Corporate Governance Issues and Non-Financial Misconducts in Banking in India and Beyond

Victoria Barnes*, Francesco De Pascalis**, and Ragini Surana***

Wells Fargo, one of the leading American banks, has recently fired the Vice President of its Indian subsidiary, following allegations that they had urinated on a woman during a flight. This note considers this decision, compares it with other incidents involving senior managers and its ramification for corporate governance in banking and beyond.

Keywords: senior management; boardroom regulation; bank management; employment law.

In January 2023, the Vice President of Wells Fargo’s Indian subsidiary was sacked following the breaking of a news story. A variety of different newspapers reported that they had urinated on a 72 year old woman mistakenly, while they were under the influence of alcohol, during a flight from New York to Mumbai. The loss of this job in the bank was only one of the outcomes of this incident. The other result was a criminal charge. The criminal charges, while important now for the VP and their future, are beyond the focus of our analysis. The note focuses considers this case as a corporate governance issue. To do so, it examines a number of similar events in the boardroom, more generally. It compares this to other scandals and allegations of executive misconduct in corporate law. Overall, this note shows the corporate reaction to executive misconduct fits within the wider pattern of corporate governance. In other words, it was not a special case for corporate law. Yet, it is so for banking and financial law. It signifies that a culture shift has clearly taken place within the wider banking industry.

The conduct, character and personalities of those in senior management is important. In order to understand Wells Fargo’s response, one might look to similar high profile incidents within the news media, where a senior manager’s character has been called into repute. These might be seen as setting guidelines for other firms to follow and, in turn, reasons for senior managers to end their contractual relationship with the employer. For example, the Tesco chairman resigned early this year after allegations of inappropriate and unprofessional behaviour were made by four women in The Guardian. Deutsche bank fired two of its senior managers in 2021 after a complaint about inappropriate messages with a female colleague. It is clear that sexual harassment is unacceptable conduct in the workplace. Such issues might well fall under the term ‘gross misconduct’ in UK employment law. Poor performance is another reason for the termination of an employment contract, along with poor handling of internal conflicts.

A notable instance of this tension between executive conduct and continued leadership was observed in the case of a major British retail group, Arcadia. Despite growing public criticism over the company’s exploitative labour practices, cost-cutting measures, and the use of offshore tax structures, its chairman retained his appointment until it went into liquidation in 2020 in the pandemic. Arcadia was, of course, at this point, in time a private company. Yet, as it owned retail outlets, it had a clear relationship to society. The business model was entirely dependent on consumers and sales. In the banking world, reputation and organisational culture is crucial, although this is not for the sake of increased profits.

A strong reputation for ethical and moral decision making is essential for survival within the financial industry. Although this might well be generally true of all individual businesses, it is even more evident in the banking industry. This is because the goods themselves are intangible and the service is often comparable, if not entirely the same. Banks not only sell financial services, but also take deposits. In order for individuals to entrust their money for safekeeping with the bank, they must be sure that the bank will not lose it through poor decision-making, motivated either by either incompetency or greed. This point about having a strong reputation for prosperity and propriety is even more important in the wake of the 2008 financial crisis. Since 2008, those in the banking and finance have had to navigate the industry’s reputation for its culture of recklessness, self indulgence and wildcat activities. Fred Godwin, former Chairman of Royal Bank of Scotland, dubbed ‘Fred the shred’, was seen as the epitome of this behaviour in British banking. He was even stripped of his knighthood.

Following the publication of allegations that the Wells Fargo VP had urinated on a woman during a flight, Wells Fargo opted to terminate the VP’s contract of employment. There were, of course, a number of options available. Certainly, if the incident was a result of intoxication or stress induced overwork, then a suitable remedy might be in medical treatment for alcoholism or stress. Empathy, compassion and support for employees and their wellbeing are now essential in the modern workplace. This says much of the at-will employment culture in the United States and the ability fire without just cause. In other jurisdictions, there are different legal rules and different cultural attitudes towards the termination of employment contracts. There are also new initiatives from bank regulators and also financial institutions, which we will now turn to discuss.

Wrongdoings outside the of the bank are now regulated in the United Kingdom by the Financial Conduct Authority. They are incorporated into codes of conduct.  This is a novel arrangement. These behaviours are labelled as ‘non financial misconducts’ or ‘out-of-hours misconducts’. Banks and the Financial Conduct Authority have considered non financial misconducts seriously. As such, they have been receiving the same degree of attention as the more traditional financial misconducts. This, nevertheless, persists as a contentious area. These new misconduct categories are used to identify those actions thought to be immoral, unethical, or even criminal. These acts are undesirable from the perspective of the bank and its regulators. What unifies them are that these actions are committed by individuals, largely outside of the workplace. Examples of ‘non financial misconduct’ or ‘out-of-hours misconducts’ include harassment, bullying, sexism, and racism, but they are not limited to these categories. They concern a person’s values and character.

Further cases are needed to establish clear boundaries on the right of financial organisations to extend their supervision outside of the workplace and working hours. There is a risk of the erosion of a right to a private life, which the scholar Margaret Thornton warns us about. The banking profession is one that is centred on long working hours. Despite the division between work and home life, issues of morality, character and ethical behaviour seem to fall between the two stools.

This style of regulation is perhaps right for individuals who have power. For those within corporations, who sit at the top of the managerial hierarchy, they have power over their employees and subordinates. If inclined to take shortcuts, this person could harm hundreds, thousands or millions of employees. Those in big banks have a similar level of power internally - but their external power is far greater. Banks attract depositors and look after their money; they also attract loan applicants, who wish to use credit to improve their lives. The exclusion or denial of a banking service has both economic and social consequences for potential customers. The bank-customer relationship is characterised in some legal systems as a fiduciary duty. The drive to regulate banking ethics and ‘non financial misconduct’ is no doubt part of the drive to professionalise the financial industry, after the 2008 Crisis.

The Wells Fargo case illustrates that when disputes about the morality of senior managers arise and become high profile, banks are keen to maintain their reputation for conservatism and sobriety. They are perhaps less keen to look to the rights of employees. A balance, though, does need to be struck between working hours, a right to private life, and ethical conduct. Each firm may have different prioritisations. This suggests that the approach in the United Kingdom, with the involvement of an independent business conduct supervisor, may be the best way to balance these competing and even diverging interests between firm, employee and wider society.

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* Victoria Barnes is a Reader of Commercial Law at Queen’s University Belfast, United Kingdom.

** Francesco De Pascalis is a Senior Lecturer in Financial Law at Brunel University London, United Kingdom.

*** Ragini Surana is a Researcher at Max Planck Institute, Germany.