October 15, 2016
Tim Sloan has been named to replace John Stumpf. Based on my knowledge of Sloan, he has the potential to be a better CEO than Stumpf. He is qualified to do this job.
But, there is still a problem which has not been resolved. The release of the former CEO is not sufficient to deal with the magnitude of the problem. Wells Fargo allowed some 2 million fake accounts to be opened and 5,000 lower level employees have been fired.
As I argued in my October 8 post in which I recommended the departure of Stumpf, there is more that should be done.
First I want to say I’m not among those who suspect bankers as intending to harm the public. I spent half my career in banking. Having spent 12 years at Wells Fargo in the 80s and 90s and time with two other major banks, I do not harbor suspicions that bankers are criminal or bad people. No one I have known in working in three banks was of this nature.
Further regulatory and legal examination will determine whether there was criminal action. I’m not expecting that. I’m doubtful anyone in management intentionally sought to line their own pockets in any way through this practice, including focusing on increasing stock value based on inaccurate growth statistics. And, I will be surprised if any member of senior management (those reporting directly to the CEO) actually directed employees to do this. If anyone down the chain of command in retail banking did, those managers should be fired, of course.
Nevertheless, the aggressive Wells Fargo sales culture was a major element of the Wells Fargo corporate strategy. That culture and the risks of that culture were fully known to the members of Wells Fargo’s direct reports to the CEO. I feel everyone in that small circle, the folks whose compensation appears to be in the range of $10 million per year (not including all stock benefits), should all be penalized. By way of illustration, reduce compensation by 50% for the coming year, by 25% for the following year, and by 25% for the 3rd year. That’s a start–recognizing by that management all failed in their fiduciary responsibility, regardless of their functional responsibility.
I’m sure this team had the usual meetings with the CEO, in which all functions performance and practices were reviewed. These managers are complicit, regardless of whether they fully understood. If they didn’t think of the risks, that’s fiduciary negligence. This is not a case of one rogue trader causing a large loss. In such a case, I would think those outside this function should not be held responsible. But in this case, it was a key element of corporate strategy. The risks should have been understood by all in senior management. All reporting to the CEO should accept responsibility and penalty.
Tim Sloan is a more difficult issue. Representative Maxine Waters and others argue that Sloan should not be the new CEO–that perhaps he should step down also, or perhaps at least someone outside the Wells Fargo management team should be recruited to be the new CEO, to assure independent investigation and correction of the culture problem. I respect this view, given the above argument. If all of senior management are complicit, then Sloan is clearly more complicit, because he was COO, presumably with enough responsibility to be ready to replace the CEO, meaning he needed to fully understand the major risks in all functions.
Here is what I would like:
Regarding Sloan: If he is to be the new CEO, I’d like to see him penalized more severely in compensation than the other members of senior management. And, I’d like to hear him make a complete statement in full honesty, explaining why he didn’t take action in his role as COO and why he should be trusted to fix the problem. I’d like to hear that. It needs to be convincing.
Regarding the 5,300 fired. I’d like Wells Fargo to offer a meaningful rehabilitation program to all but those who went beyond the pale–on the premise that management was responsible for pressures that drew these employees into inappropriate action, and for whom the dismissal severely damaged their reputations, careers, and lives. Rehabilitate them. Dismiss those above them who knew and provided the pressure.
Regarding the Board: The Board has to accept responsibility too. I think there should be significant departure from the Board, perhaps especially those who have been on for the longest time, and a number of new independent directors should be elected, with an eye to corporate social responsibility focus and experience.
Finally: According to Glass Door, the multiple of CEO compensation to median employee compensation in large US companies has risen from about 20 times in 1965 to 200 times now, and often as high as 300 times. The Huffington Post reports that John Stumpf earned 473 times the salary of the median Wells Fargo employee. Average pay for retail bankers there is about $33,000. I’d like to suggest Wells Fargo lead the next era of corporate responsibility by establishing a new limit, and move to it immediately in 2017. I don’t know what that should be, but it’s not 473 times. If median pay at Wells Fargo was $65,000 how about 100 times that as maximum for the CEO, “all in” (included stock benefits)? Does anyone think Wells would be unable to find a CEO to work and do a good job for $6.5 million? And his immediate subordinates for perhaps $5 million? I understand some candidates would take other jobs for more money, but I believe there’d be plenty of good people who would do great work for this pay–and I think those are the type of people who would not be compromising ethics and social responsibility.