Wells CEO’s dubious board defense
Give this to Wells Fargo CEO Timothy Sloan: It takes a lot of guts to speak at a conference dedicated to good corporate governance when the bank you lead has confessed to employees creating up to two million fraudulent accounts in customers’ names.
What takes even more guts is openly gushing about said company’s board of directors, the very people who failed to prevent that massive fraud. It’s a strange kind of courage, but not the type Wells Fargo requires right now.
For Sloan, the evening at Stanford presented an excellent opportunity to fall on the sword and offer sincere contrition for the scandal, which has plagued Wells Fargo since last year.
Instead, here’s what we get from the man tasked with cleaning up Wells Fargo:
“We have an exceptional board notwithstanding what ... others may have said,” Sloan told Stanford’s annual Directors’ College in Palo Alto on Monday evening. (Sloan is also on the board.)
Well, perhaps — depending on the definition of “exceptional.” Better than average? Certainly not. Deviating from the norm? One would hope that most boards aren’t this bad.
Sloan could easily have skipped praising the board, himself included. At a company recovering from scandal, “you have to be humble,” said Johanne Bouchard, a Bay Area consultant who advises boards and top executives. “‘We apologize. We didn’t think through the issues. We weren’t fully prepared.’ The board’s responsibility is to be about accountability.”
Sloan’s defense of the board is
understandable, if you figure that these are the same people who elevated him to his current position. The venue he chose to do it in is odd. Boards are under more scrutiny than ever, with activist investors demanding a say in strategy and shareholders now regularly withholding votes for executive compensation and director elections.
“By almost every measure, investors are now exerting more influence than ever on how boards and management teams operate,” wrote the authors of a PricewaterhouseCoopers report on corporate governance last year.
“In some ways, the pendulum has swung from a ‘board-centric’ model that took root after the governance and accounting scandals of the 1990s,” the report said, “to an ‘investor-centric’ model today — in which institutional investors and shareholder activists have an unprecedented say about board composition, executive compensation, and even how companies choose to allocate their capital.”
The company said it had fired some 5,000 employees for creating the suspect accounts. But they were motivated, many believe, by the bank’s aggressive sales quotas. The scandal ultimately led to the resignation of CEO John Stumpf, a temporary decline in the bank’s stock price and incalculable damage to the company’s reputation.
Since Stumpf's resignation, the company has taken several steps to fix its problems, including appointing an independent chairman, reforming compensation practices at its retail banking division, and appointing an outside company to examine the way the bank handles whistle-blowers.
“In hindsight, we made some big mistakes,” Sloan said. ”Candidly, we didn’t deal with the root causes. ... We should have provided the information to the board so they could have seen the problem sooner.”
Sloan offered two main defenses for the Wells Fargo board. The first is that the bank is big and complex and that directors couldn’t have possibly detected the fraud, given the vast amounts of data at hand.
But the board’s job is to ask tough questions. For instance, how is Wells Fargo showing such strong account growth when the industry is essentially flat? Why are so many new accounts not attracting any deposits?
“If you bring me lots of strawberries when there are no strawberries to be found, I’m going to ask, ‘Where did you get these?’ ” Bouchard said.
The second defense is that Wells Fargo’s business units operated independently — as “silos” — and therefore kept the problems from both top executives and the board.
That doesn’t pass the smell test. If Sloan is arguing that the directors were dealing with an overload of complex data and thus couldn’t connect the dots, then why grant the units such autonomy?
The board needs to make sure information gets passed up the chain, Bouchard said.
“You can’t blame others,” she said. “The board has to slow things down and ask what’s not working” before a problem arises.
Moreover, the board’s decision to appoint Sloan, the chief operating officer and a company veteran, seems suspect. Cleaning up Wells Fargo’s culture would seem better suited for an outsider with no emotional attachment to the bank.
Sloan acknowledged the skepticism, countering that an insider is better situated to fix things.
“How can a person who has spent 29 years with a company be an agent of change?” Sloan said. “You don’t know a company unless you are there. I’ve been there for so long that I have a perspective of where we’ve had issues and where we didn’t.”
But Sloan’s intimate knowledge of Wells Fargo didn’t give him the foresight to spot the fraud. As he said at Stanford, he and the rest of the board need to deal with the root causes — not just this scandal, but the conditions that could create the next one. That may require a mirror.