wells fargo corporate governance failure

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In November 2016, after the departure of Tolstedt, he acknowledged that the problem was much severe than he imagined. Details of the responsibilities of the board committees were elaborately specified (see Table 3). Gary Larkin is a research associate for The Conference Board focusing on corporate governance. You can be signed in via any or all of the methods shown below at the same time. Whether Wells Fargo can accomplish such a task remains to be seen. There were seven standing committees of the board, including the Risk Committee. The bank had started an intensive campaign for cross-selling under her leadership. We use cookies and related tracking technologies to personalize and enhance your experience on our site. The Federal Reserve’s action now puts into place a comprehensive remediation programme that Wells Fargo must satisfy before being permitted to regain its status in the marketplace. Senator Warren was particularly critical, saying such a stand either showed complicity or incompetence (Campo & Nova, 2017). When this was raised at the board level, Stumpf defended Tolstedt, saying that cross-selling is a long-term corporate strategic initiative (Wells Fargo, 2017). A mechanism of self-review of directors has been introduced, assisted by a third party. Unfortunately for the bank, the senior leadership either refused to see the signals or tried to downplay the whole issue. © 2020 Directors & Boards. (p. 30), Table 1. In February 2018, US Federal Reserve banned further growth of the bank till a robust corporate governance mechanism is in place (Gara, 2018). Its culture did not embrace reports of wrongdoing but punished those who raised concerns in order to continue with a culture premised on a misunderstanding and paranoid strategy of preservation. The cross-selling sales strategy of Wells Fargo was earlier reported by Wall Street Journal, though not with such caustic comments but enough to raise red flags (Smith, 2011). The Risk Committee also functioned as the coordinating committee to the other standing committees on the risks faced in their respective fields. The OCC entered into a consent order for the bank to improve its corporate risk and governance functions. The external auditors were KPMG. It had seven standing committees—Audit & Examination (A&E), Corporate Responsibility, Credit, Finance, Governance & Nominating and Risk. Kovacevich was very aggressive about banking, often comparing its strategy to Wal-Mart’s strategy of selling socks; for him, Norwest in banking was the mirror image of Walmart in retailing. (Wells Fargo, 2017, pp. Shareholders had a ‘say on pay’ of the executives. When the independent Director and Chair of Risk Committee Enrique Hernandez criticized Tolstedt, he acknowledged the problems of her management style but praised her as the best banker of America. John Stumpf, like Kovacevich, came from Norwest and became, after the merger in 1998, the Head of Wells Fargo’s South Western Banking group. We have seen that some boards are getting this message. In a nutshell, the fundamental question has to be asked, ‘Why not?’. In February 2016, when the HR committee assembled to fix the compensation for 2015 for the senior managers, Tolstedt had still the support of Stumpf. Six Year Summary of Select Financial Data. On one hand, they say it’s awkward to initiate a discussion to remove someone from the board who is not working out, but on the other, they acknowledge the problem with leaving someone on a board who is no longer contributing. I am consistently amazed at how so many large companies with successful business records ignore the value and necessity for business ethics and compliance. It quoted several cases where the managers resigned refusing to follow unethical practices or opted for early retirement, unable to meet the excessive pressure. Several rigorous campaigns were initiated; one such campaign christened ‘Jump to January’ particularly promoted misconduct. If the day’s target was not met, the employees had to stay back or miss the weekend. Loughlin made efforts, despite the opposition from Community Bank, to raise the issues on sales practices and brought it to the notice of the board in 2014. These methods of creating pressure among the branch managers and the threat of humiliation finally resulted in a toxic sales culture leading to low employee morale and unethical practices. The damage to its reputation is staggering and the ability of the bank to recover will depend on a sustained commitment to ethics and compliance and careful management of its business practices. The Influence of Internal Corporate Governance on Bank Credit Risk: An Empirical Analysis for T... View or download all content the institution has subscribed to. Our vision is to satisfy our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Nothing could be further from the truth on forcing products on customers. He rose steadily to become its CEO. He has been a governance thought leader for more than 13 years, having worked in the governance practices for KPMG and PwC. As I like to say, this was not a question of rocket science. The board of directors consisted of 13 members in 2014, and all except Stumpf were independent directors (see Table 2). The executive remuneration was a mixture of salary and incentive. When LA Times came up with the story in December 2013, it quoted Sloan, ‘I’m not aware of any overbearing sales culture’ (Reckard, 2013, para 18). As mentioned earlier, the board took decisive actions in respect of compensation for Stumpf and Tolstedt, including invoking clawback provisions. At the same time, employees in the community bank’s division were being terminated at an unprecedented rate, totalling nearly 5,000 employees over the first five years of the sales incentive scheme. In an unprecedented move, the Federal Reserve publicly announced a first-of-its-kind enforcement action against Wells Fargo for its corporate governance failures and slow, if not glacial pace, of remediation. All Rights Reserved. Branch managers put immense pressure on the field and conducted an hourly review. Login failed. This continued till the reporting structure was changed in 2013, where the group risk officers began to report to Loughlin. 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 (Exhibit 1). The report accused Wells Fargo, a major retail bank in the USA with 6,300 offices and USD237 billion in market valuation, of gross unethical practices in cross-selling (Reckard, 2013). If that is the case, what guarantee do we have of a robust corporate governance regime elsewhere? When Stumpf wanted to know the extent of malpractices in cross-selling, he was told that approximately one per cent of the sales staff of Community Bank was terminated for misconduct. Warren Buffet’s Berkshire Hathaway Inc is its biggest shareholder, with 9.92 per cent stake (Tan, 2017). Hernandez was, however, openly critical. Senator Elizabeth Warren, one of Harvard’s legal luminaries and the force behind the formation of CFPB, told Stumpf point blank during the hearing that his leadership was ‘gutless’ (Sonnenfeld, 2016, para 7). Even in a May 2015 board meeting, Tolstedt gave a figure of less than 250 integrity-related employee terminations, whereas it was approximately 2,500 during 2013–2014 alone. On paper, Wells Fargo had an almost ideal board, filled with independent directors, who regularly met. Employees were asked to ensure that each Wells Fargo customer held a minimum of four accounts, preferably eight, because the bank was ‘going for gr-8’! His failure to act is perhaps the most damning portrait of all. During the House Financial Services Committee testimony, he acknowledged his failure in preventing the unethical practices in time and accepted accountability (Wells Fargo, 2017). This is not systemic. Director Perspectives on the Board Member’s Job Description.”, Get in touch  External auditors were one of the ‘big fours’. https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2014-proxy-statement.pdf? Terms & Conditions Wells Fargo stands as another testament to the consequences of ignoring ethics and compliance. changing phone numbers, etc. Wells Fargo's Governance Failure: Lessons for the Directors Succumbing to pressure, she resigned in July 2016. 1.As per Wells Fargo news releases. The decentralized nature of the bank meant that Tolstedt had absolute freedom, since she had the support of the CEO. The bank boasts of more than 8,600 locations, 13,000 ATMs, business in 42 countries and approximately 26,9000 team members (Wells Fargo, 2016). From 2010, a list of noteworthy risks was prepared by ERMC to the board, which did not contain any sales integrity issues. mail@directorsandboards.com A former federal prosecutor and veteran white-collar defense attorney, Mike is an expert in compliance, internal investigations and enforcement matters. The Office of Comptroller of the Currency later joined the investigation. The new Consent Order between Wells Fargo and the Federal Reserve sets forth a comprehensive plan for the bank to improve its board governance and its risk management and compliance function. Using a cross-selling strategy, the bank ensured multiple accounts with the same customer through various financial products such as savings bank accounts and credit cards. Unfortunately, for Wells Fargo and its stakeholders, the practice continued. CFPB found that more than two million unauthorized accounts have been opened by the bank without the knowledge of the customers. However, this was strongly objected to by Tolstedt as undermining her authority (Wells Fargo, 2017). Cross-selling made much sense to the Wells Fargo management (see Figure 1). Can he make it work? It has been decided to amend the bylaws to ensure that the chairperson be an independent director. It is not clear whether Stumpf read the internal documents but there are real issues surrounding his knowledge and failure to act. As a result, employees sold unwanted and even unauthorised accounts to customers to meet management sales targets. Many phony email addresses were created, CFPB noted, to enrol consumers in online banking services (CFPB, 2016). When the programme was designed and implemented, no one inside of Wells Fargo, at any level, raised a question about the risk of creating such an incentive programme. In December 2015, he along with the Lead Director Stephen Sanger told Stumpf that Tolstedt should not continue. Looking back with perfect 20-20 hindsight, there are numerous questions to be asked, few that have been really answered, and more work that needs to be done to restore any semblance of trust between Wells Fargo, the government and its customers.

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