October 7, 2016

My longest term of employment, 12 years, was with Wells Fargo Bank. I never forgot the great experience of working there.  I was proud to see the continued success, totally unblemished since the 90s when I left, while almost all major banks, nationally and globally, had major surprises, mistakes, some costing billions of dollars in fines, accounting losses, lost shareholder value, and reputation damage.

Most problems for others have involved wholesale credit losses, monetary exchange, trading, compromised customer data, failed acquisitions, and the like. Wells Fargo’s failure is different. But, like the others, it involves failed management, failed oversight, failed governance.

Wells Fargo has been able to operate conservatively, with tight underwriting and trading standards, avoiding the credit excesses that have caused others more aggressive to stumble and fall. One reason this strategy has worked so well and so long is that Wells put major emphasis on their retail operation, and less on international and wholesale activities–where the problems for others have mostly been concentrated. The idea is that with transactions in retail of such small amounts (vs. the millions and billions of individual wholesale transactions), there is less chance of a big problem. And, if the underwriting of credit cards and mortgages is kept conservative, there should be no problems.

But, we now see what can go wrong on the other side of the ledger–not the assets (loans), but rather on the sales side.We have certainly seen issues of this type in the past–e.g., the aggressive marketing of mortgages by some financial institutions, leading up to the 2008 financial crisis.

Somehow the aggressive high pressure sales culture in retail at Wells  ended up promulgating a systemic practice of opening fake accounts to meet sales goals. Managers might tell the branch team, “I need 20,” reportedly, meaning “find a way to open 20 new accounts today so we can meet our sales goals.” This led to more than 2 million fake accounts opened, ultimately resulting in 5,300 people being fired.

Who’s responsible for this? Could it really be, as originally asserted by Wells’ CEO, a group of “rogue employees.” No, no one believes that. There could not be 5,300 rogue employees.  On the other hand, I do not think this was a conspiracy. I doubt that opening fake accounts was encouraged or approved by the senior management. I don’t think this was an overt attempt to create more personal wealth for senior executives.  To that extent, I disagree with Elizabeth Warren. I would not favor a criminal investigation–unless it is discovered that some middle and top level managers knew about the practice and encouraged it. I doubt critics assertions that Stumpf and senior colleagues intentionally promoted this to line their own pockets.

But I agree with Senator Warren that certain members of senior management should be terminated, including the CEO. Regardless of intent, this was a huge failure in management. And I agree that there should be a clawback of bonuses and downward adjustment for a time in stock awards. I think it should be massive for those up the chain of command in retail, and I think the rest of senior management should have a lesser clawback–this is a management “team.” All of senior management should be financially penalized.

The promulgation of the excessive sales culture is not new–it has been developing at Wells since the 90s and it is endorsed by management all the way to the CEO. It’s a key element of the bank’s strategy. This cannot be blamed on 5,300 lower level branch employees.  Stumpf and those in retail responsible for the culture leading to this  should resign, or be terminated. I doubt the wisdom of asking past executives to return to right the ship–this sales culture was not developed under Stumpf. It has been there for decades, and only got out of control under Stumpf.

What to do about it otherwise? This will take some serious thinking. Wells says they are abolishing sales goals. I don’t think sales goals are necessarily wrong, or necessarily the problem. It’s how aggressive those goals are and how they are administered. There is a difference between encouraging, motivating, and rewarding sales accomplishment and putting so much pressure that employees cross the line to satisfy management. On the one hand, if Wells truly eliminates any sales goals (without substituting some other name for them, like “targets”), I would wonder about the future profitability of their business, because sales are the source of growth for every kind of business.  On the other hand, if they do substitute some other system that is just “goals” under another name, the pronouncement to eliminate sales goals is going to be remembered and brought to their embarrassing attention. There is no easy way out of this dilemma.

It’s time for capitalism and corporate America to take responsibility at the top. It’s time to stop firing junior people when they were led or directed, either by clear orders or by aggressive goals without attendant policy overseen to avoid excesses. Wells management either knew and didn’t do enough to fix it, or didn’t know. Either way, that’s a huge management failure.

Wells Fargo–please do the right thing.