Board Votes and Performance Reviews

(Bloomberg View) -- Wells Fargo.

There is a chain of dudgeon in Wells Fargo & Co.'s fake accounts scandal. Millions of fake bank accounts were created, leading to big fines and reputational damage. But they were created by junior line-level employees, probably sometimes with the encouragement of branch-level managers, but without any explicit authorization from higher up. And then when 5,300 of those mostly lower-level employees were caught faking accounts, they were fired. "How could you!," their managers presumably said to them. But then, as the scandal grew, those managers also got in trouble for allowing the violations; several regional managers were moved or removed. "How could you!," their bosses presumably said to them -- except that some of those bosses had already been pushed out themselves. The chief executive officer and head of community banking left the company. "How could you!," the board of directors presumably said to them, on their way out the door

And now the directors are in trouble with their bosses, the shareholders. "How could you!," the shareholders ask:

The battle over Wells Fargo & Co.’s board is going down to the last possible moment, with uncertainty hanging over the re-election prospects of several directors at Tuesday’s annual shareholder meeting, according to people familiar with the matter.

Some large institutional shareholders have yet to weigh in and are expected to place their votes Monday, just ahead of the conclave. But, as of Sunday, votes already placed had left several directors at risk of losing re-election, the people familiar with the matter said.

I don't know! On the one hand, the board's postmortem report describes directors who worked hard to root out problems with Wells Fargo's sales culture. The board had many discussions with executives on the sales practices, and harshly criticized management's presentations as "too superficial and optimistic." This criticism led management to take the issue more seriously, and to engage with outside accountants and consultants to try to fix the problem. Plausibly, it is not the job of the board to make sure that tellers aren't opening any fake accounts. It is the job of the board to demand that management make sure that tellers aren't opening any fake accounts, and to fire the managers if it turns out that they were.

On the other hand, you know, the buck has to stop somewhere. But where? The CEO is an obvious answer, and he is gone, but the buck is still moving. It might get the board. What's next? Should the shareholders fire themselves, for failing to catch the problem in time?

There is a traditional model in which the board of directors represents the shareholders: When management messes up, the board gets angry on behalf of the shareholders; their dudgeon becomes its dudgeon. The modern model is increasingly that the board is identified with management: When management messes up, the shareholders get angry at the board; their dudgeon turns against the board. The modern model might be more accurate in describing the relationship between many boards and managements. But you want a balance between dudgeon and continuity. If the managers mess up and the board gets rid of them, it can demand that the new managers fix the problem, and hold them accountable for doing it. But if you get rid of the board too, then who stays around to make sure the problem gets fixed?

Elsewhere, here is Gretchen Morgenson on Elizabeth Warren on Wells Fargo. And "Credit Suisse is braced for a shareholder revolt this week over compensation for its top managers, despite the Swiss bank’s executive board agreeing a voluntary 40 per cent cut in its bonuses."

Performance reviews.

There is something sort of adorable about how, when one bank does a nice thing for its young employees, every other bank copies it within a matter of weeks. When one kid gets an awesome new toy, all the other kids at the playground want it too. When Goldman Sachs Group Inc. discovered the concept of the weekend in 2014, other banks quickly followed suit. That makes sense! Weekends are good, and if you are trying to recruit college students, letting them have fun on weekends has an obvious appeal. Much stranger to me is that JPMorgan Chase & Co. launched an experiment in continuous performance reviews last month, and that is proving to be contagious:

Radical transparency is coming to Goldman Sachs Group Inc. 

The Wall Street firm is rolling out a new review system where employees can get ongoing feedback from their managers and peers.

"Our employees want to know where they stand at all times," says a memo, I guess because they heard that JPMorgan employees know where they stand at all times, and that sounded good to them? It does not to me. Disclosure: I used to work at Goldman, and one review a year was one too many for me! "The correct approach," I wrote last time, "is to put your headphones in, stare at your computer, and assume that everyone loves you until you are fired, or retire." But then I am not one of these trophy-kid millennials who need consta -- wait, what?

Ms. Cooper said vice presidents and managing directors, a group that is typically in their 30s and 40s, were the most likely in the 2015 survey to say they wanted more-frequent reviews.

Okay honestly that makes sense. Managing directors and vice presidents, and the bank for that matter, really depend on their performance. If they are not effective at bringing in business, they and the bank will suffer. And they've made it this far, which means that they have a basic understanding of what they're supposed to be doing; now they need to work on fine-tuning their performance. Junior analysts are a much simpler matter. You give them general praise so they feel good, and you provide constant feedback in the form of screaming at them every time you find a typo in a pitchbook. They pretty much already know where they stand at all times.

Anyway the system is called "Ongoing Feedback 360+," and it should really be "Ongoing Feedback 365+."


There is a lot to think about in this profile of S&P Global Inc., the credit-rating agency and index provider. For one thing, you could tell the story this way:

  1. S&P's misleading credit ratings helped cause the global financial crisis.
  2. The global financial crisis helped undermine trust in financial companies.
  3. The loss of trust in financial companies helped encourage the rise of index investing.
  4. The rise of index investing helped S&P's bottom line.

That story isn't exactly right, but I think it gestures in a suggestive direction: The business of licensing indexes to index funds probably benefits if the public thinks that professional experts aren't any good at evaluating investments. (Bloomberg LP is also in the business of making indexes.) 

But there's a deeper connection between the credit ratings and the indexing. S&P is a for-profit company that makes its own judgments on questions like credit ratings and index inclusion. Before (and, let's not kid ourselves, after) the financial crisis, the ratings agencies' decisions about credit quality had a quasi-official status: S&P's ratings, to some extent, replaced bond investors' own credit research. With the rise of indexing, index providers' decisions about index inclusion -- about what companies are in the investable universe -- are to some extent replacing equity investors' own investment decisions. Investors increasingly buy stocks not because they like those stocks but because S&P tells them to. This gives S&P's judgments -- on questions like whether non-voting shares belong in its indexes -- a quasi-official power over other people's investment decisions, a power that it may not be entirely prepared to wield.

Elsewhere: "The small-cap Russell 2000 benchmark did not update on traders’ screens for the first hour of Friday’s session, the latest data glitch in a stock market that’s become increasingly reliant on indexes."

People are worried about Uber.

This profile of Uber Technologies Inc. Chief Executive Officer Travis Kalanick has a lot of standard Silicon Valley signifiers ("math savant," strip clubs, some light tax fraud), but there is also an amazing description of Uber's mergers-and-acquisitions function:

That same year, Uber came close to buying Lyft. At a meeting at Mr. Kalanick’s house, and over cartons of Chinese food, he and Mr. Michael hosted Lyft’s president, John Zimmer, who asked for 15 percent of Uber in exchange for selling Lyft. Over the next hour, Mr. Kalanick and Mr. Michael repeatedly laughed at Mr. Zimmer’s audacious request. No deal was reached. Lyft declined to comment.

I ... what ... why did he stay for an hour? Did they make a counterproposal, or just make fun of him the whole time? It's all such a Silicon-Valley stereotype, merger negotiations as frat hazing and pick-up-artist negging and nerdy jokes.

Anyway also Uber violated Apple's app-store rules by "secretly identifying and tagging iPhones even after its app had been deleted," hid this from Apple by geofencing its headquarters, and got yelled at by Tim Cook when it was caught. Uber quickly backed down. The symbolism is obvious. Uber's culture of disruption goes hand in hand with a certain antagonism to outside rules. The rules of cities and states and nations -- about taxi licensing or safety or employee rights or whatever -- are meant to be broken, and broken with pride. Uber is a new way of doing things, a disruption to entrenched political systems, a new polity not constrained by the archaic geography of traditional legal systems. If you're breaking Apple's rules, on the other hand, you have to do it discreetly, and knock if off if you're caught. You can run over Bill de Blasio, but you have to be nice to Tim Cook.


"Have you ever heard of Uber or Lyft," asks actor John O'Hurley (J. Peterman from "Seinfeld") in this television advertisement for YayYo, Inc. It's not an advertisement for YayYo's services, though. YayYo doesn't offer services. It plans to "engage in the development and eventual commercialization of one of the first metasearch 'ridesharing' applications," but so far it "remains in developmental stage," with no functional app, and has never produced any revenue. (It has, however, apparently produced a rap song advertising its app.)

No, O'Hurley is advertising YayYo's initial public offering, because that's a thing actors can do now. It's a "Regulation A+" offering under the Securities and Exchange Commission's JOBS Act rules, which allow companies to raise up to $50 million in a year without the full requirements of SEC registration. 

The offering circular and investor presentation make for interesting reading. The planned app "is reliant upon securing partnership agreements with the ridesharing services" like Uber and Lyft and accessing their platforms via application program interfaces. "Many of these platforms do not offer direct or complete API access; thus, the technical barrier to entry is steep." Nonetheless YayYo projects revenue of over $30 billion by 2021. For comparison, Uber's revenue in 2016 was $6.5 billion, on $20 billion of gross bookings. (YayYo's, again, was zero.) YayYo plans to make more money by helping people comparison-shop between Uber and Lyft than people currently spend on Uber and Lyft rides, combined.

Also YayYo's chief executive officer and founder, Ramy El-Batrawi, was accused of stock manipulation by the Securities and Exchange Commission in 2006; he settled in 2010, and was barred from acting as a director or officer of a public company for five years. Well, he's back now! That 2006 SEC complaint is a fun read too; it alleged that El-Batrawi's previous scheme "resulted in the misappropriation of more than $130 million, the collapse of several broker-dealers, and the largest bailout in the history of the Securities Investor Protection Corporation." But those were simpler times. "You might never have thought that you'd be able to have a chance to invest in the new millennium movement of ridesharing," says O'Hurley in the commercial, "but with these new SEC rules it makes it possible for the little guy like you or me to buy into an IPO previously unavailable." It sure does!

Should the SEC have its own fiduciary rule?

It has always been a little weird that the push to make brokers act in investors' best interests has come from the Department of Labor. The Department of Labor doesn't regulate brokers. It regulates certain kinds of retirement accounts, yes, and so has power over certain brokers who give advice on those accounts, but it is an awkward and patchwork system of regulation. Obviously the Securities and Exchange Commission, which does regulate brokers, should decide which sorts of fiduciary duties which sorts of brokers owe to which sorts of investors, and then codify those duties in some clear way so that brokers and investors can know what to expect.

Really the only reason the SEC doesn't do that is that it doesn't want to, which explains why it's now talking about doing it:

Wall Street’s top regulator should craft its own rule governing the advice that stockbrokers provide to retail investors, the Securities and Exchange Commission’s acting chairman said Friday.

Michael Piwowar’s comments indicate he favors the brokerage industry’s call to replace a rule issued last year by the Labor Department with one, written by the SEC, that businesses would find less onerous.

Sure, but it made sense for the SEC to write a fiduciary rule a decade ago. It's a little weird to do it only as a way to weaken the Labor Department rule.

Space mining!

Here is a story about how we are going to start mining asteroids for platinum and water within eight years. This will I suppose have practical uses, but of course one has to think about the effects on financial markets:

“You could go massively short on platinum and then show up at settlement with an asteroid, but you probably could only do that once,” James said in an interview after a presentation at the National University of Singapore’s Middle East Institute. “I don’t think the counter-party would take that trade a second time.”

Yeah no you probably couldn't even do it the once; I feel like most futures exchanges require delivery at points on planet earth, and getting an asteroid to earth is normally associated with ... mass extinction? I guess his point is that the extinction of humanity would probably collapse the price of platinum? Sure. Points for imagination, and I would watch a remake of "Trading Places" where instead of orange-juice futures it's an asteroid. 

People are worried about Theranos.

You know what I think I have never read? An article that is like "Theranos Inc. developed a blood test that ran on its own proprietary machines using pinprick blood samples, and it ran that test on a lot of customers, and the test produced accurate results for those customers that were not later voided." I am not saying it has never happened, I am just saying that at this point that would be news. Anyway here is a Wall Street Journal article about how an investor is suing Theranos and claiming that it "ran 'fake "demonstration tests" for prospective investors and business partners' using commercial devices while pretending to showcase its own technology." Theranos "said the allegations about 'fake' demonstrations had 'no merit' and 'completely distorts Theranos’ practices.'" 

People are worried about unicorns.

Here's some classic straight-down-the-middle worrying about unicorns, "many of which have struggled to adjust since a two-year feeding frenzy came to an end":

In 2014 and 2015, mutual funds, hedge funds and other investors pumped billions into companies that they now see as overvalued, and unlikely to pull off an initial public offering. As venture capitalists became more discerning, investment in U.S. tech startups plummeted by 30% in dollar terms last year from a year earlier.

"They’re like the walking dead," says a venture capitalist about some "initially well-funded startups that once looked like relatively safe bets" and that are now burning cash and searching for buyers. 

Also there appears to be a "unicorn horn store" coming to Park Slope: 

Brooklyn Owl at 252 Flatbush Ave. (near St. Mark's Avenue) will sell handmade unicorn horns that customers can slip onto their heads while letting "magic" into their hearts, said co-owners Annie and Cory Bruce.

"It’s not just the normal gift shop with a million different brands," said Annie Bruce. "We’re really trying to give the customers a unicorn experience to make them feel special when they come into the shop."

Things happen.

European Markets Leap on French Election Results. China Stocks Sink Most in Four Months Amid Leverage Crackdown. I.M.F. Torn Over Whether to Bail Out Greece Once Again. Malaysia’s 1MDB, Abu Dhabi State Investment Fund Reach Repayment Agreement. Italians probe Emirati for alleged insider trading in UniCredit. Manmohan Sing: Why shrinking the Fed balance sheet may have an easing effect. Has there been a sea change in the way banks respond to capital requirements? Pipeline Risk in Leveraged Loan Syndication. The Electric Car Revolution Now Faces Its Biggest Test. No Longer a Dream: Silicon Valley Takes On the Flying Car. Jack Ma Sees Decades of Pain as Internet Upends Old Economy. Incidents of Piracy on Upswing Off Somalia, Prompting Concern. White House Appears Ready to Go to the Mat for Its Border Wall. Refugees evade Trump by fleeing to Canada. "If you want a convenient juicebag, Capri Sun solved the problem decades ago." Alaska dentist 'pulled out patient's tooth while riding a hoverboard.' 

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.

To contact the author of this story: Matt Levine at

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