On 12 October 2016, John Stumpf stepped down as chairman and chief executive of Wells Fargo. The bank was facing a scandal over improper sales practices, including the opening of customer accounts without authorisation. Regulatory settlements had been announced in September, followed by congressional hearings and mounting pressure on its leadership. [1, 2]
The bank had been investigating misconduct and taking corrective action for years. The investigation published by its independent directors in April 2017 examined why those responses had failed to address the causes. [1]
What the turnover figures could establish
Wells Fargo’s Community Bank placed considerable emphasis on cross-selling financial products. The investigation found that its sales culture and performance management system, combined with aggressive sales management, created pressure to sell unwanted products and, in some cases, open unauthorised accounts. [1]
In October 2012, Chief Risk Officer Mike Loughlin raised concerns about employee turnover and requested a presentation examining the trends and their causes. Carrie Tolstedt, who led the Community Bank, objected, and Loughlin deferred the presentation.
In June 2013, Community Bank HR reported that turnover among branch and call-centre personnel had been approximately 42 per cent in 2012. It described the figure as slightly below turnover in comparable retail roles. Corporate Risk subsequently asked whether high turnover might be connected with sales quality. [1]
The benchmark addressed whether turnover was unusual relative to the chosen comparison group. It could not establish whether sales pressure was contributing to departures or whether the same pressure was encouraging misconduct. Those questions required evidence about working conditions and sales behaviour.
The bank therefore had a reason to investigate the relationship even if the turnover figure appeared acceptable against a retail benchmark. Treating the comparison as sufficient reassurance would leave the proposed connection untested.
What reached the board
The *Los Angeles Times* reported on improper sales practices in December 2013. By February 2014, sales practices and cross-selling were identified as a significant risk in reporting to the board. By early 2015, management was reporting that corrective action was working. [1]
The independent directors’ investigation later found that management’s reports had understated the extent of the problem. Community Bank leadership had resisted scrutiny and restricted the information reaching corporate functions and the board.
This constrained what other decision-makers could assess. If a report omitted the scale of misconduct or presented continuing problems as isolated incidents, its recipients had an incomplete basis for judging whether the response was adequate.
The report also identified a weakness in how progress was reported: management’s accounts generally lacked detailed action plans and metrics for tracking their effectiveness. [1]
Without measures showing whether misconduct was declining, the board’s regular updates could document corrective activity without establishing that the response was effective.
How senior management interpreted the evidence
Stumpf strongly supported Wells Fargo’s decentralised operating model and cross-selling strategy. Both were associated with the bank’s commercial success. As concerns became more prominent, he continued to rely heavily on Community Bank leadership to resolve them.
The investigation concluded that his confidence in the established model, reinforced by positive customer and employee survey results, contributed to his slow response. He did not investigate or challenge the sales practices with sufficient urgency. [1]
Incomplete reporting was only part of the problem. Stumpf also received warnings, but continued to interpret the problems within a sales model he trusted.
If misconduct was attributed primarily to individual employees or local supervision, disciplinary action and training appeared appropriate. Repeated incidents, however, required management to examine whether sales expectations were helping to produce the behaviour. Otherwise, the bank could keep removing employees while exposing their replacements to similar pressure.
The investigation identified the sales culture and performance management arrangements among the causes of the misconduct. Management’s reliance on corrective measures within the existing model had left those causes insufficiently addressed. [1]
Why delegation did not provide adequate oversight
Wells Fargo’s decentralised structure gave individual businesses substantial autonomy. Corporate control functions were constrained by that structure and by deference to business leadership. Community Bank leaders also resisted attempts to scrutinise their practices. [1]
Delegating corrective action to those leaders therefore created a problem for verification. They were responsible for changing the practices under examination while also supplying information about whether the changes were working. Corporate functions needed enough access and authority to test those accounts independently.
The board retained its own oversight responsibility. Its reliance on incomplete information helps explain its decisions, but does not establish that its scrutiny was adequate.
In February 2018, the Federal Reserve restricted Wells Fargo’s growth and required improvements in governance and risk management, including stronger board oversight. It stated that the board’s performance during the compliance breakdowns had not met supervisory expectations. Its criticism also extended specifically to Stumpf and former lead independent director Stephen Sanger. [4]
When the response reached the sales model
The changes did not all follow Stumpf’s departure or the completion of the investigation.
Wells Fargo announced the elimination of retail product sales goals on 13 September 2016. Their removal took effect on 1 October. On 27 September, the independent directors announced that they had launched an investigation. Stumpf stepped down on 12 October. The investigation’s findings were published on 10 April 2017. [1–3]
Leadership changes, stronger central oversight and executive compensation actions occurred across this period. The investigation informed further accountability measures; some changes to the sales model were already under way before Stumpf left. [1]
His departure was consequently one part of the response. Removing a chief executive could change who was responsible for decisions, but the bank also had to alter the incentives and oversight arrangements through which those decisions affected employees.
Assessing the leadership failure
Responsibility cannot be assessed on the assumption that everyone involved had the same information or authority. Community Bank leadership, Stumpf and the board occupied different positions in the reporting and decision-making process.
The turnover figures alone could not establish the scale of misconduct. Combined with sales-practice investigations and concerns about pressure, they warranted examination of a possible shared cause. Once corrective measures were reported as effective, management and the board needed evidence that the conduct was actually changing.
The documented failure was the persistence of an inadequate response as reasons for closer scrutiny accumulated. Assessing Stumpf’s leadership requires examining his reliance on Community Bank management and his reluctance to challenge the sales model. Assessing the board requires examining how it tested management’s assurances and whether it obtained the information needed to supervise corrective action.
Sources
[1] Independent Directors of the Board of Wells Fargo & Company (2017). *Sales Practices Investigation Report*, 10 April.
https://www.sec.gov/Archives/edgar/data/72971/000119312517118654/d375947ddefa14a.htm
[2] Wells Fargo & Company (2016). *Form 8-K*, 12 October. Departure of John G. Stumpf and appointment of Timothy J. Sloan.
https://www.sec.gov/Archives/edgar/data/72971/000119312516736870/d271369d8k.htm
[3] Wells Fargo & Company (2016). *Independent Directors Conducting Investigation of Retail Banking Sales Practices and Related Matters*, 27 September.
https://www.sec.gov/Archives/edgar/data/72971/000119312516722259/d266244dex991.htm
[4] Board of Governors of the Federal Reserve System (2018). Announcement of restrictions on Wells Fargo’s growth and requirements to improve governance and controls, 2 February.
https://www.federalreserve.gov/newsevents/pressreleases/enforcement20180202a.htm
*Source note: The account of internal events draws principally on the investigation commissioned by Wells Fargo’s independent directors. The Federal Reserve’s 2018 announcement supplies a separate regulatory assessment of governance and oversight. The discussion of what the evidence could establish, and how management and directors should have tested it, is the author’s analysis.*