecker.to look into Dodd-Frank Act and enforcement moves made by the agency’s acting chairman, Michael Piwowar. “We are concerned that Commissioner Piwowar’s actions may lack adequate justification, undermine the SEC’s mission, exceed his authority as Acting Chairman, violate other procedural requirements, and could potentially prove to be a waste of the SEC staff’s precious time and resources,” wrote Senators Sherrod Brown (D-OH), Elizabeth Warren (D-MA), Robert Menendez (D-NJ) and Brian Schatz (D-HI).

During his first appearance before the committee on March 23rd, Mr. Clayton, thought to be a critic of regulatory overreach, throttled back lightly on his intentions regarding Dodd-Frank Act rules.  "Dodd-Frank should be looked at, in particular rules that have been in place as to whether they are achieving their objectives effectively,” he said. "But I have no specific plans to" dismantle the legislation, he said.

For the sake of predictability and stability, the securities industry and the corporate governance community look forward to the new chairman being in place soon.

Robert Stead

AMZN CEO gives robotic performance

At Amazon's annual robotics conference, "Jeff Bezos looks a little too happy piloting a giant mechanical robot," observed THE VERGE.  The reporter referred to the Amazon CEO as the fifth richest person in the world.  Days later, Bloomberg declared that Jeff Bezos has leapt past Warren Buffett, among others, to become the world's second richest person.

Already world-famous for founding Amazon and Blue Origin, a private company in the vanguard of commercializing space exploration, Mr. Bezos has also placed himself in the forefront of the animated debate over robots in the workplace and their potential to displace workers.

Robots could take over 38% of U.S. jobs within about 15 years, according to an analysis conducted by accounting and consulting firm PricewaterhouseCoopers (PwC).  Moreover, its report found that in the U.S., 38% of jobs could be at risk of automation, compared with 30% in Britain, 35% in Germany and 21% in Japan.  (Be aware that the terms, "robots", "automation" and "artificial intelligence" are often used interchangeably but imprecisely.)  Per the report, the U.S. could suffer more job losses because more U.S. jobs in certain sectors are potentially more vulnerable than, say, British jobs in the same sectors.  For example, the U.S. financial and insurance sector has much higher possibility of automation than its British counterpart because American finance workers are less educated than British ones.

Former Microsoft chairman and CEO Bill Gates is concerned enough about the possibility of robots taking human jobs that he's proposed taxing robots like humans.  Mr. Gates points out that if a worker does $50,000 worth of work, that is taxed.  He says "you'd think we'd tax the robot at a similar level."  Robots will be depriving humans of work, the rationale goes, so to support those humans the company deploying them will continue to pay tax for their employment.  The proceeds would then be used as a means to support the rest of society.

Treasury Secretary Steven Mnuchin said recently that he wasn’t worried about artificial intelligence taking over American jobs.  “I think we’re so far away from that that it’s not even on my radar screen,” he told Axios Media. “I think it’s 50 or 100 more years.”  Mr. Mnuchin also said automation would enable human workers to do more productive jobs at higher wages. “It’s taken jobs that are low-paying,” he said. “We need to make sure we are investing in education and training for the American worker.”

For his part, Jeff Immelt, CEO of General Electric, a major producer of factory automation gear, is also trying to calm what he considers overblown fears of robot-driven joblessness.

Former Treasury Secretary and Harvard president Lawrence Summers believes the impact of artificial intelligence on wages and employment will come much sooner than Mr. Mnuchin anticipates.  Insofar as Mr. Gates proposing a tax on robots to cushion worker dislocation and limit inequality, Mr. Summers cannot see any logic to singling out robots as job destroyers, compared with, e.g., word-processing programs that accelerate the production of documents.  You could cut and paste the irony. 

Worries about imminent massive job losses due to automation seem to have gotten ahead of themselves.  As far as job creation and retention go, Amazon, founded in 1994, currently employes over 341,000 people - as well as quite a few robots in its warehouses.  But against the backdrop of rising executive pay, stagnating wages for most others in the work force, excluding, that is, record numbers of Americans currently not in the work force, a high-profile executive might not want to be cast in the role of the Terminator.

Robert Stead