Wells Fargo board's report is too kind to itself

Conducted by independent directors with the assistance of a law firm, the report details a flawed management system and warped sales culture

Wells Fargo board's report is too kind to itself

By Tom Buerkle

NEW YORK (Reuters Breakingviews) - Coming clean after a scandal is never easy. Wells Fargo’s board has clawed back an additional $75 million (all dollars US) in pay from former retail boss Carrie Tolstedt and ex-chief executive John Stumpf, who are being held responsible for aggressive sales practices that led to the $270-billion bank's embarrassing fake-accounts scandal. But an internal report released on Monday suggests there were red flags directors should have focused on earlier.

The report, conducted by independent directors with the assistance of law firm Shearman & Sterling, details a flawed management system and a warped sales culture. Wells gave wide leeway to business heads under the mantra “Run it like you own it.” Although the buck theoretically stopped with Stumpf, he was not perceived “as someone who wanted to hear bad news or deal with conflict,” the report states. That mindset filtered down.

Inside the community bank, as Wells' retail unit is known, Tolstedt and her top managers set aggressive targets for new accounts and dismissed pushback from regional bosses who felt the goals were unrealistic. It was more convenient to blame and fire individuals when unwanted accounts were opened than to question the pressure they were under. After the matter was drawn to the board's attention as a risk in 2014, even when directors asked for information they were fobbed off with partial, optimistic responses.

Since the Consumer Financial Protection Bureau levied a $185-million fine last September, the Wells board has taken action. It split the roles of chairman and CEO, both of which Stumpf held before resigning in October. It also centralized risk management and eliminated sales targets at the retail bank. But the board wasn't proactive or persistent enough until regulators and ultimately lawmakers publicly shamed the company and Stumpf.

Proxy adviser ISS has recommended that shareholders vote against 12 of the 15 directors at the Wells annual meeting later this month, including chairman Stephen Sanger, arguing that all the members of the risk, audit and human-resource committees fell short. That may be too sweeping, but the risk-focused directors — including Sanger and committee chair Enrique Hernandez — certainly have plenty to answer for. They shouldn't be surprised if shareholders ask some tough questions, and maybe kick some of them out of the boardroom.

 

CONTEXT NEWS

- An out-of-control sales culture and a retail-banking chief who resisted scrutiny of her operations contributed to the fake-accounts scandal at Wells Fargo, according to an internal investigation led by the bank’s independent directors that was released on April 10.

- Carrie Tolstedt, who stepped down as head of Wells’ community bank two months before the Consumer Financial Protection Bureau fined the bank $185 million for fraudulent sales practices in September 2016, “did not like to be challenged or hear negative information,” the report stated. It also said she sought to block efforts to escalate investigations into sales practices and kept from the board information about the number of employees terminated. The board decided on April 7 to require her forfeiture of $47 million in outstanding stock options.

- The board also clawed back an additional $28 million in incentive compensation from former chief executive John Stumpf, saying his commitment to the bank’s sales culture led him to minimize problems with it.

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