Wells Fargo dings top execs US$75M over sales scandal
Two former officials did little to stop unethical sales tactics, board probe finds
The problems at Wells Fargo and its overly aggressive sales culture date back at least 15 years, and management had little interest in dealing with the issue until it spiralled out of control resulting in millions of accounts being opened fraudulently, according to an investigation by the company’s board of directors.
The bank’s board also clawed back another US$75 million in pay from two former executives, CEO John Stumpf and community bank executive Carrie Tolstedt, saying both executives dragged their feet for years regarding problems at the second-largest U.S. bank. Both were ultimately unwilling to accept criticism that the bank’s sales-focused business model was failing.
The 110-page report has been in the works since September, when Wells acknowledged that its employees opened up to two million chequing and credit card accounts without customers’ authorization. Trying to meet unrealistic sales goals, Wells employees even created phoney email addresses to sign customers up for online banking services.
“(Wells’ management) created pressure on employees to sell unwanted or unneeded products to customers and, in some cases, to open unauthorized accounts,” the board said in its report.
Many current and former employees have talked of intense and constant pressure from managers to sell and open accounts, and some said it pushed them into unethical behaviour. The report backs up those employees’ accounts.
“It was common to blame employees who violated Wells Fargo’s rules without analyzing what caused or motivated them to do so ... (or determine) whether there were responsible individuals, who while they might have (not) directed the specific misconduct, contributed to the environment (that caused it),” the board said.
The report also says that problems in the bank’s sales culture date back to at least 2002, far earlier than what the bank had previously said. And that Stumpf knew about sales problems at a branch in Colorado since at least that year.
The bank has already paid US$185 million in fines to federal and local authorities and settled a US$110 million class-action lawsuit. The scandal also resulted in the abrupt retirement last October of Stumpf, its longtime CEO, not long after he underwent blistering questioning from congressional panels. The bank remains under investigation in several states, as well as by the Securities and Exchange Commission, for its practices.
The board’s report recommended that Stumpf and Tolstedt have additional compensation clawed back for their negligence and poor management. Tolstedt will lose US$47.3 million in stock options, on top of US$19 million the board had already clawed back. Stumpf will lose an additional US$28 million in compensation, on top of the US$41 million the board already clawed back. Along with the millions clawed back from other executives earlier this year, the roughly US$180 million in clawbacks are among the largest in U.S. corporate history.
The board found that, when presented with the growing problems in Wells’ community banking division, senior management was unwilling to hear criticism or consider changes in behaviour. The board particularly faulted Tolstedt, calling her “insular and defensive” and unable to accept scrutiny from inside or outside her organization. The board also found that Tolstedt actively worked to downplay any problems in her division. In a report made in October 2015, nearly three years after a Los Angeles Times investigation uncovered the scandal, Tolstedt “minimized and understated problems at the community bank.”
Tolstedt declined to be interviewed for the investigation, the board said, on advice from her lawyers.
Stumpf also received his share of criticism. In its report, the board found that Stumpf was also unwilling to change Wells’ business model when problems arose.
“His reaction invariably was that a few bad employees were causing issues ... he was too late and too slow to call for inspection or critical challenge to (Wells’) basic business model,” the board said.
Stumpf, however, did not seem to express regret for how he handled those initial weeks after the bank was fined, including where he initially levied most of the blame on low-level employees for the sales practices problems instead of management, said Stuart Baskin, lawyer with Shearman & Sterling, the firm that the board hired to investigate the sales scandal
The investigation found that Wells’ corporate structure was also to blame. Under Stumpf, Wells operated in a decentralized fashion, with executives of each of the businesses running their divisions almost like separate companies.
While there is nothing wrong with operating a large company that way, the board said, the structure backfired in this case by allowing Tolstedt and other executives to hide the problems in their organization.