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.
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.
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.