Wells Fargo Lessons: Will Leaders Ever Learn?

Ben W. Heineman, Jr. is former GE General Counsel and is a senior fellow at Harvard Law School and Harvard Kennedy School of Government. He is author of The Inside Counsel Revolution: Resolving the Partner-Guardian Tension (Ankerwycke 2016), as well as High Performance with High Integrity (Harvard Business Press 2008).

We’ve seen this bad movie before. The question is why does it keep repeating itself and why do business people never learn the obvious lessons?

An internal report from independent Wells Fargo directors and the law firm, Shearman & Sterling has recently laid out in detail the sorry story of systemic consumer fraud that began 15 years ago in 2002. The misconduct was eye-popping. To meet sales quotas, receive incentive compensation and please superiors, thousands of Wells Fargo employees (5000 in recent years) falsified bank records, forged customer signatures, opened more than 2000 unauthorized checking or savings accounts for non-consenting customers, charged improper fees, and illegally transferred customer funds.

Despite numerous warning signs inside the company over the years, there was no concerted high level Wells Fargo response until LA Times news stories about consumer fraud appeared in 2013 and the LA City Attorney filed suit in 2015. Then the dam broke. Retail bank chief Carrie Tolstedt resigned in July 2016, and Wells Fargo CEO John Stumpf “retired” in October. Tolstedt gave up $67M and Stumpf $69M in compensation either through clawbacks or forfeiture of unvested benefits. Five other senior executives were fired (and lost $15.5M in compensation). And the Wells Fargo Operating Committee—including staff leaders of HR, Law, Risk and Audit—lost $32M in aggregate through cancellation of bonuses or reduction of yet-to-be-paid awards.

To resolve enforcement issues, Wells Fargo agreed to pay Los Angeles, the Comptroller of the Currency and the Consumer Financial Protection Bureau $185M in September 2016. Early this year, it agreed preliminarily to settle a consumer class action for more than $100M. Both state and federal law enforcement authorities continue to investigate the matter. Numerous individual suits from both customers and employees remain. And Wells Fargo has more than $1.5 billion reserved for this issue. Most importantly, Wells Fargo’s reputation as a consumer franchise took a major hit. CEO Timothy Sloan recently said that when “you step back and look at how serious the retail sales practices issues were and the reputational impact on the company, you can only reach [the] conclusion” that performance with customers and stock price relative to peers was impacted. After resolving the government case, the bank eliminated sales goals in the retail bank and added incentives for customer service among many other reforms.

In one sentence: Wells Fargo failed to have a strong uniform, company-wide culture that put as much emphasis in reality on high integrity and sound risk management as it did on high performance. In this regard, the bank joins a long list of other major corporations where a failed integrity culture led to serious damage: from the financial frauds of Enron and Worldcom; to product issues involving the VW diesel emissions fraud, the GM ignition switch, the Toyota accelerators and the Ford/Bridgestone tire defects; to the bribery scandals of Siemens and Wal-Mart; to BP’s environmental catastrophe in the Gulf of Mexico; to the almost endless litany of enforcement/culture issues besetting the financial services industry from the Great Recession onwards.

Yet despite the extensive public discussion of these—and many other—corporate cultural failures, Wells Fargo seemed oblivious to the front-page, above-the-fold litany of lessons. Instead, until it was caught out publicly by newspaper stories in 2013 and the governmental enforcement action in 2015, it plowed on with a broken culture indifferent to fraudulent sales practices completely antithetical to a sound consumer bank.

In brief, the report to the board highlights some basic failings/lessons.

  • Wells Fargo had a decentralized theory of management which meant that core corporate mission and values were the responsibility of business unit leaders and not driven by the CEO and the top of the company. This in turn meant that a culture of silence—which ignored multiple warning signs from within the bank—stifled a uniform, open culture of integrity.
  • The fraudulent sales practices were due, most immediately, to distorted culture and performance management systems of the Community Bank, headed by Ms. Tolstedt. In the words of the Shearman & Sterling report: “Wells Fargo’s decentralized corporate structure gave too much autonomy to the Community Bank’s senior leadership, who were unwilling to change the sales model or even recognize it was the root cause of the problem….[and who] resisted and impeded outside scrutiny or oversight and, when forced to report, minimized the scale and nature of the problem.”
  • CEO John Stumpf failed to react to information about fraudulent sales practices. He was wedded to the decentralized model; a supporter of Ms. Tolstedt; and was credulous in his belief that Community Banking itself would fix the problems it had created. In the words of the report: “Stumpf did not engage in investigation and critical analysis to fully understand the problem….[his] commitment to the sales culture … led him to minimize problems with it, even when plausibly brought to his attention.” He “helped create a culture that led to sales practices abuses.”

His failure to look at the problem squarely and lead a bank-wide effort to investigate and remediate is an object lesson in poor CEO leadership. Stumpf’s replacement as CEO, Tim Sloan, recently said on a CNN interview that the bank “should have addressed concerns” when they arose more than 12 years ago.

  • The performance of the key corporate-wide staffs—Legal, Audit, Risk and HR—is also a stark lesson in what not to do. Following Stump’s lead, they deferred to the business unit and failed to confront the sales practice problem, highlight it and solve it, despite numerous warnings over the years. Again, in the words of the report: the leaders of the staffs “missed opportunities to analyze, size and escalate sales practices issues,” mimicking the CEO’s deference to business units even in the face of damning evidence.
  • The Wells Fargo board also failed to seize on an issue that went to the core of consumer banking. It did not learn until early 2014 of the bad sales practices (as a result of the news stories). Those practices then became a regular “risk” item on the board agenda. But even then the board failed to push for a stronger centralized Risk Management function; failed to insist on detailed plans and detailed facts from the CEO and corporate staffs on how they planned to address the fraud; and failed to force out Tolstedt immediately even though it had doubts from mid-2015 on about her candor and resolve. Only after the September 2016 settlement with Los Angeles and other authorities did the Board rouse itself and start to deal forcefully with this integrity issue at the core of the Bank—to step up to their responsibilities. At the recent annual shareholders meeting, all 15 current directors were re-elected but some with votes as small as 53 percent. Board chair Stephen Sanger said the shareholder vote “sent a clear message of dissatisfaction.”

As with so many other corporate improprieties, many people at Wells Fargo knew for some time about the fraudulent sales practices. Yet a decentralized culture—with fatal indifference and passivity in the CEO, corporate control functions and, ultimately, the board—let bad behavior go on for far too long with the involvement of far too many people. Despite front page story after story describing the failures of culture at other major corporations, this indifference and passivity about malignant sales practices at the heart of the bank’s mission was prevalent for years.

With the incessant drumbeat of corporate failings, people concerned about the health of business must ask once again. Will the leaders of today’s enterprises learn the lessons of Wells Fargo’s failed culture and failed response? Paradoxically, one of the most salient points in the Wells Fargo saga is: don’t emulate the Bank and ignore the searing and manifest lessons of corporate cultural failure all around you, including Wells Fargo’s, as you lead your own company.

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One Comment

  1. Posted Wednesday, April 26, 2017 at 8:55 pm | Permalink

    In Australia, the cover up of information and the dissemination of misinformation concerning a particular huge financial fraud, so that the weaknesses in the financial system and financial regulators is not disclosed, but this leaves the public without the opportunity to learn from a crisis event.

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