As Discover Financial Services faces regulatory scrutiny, the card company’s interim CEO Thursday committed to bolstering risk and compliance efforts, following the exit of former CEO Roger Hochschild.

In the wake of Hochschild’s abrupt departure Monday, Discover held a business update conference call Thursday, during which interim CEO John Owen and CFO John Greene shared the company’s priorities and addressed analyst questions. 

Owen and Greene repeatedly pledged the company’s commitment to improving compliance, risk management and corporate governance efforts. One of Owen’s top goals will be continuing to build the company’s compliance management system, he said.

“We have made significant investments in this area, but still have work to do in order to strengthen our corporate governance structures and simplify operations,” Owen said.

In July, Discover said it received a proposed consent order from the Federal Deposit Insurance Corp. relating to the company’s compliance management system. The proposed consent order from the FDIC “is still that — we don’t have a final consent order,” Greene said. “I would expect the agency will make that public when they’re ready.”

In the past, Discover also received consent orders from the Consumer Financial Protection Bureau, in 2015 and 2020, related to the company’s student loan servicing practices.

Board thinking on Hochschild exit

As Discover grapples with compliance issues, the board isn’t making management changes under the direction of regulators, Owen asserted.

Owen also discussed the reasoning behind the board’s agreement with Hochschild that it was time for him to exit, though Owen didn’t comment on the sudden nature of the decision. “Roger’s been here 25 years, been a big part of the growth over 25 years,” Owen said. “Given the regulatory environment and the consent orders we’re facing, it’s time to make some changes in the management.”

The board had been discussing the issue for several weeks, before reaching the agreement with Hochschild that it was the right time for a change, Owen added.

Owen, a former banking executive who was appointed to Discover’s board in 2022, suggested further changes to the Riverwoods, Illinois-based company’s C-suite are unlikely. He pointed to the company’s recent appointments of IT, compliance and legal chiefs and the presence of seasoned leaders. “Our goal is to keep this team in place for the foreseeable future,” he said.

From 2019 to 2023, Discover has increased its risk and compliance expenses by about $300 million, Greene noted. The company is on track to spend about $260 million on compliance this year, he said Thursday. 

“The company’s historically under-invested (in compliance), and we’re paying the price right now,” Greene said.

The company had no updates to share on the compliance front. An investigation into Discover’s pricing error disclosed during the second-quarter earnings call is nearing an end, Greene said. A spokesperson didn’t immediately provide more details on that probe. 

The proposed consent order is focused on a period prior to 2022 and 2023, “so there could be other regulatory follow-ups from that,” from the FDIC or other agencies, Greene said. A spokesperson didn’t immediately respond when asked for more detail on Greene’s statement.   

When Discover does get the FDIC’s final consent order, “we’ll be getting those outcomes, putting them into action plans and getting those things resolved as quickly as possible,” Owen said. 

Discover has hired about 200 compliance officers over the past several months, Owen said.

As regulators have become more aggressive, especially in the wake of the Silicon Valley Bank collapse and other bank failures earlier this year, it’s become a tougher environment for companies such as Discover to operate in, William Blair Analyst Robert Napoli said in an interview. “There’s a lot of consent orders out there these days, so it’s not unusual,” Napoli said. “A lot of investors glance over those.”

He expressed some skepticism, however, about Discover’s comments about compliance investments.

“Discover has an army of people in the regulatory and compliance areas,” Napoli said. “They say they’ve under-invested in it. I’m not so sure. They have a lot of headcount in those areas. Apparently, they haven’t been as effective as they should be.” 

Search for a new CEO

Discover has begun the CEO search process, working with an executive search firm to come up with a slate of candidates that will include both internal and external candidates, Owen said. 

The company is “acting with urgency” on the process, but Owen said Discover will take the appropriate amount of time needed to choose the best candidate.

“Companies that get this right take the time to really evaluate both internal and external (candidates),” Owen said. “Many companies that promote an internal candidate quickly, I think, don’t take time to do due diligence on external candidates.”

Napoli expects the company’s next CEO will be from the banking world or from “a significant fintech.” Most likely, “somebody that’s running the credit card business for Citigroup or Bank of America would be high on the list,” he said.

Josh Crist, co-managing partner at executive search firm Crist Kolder Associates, said his firm placed Greene in the CFO role in 2019. Crist believes Greene will be viewed as an internal successor candidate for the CEO post.

“If the need is for a seasoned player, someone who’s been there, done that, to grab ahold of this thing, then they’re going to have to go external,” Crist said in an interview.

The abrupt nature of Hochschild’s exit “does put more pressure on everybody involved, without a doubt,” Crist said. 

Discover will likely “want to start seeing external potential candidates as quickly as humanly possible,” to be able to make a decision within the next couple of months, Crist said. “I would assume that they would hopefully find a suitable candidate prior to end of year.”