Wells Fargo: Setting the Stagecoach Thundering Again 1

 

Wells Fargo: Setting the Stagecoach Thundering Again

 

Mahendra R. Gujarathi, Bentley University Samir Kumar Barua, Former Director, IIMA

 

“The reason we wake up in the morning is to help our customers succeed financially and to satisfy all their financial needs. The result is we make money because of our focus on serving customers, not the other way around. This time-tested vision will forever be what matters to Wells Fargo. We’ll never put the stagecoach ahead of the horses.”

— John Stumpf, in the 2011 annual report of Wells Fargo1 The September 20, 2016 hearing of the Senate Banking Committee2 will be remembered for the relentless grilling of John Stumpf, Chairman and CEO of Wells Fargo (hereafter, Wells Fargo, or the Bank). Senator Elizabeth Warren (D-Mass.) began with the question, “Have you returned one single nickel of the millions of dollars you were paid while the scam was going on?” As Stumpf stuttered and fumbled in responding to a series of incisive questions, she concluded, “So you haven’t resigned. You haven’t returned a single nickel of your personal earnings. You haven’t fired a single senior executive. Instead, evidently, your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership.”3

The Senate Banking Committee hearing followed imposition of fines on Wells Fargo on September 8, 2016 by the Consumer Financial Protection Bureau ($100 million), the Los Angeles City Attorney ($50 million) and the Office of the Comptroller of the Currency ($35 million). The reason for the fines (totaling $185 million) was that the Bank had allegedly opened over two million unauthorized checking and credit card accounts without the consent of the customers between May 2011 and July 2015. Wells Fargo settled with the regulatory agencies without admitting or denying the alleged misconduct.4

The hearing of the House Financial Services Committee5 on September 29, 2016 echoed views expressed in the Senate Banking Committee hearing. Congressman Gregory Meeks (D-New York) said to Stumpf, “I can’t believe what I’m hearing here. You’re going to tell me there’s not a problem with the culture” at Wells Fargo. Patrick McHenry (R-North Carolina) accused Stumpf of being “tone deaf” for how he didn’t

 

—————————– Copyright © 2017 by Case Research Journal and by Samir Kumar Barua and Mahendra R. Gujarathi. All rights reserved. The case was prepared by the authors for the sole purpose of providing material for classroom discussion. It is not intended to illustrate either effective or ineffective handling of a managerial situation. The authors would like to thank Professors Nader Asgary, Jill Brown, Atul Gupta, Mike Hoffman, and Joseph Weiss for their comments on earlier drafts of the case. Research and editorial assistance of Richard Garwood, Megan Pitkin, and Diane Wilson is gratefully acknowledged, and so are the helpful and insightful comments of three anonymous reviewers and the editor John Lawrence.

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grasp the impact the scandal could have on societal trust in the banking system. Stumpf was clearly on the defensive as he confirmed that Wells Fargo had fired 5,300 employees in the last five years and that customers had been refunded $2.6 million of the wrongfully charged fees. However, he insisted: “We never directed nor wanted our employees, whom we refer to as team members, to provide products and services to customers they did not want or need.”6

Under relentless criticism, Stumpf revealed to the House Financial Services Committee that he had recommended that Wells Fargo’s board rescind $41 million of unvested stock awarded to him, and $19 million to Carrie Tolstedt, who led the bank’s community banking unit where the wrongful sales practices (aggressive “cross-selling” of products without customer authorization) occurred.7 Would that be an adequate atonement for what had transpired under their watch at Wells Fargo? “You have broken long-standing ethical standards inside the company. How can you rebuild trust?” asked Congressman Patrick McHenry (R-North Carolina).8

EVOLUTION OF WELLS FARGO

Wells, Fargo and Company was founded on March 18, 1852 by Henry Wells and William Fargo. It began by offering banking and express services in California. Over the years, Wells Fargo got indelibly linked with the striking image of a stagecoach drawn by six thundering stallions. In 1857, it formed an Overland Mail Company to deliver mail using its stagecoach network. In 1905, Wells Fargo established banking as a separate business. The Bank survived the Great Depression as well as the difficult period of World War II.9 The prosperity of the 1960s saw the Bank emerge as a major regional bank in the western part of the U.S. By the 1980s, when it started its online banking service, Wells Fargo had become one of the top ten banks in the U.S.

The Bank weathered the financial crisis of 2007-08 relatively unscathed. In fact, Wells Fargo used it as an opportunity to grow inorganically, by acquiring Wachovia, another bank which was facing unprecedented financial troubles as a result of the mortgage crisis. On October 3, 2008, in a dramatic takeover battle, Wells Fargo triumphed over Citigroup to acquire Wachovia for $15.1 billion. The acquisition allowed Wells Fargo to double the number of its branches, and more than double its total deposits. Wachovia’s extensive retail network in the eastern U.S. complemented Wells Fargo’s presence primarily in the western U.S., and allowed it to become North America’s most extensive distribution network for financial services. In a conference call10 announcing the acquisition of Wachovia, Richard Kovacevich, the then chairman of the board of Wells Fargo said, “Wachovia’s number one industry position in service with Wells Fargo’s number one ranking in sales and cross-selling is unbeatable. But, most importantly our competitive advantage is our people. We share a common culture with strong ethical values of doing what’s right.”11 Although the Wachovia acquisition was completed by December 31, 2008, it took three years to fully integrate the operations of Wells Fargo and Wachovia.

By the end of 2015, Wells Fargo had become a diversified banking and financial services company with assets of over $1.8 trillion and approximately 265,000 employees. It provided banking, insurance, investments, mortgages, consumer and commercial finance through 8,700 locations, 13,000 ATMs, and internet and mobile banking. Wells Fargo’s vision and values statement12 in 2015 alluded to the size and scope of its activities:

“We’ve become one of the nation’s largest financial institutions, serving one in three U.S. households and employing approximately one in 600 working Do N

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Wells Fargo: Setting the Stagecoach Thundering Again 3

 

Americans. We have team members in 36 countries, serving 70 million customers in more than 130 countries around the world. Forbes magazine ranks us among the top 10 publicly traded companies in the world based on a composite of sales, assets, profits, and market value.”13

The three major, fairly autonomous, segments of Wells Fargo’s business in 2015 were: Community Banking, Wholesale Banking, and Wealth and Investment Management. The Community Banking Division offered a complete suite of diversified financial products and services to consumers and small businesses with annual sales of up to $5 million. Its loan products included lines of credit, automobile inventory financing, equity lines, equipment loans, education loans, residential mortgage loans and credit cards. Consumer and business deposit products include checking accounts, savings deposits, money market accounts, Individual Retirement Accounts, time deposits, global remittance, and debit cards. The Wholesale Banking Division provided financial solutions to businesses with annual sales exceeding $5 million. It provided a complete line of business banking, commercial, corporate, capital markets, cash management and real estate banking products and services. These included traditional commercial loans and lines of credit, letters of credit, asset-based lending, equipment leasing, international trade facilities, trade financing, collection services, foreign exchange services, and treasury management. The Wealth and Investment Management Division provided a full range of personalized wealth management, investment, and retirement products and services. It also delivered financial planning, private banking, credit, investment management and fiduciary services to high-net worth and ultra-high- net worth individuals and families.

FINANCIAL PERFORMANCE, STOCK RETURNS, AND EXECUTIVE COMPENSATION

The financial performance of Wells Fargo for six years (2010-2015) is presented in Exhibit 1. During this period, although its net revenues did not change much, Wells Fargo’s assets grew by 46% and net income by over 85%. By early 2015, it had posted 18 consecutive quarters of profit growth. Wells Fargo performed better than its competitors. As can be seen in Exhibit 2, compared to Bank of America, J. P. Morgan Chase and Goldman Sachs, Wells Fargo’s Return on Assets (ROA) as well as the Return on Equity (ROE) were higher in most years. Historically, its efficiency ratio – the cost incurred to generate a dollar of revenue – had also been low. In Q1 of 2016, while the Bank’s efficiency ratio was 58.7%, that of JPMorgan, Citigroup, and Bank of America was 60.5%, 61.4%, and 75.9%, respectively.14

Of the three major segments of business, Community (i.e., Retail) banking contributed most to the revenues, operating income and net income of Wells Fargo (see Exhibit 3). In 2015, the Community Banking division contributed 57% of the revenues, 59% of operating income and net income, and 51% of the total assets of Wells Fargo. In his letter to the stockholders in the 2015 annual report, Stumpf said, “Our time-tested business model – which produced a balanced mix of net interest income and noninterest income across more than 90 businesses – allowed us to deliver consistent performance despite the challenging environment.”15

Wells Fargo’s financial performance was reflected in the increase in its stock price. In July 2015, with market capitalization of about $300 billion, Wells Fargo became the most valuable bank in the world. Its stock outperformed the broader benchmark KBW NASDAQ Bank Index (BKX) consisting of about 24 leading national and regional Do

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banks. An investment of $100 in the Bank’s stock at the end of 2009 would have fetched $230 by the end of December 2015, earning investors a compounded annual return of 12.4% over the six-year period. For the same period, an investment of $100 in the Bank Index, BKX would have netted investors $171, a compounded annual return of only 9.4%.16 Wells Fargo stock had also outperformed the broader stock market index over longer periods of time. For the decade ending December 2015, its stock yielded a 14.3% compounded annual return to the stockholders compared with the 7.3% for S&P 500 index.

The impressive financial and stock performance of Wells Fargo was reflected in the compensation packages given to its senior management. The Human Resources Committee (HRC) of the Board took into account the Bank’s financial performance (including comparison with peers), progress on strategic priorities, strong and effective leadership, business line performance (for business line leaders), proactive assessment and management of risks, and independent compensation consultant’s advice in determining executive compensation.17 In 2015, Stumpf (CEO and Chairman) and Tolstedt (head of community banking) received total compensation of $19.3 million and $9.1 million, respectively.

Wells Fargo’s exceptional performance stemmed, in part, from its success in cross- selling. In the Senate hearings, Senator Elizabeth Warren (D-Mass.) referred to a sample of reports from stock analysts, all recommending a buy on Wells Fargo stock because of the strong cross-sell numbers year after year. The senator noted that Ms. Tolstedt received more than $20 million in annual bonuses during 2010 to 2015, “justified by the company in certain instances because of the ‘strong cross-sell ratios’ in her division. That is a direct reference to the extraordinary number of accounts created by her division, many of which were never authorized by customers.”18

WELLS FARGO’S VISION, VALUES AND CODE OF ETHICS

The vision of Wells Fargo was enunciated on its website as follows:

“We aspire to create deep and enduring relationships with our customers by providing them with an exceptional experience and by discovering their needs and delivering the most relevant products, services, advice, and guidance.”19

The five primary values that defined the foundation for Wells Fargo’s actions were described as follows:

“First, we value and support our people as a competitive advantage and strive to attract, develop, retain and motivate the most talented people we can find. Second, we strive for the highest ethical standards with our team members, our customers, our communities and our shareholders. Third, with respect to our customers, we strive to base our decisions and actions on what is right for them in everything we do. Fourth, for team members we strive to build and sustain a diverse and inclusive culture – one where they feel valued and respected for who they are as well as for the skills and experiences they bring to our company. Fifth, we also look to each of our team members to be leaders in establishing, sharing and communicating our vision. In addition to our five primary values, one of our key day-to-day priorities is to make risk management a competitive advantage by working hard to ensure appropriate controls are in place to reduce risks to our customers, maintain and increase our competitive market position, and protect Wells Fargo’s long-term safety, soundness and reputation.”20 Do N

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Wells Fargo: Setting the Stagecoach Thundering Again 5

 

Wells Fargo’s Code of Ethics and Business Conduct21 reiterated the employee

responsibility to protect the reputation and integrity of Wells Fargo and asked them to contact their manager, HR advisor, or Office of Global Ethics and Integrity for help. Employees could also report any concern regarding accounting, internal accounting controls and auditing matters directly to the Audit and Examinations Committee of the Board, and could call the Bank’s ethics hotline (called “EthicsLine”) if “you see or suspect illegal or unethical behavior involving Wells Fargo”22 The Bank’s Code of Ethics and Business Conduct not only described the importance of ethical behavior but also provided a systematic approach for employees when faced with an ethical dilemma (see Exhibit 4).

 

BOARD OF DIRECTORS AND CORPORATE GOVERNANCE23

In 2016, Wells Fargo’s Board of Directors consisted of 15 directors. Except for John Stumpf, every board member was an independent director as defined by the rules of the New York Stock Exchange (NYSE). All standing committees of the Board, including the Human Resources Committee (HRC) that determined the compensation of senior executives, consisted solely of independent directors. The Board had also adopted Wells Fargo’s Codes of Ethics for its members. In 2016, NYSE Governance Services, a subsidiary of New York Stock Exchange, bestowed the Best Board Diversity Initiative Award on Wells Fargo in recognition of the wide breadth of experience, industry, age, ethnicity, and gender the Board possessed. In view of the financial performance of the Bank and of Wells Fargo’s stock, the shareholders approved generous compensation to the Board of Directors. For 2015, the compensation to board members consisting of cash and stock awards ranged from $279,027 to $402,027.24

The offices of the Chairman of the Board and the Chief Executive Officer were combined, with Mr. Stumpf serving as Chairman and CEO. On several occasions, including the 2016 proxy statement, shareholders had proposed a separation of the role of CEO and Chairman of the Board. The justifications for the proposal included: (a) the worldwide trend of separating the positions of Chairman and CEO of companies, (b) weakening of leadership due to over-extension of duties that may result in inadequate oversight and (c) fundamental differences between the roles of Chairman and CEO and therefore the incongruity if the positions were held by one person. The Board advised the shareholders to vote against the proposal by arguing that the Bank’s governance structure was working effectively, and that the Board’s Lead Director provided effective independent oversight of management and Board accountability and responsiveness to shareholders. The Board also pointed out that such a proposal had been rejected by the shareholders eleven times in succession already. The Proxy Statements of the Bank from 2012-2016, which included some proposals pertaining to the efficacy of internal controls at the Bank, reveal that the Board advised to vote against every proposal from the shareholders in every year because (a) the changes required in the proposals were considered unnecessary and (b) the policies and practices of the Bank were robust and were reviewed and monitored adequately.

 

JOHN STUMPF, CHAIRMAN AND CEO25

Life for John Gerard Stumpf, who received several accolades, such as inclusion in Bloomberg’s list of 50 Most Influential Business people in 2012, and Banker of the Do

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Year in 2013, started rather modestly. Born on September 15, 1953, he grew up as one of eleven children on a dairy and poultry farm in Minnesota. Stumpf would rise at 4:30 a.m. to collect eggs and would milk cows after school. “Even though we were very poor financially we learned the value of plural pronouns—us, we and ours,” said Stumpf. “There wasn’t a lot of time for I, me and my.” 26 Mediocre grades and limited family finances required Stumpf to work as a bread-maker while getting a bachelor’s degree in finance from St. Cloud State University. After graduation, he worked as a repossession agent at First Bank in St. Paul, Minnesota before completing an MBA degree in finance from the Carlson School of Management at the University of Minnesota.

In 1982, Stumpf joined Northwestern National Bank where he held a number of management positions before assuming responsibility for Norwest Bank Arizona in 1989. He became regional president for Norwest Banks in Colorado and Arizona in 1991. During the four years (1994-98) in which he was regional president for Norwest Bank Texas, he led Norwest’s acquisition of 30 Texas banks with total assets of more than $13 billion. In 1998, following the merger of Norwest Corporation with Wells Fargo, Stumpf became head of the combined entity – Southwestern Banking Group (Arizona, New Mexico and Texas). Two years later he became head of the new Western Banking Group (Arizona, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming). In 2000, he led the integration of Wells Fargo’s $23 billion acquisition of the First Security Corporation.

In 2002, Stumpf was named Group Executive Vice President (EVP) of Community Banking. He was elected to Wells Fargo’s Board of Directors in June 2006. Stumpf succeeded Richard Kovacevich as CEO in June 2007.27 In January 2010, he also became Chairman of the Board of Directors. As the CEO, Stumpf instituted a policy of open debate on issues concerning the Bank. “Around here if you have something to say, you say it—nobody is going to be offended. We’ve learned how to disagree without being disagreeable.”

CARRIE TOLSTEDT, HEAD OF COMMUNITY BANKING

Carrie Tolstedt headed the community banking division of Wells Fargo from June 2007 until July 2016. She was set to retire from the Bank at the end of 2016. Tolstedt was a 30-plus year veteran in the financial services industry with 27 years at Wells Fargo. A graduate of the University of Nebraska (BS degree in Business Administration) she joined Wells Fargo as a Norwest Bank team member in 1986. Tolstedt had been included four times in Fortune magazine’s “50 Most Powerful Women in Business.” In recognizing Tolstedt at the top of its list of the 25 Most Powerful Women in Banking in 2010, American Banker28 noted her cross-selling prowess and the challenges she faced from integration of Wachovia with Wells Fargo:

“The task of the integration is monumental, but the company’s enviable cross-sell ratings – now above 6.1 products per household – suggest that her team has been able to take on the extra work from the merger without losing its focus on serving its original customer base.

One risk of such a large integration would be that the company’s internal service culture would begin to drift … but Tolstedt ‘thinks up ways to communicate values to the front line’.”

Tolstedt rose through the ranks at Wells Fargo to become a key associate of John Stumpf. When her retirement was announced, Stumpf praised Tolstedt as one of Wells Fargo’s most valuable leaders, “a standard-bearer of our culture, a champion for our Do N

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Wells Fargo: Setting the Stagecoach Thundering Again 7

 

customers, and a role model for responsible, principled and inclusive leadership.”29 In the Senate Banking Committee hearings, Stumpf defended her compensation. He said that Tolstedt did not receive any severance upon her retirement in July and that the reported $124 million amount she was set to receive upon retirement was instead from the previous years’ compensation.

ECONOMICS OF CROSS-SELLING

Cross-selling is the practice of selling related or complementary products to an existing customer of an organization. In 2007, a White Paper by Equifax30 noted: “With 5+ billion pieces of direct mail blanketing U.S. consumers each year, marketers can no longer afford undisciplined ‘blast marketing’ approaches. Reaching the right customer, at the right time, through the right channel, with the right offer is a must for those required to justify direct marketing expenditures and realize the full potential of their cross-sell strategy.” The White Paper further mentioned that cross-selling enabled a firm to (a) increase a customer’s reliance on the firm, while decreasing the likelihood of the customer switching to a competitor, and (b) profitably extract the maximum revenue potential from a client, improving the top-line revenue and marketing ROI. Efficiency gains also flow from servicing one account rather than several.

Cross-selling has become the cornerstone of the marketing strategy of the financial services industry. Its importance increased as the net interest margin – the difference between the average interest rate charged to the customers and the average cost of funds for the banks – declined from 3.83% in 2010 to 2.98% in 2015.31 The Equifax32 paper noted: “Successful cross-selling and customer retention are highly correlated. For most institutions we have worked with, about 50% of single-service checking households are lost each year. The addition of a savings relationship improves retention to about 67%; and adding a loan relationship as well improves retention to 90% or more.” It also mentioned a finding in a report by A.T. Kearney that a 5% increase in retention could increase profits from 25% to 85%, and observed that acquiring new customers was seven times more expensive than retaining existing customers. Another A. T. Kearney report claimed that “the average profit generated by a U.S. bank customer holding two products at a bank is $150. If the customer holds nine or more products, the return is $1000 or more.”33

WELLS FARGO: “KING OF CROSS-SELL”

Cross-selling at the Bank was the brainchild of Mr. Stumpf’s predecessor, Richard Kovacevich, when he led Norwest Corp., which merged with Wells Fargo in 1998.34 Indeed, Norwest stated that the rationale for the merger was to increase cross-selling opportunities to attract new customers and earn more of their business. The financial analysts agreed as well. A First Union analyst mentioned that the greatest opportunity and the greatest challenge was to get the employees from the former Wells Fargo side of the Bank to adopt the sales culture and enthusiasm of the former Norwest.35 Richard Kovacevich lucidly explained Wells Fargo’s rationale for cross-selling in the Bank’s vision and values statement in 2006:

“Cross-Selling—or what we call ‘needs-based’ selling— is our most important strategy. Why? Because it is an ‘increasing returns’ business model. It’s like the ‘network effect’ of e-commerce. It multiplies opportunities geometrically. The more you sell customers, the more you know about them. The more you know Do

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about them, the easier it is to sell them more products. The more products customers have with you, the better value they receive and the more loyal they are. The longer they stay with you, the more opportunities you have to meet even more of their financial needs. The more you sell them, the higher the profit because the added cost of selling another product to an existing customer is often only about ten percent of the cost of selling that same product to a new customer.”36

At the time of Wachovia acquisition, the cross-sell ratio for Wells Fargo (5.95) was much higher than that for Wachovia (4.65). The customers acquired from Wachovia therefore provided an opportunity to Wells Fargo to offer additional products and services. Wells Fargo’s senior management was so proud of its impressive cross-sell ratio that it mentioned the ratio in virtually every annual report since 1998, and in dozens of quarterly earnings calls.

The emphasis on cross-selling continued under the stewardship of Stumpf. In addition to signing up existing customers for additional services offered by Wells Fargo, the Bank offered customers a set of inter-related products with discounts integrated into the package. For example, its premier relationship package (called PMA) offered customers free current account and free bill payments, together with options to add a savings account, credit card, mortgage loan, and a discount brokerage account. About 63% of new current account customers opted for such packages with an average of four products per package.37

To improve the cross-sell ratio, Wells Fargo developed a system of incentivizing its staff. According to a Wells Fargo spokesperson, “We target loyalty, not just customer satisfaction. Gallup [the market research agency] surveyed 50,000 of our customers per month. This gives us a statistically meaningful sample across our entire network. We can measure indicators of customer satisfaction and customer loyalty. We take action on these results and increasingly our incentive compensation is based on these results.”38

Exhibit 5 depicts the cross-sell ratio of Wells Fargo from 1998 to 2016. In the testimony before the Senate Banking Committee, Senator Elizabeth Warren (D-Mass.) mentioned that in 12 quarterly earnings calls, Stumpf had personally cited Wells Fargo’s success at cross-selling accounts as one of the main reasons to buy stock of the Bank.39 During the Senate hearings, however, Stumpf denied the allegation and called cross- selling “shorthand for deepening relationships.” 40

By 2009, Wells Fargo had recorded an increased cross-sell ratio for eleven consecutive years. In a March 2010 speech to investors41, Stumpf said: “If we stay squarely focused on our customers, cross-selling them, helping them, we’ll win.” In the 2010 annual report, Stumpf proposed Wells Fargo’s sales goal of eight accounts per customer by declaring, “it rhymed with ‘great’,” and that “Perhaps our new cheer should be: ‘Let’s go again, for 10!'” In the same report, he also mentioned the challenges in cross-sell:

“If anyone tells you it’s easy to earn more business from current customers in financial services, don’t believe them. We should know. We’ve been at it almost a quarter century. We’ve been called, true or not, the ‘king of cross- sell’.”42

In 2012, Stumpf had remarked43:

“There are only three ways a company can grow. First, earn more business from your current customers. Second, attract customers from your Do N

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Wells Fargo: Setting the Stagecoach Thundering Again 9

 

competitors. Or third, buy another company. If you can’t do the first, what makes you think you can earn more business from your competitors’ customers or from customers you buy through acquisition?”

The mantra of cross-sell reverberated not only in the corporate corridors and company statements of Wells Fargo but was also implicit in the booklet on vision and values44:

“Retention is an important part of any long-term plan to keep up Wells Fargo’s above-average returns on assets and equity. Extraordinary profitability emanates from differentiating your product or service from the ones from the competition. Increasing customer stickiness and reducing ‘price comparisons’ is actually a key component of maintaining extraordinary profitability.”

Wells Fargo was not alone in using cross-selling as a marketing tool. Several large and regional banks including Bank of America, Citizens Bank, PNC Bank, SunTrust Bank, and Fifth Third Bank used it too. However, the success in cross-selling achieved by Wells Fargo was unparalleled. A report by A.T. Kearney45 mentioned that while the cross-sell figure (number of products or accounts per customer) for the U.S. banks averaged 2.71, Wells Fargo’s cross-sell ratio in the second quarter of 2016 was 6.27.

INCENTIVES FOR AND EFFECTS OF CROSS-SELLING

The financial incentives offered to employees for “cross-selling” were significant. Branch employees who hit sales targets could earn bonuses of $500 to $2,000 per quarter. The base salaries of branch employees were about $25,000 to $30,000 a year. Hence, the bonuses for “cross-sell” made a big difference to the paychecks of the junior employees.46 The district managers could get bonuses of $10,000 to $20,000 a year.

In addition to providing bonuses, the Bank mandated ‘quotas’ for the number and types of products to be sold by employees. An employee remarked: “We were constantly told we would end up working for McDonald’s . . . If we did not make the sales quotas, we had to stay for what felt like after-school detention, or report to a call session on Saturdays.”47 While many employees sincerely tried to sell the right products to the right customers, some employees forced products on whichever customer they could. A homeless woman, for instance had been talked into opening six checking and savings accounts with fees totaling $39 a month.48

An internal investigation by the Bank revealed that as many as 1,534,280 deposit accounts and another 565,443 credit card accounts that were unauthorized got opened.49 The employees transferred funds, when needed, from the customers’ authorized accounts, ordered credit cards without customers’ permission, created phony PIN numbers and fake e-mail addresses to enroll existing customers for ‘Net Banking’ services, and forged client signatures on paperwork.50

Many of the questionable accounts were created by moving a small amount of money from the existing accounts of customers to open a new one. Shortly thereafter, the employees would close the new accounts and move the money back to the original accounts, yet getting the credit towards meeting their quotas. Sometimes, the customers were told, on phone calls, that Wells Fargo planned to send them a new credit card as a “thank you” for their business. If a customer didn’t want the card, he or she was told to cut up the card when it arrived in the mail. However, the customers did not know that issuing each new card required a credit check, which could potentially lower their credit score. Do

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In many cases, customers did not know that an account had been opened in their name until they received a letter congratulating them on opening a new account. Sometimes, when the customers complained about the unwanted credit cards, the branch manager would blame a computer glitch or say the card had been requested by someone with a similar name. On several occasions, upon receiving the customer complaint, Wells Fargo refunded the amount charged to the customer. However, such refund would not restore the deterioration in the credit worthiness of the customer, who would have to pay higher charges on borrowings and perhaps be denied access to credit in the future.51

The external auditors of Wells Fargo – KPMG52 – did not raise any red flags in their audit reports or in their reports on the effectiveness of internal controls at the Bank.

CUSTOMER CONSENTS FOR ADDITIONAL ACCOUNTS

A 2007 internal document titled “Sales Quality Manual” stated that customer consent for each specific solution or service was required every time (including each product in a package). The document also stated that “splitting a customer deposit and opening multiple accounts for the purpose of increasing potential Incentive Compensation (IC) is considered a sales integrity violation.”53

The official policy above was consistent with the Bank’s vision: “We want to satisfy our customers’ financial needs and help them succeed financially.”54 Elaborating on vision further, the website of the Bank stated, “Our vision has nothing to do with transactions, pushing products, or getting bigger for the sake of bigness. It’s about building lifelong relations one customer at a time. Forcing employees to engage in illegal or unethical activities is also not Wells Fargo’s way of doing business. Our people are resources to be invested in, not expenses to be managed – because teamwork is essential to our success in helping customers.”55 And it conveyed the importance for the employees to understand Wells Fargo’s vision: “We define ‘culture’ as understanding our vision and values so well that you instinctively know what you need to do when you come to work each day.”56

Despite the stated vision and policy of the Bank, two million unauthorized accounts were opened. When the Senate Banking Committee questioned Stumpf on the issue of unauthorized accounts, he repeatedly stated that the vast majority of employees did the right thing, and whenever the internal investigations found that an employee had created an account and funded it on behalf of the customer without that customer’s permission, the employee was terminated. He said the 5,300 terminated employees had “violated the company’s code of ethics, were dishonest, and did not honor our culture.”

Responding to Stumpf’s testimony, Senator Jeff Merkley (D-Oregon) remarked during the Senate Banking Committee hearing: “This was a systemic problem that you benefited from enormously, that the bank benefited from enormously, and you are scapegoating the people at the very bottom.” In a rare display of bipartisanship, the Senate Republicans also took a tough stance on the Bank’s “cross-selling” activities. Senator Pat Toomey (R-Pennsylvania) said, “This isn’t cross-selling, this is fraud. Wells Fargo executives were completely out of touch.”

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Wells Fargo: Setting the Stagecoach Thundering Again 11

 

EMPLOYEE REACTION TO INCENTIVES AND MANDATES FOR CROSS-SELLING

Employee displeasure with high-pressure sales quotas had started much earlier, though it did not receive wide publicity until after the Bank was fined in September 2016.57 For instance, employees delivered petitions with over 10,000 signatures to the Board at both the 2014 and 2015 annual meetings urging the Board to recognize the link between high-pressure sales quotas and the fraudulent opening of accounts without customer permission.58

Dozens of fired employees spoke to the media to express their views on the alleged scam. The Wall Street Journal59 reported the story of one employee (Scott Trainor) who said that managers suggested that employees hunt for sales prospects at bus stops and retirement homes. The employees who refused to act on such suggestions were harassed, penalized and even terminated. The employees who quit or were fired also mentioned that many branch managers routinely monitored employees’ progress toward meeting sales goals, sometimes hourly, and sales numbers at the branch level were reported to higher-ranking managers as many as seven times a day. If an employee did not meet the sales goals, the employee was reportedly chastised and embarrassed by the community banking president in front of other staff. 60

The New York Times61 reported that another employee (Dennis Russell) who was fired in 2010 said that as a telephone banker, he handled incoming customer service calls and was expected to refer 23 percent of his callers to a sales representative for additional product sales. But the customers Mr. Russell spoke with were usually in dire financial shape. Looking at their accounts, he could see mortgages in foreclosure, credit cards in collections and cars being repossessed for overdue loan payments. “The people calling didn’t have assets to speak of,” Mr. Russell said. “What products could you possibly offer them in a legitimate way? It’s a crock, they established the culture that made this happen – it comes down from the top.”

Employees acknowledged that the Bank had a dispute resolution policy (See Exhibit 6 for a summary) but added that it was a sham. CBS News62 reported that a former banker (Yesenia Guitron) sued Wells Fargo in 2010 claiming that intense sales pressure and unrealistic quotas drove employees to falsify documents and game the system to meet their sales goals. She did everything Wells Fargo had asked employees to do to report such misconduct. She told her manager about her concerns. She called Wells Fargo’s ethics hotline. When those steps yielded no results, she went up the chain, contacting a human resources representative and the bank’s regional manager. After months of retaliatory harassment, Guitron was fired for insubordination.

ETHICS HOTLINE AND RETALIATION

CNN Money63 reported several instances of harassment of employees at Wells Fargo. Refusing to act on orders to open unauthorized bank and credit accounts, an employee (Mr. Bado) called the ethics hotline of Wells Fargo and sent an email to human resources in September 2013, flagging unethical sales he was being instructed to execute. Eight days after that email, he was terminated on the grounds of tardiness. Another employee (Mr. Johnson) said that after he started working, his manager began pressuring him to open accounts for his friends and family — with or without their knowledge. When he refused, Johnson was criticized for not being a team player. Following up on the instructions he had received during training, he called the Do

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12 Case Research Journal • Volume 37 • Issue 2 • Spring 2017

 

company’s ethics hotline. Three days later, Johnson was fired for “not meeting expectations.”64

The dismissals of Mr. Bado and Mr. Johnson occurred despite the Bank’s explicit non-retaliation policy (see Exhibit 7) outlined in the handbook that was given to every employee. A story in CNN News65 confirmed that the “can the whistleblowers” process was institutionalized at the Bank. The Human Resources department provided business units with tips on how to create trumped-up charges on employees to cover up the real reason for their dismissal. One former Wells Fargo human resources official even said the Bank had a method in place to retaliate against tipsters.66

In December 2015, Wells Fargo added an arbitration clause to the employment contract. This clause required employees to bring any complaints privately and individually, making it difficult for them to band together to sue the Bank. The Bank also forced customers into private arbitration. Customers signed a form at the time of opening their accounts waving their right to file a lawsuit in case of a dispute with the Bank and instead agree to private arbitration to settle the dispute.67 Wells Fargo had had other earlier brushes with legal authorities, albeit in different contexts.68

REACTION OF WELLS FARGO AND JOHN STUMPF

In response to employee concerns expressed in the media, Wells Fargo said: “We disagree with the allegations in the complaint and will vigorously defend against the misrepresentations it contains about Wells Fargo and all of the Wells Fargo team members whose careers have been built on doing the right thing for our customers every day.”69 The Bank said that it would get rid of the goals (i.e. “quotas”) for cross- selling but would not back away from cross-selling. Stumpf mentioned in his Congressional testimony that the Bank does not have “quotas”; it has sales “goals”. Sales targets or goals are not illegal or pernicious. In 2012, the United States District Court for the Northern District of California had ruled that even if its sales targets were unreasonable, the Bank had the right to use them as an employment yardstick.70

In the Congressional hearing, Stumpf was asked when the problem of sham accounts and other malfeasance was first discovered. He testified that the first occurrence was in 2011 when one thousand employees were terminated for unethical behavior. The Board of the Bank had also been made aware of the termination and its reasons.71 Stumpf also asserted that the number of employees terminated was insignificant for a large firm such as Wells Fargo with 268,000 employees. Although the settlement on September 8, 2016 involved conduct that began in 2011, Stumpf said that the Bank was going back to 2009 and 2010, when Wachovia was being absorbed, to determine whether the misconduct was taking place then.

In August 2015, Wells Fargo hired PricewaterhouseCoopers LLP (PwC) to carry out detailed analysis of the sales practices pertaining to all the 82 million deposit accounts and nearly 11 million credit card accounts that had been opened between 2011 and 2015 to quantify the remediation needed to compensate the customers who had suffered as a result of accounts fraudulently opened in their names. About a dozen PwC employees worked on the assignment for about a year and confirmed prevalence of fraudulent sales practices at the Bank.72

During the testimony, Stumpf apologized several times, stating:

“We recognize now that we should have done more sooner to eliminate unethical conduct or incentives that may have unintentionally encouraged that conduct.” Do N

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Wells Fargo: Setting the Stagecoach Thundering Again 13

 

Congressman Gregory Meeks (D-New York) charged that what had happened in Wells Fargo was an example of irresponsible leadership. When Stumpf responded that he held the leadership job at the pleasure of the Board, Meeks said, “The whole Board needs to go.”73

STUMPF’S RESIGNATION, APPOINTMENT OF A NEW CEO AND UNRESOLVED QUESTIONS

The pressure on Wells Fargo and its CEO was relentless. Many Senators and Congressmen demanded resignation of Stumpf and claw-back of his compensation of about $200 million during the years of misconduct. They also demanded a claw-back from Tolstedt, who was set to retire at the end of 2016 with a $124 million paycheck (a mix of shares, options and restricted stock).74 The lawsuits against the Bank — from customers, former employees and shareholders — had started piling up. Shareholders filed a class action lawsuit alleging that the Bank misled investors about its financial performance and the success of its sales practices. The stock price of Wells Fargo had fallen more than 10% since September 8, 2016 when it reached a settlement with regulators, wiping off more than $25 billion of market capitalization.75

On October 12, 2016, Stumpf, who navigated Wells Fargo through the financial crisis and created the most valuable bank in the world, resigned from the Board and CEO positions.76 The Board appointed Tim Sloan, a 29-year veteran at Wells Fargo, as CEO of the Bank. The Board also separated the position of Chairman from that of CEO, appointed the incumbent Lead Director, Stephen Sanger as non-executive Chairman of the Board, and Elizabeth Duke, as the Vice Chair.77 Stumpf, who had famously declared on the Bank’s website, “Integrity is not a commodity. It’s the most rare and precious of personal attributes. It is the core of a person’s – and a company’s – reputation” would leave the challenge to restore the Bank’s credibility to his successor, Tim Sloan. Tim Sloan had served as chief operating officer of Wells Fargo from November 2015 to October 2016. Prior to that, he had served the Bank as the chief financial officer and chief administrative officer. From 1991 to 2010, Sloan had held various leadership roles in the Wholesale Banking division of Wells Fargo.

As Sloan took over the reins of Wells Fargo, several questions remained answered. How could unethical behavior have persisted for so long at the iconic Bank that was respected for its integrity and dedication to customer service? As the new CEO, Sloan faced many questions. What role, if any, should cross-selling play in the future without running the risk of employee misconduct and customer dissatisfaction? How should the compensation policies at Wells Fargo be calibrated to provide incentives to cross- sell, but without impairing the interests of its customers? How should the reputation of Wells Fargo as an ethical organization be restored? How to continue the trajectory of enhanced financial performance? What kind of relationship to foster with the Board of Wells Fargo and its new Chairman? How to restore employee morale and improve public perception of Wells Fargo? In an interview with the Washington Post78, he said, “I am going to do the right thing by repairing the reputation of the company. As a new CEO, my immediate and highest priority is to restore trust in Wells Fargo.” Mr. Sloan’s task was clearly cut out. He had to make key decisions on strategy, structure and systems at Wells Fargo to set the stagecoach thundering again across the length and breadth of the U.S. Do

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14 Case Research Journal • Volume 37 • Issue 2 • Spring 2017

 

Exhibit 1: Summary Financials 2010-2015 of Wells Fargo (in millions, except per share amounts)

 

Source: Wells Fargo, 2015 Annual Report, Six-year Summary

In co

m e

St at

em en

t 20

10 20

11 20

12 20

13 20

14 20

15

N et

in te

re st

in co

m e

44 ,7

57 42

,7 63

43 ,2

30 42

,8 00

43 ,5

27 45

,3 01

N on

in te

re st

in co

m e

40 ,4

53 38

,1 85

42 ,8

56 40

,9 80

40 ,8

20 40

,7 56

R

ev en

ue 85

,2 10

80 ,9

48 86

,0 86

83 ,7

80 84

,3 47

86 ,0

57

Pr ov

is io

n fo

r cr

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lo ss

es 15

,7 53

7, 89

9 7,

21 7

2, 30

9 1,

39 5

2, 44

2

N on

in te

re st

e xp

en se

50 ,4

56 49

,3 93

50 ,3

98 48

,8 42

49 ,0

37 49

,9 74

N et

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re n

on co

nt ro

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in te

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s 12

,6 63

16 ,2

11 19

,3 68

22 ,2

24 23

,6 08

23 ,2

76

Le ss

: N et

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te re

st s

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W el

ls F

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18 ,8

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18

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Wells Fargo: Setting the Stagecoach Thundering Again 15

 

Exhibit 2: ROA and ROE of Wells Fargo and Competitors, 2010-2015

 

Source: Bloomberg

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2010 2011 2012 2013 2014 2015

% R

e tu

rn o

n A

ss e

ts

Years

Return on Assets (ROA)

Wells Fargo

Bank of America

J.P. Morgan Chase

Goldman Sachs

-4

-2

0

2

4

6

8

10

12

14

2010 2011 2012 2013 2014 2015

% R

e tu

rn o

n E

q u

it y

Years

Return on Equity (ROE)

Wells Fargo

Bank of America

J.P. Morgan Chase

Goldman Sachs

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16 Case Research Journal • Volume 37 • Issue 2 • Spring 2017

 

Exhibit 3: Wells Fargo: Segment Financials, 2010-2015

 

Source: Bloomberg

In M

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U SD

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