About

e*Bancorp e*Bancorp (NYSE: e*BNC), an online financial institution, was born in the early 1980s. It was the prodigy of brothers, William and Isaac Smart. Living up to its vision statement, The Bank You Trust with Every Click, this global online financial institution drives its business throughout the entire US, and countries in Europe, Asia, and the Caribbean. Services include consumer and commercial banking, as well as mortgage banking, wealth management, corporate payment services, equipment leasing, and insurance. The company is a banking industry leader in e-insurance brokerage through its Wall Financial Insurance Services subsidiary. The company is aware that demand for e-banking services is directly positioned to economic activity and the level of interest rates. The profitability of online banks depends on e-marketing skills, efficient e-operations, and good risk management. Large economies of scale exist in some segments of the industry, which has encouraged industry consolidation. The industry is capital-intensive and highly automated; annual revenue per employee is close to $200,000. Introduction e*Bancorp realizes the importance of reputational risk management to their bottom line, and the costs of being perceived as an industry straggler could be excessive. However, based on the substantial growth of e-banking within the last decade, the banks senior executives and their key shareholders have found ways to effectively fight back against other competitors, by 4 increasing its current product offerings, and providing new value-added services to its existing and potential new customers. This e-tailer is projecting a 25 % profit increase within the next five years.

Overview / Analysis

An annual audit for FY 2007 completed by Federal regulators revealed that e*Bancorp retained areas of weaknesses with regards to their ethical internal control environment. These consist of: Ethical issues arising from internal and industry practices Unethical practices in e-marketing Unethical practices relating to e-banking products In order to avoid future heavy fines, the company was issued warnings about these findings. They responded via a one page letter to the SEC that these violations will be corrected in time for their FY2009 audit. Understandably, e*Bancorps CFO, John Majors, is very concerned about these findings. According to Federal regulations, a companys CFO is responsible for signing off on a companys10K filings. Besides facing heavy fines, John Majors may face possible jail time if the company does not correct these deficiencies by August 31, 2009. Regulators are expected to return to e*Bancorp for another audit in September 2009. e*Bancorps shareholders have already raised unease about these findings, and the potential impact this may have on the companys stock valuation. Furthermore, the October 15, 2007 online edition of the Wall Street Journal wrote an exclusive article on page three about 5 companys unethical behavior and practices, and cited e*Bancorp, together with now-defunct companies like Enron, and WorldCom, as well as several Wall Street financial institutions. This article created a stir among its investors, and caused e*Bancorps stock prices to dip by $40.00 during the week of October 18, 2007. From past experience, senior management and key stakeholders at e*Bancorp recognize that to implement any compliance or risk management program is a costly effort. The implementation of ISO/IEC 27006:2007 and VeriSign certifications and compliancy cost the company more than $4.6 million in FY 2006 and 2007 combined. In December, 2007, William Isaac, Chairman of the Board, during a live webcast, to appease the worries of its shareholders, boasted that our company has eliminated all security risks, and we feel confident that our investment in online security was well spent, and we now have the best system in the e-banking industry. On the other hand, Susan Eisenberg, Chief Legal Counsel, and Shah Patel, CRO, discern that e*Bancorp does not possess the skill sets or knowledge about how to incorporate ethics in the companys overall risk management program. To boot, part of the companys risk management function is supplied by the vendor, e-Risks Associates, LLP, which costs the company approximately $2 million per year. Nevertheless, the companys Board of Directors, senior executives and shareholders are very excited about their latest product offering, mDeposit. mDeposit allows a customer to make deposits from any part of the globe, using their mobile device or laptop. Customers will no longer have to mail in deposits to their processing sites in India or Wisconsin, and wait for a 5- day processing time turnaround. Funds availability will now only require a 1-day processing 6 time. e*Bancorp speculates this as the e-product of the new millennium. They are confident that mDeposit will allow the company to gain market dominance in the consumer e-banking industry. Too, because they formed strategic partnerships with the best technology company, and marketing companies on the globe, the companys CEO, Larry Goldman, asserts that e*Bancorp will be a force to reckon withstock prices will soar year after year. The bank realizes that they can actually hold a de facto monopoly in the consumer e-banking business. Traditional financial institutions that offer online services may now find it impossible to compete with e*Bancorp. mDeposit is due to launch in fall 2009, and media teaser ads will begin in summer 2009. As one, the companys key stakeholders are overwhelmed and are challenged with the following dilemmas: Implement an organizational-wide ethical risk management program Face heavy fines, and risk reputational damage Spend their $5 million budget on the new product, mDeposit.

Status Report

In March 2008, the company held its first meeting to address these dilemmas. Attendees included members of the C-suite, senior managers from Legal, Human Resources, Finance and Accounting, Technology, Marketing, Internal Audit, and Risk Management. Issues centered on the audit findings were discussed in detail. A committee called, Project Ethics, was formed, and 7 included representatives from each of the aforementioned departments. Project Ethics was tasked with exploring the possibilities of implementing an organizational-wide ethical risk management program, and researching the financial and social impacts of risk reputational damage. At the next meeting in April 2008, Project Ethics reported their findings. Because of other issues, for instance the impending mDeposit launch, time conflicts, and overworked staff, the information presented lacked substance and luster. The companys CEO, Larry Goldman, also discussed a further 1.5% drop in the companys stock prices. He stated that investors were beginning to express further concerns about the state of the companys ethical program. Conflicts abounded in the May 2008 meeting. No decisions were made as to how these dilemmas should be addressed. The CFO, John Majors, presented the attendees with a BIA of each dilemma. This created further anxiety, and conflicting views amongst the attendees. It has been exactly three months since the last executive meeting, and e*Bancorps key stakeholders cannot decide in what direction they should pursue concerning their dilemmas. After countless meetings, conflicts, and indecision, they all agreed to hire the consulting firm, Wharton Global Associates, to assist them with this decision making.

Case Problems (which option the e*bancorp should select (to fix the current issues within the company) and invest their money on why?)

e*Bancorps senior executives are alarmed that they may not have sufficient information to make a valid decision about which direction to go, but they acknowledge that if they do not act now they may face financial, and reputational damage. They have a budget of $5 million to spend. The options under consideration include:

1. Design and implement a new ethical risk management program and strategy. This also includes the hiring of a CECO

2. Analyze and examine the probable effects of reputational damage on e*Bancorp, including potential loss of confidence among existing and potential new customers

3. Determine the possible financial impact of fines imposed by Federal regulators, such as the FSGO, FTC, SEC, and OCC

4. Project the potential financial gains on spending their $5 million budget on the new product offering, mDeposit.