As John G. Stumpf, the chief executive of Wells Fargo,
prepares to face a congressional tribunal on Thursday for the second
time in two weeks, questions are intensifying about the bank’s sham
accounts scandal and its lethargic response to it.
And
late Tuesday, with the focus of the criticism spreading from the bank’s
chief executive to its board, the company’s directors took action.
Announcing an investigation into the bank’s sales practices, the board
said Mr. Stumpf would forfeit approximately $41 million worth of stock
awards, forgo his salary during the inquiry and receive no bonus for
2016.
The
Wells Fargo board also announced the immediate retirement of Carrie L.
Tolstedt, the former senior executive vice president of community
banking, who ran the unit where the fake accounts were created. She will
forfeit $19 million in stock grants, will receive neither a bonus for
this year nor a severance, and will be denied certain enhancements in
retirement pay, the board said.
These actions by the Wells Fargo board, while welcome, were slow in coming.
A
corporate board has many duties, but three of the most crucial are at
the center of the Wells Fargo mess. One is to assess the risks inherent
in the company’s business and handle them before they develop into a
crisis. Another is to dispense compensation that does not encourage bad
behavior. And finally, a board must monitor a company’s culture, from
top to bottom.
The Wells Fargo board has disappointed in all three.
“Unfortunately,
it appears that the bank’s response was to view the problem as employee
misconduct and to fire people as opposed to looking at the supervisory
chain and culture,” said Sheila C. Bair, the former chairwoman of the
Federal Deposit Insurance Corporation who is now president of Washington
College in Chestertown, Md. “Culture and tone at the top are exactly
what the board should be looking at.”
I
asked Mary Eshet, a Wells Fargo spokeswoman, to respond to Ms. Bair’s
criticism. She declined and said the company had no comment on the
board’s discussions.
The
Wells Fargo culture is under attack for good reason. For years, the
bank pressed its employees to open as many different types of accounts
as possible, whether or not their customers needed them, rewarding
workers who complied with promotions and bonuses and punishing those who
did not. The push for these accounts was so intense and relentless that
some bank employees forged customers’ signatures on new accounts to
make sales quotas.
Continue reading the main story
Mr.
Stumpf acknowledged in testimony before the Senate last week that Wells
Fargo officials knew about the practice far longer than they had
initially stated.
It
is troubling, given the nature of the scandal and the bank’s failure to
correct it, that two Wells Fargo directors are former financial
regulators with extensive experience in consumer banking. One is
Elizabeth A. Duke, a member of the Federal Reserve Board from 2008 to
2013. She served as chairwoman of the Fed’s committee on consumer and
community affairs and also sat on its bank supervision and regulation
committee. Ms. Duke joined Wells Fargo’s board in 2015 and is a member
of the bank’s credit, finance and risk committees.
In
its proxy filing, Wells Fargo cited Ms. Duke’s “insight and a unique
understanding of risks and opportunities that contribute important risk
management experience to the board.”
Cynthia
H. Milligan is the other former bank regulator on the Wells Fargo
board. A member since 1992, Ms. Milligan was director of banking and
finance for the State of Nebraska from 1987 until 1991, responsible for
supervising several hundred banks and other financial institutions, the
bank said.
Neither director would speak to me for this article.
From
the outside looking in, the composition of the Wells Fargo board seems
to check all the right boxes. Its 15 members include top corporate
executives, former high-ranking United States government officials, an
accounting expert and an academic. All are paid well for their work.
Last year, directors earned from $279,000 to $402,000.
Wells
Fargo is especially proud of its board’s diversity. Ten of the
directors are either female, Asian, African-American or Hispanic, the
company’s proxy said. Women make up 40 percent of its board, twice that of the typical Standard & Poor’s 500 company.
Warren Calls Out Wells Fargo C.E.O.
“You should resign, you should give back the money,” said Senator Elizabeth Warren. “And you should be criminally investigated.”
By CNBC on Publish Date September 20, 2016.
Photo by Michael Reynolds/European Pressphoto Agency.
Watch in Times Video »
As
is the case at many large companies, Wells Fargo’s chief executive, Mr.
Stumpf, is also its board chairman. In that role, he made
recommendations on pay to the human resources committee charged with
setting compensation for his top lieutenants.
During
the last three years, Ms. Tolstedt received compensation worth over $27
million, according to Wells Fargo’s proxy statement. She stepped down
in July and was scheduled to retire at the end of the year. That process
was accelerated on Tuesday.
Anatomy of the Wells Fargo Scandal
Over the last several weeks, interviews with employees,
congressional hearings and inquiries outline the sales pressure and
unrealistic quotas that led to problematic practices at Wells Fargo.
The Scandal Breaks
In early September, the Wells Fargo scandal is brought to light after the bank is fined $185 million for creating more than 1.5 million bank accounts and 565,000 credit card accounts that regulators say were sham accounts.Employees Describe the Sales Pressure
In interviews with The Times, several Wells Fargo employees openly describe the intense sales pressure that was nurtured and honed over decades. “I was always getting written up for failing to bump my solutions numbers up,” said one employee.C.E.O. on the Hot Seat
John Stumpf, who grew up on a dairy and poultry farm as one of 11 children, had cultivated his image as a community banker and that of his bank as the antithesis of a giant global lender. Now, he finds himself at the center of a controversy over broad failures of oversight inside the bank.A Political Grilling
At a closely watched Senate hearing, Mr. Stumpf tries to make amends for the bank's scandal but faces withering criticism. Senator Elizabeth Warren calls for his resignation adding, “and you should be criminally investigated.”Echoes of Past Abuses
In a Fair Game column, Gretchen Morgenson writes that the latest Wells Fargo issue is not the first time that the bank has been in the spotlight for its culture. “There were enough problematic foreclosure cases involving Wells Fargo moving through the courts that the bank’s dubious practices seemed as pervasive then as the questionable account-opening scheme does now,” she writes.Accountability Under the Law
The Justice Department has the perfect opportunity to seek accountability as various jurisdictions investigate, James B. Stewart writes in a Common Sense column. Too often, high-level officials haven't been prosecuted for financial crimes, but the Wells case “may prove the exception,” he writes.Workers Claim Retaliation
Former Wells Fargo workers file lawsuits saying they were penalized or terminated for refusing to set up accounts without customers' knowledge in order to meet sales targets. Some Wells Fargo employees say they tried to sound the alarm about the sham accounts but were met with retaliation.
But in his Senate testimony
last week, Mr. Stumpf seemed to back away from a role in determining
compensation. He also balked when asked if the bank would claw back some
of Ms. Tolstedt’s compensation.
Claiming
that he was not an expert in compensation, he said the Wells Fargo
board and its human resources committee would make that decision
independently. “I’m not part of that process,” he said. “I want to make
sure that’s a very independent process and nothing that I would say
would prejudice their deliberative process.”
But
Brian T. Foley, a compensation consultant in White Plains, pointed out
that Wells Fargo’s proxy filings clearly state Mr. Stumpf’s direct role
in the committee’s incentive pay decisions. Last year’s filing stated
that for four top executives at the bank, including Ms. Tolstedt, the
committee considered “the recommendations of Mr. Stumpf based on his
assessment of their respective 2015 performance,” among other things.
Asked
about this discrepancy, Ms. Eshet, the Wells Fargo spokeswoman, said in
a statement: “The current situation involving the board’s consideration
of potential recovery of compensation is different, and Mr. Stumpf did
not want to bias that process. He believes it is appropriate for the
human resources committee and the board to first consider that issue
independently. If the board asks his view during their process, he will
of course share it.”
Still,
by punting the decision to the committee, Mr. Foley said, Mr. Stumpf
showed zero leadership. “Stumpf is saying, ‘I have no involvement in
assessing the situation,’ but he’s been doing it year in, year out,” Mr.
Foley said in an interview. “I would have expected him to have not only
apologized but to have said, ‘I’m not taking a bonus this year, and I’m
going to urge the board to be very careful about paying bonuses to any
executive officer who knew about the activities or should have known.’”
Some of that happened on Tuesday.
Since
the financial crisis of 2008, it has become clear that a bank’s
compensation practices can pose enormous risks if they reward improper
behavior. Wells Fargo’s proxy says as much. It noted that the human
resources committee meets each year with the company’s chief risk
officer “to review and assess any risks posed by our enterprise
incentive compensation programs,” the company said.
Still, this meeting did not appear to pick up the risks associated with the unauthorized account openings at Wells Fargo.
Ms.
Bair said one reason for this lapse may have been a communication
breakdown between the risk committee of the Wells Fargo board and its
human resources committee. “Compensation drives behavior, but was the
risk committee ever briefed on compensation?” Ms. Bair asked. “For any
risk committee to do their job, they really have to understand
compensation issues.”
In
recent years, some shareholders have tried to force Wells Fargo to hire
an independent board chairman, contending that the dual role held by
Mr. Stumpf assigns too much power to him.
Companies
whose chief executives also preside over their boards argue that having
a lead independent director achieves the necessary balance of power.
Wells Fargo made just such a pitch to shareholders at its annual meeting
in April when they voted on a proposal requiring the company to engage
an independent chairman. The bank’s lead independent director is Stephen
W. Sanger, a former chairman and chief executive of General Mills.
Contending
that its governance structure “is working effectively” and citing Mr.
Sanger’s role, Wells Fargo urged shareholders to vote against the
proposal. The company was persuasive — the proposal garnered support of
only 17.2 percent of votes cast.
Depending upon how the board handles the current difficulties, though, such a vote could have a different outcome next year.
It’s
doubtful that anyone on the Wells Fargo board welcomes the spotlight
that is now trained on it. After all, corporate boards rarely have to
answer for their actions or inaction. Clearly, the Wells Fargo board has
some ’splaining to do. And the sooner it realizes that, the better.
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