business account

1

WELLS FARGO CASE STUDY

Business ethics

University of West London

2

Table of contents

0.2 Introduction: ................................................................................................................................. 3

1. Corporate Governance .................................................................................................................... 3

1.1 Definition of Corporate Governance ............................................................................................ 3

1.2 Obstacles within a Corporate Governance ................................................................................... 3

1.3The pillars in a Corporate Governance .............................................................................................. 4

2. Investigate and evaluate the approach of Wells Fargo to Corporate Governance from the

perspective of normative and descriptive business ethics theories. .................................................. 4

2.1 US Governance code ..................................................................................................................... 4

2.2 Wells Fargo’s Boards of Directors ................................................................................................. 5

2.3 The reason of the scandal and the proofs. ................................................................................... 6

2.4 Theories applied. ........................................................................................................................... 7

3. Analyse stakeholders’ perspective on the business behaviour ...................................................... 7

3.1 The main stakeholders hit by the scandal in Wells Fargo: ............................................................ 8

3.2 Theories related to the scandal: ................................................................................................... 8

4. Conclusion ....................................................................................................................................... 8

Bibliography ........................................................................................................................................ 9

3

0.1 Executive summary The consecutive report will analyse the meaning of corporate governance and who are the main part

within it highlighting that profit is the reason of controversy between different levels and there are

important pillars to consider having a winning corporation.

Trough the US governance code the shareholders’ position within Wells Fargo demonstrates having

abused of their power without respecting employees’ ethical decisions at the expenses of the

customers. There are public data demonstrating their unethical strategy that was winning in short-

term time and ethical theories proving their culpability.

A brief stakeholder analysis will be conducted designating the main stakeholders hit by the scandal

and their reaction applied to more ethical theories.

0.2Introduction:

The following report on Wells Fargo will be investigating on their scandal in 2016 through Corporate

Governance concept. There will be a brief introduction about the meaning of Corporate Governance,

who are the main actors of it and what are the obstacles within it as well as the importance of the

people working at different levels within a business and what they claim.

There will be an investigation on the scandal approached by the US Governance code, highlighting

the main point of the code and applying them to the scandal, an overview of the importance of the

Board of Directors and their behaviour with upper and lower levels.

Also, it will be state the reason why employees adopted certain behaviours and what is the result in

terms of numbers. A few theories will explain the attitude of the bank as well as the one of the

employees and to conclude there will be an analyse of the stakeholder on how they have been

affected and throw the theories, what they could have done differently.

1. Corporate Governance

1.1 Definition of Corporate Governance

Corporate governance are the rules, processes and structures (Crane, 2016) that allows the supervision of who oversees the business management (Kitano, 2012) by the board of directors, or other committees. The reason of the existence of corporate governance is to enable shareholders to influence goals, supervision and rewards over managers(Crane, 2016). It is important to understand that the owner of the company and the company itself are two different legal identities, known as corporate identity (Marisetty, 2020). The ownership of the business is shared by shareholders whose chose a board of directors that will manage the business in their interest, such as investing in the company. Within a business there are alsostakeholders, (ex. managers)who are seeking for the growth of the company.

1.2 Obstacles within a Corporate Governance

What makes their relationship precarious is conflict of interest and informational asymmetry, where managers complying their goal are seeking for higher salary consequently less income for the owners and owners that only know if the performances are exceeding without being aware of the efforts taken to run their possession(Crane, 2016). In the case of the bank, both parties’ interests were satisfied, everyone was earning more

4

money regardless being illegal and unethical, however the CEO John Stumpf denied all the responsibilities. Corporate governance includes high cost of administration, meetings and decision taken by the board of directors must be registered and the Boards of directors in Wells Fargo was dealing with them. There should be different corporate governances to different sizes of businesses however this is still an ongoing discussion (Starbuck, 2020).

1.3 The pillars in a Corporate Governance

The pillars of corporate governance are investors, managers, directors and societal expectation (Marisetty, 2020) as well as transparency, accountability, and security. Before the scandal, the bank could account with all the pillars, it had strong bases and a good reputation, but by opening fake accounts, pushing on cross-selling in an improper way with a loss in value of $2.7 billion within days after the scandal(Syafinaz, 2020). The strength of the corporate depends not only on the quality of practice spent to build up the pillars but also on the political economic settings. Large businesses need more attention, a few of them they behaved badly on occasion, acting selfishly or dishonestly (Starbuck, 2020), Wells Fargo intentions were to increase their income betraying their customers’ trust. There are inconsistencies and failure in strategy, a good strategy would have led to a healthy increase in profit. A good corporate governance will bring to improve investor confidence, a better access to capital and an increase in profits, the consequences of their bad action had led to a loss in all these fields.

2. Investigate and evaluate the approach of Wells Fargo to Corporate Governance

from the perspective of normative and descriptive business ethics theories.

Wells Fargo was born in 1852 earning a reputation of trust due to its attention and loyalty to its customers (History of Wells Fargo, 2020) supporting from the single customer to businesses. During the 2008 during a financial collapse it bought Wachovia resulting as the third largest bank in terms of assets. As well as external stability, it shown to have internal stability with reliable employees and strong teams, however during 2013 some rumours coming from Southern California stated that employees were using aggressive tactics to reach their targets. At that time, the news managed to be under control but employees in other branches started using the same approach resulting in the scandal of 2016 for its cross-selling.

2.1 US Governance code

It is based on the Anglo-America corporation model, The Governance code in US states that stakeholders play an important role withing the business. Shareholders will receive their profit after the managers are paid their salaries. This will create an incentive to maximise the company’s value and tempt to generate a great benefit to the society.

5

The US code recognize that working in shareholder’s interests only, will not bring long term success. They are increasingly recognizing their success due to the care provided to their stakeholders. Nevertheless, CEOs are subjected to act in their own interests, so if an opportunity is given they will act in shareholders’ expenses, resulting as offering the Board incentives to act in the best way for their employees, this is likely to result as a corporate failure. Large shareholders or in the case of banks institutional investors, like the Wells Fargo, they are large enough to motivate active engagement with management(The U.S. Corporate Governance System, 2020). The Security and Exchange Commission (SEC) bases her principle on a simple rule that require public companies to disclose financial information to the public and promotes efficiency and transparency that consequently will promote capital formation and investors trust. SEC works close to other institutions to prevent the crime and it is fundamental to gain trust(The U.S. Corporate Governance System, 2020). The failure of regulating corporate governance is the approach of box ticking that encouraged employees to use their creativity in beating the system skipping the rules. The responsibility of a company financial statement is on auditors and accountants; they must have an internal audit function and internal risk assessment. To ultimate this, directors have oversight role, they will be held liable for omission of material(Niles, 2020). Nonetheless, for years has been doubted the authenticity of the documents. A deep concern for employees, suppliers, and customers, and implicitly for its own continued existence, defines the corporate mission.

When management’s interests coincide with those of shareholders, management can justify its decision by saying that shareholder interests prevailed in this instance, and vice versa. This was the tactic adopted by high-level management. It is a basic principle of enlightened value maximization that we cannot maximize the long- term market value of an organization if we ignore or mistreat any important constituency.

2.2 Wells Fargo’s Boards of Directors The board of director are fiduciaries (Niles, 2020) and the expectations from shareholders is focus on promoting and developing the long-term success of the company. As per employees’ duty Wells Fargo’s boards of directors should act in a loyal way as well as the employees. The potential of directors to add value is all too often framed in terms of their ability to add value to management by giving advice on issues such as strategy, choice of market and decision making. Their relationship with the managers should be effective and unavoidable. It is also their responsibility to review and approve strategic plans and risk tolerance, and works with management in setting the schedule, format, and agenda for Board(Wells Fargo & Company Corporate Governance Guidelines,2020).

The Corporate Responsibility Committee of the Wells Fargo Board of Directors oversees all of the Company’s government relations activities and public advocacy policies and programs, and at least annually receives reports from management, notwithstanding the outside directors

were weak and at risk of being manipulated by the executives because depending on them(Government Relations and Public Policy, 2020)

Having a good board of directors practice, resulted inthe company selling and opening fake accounts to their customers.

2.3 The reason of the scandal and the proofs.

Wells Fargo has a strict quota regulating the number of daily goals. Not always possible to achieve because simply there were not enough customers entering the premises, however managers kept demanding to meet meet them. Who was not reaching their daily quotas had to work longer hours or being threatened to lose their job(Levine, 2020), who managed to reach their goals was seeing their salary increasing of up to 20%(Tayan, 2020). At that time employees were asked to ens 8 accounts per customers(The Wells Fargo Scandal, 2020) Applied this strategy, customers noticed that were receiving unexpected credit or debit cards, they had to pay for inexistent fees to seize their The analysis concluded that 1,5m deposit accounts have been opened through “forced” operations without customers’ consent Moreover, half of those accounts incurred in about process of being refunded. It is observable that their approach is functional by looking at the ROA in 2016 financial statement showing 11% of growth compared to the previous year. Their ROE in 2016 financial statement there is an increase of 9% Annual Report 2016, 2020), compared to 2015 report that declares only the 6% of growth Fargo & Company Annual Report 2015, 2020)

The following chart shows that more than 52% of the customers in 2014 were buying more than 8 products(Tayan, 2020).

After the scandal went public, initially the blame was made on local branches or employees, lately has been shifted to higher- 2016, 2020).

were weak and at risk of being manipulated by the executives because depending on (Government Relations and Public Policy, 2020).

aving a good board of directorsdoes not mean that it operates in an effective and good the company being hit by a scandal in 2016 resulting from its cross

selling and opening fake accounts to their customers.

The reason of the scandal and the proofs.

Wells Fargo has a strict quota regulating the number of daily goals. Not always possible to achieve because simply there were not enough customers entering the premises, however managers kept demanding to meet deadlines whatever it could take to

Who was not reaching their daily quotas had to work longer hours or being threatened to lose , who managed to reach their goals was seeing their salary increasing of

asked to ensure that “gr-8” was being applied, meaning opening (The Wells Fargo Scandal, 2020).

Applied this strategy, customers noticed that were receiving unexpected credit or debit cards, they had to pay for inexistent fees to seize their house. The analysis concluded that 1,5m deposit accounts have been opened through “forced” operations without customers’ consent(Levine, 2020). Moreover, half of those accounts incurred in about $2 million in fees, which are now in the

It is observable that their approach is functional by looking at the ROA in 2016 financial statement showing 11% of growth compared to the previous year. Their ROE in 2016 financial statement there is an increase of 9% (Wells Fargo & Company

, compared to 2015 report that declares only the 6% of growth Fargo & Company Annual Report 2015, 2020).

that more than 52% of the customers in 2014 were buying more

the scandal went public, initially the blame was made on local branches or employees,

-up management levels(Wells Fargo & Company Annual Report

6

were weak and at risk of being manipulated by the executives because depending on

effective and good hit by a scandal in 2016 resulting from its cross-

Not always possible to achieve because simply there were not enough customers entering the deadlines whatever it could take to

Who was not reaching their daily quotas had to work longer hours or being threatened to lose , who managed to reach their goals was seeing their salary increasing of

meaning opening

Applied this strategy, customers noticed that were receiving unexpected credit or debit cards,

The analysis concluded that 1,5m deposit accounts have been opened through “forced”

in fees, which are now in the

It is observable that their approach is functional by looking at the ROA in 2016 financial

(Wells Fargo & Company

, compared to 2015 report that declares only the 6% of growth (Wells

that more than 52% of the customers in 2014 were buying more

the scandal went public, initially the blame was made on local branches or employees, (Wells Fargo & Company Annual Report

7

2.4 Theories applied. Being based in US most of the employees from the top to the bottom level, act with an individualistic approach, it is consistent with choice within constraints, their decision are based on what benefit themselves. Theory 1: Egoism A. Smith (1776) claimed that there is no need to promote public interest; and the wealth of a nation should be ensured from egoistic behaviour. Thus, the most effective market behaviour in the context of the best means of resource allocation should be based on the selfishness of all the actors and failures seems to be a manifestation of a discrepancy between market reality and the classical assumptions (Pienkowski, 2020). Assuming that businesses at all levels want to succeed and gain the more from their business, Wells Fargo had plead guilty, claiming that they are working in the interest of their customers, they were acting in a completely egoistic manner. If the mission is a long-term interest to the company, the plan did not work in the planned way. The management would not invest on employees to act in an illegal way;however, the CEO, Mr. Stumpf, was giving incentives to the Board shown his egoistic behaviour. Consequently,managers were pushing for making profit in a difficult way and the employees’ response was worthless but easy(Levine, 2020). The short-term result was an increase in profit for shareholders and bonuses for employees but opposite scenario is presented in a long-term vision as the bank had a massive loss of money by being fined and returning the stolen money as well as firing employees and invest on trainings on new others.

Theory 2: Postmodern ethics The postmodern ethic is an approach that locates morality beyond the sphere of rationality in an emotional moral impulse(Crane, 2016). The individual question himself whether their actions are imputable to their willingness or to the organization’s code. Looking at cognitive moral development on level two by Lawrence Kohlberg’s (1969) and at the locus of control, which is external, employees seems to be working following what has been told them to do as the threaten to lose their job is vivid and the consequences of not obeying are not to be impute to themselves but higher-up management will decide their future. Before the scandal made public, many employees decided to resign because their personal values and moral integrity were strong while whoever decided to work for the company was motivated by low moral intensity as lack of proximity has being designated, as most of the accounts were opened online without the consensus of the customer.

3. Analyse stakeholdersstakeholdersstakeholdersstakeholders’perspective on the business behaviour

Freeman states that stakeholders are any group that affects or is affected by a firm’s

performance(Kochan and Rubinstein, 2020).

To be more analytic is the influence of potential stakeholders contribute valued resources to the

firm, how they put these resources at risk or take the risk if the business fails, and their power within

the organization.

It is on the management to choose the weight stakeholders have and whether goals and governance

process will have an impact on that. However, in US legal rules give salience to the interest of the

stakeholders(Kochan and Rubinstein, 2020).

8

3.1 The main stakeholders hit by the scandal in Wells Fargo:

- Customers are the new orientation of a firm and working on their interest will bring major success.

During the scandal, they have been affected by being charged non-existent fees, being seized of

their goods and their credit score being affected, affecting their present and future decision.

- Employees have been acting unethically but a “major force” coming from the CEO to maximise the

profit did not give them the possibility to act in a level and loyal way. Many of them have lost their

job because they could not reach their targets or because they could not manage the pressure,

others are discounting 30 or more years in prison for fraud or stolen identity(Wells Fargo: Customer

Account Abuse (2015), 2020).

Without these two stakeholders, the business could not exist. Despite this and claiming their loyalty

and transparency(Wells Fargo, 2020), the bank decided to adopt a different approach.

3.2 Theories related to the scandal:

Virtue ethics: It states that morally correct actions are those undertaken by actors with virtuous

characters and morals(Crane, 2016).

In this scandal it would have been possible to claim this theory if at least one of the employees stood

up and claim the problem, but as per employees disclamation, they were afraid of losing their job

because as well as the pressure received, they were having the feeling that no other jobs would be

available for them(Zambelich, 2020). They had no self-control and they were lying to their customers

legally breaching the law. At the end they were making the interest of the bank instead of the

interest of the customers.

Individualism:Individualism promotes a view of the self as self-directed, autonomous, and

separate from others(Santos, 2020).

From this point of view, the individualism starts from the CEO setting unreachable quotas,

followed by the pressure that the Board was putting on the management that was influencing

employees’ behaviour. All this situation is driven by individualistic approach that will only

benefit the business.

Unfortunately, the customers were the pure victims in all this scandal. Their behaviour cannot

be explained by any theory due to their lack of knowledge of the situation that was occurring.

4. Conclusion

This report has given an overview of the Corporate Governance and the US Governance Code

highlighting the unethical behaviour of the company that started from the top-level.

When this happens, the ethical values throughout the whole company will be affected by a change

and the outcome from this scandal is that shareholders’ interests overcame stakeholders benefit,

impacting their life in several ways.

It is not always a good Corporate Governance that will bring to exceed in results, when the human’s

willingness of success is unethical, it will find the way to reach their goals at the expenses of the

others.

9

Bibliography

Business Ethics Case Analyses. 2020. Wells Fargo: Customer Account Abuse (2015). [online]

Available at: http://businessethicscases.blogspot.com/2015/11/wells-fargo-customer-account-abuse-

2015.html

Corporate Governance. 2020. The U.S. Corporate Governance System. [online] Available at:

https://saylordotorg.github.io/text_corporate-governance/s03-01-the-u-s-corporate-governance-s.html

Crane, A., 2016. Business Ethics - Managing Corporate Citizenship And Sustainability In The Age Of

Globalization. Glasgow: Bell & Bain Ltd, pp.102, 108, 206, 208.

Icaew.com. 2020. What Is Corporate Governance?. [online] Available at:

https://www.icaew.com/technical/corporate-governance/principles/principles-articles/does-corporate-

governance-matter.

Journals-sagepub-com.ezproxy.uwl.ac.uk. 2020. The Wells Fargo Scandal. [online] Available at:

https://journals-sagepub-com.ezproxy.uwl.ac.uk/doi/10.1177/2277977918803476 gr-8

Kitano, H., 2012. Corporate Governance Ignoring Shareholder Value: First, We Need A Definition Of

Corporate Governance. [online] ProQuest. Available at:

https://search.proquest.com/docview/1510545509/fulltextPDF/A485901E278E4A32PQ/1?accountid=1

4769

Kochan, T. and Rubinstein, S., 2020. Toward A Stakeholder Theory Of The Firm: The Saturn

Partnership. [online] ProQuest. Available at: https://search-proquest-

com.ezproxy.uwl.ac.uk/docview/213827832?pq-origsite=summon

Levine, M., 2020. Wells Fargo Opened A Couple Million Fake Accounts. [online] Bloomberg.com.

Available at: https://www.bloomberg.com/opinion/articles/2016-09-09/wells-fargo-opened-a-couple-

million-fake-accounts

Marisetty, V., 2020. Corporate Governance Survey: A Holistic View For Altruistic Practice: Corporate

Governance Practice: Interview With N R Narayana Murthy, Founder, Infosys Technologies. [online]

IIMB Management Review. Available at:

https://www.sciencedirect.com/science/article/pii/S0970389610000844

Niles, S., 2020. Corporate Governance 2019 | Laws And Regulations | USA | ICLG. [online]

International Comparative Legal Guides International Business Reports. Available at:

https://iclg.com/practice-areas/corporate-governance-laws-and-regulations/usa

Pienkowski, D., 2020. Selfishness, Cooperation, The Evolutionary Point Of View And Its Implications

For Economics. [online] Ecological Economy. Available at: https://www-sciencedirect-

com.ezproxy.uwl.ac.uk/science/article/pii/S0921800907005034?via%3Dihub

Santos, H., 2020. Global Increases In Individualism. [online] Sage Journals. Available at:

https://journals-sagepub-

com.ezproxy.uwl.ac.uk/doi/full/10.1177/0956797617700622?utm_source=summon&utm_medium=dis

covery-provider

Syafinaz, N., 2020. Corporate Governance And Its Determinants: A Study On Wells Fargo Scandal.

[online] Research Date. Available at:

https://www.researchgate.net/publication/332932610_Corporate_Governance_and_Its_Determinants

_A_Study_on_Wells_Fargo_Scandal.

Starbuck, W., 2020. Why Corporate Governance Deserves Serious And Creative Thought. [online]

Academy of Management Perspectives. Available at: https://www-jstor-

org.ezproxy.uwl.ac.uk/stable/43822037?pq-origsite=summon&seq=2#metadata_info_tab_contents.

10

Tayan, B., 2020. The Wells Fargo Cross-Selling Scandal. [online] Corpgov.law.harvard.edu. Available

at: https://corpgov.law.harvard.edu/2019/02/06/the-wells-fargo-cross-selling-scandal-2/

Wellsfargo.com. 2020. Government Relations And Public Policy. [online] Available at:

https://www.wellsfargo.com/about/corporate-responsibility/government-relations/

Wellsfargo.com. 2020. History Of Wells Fargo – Wells Fargo. [online] Available at:

https://www.wellsfargo.com/about/corporate/history/

Wells Fargo. 2020. Wells Fargo – Banking, Credit Cards, Loans, Mortgages & More. [online] Available

at: https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2016-

annual-report.pdf annual report 2016>

Wellsfargomedia.com. 2020. Wells Fargo & Company Annual Report 2015. [online] Available at:

https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2015-annual-

report.pdf

Wellsfargomedia.com. 2020. Wells Fargo & Company Annual Report 2016. [online] Available at:

https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2016-annual-

report.pdf

Wellsfargomedia.com. 2020. WELLS FARGO & COMPANY CORPORATE GOVERNANCE

GUIDELINES. [online] Available at:

https://www08.wellsfargomedia.com/assets/pdf/about/corporate/governance-guidelines.pdf

Zambelich, A., 2020. Former Wells Fargo Employees Describe Toxic Sales Culture, Even At HQ.

[online] Npr.org. Available at: https://www.npr.org/2016/10/04/496508361/former-wells-fargo-

employees-describe-toxic-sales-culture-even-at-hq?t=1588355174226