The Wells Fargo Cross-Selling Scandal

Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a recent paper by Mr. Tayan. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here); The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann (discussed on the Forum here); and How to Fix Bankers’ Pay by Lucian Bebchuk (discussed on the Forum here).

In recent years, more attention has been paid to corporate culture and “tone at the top,” and the impact that these have on organizational outcomes. While corporate leaders and outside observers contend that culture is a critical contributor to employee engagement, motivation, and performance, the nature of this relationship and the mechanisms for instilling the desired values in employee conduct is not well understood.

For example, a survey by Deloitte finds that 94 percent of executives believe that workplace culture is important to business success, and 62 percent believe that “clearly defined and communicated core values and beliefs” are important.

Graham, Harvey, Popadak, and Rajgopal (2016) find evidence that governance practices and financial incentives can reinforce culture; however, they also find that incentives can work in opposition to culture, particularly when they “reward employees for achieving a metric without regard to the actions they took to achieve that metric.” According to a participant in their study, “People invariably will do what you pay them to do even when you’re saying something different.”

The tensions between corporate culture, financial incentives, and employee conduct is illustrated by the Wells Fargo cross-selling scandal.

Wells Fargo

Wells Fargo has long had a reputation for sound management. The company used its financial strength to purchase Wachovia during the height of the financial crisis—forming what is now the third-largest bank in the country by assets—and emerged from the ensuing recession largely unscathed, with operating and stock price performance among the top of its peer group (see Exhibit 1, available in the complete publication here). Fortune magazine praised Wells Fargo for “a history of avoiding the rest of the industry’s dumbest mistakes.” American Banker called Wells Fargo “the big bank least tarnished by the scandals and reputational crises.” In 2013, it named Chairman and CEO John Stumpf “Banker of the Year.” Carrie Tolstedt, who ran the company’s vast retail banking division, was named the “Most Powerful Woman in Banking.” In 2015, Wells Fargo ranked 7th on Barron’s list of “Most Respected Companies.”

Wells Fargo’s success is built on a cultural and economic model that combines deep customer relations and an actively engaged sales culture. The company’s operating philosophy includes the following elements:

Vision and values. Wells Fargo’s vision is to “satisfy our customers’ needs, and help them succeed financially.” The company emphasizes that:

Our vision has nothing to do with transactions, pushing products, or getting bigger for the sake of bigness. It’s about building lifelong relationships one customer at a time. … We strive to be recognized by our stakeholders as setting the standard among the world’s great companies for integrity and principled performance. This is more than just doing the right thing. We also have to do it in the right way.

The company takes these statements seriously. According to Stumpf, “[Our vision] is at the center of our culture, it’s important to our success, and frankly, it’s been probably the most significant contributor to our long-term performance.” … “If I have any one job here, it’s keeper for the culture.”

Cross-selling. The more products that a customer has with Wells Fargo, the more information the bank has on that customer, allowing for better decisions about credit, products, and pricing. Customers with multiple products are also significantly more profitable (see Exhibit 2, available in the complete publication here). According to Stumpf:

To succeed at it [cross-selling], you have to do a thousand things right. It requires long-term persistence, significant investment in systems and training, proper team member incentives and recognition, [and] taking the time to understand your customers’ financial objectives.

Conservative, stable management. Stumpf’s senior management team consists of direct reports with an average of 27 years of experience at Wells Fargo. Decisions are made collectively. According to former CEO Richard Kovacevich, “No single person has ever run Wells Fargo and no single person probably ever will. It’s a team game here.” Although the company maintains independent risk and oversight mechanisms, all senior leaders are responsible for ensuring that proper practices are embedded in their divisions:

The most important thing that we talk about inside the company right now is that the lever that we have to manage our reputation is to stick to our vision and values. If we are doing things for our customers that are the right things, then the company is going to be in very good shape. … We always consider the reputational impact of the things that we do. There is no manager at Wells Fargo who is responsible for reputation risk. All of our business managers in all of our lines of business are responsible.

Wells Fargo has been listed among Gallup’s “Great Places to Work” for multiple years, with employee engagement scores in the top quintile of U.S. companies (see Exhibit 3, available in the complete publication here).

Cross-Selling Scandal

In 2013, rumors circulated that Wells Fargo employees in Southern California were engaging in aggressive tactics to meet their daily cross-selling targets. According to the Los Angeles Times, approximately 30 employees were fired for opening new accounts and issuing debit or credit cards without customer knowledge, in some cases by forging signatures. “We found a breakdown in a small number of our team members,” a Wells Fargo spokesman stated. “Our team members do have goals. And sometimes they can be blinded by a goal.” According to another representative, “This is something we take very seriously. When we find lapses, we do something about it, including firing people.”

Some outside observers alleged that the bank’s practice of setting daily sales targets put excessive pressure on employees. Branch managers were assigned quotas for the number and types of products sold. If the branch did not hit its targets, the shortfall was added to the next day’s goals. Branch employees were provided financial incentive to meet cross-sell and customer-service targets, with personal bankers receiving bonuses up to 15 to 20 percent of their salary and tellers receiving up to 3 percent.

Tim Sloan, at the time chief financial officer of Wells Fargo, refuted criticism of the company’s sales system: “I’m not aware of any overbearing sales culture.” Wells Fargo had multiple controls in place to prevent abuse. Employee handbooks explicitly stated that “splitting a customer deposit and opening multiple accounts for the purpose of increasing potential incentive compensation is considered a sales integrity violation.” The company maintained an ethics program to instruct bank employees on spotting and addressing conflicts of interest. It also maintained a whistleblower hotline to notify senior management of violations. Furthermore, the senior management incentive system had protections consistent with best practices for minimizing risk, including bonuses tied to instilling the company’s vision and values in its culture, bonuses tied to risk management, prohibitions against hedging or pledging equity awards, hold-past retirement provisions for equity awards, and numerous triggers for clawbacks and recoupment of bonuses in cases where they were inappropriately earned (see Exhibit 4, available in the complete publication here). Of note, cross-sales and products-per-household were not included as specific performance metrics in senior executive bonus calculations even though they were for branch-level employees.

In the end, these protections were not sufficient to stem a problem that proved to be more systemic and intractable than senior management realized. In September 2016, Wells Fargo announced that it would pay $185 million to settle a lawsuit filed by regulators and the city and county of Los Angeles, admitting that employees had opened as many as 2 million accounts without customer authorization over a five-year period. Although large, the fine was smaller than penalties paid by other financial institutions to settle crisis-era violations (see Exhibit 5, available in the complete publication here). Wells Fargo stock price fell 2 percent on the news (see Exhibit 6, available in the complete publication here). Richard Cordray, director of the Consumer Financial Protection Bureau, criticized the bank for failing to

… monitor its program carefully, allowing thousands of employees to game the system and inflate their sales figures to meet their sales targets and claim higher bonuses under extreme pressure. Rather than put its customers first, Wells Fargo built and sustained a cross-selling program where the bank and many of its employees served themselves instead, violating the basic ethics of a banking institution including the key norm of trust.

A Wells Fargo spokesman responded that, “We never want products, including credit lines, to be opened without a customer’s consent and understanding. In rare situations when a customer tells us they did not request a product they have, our practice is to close it and refund any associated fees.” In a release, the banks said that, “Wells Fargo is committed to putting our customers’ interests first 100 percent of the time, and we regret and take responsibility for any instances where customers may have received a product that they did not request.”

The bank announced a number of actions and remedies, several of which had been put in place in preceding years. The company hired an independent consulting firm to review all account openings since 2011 to identify potentially unauthorized accounts (see Exhibit 7, available in the complete publication here). $2.6 million was refunded to customers for fees associated with those accounts. 5,300 employees were terminated over a five-year period. Carrie Tolstedt, who led the retail banking division, retired. Wells Fargo eliminated product sales goals and reconfigured branch-level incentives to emphasize customer service rather than cross-sell metrics. The company also developed new procedures for verifying account openings and introduced additional training and control mechanisms to prevent violations.

Nevertheless, in subsequent weeks, senior management and the board of directors struggled to find a balance between recognizing the severity of the bank’s infractions, admitting fault, and convincing the public that the problem was contained. They emphasized that the practice of opening unauthorized accounts was confined to a small number of employees: “99 percent of the people were getting it right, 1 percent of people in community banking were not. … It was people trying to meet minimum goals to hang on to their jobs.” They also asserted that these actions were not indicative of the broader culture:

I want to make very clear that we never directed nor wanted our team members to provide products and services to customers that they did not want. That is not good for our customers and that is not good for our business. It is against everything we stand for as a company.

If [employees] are not going to do the thing that we ask them to do—put customers first, honor our vision and values—I don’t want them here. I really don’t. … The 1 percent that did it wrong, who we fired, terminated, in no way reflects our culture nor reflects the great work the other vast majority of the people do. That’s a false narrative.

They also pointed out that the financial impact to the customer and the bank was extremely limited. Of the 2 million potentially unauthorized accounts, only 115,000 incurred fees; those fees totaled $2.6 million, or an average of $25 per account, which the bank had refunded. Affected customers did not react negatively:

We’ve had very, very low volumes of customer reaction since that happened. … We sent 115,000 letters out to people saying that you may have a product that you didn’t want and here is the refund of any fees that you incurred as a result of it. And we got very little feedback from that as well.

The practice also did not have a material impact on the company’s overall cross-sell ratios, increasing the reported metric by a maximum of 0.02 products per household. According to one executive, “The storyline is worse than the economics at this point.”

Nevertheless, although the financial impact was trivial, the reputational damage proved to be enormous. When CEO John Stumpf appeared before the U.S. Senate, the narrative of the scandal changed significantly. Senators criticized the company for perpetuating fraud on its customers, putting excessive pressure on low-level employees, and failing to hold senior management responsible (see Exhibit 8, available in the complete publication here). In particular, they were sharply critical that the board of directors had not clawed back significant pay from John Stumpf or former retail banking head Carrie Tolstedt, who retired earlier in the summer with a pay package valued at $124.6 million. Senator Elizabeth Warren of Massachusetts told Stumpf:

You know, here’s what really gets me about this, Mr. Stumpf. If one of your tellers took a handful of $20 bills out of the cash drawer, they’d probably be looking at criminal charges for theft. They could end up in prison. But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multimillion dollar bonuses, and you went on television to blame thousands of $12-an-hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability. You should resign. You should give back the money that you took while this scam was going on, and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission.

Following the hearings, the board of directors announced that it hired external counsel Shearman & Sterling to conduct an independent investigation of the matter. Stumpf was asked to forfeit $41 million and Tolstedt $19 million in outstanding, unvested equity awards. It was one of the largest clawbacks of CEO pay in history and the largest of a financial institution. The board stipulated that additional clawbacks might occur. Neither executive would receive a bonus for 2016, and Stumpf agreed to forgo a salary while the investigation was underway.

Two weeks later Stumpf resigned without explanation. He received no severance and reiterated a commitment not to sell shares during the investigation. The company announced that it would separate the chairman and CEO roles. Tim Sloan, chief operating officer, became CEO. Lead independent director Stephen Sanger became nonexecutive chairman; and Elizabeth Duke, director and former Federal Reserve governor, filled a newly created position as vice chairman.

The long-term impact on the bank was unclear. Customer visits to branches declined 10 percent year-over-year in the month following the scandal. Credit card and debit card applications also fell. Deposits and new checking accounts, however, continued to grow—albeit at below-historical rates. The senior management team promised more proactive outreach to customers and investors. Internally, the company placed greater emphasis on customer service and sought to clarify roles and responsibilities for risk management.

Why this Matters

  1. The Wells Fargo cross-selling scandal demonstrates the importance of financial incentives not just at the senior-management level but at all levels of an organization. Was the company wrong to provide incentives to branch-level employees to increase the number of products sold per household? Would the program have worked better if coupled with additional metrics? With closer monitoring and measurement?
  2. Branch-level employees were incentivized to increase products per household but the senior-executive bonus system did not include this metric. Did this disconnect contribute to a failure to recognize the problem earlier? Did it lead to senior executive failure to monitor lower-level incentive structures?
  3. The financial impact of the Wells Fargo cross-selling scandal was fairly limited but the reputational damage to the bank was massive. What systems should have been put in place to identify and escalate potential problems earlier? What steps should senior management and the board have taken immediately following the news to better contain the fallout?
  4. Wells Fargo prides itself on its vision and values and culture. By several measures, these have been highly beneficial to the company’s performance. What is the best mix of incentives to reinforce these concepts across the company? How do you maximize the positive contribution that financial incentives make to culture while minimizing the potential negative outcomes that can occur?
  5. Wells Fargo chose an inside executive as CEO successor to John Stumpf. Was this the correct decision? Are wholesale changes needed to the company, its culture, and its systems? Or is a seasoned company veteran better positioned to help Wells Fargo recover from the scandal?

The complete publication, including footnotes and exhibits, is available here.

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