Wk1: Case Study Leading

google finance academy 1

By Brian Tayan january 8, 2019

The wells fargo cross-selling scandal

Stanford cloSer looK SerieS

introduction

In recent years, more attention has been paid to corporate

culture and “tone at the top,” and the impact that these have on

organizational outcomes. While corporate leaders and outside

observers contend that culture is a critical contributor to

employee engagement, motivation, and performance, the nature

of this relationship and the mechanisms for instilling the desired

values in employee conduct is not well understood.

For example, a survey by Deloitte finds that 94 percent

of executives believe that workplace culture is important to

business success, and 62 percent believe that “clearly defined

and communicated core values and beliefs” are important.1

Graham, Harvey, Popadak, and Rajgopal (2016) find evidence

that governance practices and financial incentives can reinforce

culture; however, they also find that incentives can work in

opposition to culture, particularly when they “reward employees

for achieving a metric without regard to the actions they took to

achieve that metric.” According to a participant in their study,

“People invariably will do what you pay them to do even when

you’re saying something different.”2

The tensions between corporate culture, financial incentives,

and employee conduct is illustrated by the Wells Fargo cross-

selling scandal.

Wells Fargo culture, Values, and ManageMent

Wells Fargo has long had a reputation for sound management.

The company used its financial strength to purchase Wachovia

during the height of the financial crisis—forming what is now the

third-largest bank in the country by assets—and emerged from

the ensuing recession largely unscathed, with operating and stock

price performance among the top of its peer group (see Exhibit 1).

Fortune magazine praised Wells Fargo for “a history of avoiding

the rest of the industry’s dumbest mistakes.”3 American Banker

called Wells Fargo “the big bank least tarnished by the scandals

and reputational crises.”4 In 2013, it named Chairman and CEO

John Stumpf “Banker of the Year.”5 Carrie Tolstedt, who ran the

company’s vast retail banking division, was named the “Most

Powerful Woman in Banking.”6 In 2015, Wells Fargo ranked 7th

on Barron’s list of “Most Respected Companies.”7

Wells Fargo’s success is built on a cultural and economic model

that combines deep customer relations with an actively engaged

sales culture. The company’s operating philosophy includes the

following elements:

Vision and values. Wells Fargo’s vision is to “satisfy our

customers’ needs, and help them succeed financially.” The

company emphasizes that:

Our vision has nothing to do with transactions, pushing products, or getting bigger for the sake of bigness. It’s about building lifelong relationships one customer at a time. … We strive to be recognized by our stakeholders as setting the standard among the world’s great companies for integrity and principled performance. This is more than just doing the right thing. We also have to do it in the right way.8

The company takes these statements seriously. According to

Stumpf, “[Our vision] is at the center of our culture, it’s important

to our success, and frankly, it’s been probably the most significant

contributor to our long-term performance.”9 … “If I have any one

job here, it’s keeper for the culture.”10

Cross-selling. The more products that a customer has with

Wells Fargo, the more information the bank has on that customer,

allowing for better decisions about credit, products, and pricing.

Customers with multiple products are also significantly more

profitable (see Exhibit 2). According to Stumpf:

To succeed at it [cross-selling], you have to do a thousand things right. It requires long-term persistence, significant investment in systems and training, proper team member incentives and recognition, [and] taking the time to understand your customers’ financial objectives.11

Conservative, stable management. Stumpf’s senior

management team consisted of 11 direct reports with an average

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of 27 years of experience at Wells Fargo.12 Decisions are made

collectively. According to former CEO Richard Kovacevich, “No

single person has ever run Wells Fargo and no single person

probably ever will. It’s a team game here.”13 Although the company

maintains independent risk and oversight mechanisms, all senior

leaders are responsible for ensuring that proper practices are

embedded in their divisions:

The most important thing that we talk about inside the company right now is that the lever that we have to manage our reputation is to stick to our vision and values. If we are doing things for our customers that are the right things, then the company is going to be in very good shape. … We always consider the reputational impact of the things that we do. There is no manager at Wells Fargo who is responsible for reputation risk. All of our business managers in all of our lines of business are responsible.14

Wells Fargo has been listed among Gallup’s “Great Places to Work”

for multiple years, with employee engagement scores in the top

quintile of U.S. companies.

cross-selling scandal

In 2013, rumors circulated that Wells Fargo employees in Southern

California were engaging in aggressive tactics to meet their

daily cross-selling targets.15 According to the Los Angeles Times,

approximately 30 employees were fired for opening new accounts

and issuing debit or credit cards without customer knowledge,

in some cases by forging signatures. “We found a breakdown in

a small number of our team members,” a Wells Fargo spokesman

stated. “Our team members do have goals. And sometimes they

can be blinded by a goal.”16 According to another representative,

“This is something we take very seriously. When we find lapses,

we do something about it, including firing people.”17

Some outside observers alleged that the bank’s practice of

setting daily sales targets put excessive pressure on employees.

Branch managers were assigned quotas for the number and types

of products sold. If the branch did not hit its targets, the shortfall

was added to the next day’s goals. Branch employees were

provided financial incentive to meet cross-sell and customer-

service targets, with personal bankers receiving bonuses up to 15

to 20 percent of their salary and tellers receiving up to 3 percent.

Tim Sloan, at the time chief financial officer of Wells Fargo,

refuted criticism of the company’s sales system: “I’m not aware of

any overbearing sales culture.”18 Wells Fargo had multiple controls

in place to prevent abuse. Employee handbooks explicitly stated

that “splitting a customer deposit and opening multiple accounts

for the purpose of increasing potential incentive compensation is

considered a sales integrity violation.”19 The company maintained

an ethics program to instruct bank employees on spotting and

addressing conflicts of interest. It also maintained a whistleblower

hotline to notify senior management of violations. Furthermore,

the senior management incentive system had protections consistent

with best practices for minimizing risk, including bonuses tied to

instilling the company’s vision and values in its culture, bonuses

tied to risk management, prohibitions against hedging or pledging

equity awards, hold-past retirement provisions for equity awards,

and numerous triggers for clawbacks and recoupment of bonuses

in cases where they were inappropriately earned (see Exhibit 3). Of

note, cross-sales and products-per-household were not included

as specific performance metrics in senior executive bonus

calculations even though they were for branch-level employees.20

In the end, these protections were not sufficient to stem a

problem that proved to be more systemic and intractable than

senior management realized. In September 2016, Wells Fargo

announced that it would pay $185 million to settle a lawsuit filed

by regulators and the city and county of Los Angeles, admitting

that employees had opened as many as 2 million accounts without

customer authorization over a five-year period.21 Although

large, the fine was smaller than penalties paid by other financial

institutions to settle crisis-era violations. Wells Fargo stock

price fell 2 percent on the news (see Exhibit 4). Richard Cordray,

director of the Consumer Financial Protection Bureau, criticized

the bank for failing to

… monitor its program carefully, allowing thousands of employees to game the system and inflate their sales figures to meet their sales targets and claim higher bonuses under extreme pressure. Rather than put its customers first, Wells Fargo built and sustained a cross-selling program where the bank and many of its employees served themselves instead, violating the basic ethics of a banking institution including the key norm of trust.22

A Wells Fargo spokesman responded that, “We never want products,

including credit lines, to be opened without a customer’s consent

and understanding. In rare situations when a customer tells us

they did not request a product they have, our practice is to close it

and refund any associated fees.”23 In a release, the banks said that,

“Wells Fargo is committed to putting our customers’ interests first

100 percent of the time, and we regret and take responsibility for

any instances where customers may have received a product that

they did not request.”24

The bank announced a number of actions and remedies,

several of which had been put in place in preceding years. The

company hired an independent consulting firm to review all

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account openings since 2011 to identify potentially unauthorized

accounts. $2.6 million was refunded to customers for fees

associated with those accounts. 5,300 employees were terminated

over a five-year period.25 Carrie Tolstedt, who led the retail

banking division, retired. Wells Fargo eliminated product sales

goals and reconfigured branch-level incentives to emphasize

customer service rather than cross-sell metrics.26 The company

also developed new procedures for verifying account openings

and introduced additional training and control mechanisms to

prevent violations.27

Nevertheless, in subsequent weeks, senior management

and the board of directors struggled to find a balance between

recognizing the severity of the bank’s infractions, admitting fault,

and convincing the public that the problem was contained. They

emphasized that the practice of opening unauthorized accounts

was confined to a small number of employees: “99 percent of the

people were getting it right, 1 percent of people in community

banking were not. … It was people trying to meet minimum goals

to hang on to their jobs.”28 They also asserted that these actions

were not indicative of the broader culture:

I want to make very clear that we never directed nor wanted our team members to provide products and services to customers that they did not want. That is not good for our customers and that is not good for our business. It is against everything we stand for as a company.29

If [employees] are not going to do the thing that we ask them to do—put customers first, honor our vision and values—I don’t want them here. I really don’t. … The 1 percent that did it wrong, who we fired, terminated, in no way reflects our culture nor reflects the great work the other vast majority of the people do. That’s a false narrative.30

They also pointed out that the financial impact to the customer

and the bank was extremely limited. Of the 2 million potentially

unauthorized accounts, only 115,000 incurred fees; those fees

totaled $2.6 million, or an average of $25 per account, which the

bank had refunded. Affected customers did not react negatively:

We’ve had very, very low volumes of customer reaction since that happened. … We sent 115,000 letters out to people saying that you may have a product that you didn’t want and here is the refund of any fees that you incurred as a result of it. And we got very little feedback from that as well.31

The practice also did not have a material impact on the company’s

overall cross-sell ratios, increasing the reported metric by a

maximum of 0.02 products per household.32 According to one

executive, “The story line is worse than the economics at this

point.”33

Nevertheless, although the financial impact was trivial, the

reputational damage proved to be enormous. When CEO John

Stumpf appeared before the U.S. Senate, the narrative of the

scandal changed significantly. Senators criticized the company for

perpetuating fraud on its customers, putting excessive pressure

on low-level employees, and failing to hold senior management

responsible. In particular, they were sharply critical that the board

of directors had not clawed back significant pay from John Stumpf

or former retail banking head Carrie Tolstedt, who retired earlier

in the summer with a pay package valued at $124.6 million.34

Senator Elizabeth Warren of Massachusetts told Stumpf:

You know, here’s what really gets me about this, Mr. Stumpf. If one of your tellers took a handful of $20 bills out of the cash drawer, they’d probably be looking at criminal charges for theft. They could end up in prison. But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multimillion dollar bonuses, and you went on television to blame thousands of $12-an-hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability. You should resign. You should give back the money that you took while this scam was going on, and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission.35

Following the hearings, the board of directors announced that

it hired external counsel Shearman & Sterling to conduct an

independent investigation of the matter. Stumpf was asked to

forfeit $41 million and Tolstedt $19 million in outstanding,

unvested equity awards. It was one of the largest clawbacks of

CEO pay in history and the largest of a financial institution. The

board stipulated that additional clawbacks might occur. Neither

executive would receive a bonus for 2016, and Stumpf agreed to

forgo a salary while the investigation was underway.36

Two weeks later, Stumpf resigned without explanation. He

received no severance and reiterated a commitment not to sell

shares during the investigation. The company announced that

it would separate the chairman and CEO roles.37 Tim Sloan,

chief operating officer, became CEO. Lead independent director

Stephen Sanger became nonexecutive chairman; and Elizabeth

Duke, director and former Federal Reserve governor, filled a

newly created position as vice chairman.

independent inVestigation report

In April 2017, the board of directors released the results of its

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independent investigation which sharply criticized the bank’s

leadership, sales culture, performance systems, and organizational

structure as root causes of the cross-selling scandal (see Exhibit 5).

Performance and incentives. The report faulted the company’s

practice of publishing performance scorecards for creating

“pressure on employees to sell unwanted or unneeded products to

customers and, in some cases, to open unauthorized accounts.”38

Employees “feared being penalized” for failing to meet goals, even

in situations where these goals were unreasonably high:

In many instances, community bank leadership recognized that their plans were unattainable. They were commonly referred to as 50/50 plans, meaning that there was an expectation that only half the regions would be able to meet them.

The head of strategic planning for the community bank was

quoted as saying that the goal-setting process is a “balancing act”

and recognized that “low goals cause lower performance and high

goals increase the percentage of cheating.”

The report also blamed management for, “tolerating low

quality accounts as a necessary by-product of a sales-driven

organization.” …

Management characterized these low quality accounts, including products later canceled or never used and products that the customer did not want or need, as “slippage” and believed a certain amount of slippage was the cost of doing business in any retail environment.

The report faulted management for failing to identify “the

relationship between the goals and bad behavior [even though]

that relationship is clearly seen in the data. As sales goals became

more difficult to achieve, the rate of misconduct rose.” Of note, the

report found that “employees who engaged in misconduct most

frequently associated their behavior with sales pressure, rather

than compensation incentives.”

Organizational structure. In addition, the report asserted that

“corporate control functions were constrained by [a] decentralized

organizational structure” and described the corporate control

functions as maintaining “a culture of substantial deference to the

business units.”

Group risk leaders “took the lead in assessing and addressing

risk within their business units” and yet were “answerable

principally to the heads of their businesses.” For example, the

community bank group risk officer reported directly to the head

of the community bank and only on a dotted-line basis to the

central chief risk officer. As a result,

Risk management … generally took place in the lines of business,

with the business people and the group risk officers and their staffs as the “first line of defense.”

John Stumpf believed that this system “better managed risk

by spreading decision-making and produced better business

decisions because they were made closer to the customer.”39

The board report also criticized control functions for not

understanding the systemic nature of sales practice violations:

Certain of the control functions often adopted a narrow “transactional” approach to issues as they arose. They focused on the specific employee complaint or individual lawsuit that was before them, missing opportunities to put them together in a way that might have revealed sales practice problems to be more significant and systemic than was appreciated.

The chief operational risk officer

did not view sales practices or compensation issues as within her mandate, but as the responsibility of the lines of businesses and other control functions (the law department, HR, audit and investigations). She viewed sales gaming as a known problem that was well-managed, contained and small.

The legal department focused

principally on quantifiable monetary costs—damages, fines, penalties, restitution. Confident those costs would be relatively modest, the law department did not appreciate that sales integrity issues reflected a systemic breakdown.

Human resources

had a great deal of information recorded in its systems, [but] it had not developed the means to consolidate information on sales practices issues and to report on them.

The internal audit department

generally found that processes and controls designed to detect, investigate and remediate sales practice violations were effective at mitigating sales practices-related risks. … As a general matter, however, audit did not attempt to determine the root cause of unethical sales practices.

The report concluded that

while the advisability of centralization was subject to considerable disagreement within Wells Fargo, events show that a strong centralized risk function is most suited to the effective management of risk.

Leadership. Furthermore, the board report criticized CEO

John Stumpf and community banking head Carrie Tolstedt for

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leadership failures.

According to the report, Stumpf did not appreciate the scope

and scale of sales practices violations: “Stumpf’s commitment to

the sales culture … led him to minimize problems with it, even

when plausibly brought to his attention.” For example, he did

not react negatively to learning that 1 percent of employees were

terminated in 2013 for sales practices violations: “In his view, the

fact that 1 percent of Wells Fargo employees were terminated

meant that 99 percent of employees were doing their jobs

correctly.” Consistent with this, the report found that Stumpf “was

not perceived within Wells Fargo as someone who wanted to hear

bad news or deal with conflict.”

The report acknowledged the contribution that Tolstedt made

to the bank’s financial performance:

She was credited with the community bank’s strong financial results over the years, and was perceived as someone who ran a “tight ship” with everything “buttoned down.” Community bank employee engagement and customer satisfaction surveys reinforced the positive view of her leadership and management. Stumpf had enormous respect for Tolstedt’s intellect, work ethic, acumen and discipline, and thought she was the “most brilliant” community banker he had ever met.

At the same time, it was critical of her management style, describing

her as “obsessed with control, especially of negative information

about the community bank” and faulting her for maintaining “an

‘inner circle’ of staff that supported her, reinforced her views, and

protected her.” She “resisted and rejected the near-unanimous

view of senior regional bank leaders that the sales goals were

unreasonable and led to negative outcomes and improper

behavior.”

Tolstedt and certain of her inner circle were insular and defensive and did not like to be challenged or hear negative information. Even senior leaders within the Community Bank were frequently afraid of or discouraged from airing contrary views.

Stumpf “was aware of Tolstedt’s shortcomings as a leader

but also viewed her as having significant strengths.” … He “was

accepting of Tolstedt’s flaws in part because of her other strengths

and her ability to drive results, including cross-sell.”

Board of Directors. Finally, the report evaluated the process

by which the board of directors oversaw sales-practice violations

and concluded that “the board was regularly engaged on the issue;

however, management reports did not accurately convey the

scope of the problem.” The report found that

Tolstedt effectively challenged and resisted scrutiny from both

within and outside the community bank. She and her group risk officer not only failed to escalate issues outside the community bank, but also worked to impede such escalation. … Tolstedt never voluntarily escalated sales practice issues, and when called upon specifically to do so, she and the community bank provided reports that were generalized, incomplete, and viewed by many as misleading.

Following the initial Los Angeles Times article highlighting potential

violations, “sales practices” was included as a “noteworthy risk”

in reports to the full board and the board’s risk committee.

Beginning in 2014 and continuing thereafter, the board received

reports from the community bank, the corporate risk office,

and corporate human resources that “sales practice issues were

receiving scrutiny and attention and, by early 2015, that the risks

associated with them had decreased.”

Board members expressed the view that “they were

misinformed” by a presentation made to the risk committee in May

2015 that underreported the number of employees terminated

for sales-practice violations, that reports made by Tolstedt to the

committee in October 2015 “minimized and understated” the

problem, and that metrics in these reports suggested that potential

abuses were “subsiding.”

Following the lawsuit by the Los Angeles City Attorney, the

board hired a third-party consultant to investigate sales practices

and conduct an analysis of potential customer harm. The board

did not learn the total number of employees terminated for

violations until it was included in the settlement agreement in

September 2016.

Wells Fargo response. With the release of the report, Wells

Fargo announced a series of steps to centralize and strengthen

control functions. The board also announced that it would claw

back an additional $47.3 million in outstanding stock option

awards from Tolstedt and an additional $28 million in previously

vested equity awards from Stumpf.40

long-terM oVerhang

The board report and related actions did not put an end to

shareholder and regulatory pressure. At the company’s 2017

annual meeting, 9 of the company’s 15 directors received less than

75 percent support and 4 received less than 60 percent, including

board chairman Stephen Sanger (56 percent), head of the risk

committee Enrique Hernandez (53 percent), head of the corporate

responsibility committee Federico Peña (54 percent), and Cynthia

Milligan who headed the credit committee (57 percent).41 The

bank subsequently announced the resignations of 6 directors,

including Sanger, who was replaced by Elizabeth Duke as board

chair.

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Wells Fargo continued its efforts to reexamine all aspects of

its business. In August 2017, the company increased its estimate

of the number of potentially unauthorized consumer accounts to

3.5 million and issued an additional $2.8 million in refunds.42 The

bank also announced that it identified sales practice violations in

both its auto and mortgage lending divisions. In February 2018,

citing “widespread consumer abuses,” the Federal Reserve Board

took the unprecedented action of placing a strict limit on the

company’s asset size, forbidding the bank from growing past the

$1.95 trillion in assets it had at year end until it demonstrated an

improvement in corporate controls. According to Federal Reserve

Board Chair Janet Yellen:

We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again. The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers.43

In April 2018, the bank agreed to a $1 billion settlement with

the Consumer Financial Protection Bureau and the Office of

the Comptroller of the Currency to resolve auto and mortgage

lending violations. Two weeks later it agreed to pay $480 million

to settle a securities class action lawsuit over cross-selling. In

December 2018, the company settled with 50 state attorneys

general to resolve civil claims for cross-selling, auto lending, and

mortgage lending violations and agreed to pay $575 million.

Why this Matters

1. The Wells Fargo compensation system emphasized cross-

selling as a performance metric for awarding incentive pay to

employees. The company also published scorecards that ranked

individual branches on sales metrics, including cross-selling.

Was the company wrong to use cross-selling as a metric in its

incentive systems? Would the program have worked better if

structured differently? The independent report suggests that

employee pressure was a greater contributor to misconduct

than financial incentives. Is this assessment correct?

2. Branch-level employees were incentivized to increase products

per household but the senior-executive bonus system did not

include this metric. Did this disconnect contribute to a failure

to recognize the problem earlier?

3. Wells Fargo prides itself on its vision and values and culture.

By several measures, these have been highly beneficial to the

company’s performance. What factors should senior executives

consider to ensure that compensation and performance

systems encourage the achievement of company objectives

without compromising culture?

4. The dollars involved in the Wells Fargo cross-selling scandal

were small (less than $6 million in direct fees) but the

reputational damage to the bank was massive. How can a

company prepare against problems that do not seem to be

“material” in a financial sense but ultimately have a material

impact on the business and its reputation?

5. The independent investigation concludes that “a strong

centralized risk function is most suited to the effective

management of risk.” Is this conclusion correct? What steps can

executives in a decentralized organization take to minimize

gaps in oversight without creating unnecessary bureaucracy?

6. The Wells Fargo cross-selling scandal highlights the challenge

of a high-performing executive whose behavior ultimately does

not align with company values. How much autonomy should

high-performing executives be afforded? How can a company

balance autonomy and accountability?

7. The independent investigation largely exonerates the Wells

Fargo board of directors. How much blame does the board

deserve? What could it have done differently to prevent the

cross-selling issue from snowballing?

8. Wells Fargo had the elements in place of a properly functioning

governance system, including risk management, audit, legal,

and human resources. Furthermore, each of these groups was—

at least to some degree—aware of sales practice violations in

the consumer bank. And yet no one recognized the systemic

nature of the problem or took the necessary steps to address

it. How can a company gauge whether its governance

system is effective in identifying and mitigating risk? 

1 Deloitte, “Core Beliefs and Culture: Chairman’s Survey Findings,” (2012).

2 John R. Graham, Campbell R. Harvey, Jillian Popadak, and Shiva Rajgopal, “Corporate Culture: Evidence from the Field,” Social Science Research Network (2016).

3 Adam Lashinsky, “Riders on the Storm,” Fortune (May 4, 2009). 4 Maria Aspan, “Wells Fargo’s John Stumpf, the 2013 Banker of the Year,”

American Banker (Nov. 21, 2013). 5 Ibid. 6 Tolstedt was named to the list continuously from 2003 to 2015 and

named number 1 in 2010. See Sara Lepro, “Wells’ Tolstedt at Top of Power List,” American Banker (Sep. 27, 2010).

7 Vito J. Racanelli, “Apple Tops Barron’s List of Respected Companies,” Barron’s ( Jun. 27, 2015).

8 Wells Fargo’s Vision & Values was written in booklet form in the early 1990s and is distributed to all employees. See Wells Fargo, “The Vision and Values of Wells Fargo,” (Accessed Nov. 1, 2016).

9 “Wells Fargo & Co. at Goldman Sachs U.S. Financial Services Conference,” CQ FD Disclosure (Dec. 8, 2015).

10 Maria Aspan, loc. cit.

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11 Wells Fargo, 2010 Annual Report. 12 Wells Fargo, “Wells Fargo & Co. 2016 Investor Day,” CQ FD Disclosure (May 24, 2016).

13 Maria Aspan, loc. cit. 14 Pat Callahan, Executive Vice President, “Wells Fargo & Company 2010

Investor Conference,” CQ FD Disclosure (May 14, 2010). 15 There is some evidence that employees were discussing sales pressure

on social media sites, such as Glassdoor, as far back as 2010; however, the frequency is modest (less than 10 percent of employee reviews). Research by the author.

16 E. Scott Reckard, “Wells Fargo Fires Workers Accused of Cheating on Sales Goals,” Los Angeles Times (Oct. 3, 2013).

17 E. Scott Reckard, “Wells Fargo’s Pressure-Cooker Sales Culture Comes at a Cost,” Los Angeles Times (Dec. 21, 2013).

18 Ibid. 19 Cited in Emily Glazer, “How Wells Fargo’s High-Pressure Sales Culture

Spiraled Out of Control,” The Wall Street Journal (Sep. 16, 2016). 20 Wells Fargo, Form DEF-14A (Mar. 16, 2016). 21 The fine comprised of $100 million to the Consumer Financial Protection Bureau, $35 million to the Office of Comptroller of the Currency, and $50 million to the city and county of Los Angeles. In addition, the bank refunded customers for fees they incurred on these accounts. Accounts included deposit accounts, checking accounts, debit cards, and credit cards. The lawsuit was first filed in 2015. James Rufus Koren, “Wells Fargo to Pay $185 Million Settlement for ‘Outrageous’ Sales Culture,” Los Angeles Times (Sep. 8, 2016).

22 “Full Committee Hearing on ‘An Examination of Wells Fargo’s Unauthorized Accounts and the Regulatory Response,” Federal News Service (Sep. 20, 2016).

23 Emily Glazer, “Wells Fargo to Pay $185 Million Fine Over Account Openings,” The Wall Street Journal (Sep. 8, 2016).

24 Wells Fargo press release, “Wells Fargo Issues Statement on Agreement Related to Sales Practices,” BusinessWire (Sep. 8, 2016).

25 This represented 1 percent per year of the approximately 100,000 Wells Fargo employees working in retail branches. 10 percent of the terminated employees were at the manager level or above. The review was subsequently expanded to include 2009 and 2010.

26 Emily Glazer “Can This Woman Save Wells Fargo’s Consumer Banking Business?” The Wall Street Journal (Oct. 19, 2016).

27 Wells Fargo press release, (Sep. 8, 2016), loc. cit. 28 CFO John Shrewsberry in “Wells Fargo’s (WFC) Management Presents

at Barclays Global Financial Services Conference (Transcript),” Seeking Alpha (Sep. 13, 2016).

29 CEO John Stumpf in “Full Committee Hearing on ‘An Examination of Wells Fargo’s Unauthorized Accounts and the Regulatory Response,’” Federal News Service (Sep. 20, 2016).

30 CEO John Stumpf in Emily Glazer and Christina Rexrode, “Wells Boss Says Staff at Fault for Scams,” The Wall Street Journal (Sep. 14, 2016).

31 CFO John Shrewsberry in “Wells Fargo’s (WFC) Management Presents at Barclays Global Financial Services Conference (Transcript),” loc. cit.

32 According to CEO Timothy Sloan, “Let me clarify that these accounts had a de minimis impact to the retail banking household cross-sell ratio that we report on a quarterly basis, with the maximum impact in any one quarter of 0.02 products per household or 0.3% of the reported metric. At no time were all of the identified accounts included in our reported cross-sell ratio because unused deposit accounts rolled off.” See “Wells Fargo & Company’s (WFC) CEO Timothy Sloan on Q3 2016 Results— Earnings Call Transcript,” Seeking Alpha (Oct. 14, 2016).

33 CFO John Shrewsberry in Emily Glazer, “Wells Maps a Crisis Plan— Executives Say Bank’s Situation Will Get Harder Before It Gets Better

After Scandal,” The Wall Street Journal (Oct. 12, 2016). 34 Note that the majority of this compensation represented equity-awards

accrued over her 27 year tenure with the company and were subject to the company’s hold-past-retirement policy. See Exhibit 3 and Wells Fargo, Form 8-K (Jul. 12, 2016).

35 “Full Committee Hearing on ‘An Examination of Wells Fargo’s Unauthorized Accounts and the Regulatory Response,’” loc. cit.

36 Wells Fargo press release, “Independent Directors of Wells Fargo Conducting Investigation of Retail Banking Sales Practices and Related Matters,” BusinessWire (Sep. 28, 2016).

37 For more information on the impact of separating the chairman and CEO roles see: David F. Larcker and Brian Tayan, “Chairman and CEO: The Controversy Over Board Leadership Structure,” Stanford Closer Look Series (Jun. 24, 2016); and David F. Larcker and Brian Tayan, “Independent Chairman,” Stanford Quick Guide Series: Research Spotlight (Nov. 2015).

38 Unless otherwise specified, quotations in this section are derived from: “Independent Director of the Board of Wells Fargo & Company: Sales Practices Investigation Report,” (April 10, 2017), available at: https:// www.wellsfargo.com/assets/pdf/about/investor-relat ions/ presentations/2017/board-report.pdf. Edited lightly for clarity or grammar.

39 Senior executives separately have noted that decentralization is an important element of the company’s credit culture and has allowed the company to record lower credit losses over multiple economic cycles because small dollar loans are made faster and closer to the customer. Interview with the author May 2, 2018.

40 Wells Fargo press release, “Wells Fargo Board Releases Findings of Independent Investigation of Retail Banking Sales Practices and Related Matters,” BusinessWire (Apr. 10, 2017).

41 Average support in an uncontested director election is 94 percent. According to Institutional Shareholder Services, over the 10 year period 2007-2016, approximately 22 directors per year among all S&P 500 companies received less than 60 percent support, on average. See Emily Glazer, “Wells Fargo Directors Face Shareholders’ Ire,” The Wall Street Journal (April 26, 2017); and Wells Fargo press release, “Wells Fargo Announces Preliminary Voting Results of 2017 Annual Meeting,” BusinessWire (April 25, 2017).

42 The additional accounts resulted from an increase in the scope of the years covered, from January 2009 to September 2016. The bank noted that its estimate was conservative and likely included properly authorized accounts: “The analysis was data-driven and looked at account usage patterns. Since usage patterns of some authorized accounts opened with a customer’s consent can be similar to some unauthorized accounts, it is likely that some properly authorized accounts were included in the population identified as unauthorized accounts.” Wells Fargo press release, “Wells Fargo Reports Completion of Expanded Third-Party Review of Retail Banking Accounts, Paving Way to Complete Remediation Effort,” BusinessWire (August 31, 2017).

43 Federal Reserve press release, “Responding to widespread consumer abuses and compliance breakdowns by Wells Fargo, Federal Reserve restricts Wells’ growth until firm improves governance and controls. Concurrent with Fed action, Wells to replace three directors by April, one by year end,” (February 2, 2018).

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Brian Tayan is a researcher with the Corporate Governance Research Initiative at the Stanford Graduate School of Business and a member of the Rock Center for Corporate Governance at Stanford University. He is coauthor of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance. He would like to thank Michelle E. Gutman for research assistance in the preparation of these materials.

The Stanford Closer Look Series is a collection of short case studies that explore topics, issues, and controversies in corporate governance and leadership. The Closer Look Series is published by the Corporate Governance Research Initiative at the Stanford Graduate School of Business and the Rock Center for Corporate Governance at Stanford University. For more information, visit: http:/www.gsb.stanford.edu/cgri-research.

Copyright © 2019 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

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exhibit 1 — Wells Fargo: selected perForMance Metrics

As of March 21, 2016, rounded to the nearest percentage.

total shareholder return

7% 6% 6% 5%

-10%

-20%

-3%

12% 8%

12% 9%

1%

-1%

7%

12% 11%

9% 11%

4%

-2%

7%

Wells Fargo

JP Morgan us Bank PnC Bank of america

Citigroup KBW Bank avg

an nu

al iz

ed t

sr

10 Year

5 Year

3 Year

relation BetWeen returns and Volatility

Wells Fargo

JP Morgan

Citigroup

Bank of america

0.0%

0.5%

1.0%

1.5%

0% 50% 100% 150%

lo ng

-t er

m a

ve ra

ge r

o a

normalized standard deviation of roa

Based on quarterly results, Q1 2009 through Q4 2015.

Sources: Wells Fargo, Investor Day (May. 24, 2016); Wells Fargo, Credit Suisse Financial Services Forum (Feb. 9, 2016).

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exhibit 2 — Wells Fargo: cross-selling Metrics

Note: Shows the relationship between the number of products that a retail banking customer holds with Wells Fargo and the percentage of those customers who make an additional product purchase from Wells Fargo in the subsequent year.

relation BetWeen nuMBer oF ProduCts Per CustoMer and Future PurChases

retail BanKing ProFit Per CustoMer

Source: Wells Fargo, Investor Day (May 20, 2014).

12%

52%

1 2 3 4 5 6 7 8+

% C

us to

m er

s Pu

rc ha

si ng

a dd

iti on

al P

ro du

ct

Products per Customer

1x 3x

5x

10x

3 5 8 10+

Pr of

it pe

r C us

to m

er

Products per Customer

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exhibit 3 — Wells Fargo: selected executiVe coMpensation proVisions

Note: Edited slightly for length.

Source: Wells Fargo, Form DEF-14A (Mar. 16, 2016).

Policy / Provision requirement / trigger

executive officer stock ownership Policy

until one year following retirement, our executive officers must hold shares equal to at least 50% of the after-tax profit shares (assuming a 50% tax rate) acquired upon the exercise of options or vesting of rsrs [restricted share rights] and Performance shares, subject to a maximum requirement of ten times the executive officer’s cash salary.

unearned Compensation recoupment

Misconduct by an executive that contributes to the Company having to restate all or a significant portion of its financial statements.

extended Clawback Policy incentive compensation was based on materially inaccurate financial information, whether or not the executive was responsible.

Performance-Based Vesting Conditions

Misconduct which has or might reasonably be expected to have reputational or other harm to the Company or any conduct that constitutes “cause.” Misconduct or commission of a material error that causes or might be reasonably expected to cause significant financial or reputational harm to the Company or the executive’s business group. improper or grossly negligent failure, including in a supervisory capacity, to identify, escalate, monitor or manage in a timely manner and as reasonably expected, risks material to the Company or the executive’s business group. the Company or the executive’s business group suffers a material downturn in financial performance or suffers a material failure of risk management.

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$200

$250

$300

$350

$400

$450 M

arket Cap ($ billions)

exhibit 4 — Wells Fargo: stock price and Market capitalization

Note: Prices of the KBW Bank Index re-indexed to coincide with Wells Fargo stock price as of September 1, 2016.

Source: Yahoo! Finance.

1. Wells Fargo announces $185 million settlement with CFPB and OCC.

2. Stumpf resigns as CEO; replaced by Sloan.

3. Wells Fargo board of directors releases report of independent investigation.

4. Wells Fargo annual meeting; 9 directors reelected with less than 75 percent support.

5. Wells Fargo discloses auto loan insurance violations; mortgage product violations.

6. Wells Fargo increases the number of potentially unauthorized consumer accounts to 3.5 million.

7. Federal Reserve imposes asset cap on Wells Fargo; the bank enters into a consent order.

8. Wells Fargo announces $1 billion settlement with CFPB and OCC.

1

2

3

4 5

6

7

8

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exhibit 5 — independent inVestigation report: executiVe suMMary (excerpts)

When the Independent Directors of the Board authorized this investigation, the purpose was to examine the root causes of

sales practice abuses and to assess how issues of corporate structure and culture as well as individual actions contributed to

the injuries inflicted upon Wells Fargo’s customers and the extraordinary damage to Wells Fargo’s brand and reputation, not

merely to determine compensation or disciplinary action. The Board did so in the spirit of lessons to be learned, to promote

accountability, to strengthen the organization and to minimize the likelihood of future occurrences. This section of the Report

summarizes the factual findings of the investigation, which are developed in greater detail in the subsequent sections. …

The CommuniTy Bank

Wells Fargo, with its successful Community Bank, had a long history of strong performance as a self-identified sales organization

with a decentralized corporate structure guided by its Vision & Values statement. While there is nothing necessarily pernicious

about sales goals, a sales-oriented culture or a decentralized corporate structure, these same cultural and structural characteristics

unfortunately coalesced and failed dramatically here. There was a growing conflict over time in the Community Bank between

Wells Fargo’s Vision & Values and the Community Bank’s emphasis on sales goals. Aided by a culture of strong deference to

management of the lines of business (embodied in the oft-repeated “run it like you own it” mantra), the Community Bank’s

senior leaders distorted the sales model and performance

management system, fostering an atmosphere that prompted low quality sales and improper and unethical behavior.

Senior management in the Community Bank had a deep-seated adherence to its sales model. The model generally called for

significant annual growth in the number of products, such as checking accounts, savings accounts and credit cards, sold each

year. Even when challenged by their regional leaders, the senior leadership of the Community Bank failed to appreciate or

accept that their sales goals were too high and becoming increasingly untenable.

Over time, even as senior regional leaders challenged and criticized the increasingly unrealistic sales goals — arguing that they

generated sales of products that customers neither needed nor used — the Community Bank’s senior management tolerated

low quality accounts as a necessary by-product of a sales-driven organization. In particular, the Community Bank’s senior

leaders were concerned that tightening up too much on quality would risk lowering sales of products that customers actively

used; and, more generally, the senior leaders were reluctant to take steps that they believed might have a negative impact on the

Community Bank’s financial performance. They also failed to adequately consider that low quality accounts could be indicative

of unauthorized accounts. …

To assist the investigation, Shearman & Sterling retained FTI Consulting. The firm analyzed various metrics to assist in

determining the impact of the Community Bank’s sales culture. First, it examined Wells Fargo’s investigations data for allegations

of sales integrity violations and associated terminations and resignations. And second, it analyzed information relating to the

rate at which the Community Bank’s customers were funding — that is, making initial deposits into — new checking and

savings accounts. While there can be many reasons a customer might not fund an account, lower funding rates (the proportion

of new accounts with more than de minimis deposits) suggest that some customers were sold accounts that they may not have

wanted or needed.

Trends in the data show, perhaps not surprisingly, that as sales goals became harder to achieve, the number of allegations

and terminations increased and the quality of accounts declined. Thus, the number of sales integrity-related allegations and

associated terminations and resignations increased relatively steadily from the second quarter of 2007 and both peaked in the

fourth quarter of 2013, when a newspaper article brought to light improper sales practices in Los Angeles. After the Community

Bank and the corporate control functions started to focus more resources and attention on the problem and the growth of sales

goals moderated somewhat starting in 2013, the number of sales integrity-related allegations and associated terminations and

resignations steadily fell.

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exhibit 5 — continued

This was mirrored by the funding rate. It dropped steadily, from approximately 90% in 2005 to below 80% in 2012; it then rose

somewhat in 2013, continued climbing thereafter, and exceeded 95% by 2016, paralleling Wells Fargo’s increasing focus on sales

practices after 2013.

As reflected in the reduction in plan sales goals for 2013, while the Community Bank did take steps over time to address issues

associated with sales practice violations and aggressive sales goals, those steps were incremental, implemented slowly and

insufficient to address the root cause of the problem. There was a disinclination among the Community Bank’s senior leadership,

regardless of the scope of improper behavior or the number of terminated employees, to see the problem as systemic. It was

common to blame employees who violated Wells Fargo’s rules without analyzing what caused or motivated them to do so. …

In addition, keeping the sales model intact and sales growing meant that the Community Bank’s performance management

system had to exert significant, and in some cases extreme, pressure on employees to meet or exceed their goals. Many

employees felt that failing to meet sales goals could (and sometimes did) result in termination or career-hindering criticism

by their supervisors. Employees who engaged in misconduct most frequently associated their behavior with sales pressure,

rather than compensation incentives, although the latter contributed to problematic behavior by over-weighting sales as against

customer service or other factors. Conversely, employees saw that the individuals most likely to be praised, rewarded and held

out as models for success were high sales performers. …

The Community Bank identified itself as a sales organization, like department or retail stores, rather than a service-oriented

financial institution. This provided justification for a relentless focus on sales, abbreviated training and high employee turnover.

Wells Fargo’s decentralized organizational structure and the deference paid to the lines of business contributed to the persistence

of this environment. Carrie Tolstedt and certain of her inner circle were insular and defensive and did not like to be challenged

or hear negative information. Even senior leaders within the Community Bank were frequently afraid of or discouraged from

airing contrary views. Tolstedt effectively challenged and resisted scrutiny both from within and outside the Community Bank.

She and her group risk officer not only failed to escalate issues outside the Community Bank, but also worked to impede such

escalation, including by keeping from the Board information regarding the number of employees terminated for sales practice

violations. Although they likely did so to give themselves freedom to address these issues on their own terms, rather than to

encourage improper behavior, the dire consequences and cost to Wells Fargo are the same. …

Senior managemenT

John Stumpf

… After decades of success, Stumpf was Wells Fargo’s principal proponent and champion of the decentralized business model

and of cross-sell and the sales culture. His commitment to them colored his response when sales practice issues became more

prominent in 2013 and subsequent years and led him to stand back and rely on the Community Bank to fix the problem, even in

the face of growing indications that the situation was worsening and threatened substantial reputational harm to Wells Fargo.

Because it was the responsibility of Community Bank leadership to run the business “like they owned it,” Stumpf did not engage

in investigation and critical analysis to fully understand the problem. And, as discussed below, the corporate control functions

that reported to him and upon which he relied were similarly constrained by Wells Fargo’s decentralized model.

Stumpf’s commitment to the sales culture also led him to minimize problems with it, even when plausibly brought to his

attention. Stumpf was by nature an optimistic executive who refused to believe that the sales model was seriously impaired. His

reaction invariably was that a few bad employees were causing issues, but that the overwhelming majority of employees were

behaving properly. He was too late and too slow to call for inspection of or critical challenge to the basic business model.

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exhibit 5 — continued

Stumpf’s long-standing working relationship with Tolstedt influenced his judgment as well. Tolstedt reported to Stumpf until

late 2015 and he admired her as a banker and for the contributions she made to the Community Bank over many years. At the

same time, he was aware that many doubted that she remained the right person to lead the Community Bank in the face of sales

practice revelations, including the Board’s lead independent director and the head of its Risk Committee. Stumpf nonetheless

moved too slowly to address the management issue. …

CorporaTe ConTrol organizaTionS

Sections of the Report below describe how Wells Fargo control functions, specifically Corporate Risk, the Law Department,

Human Resources, Internal Investigations and Audit, dealt with sales practice issues in the Community Bank. Several common

themes — again, substantially related to Wells Fargo’s culture and structure — hampered the ability of these organizations to

effectively analyze, size and escalate sales practice issues.

First, Wells Fargo’s decentralized organizational structure meant that centralized functions had parallel units in the Community

Bank, which impeded corporate-level insight into and influence over the Community Bank. Historically, the risk function at

Wells Fargo was highly decentralized. The line of business risk managers were answerable principally to the heads of their

businesses and yet took the lead in assessing and addressing risk within their business units. The Risk Committee of the Board,

consisting of the chairs of all the Board’s standing committees, was created in 2011 to oversee risk across the enterprise. This

involved a multi-year plan starting in 2013 to substantially grow Corporate Risk, to move toward centralization of more risk

functions and to enhance Corporate Risk’s ability to oversee the management of risk in the lines of business. Consistent with

this plan, the Board supported major funding increases for Corporate Risk for 2014-2016. But, as problems with sales practices

in the Community Bank became more apparent in 2013-2015, Corporate Risk was still a work in progress and the Chief Risk

Officer had limited authority with respect to the Community Bank. As events were unfolding, his visibility into risk issues at

the Community Bank was hampered by his dependence on its group risk officer and he was essentially confined to attempting

to cajole and persuade Tolstedt and the Community Bank to be more responsive to sales practice-related risks.

Similarly, the decentralized structure of Human Resources contributed to a lack of visibility into the scope and nature of sales

practice problems. Almost all sales integrity cases and issues touched upon some facet of the HR function, including with

respect to employee terminations, hiring, training, coaching, discipline, incentive compensation, performance management,

turnover, morale, work environment, claims and litigations. Despite this, there was no coordinated effort by HR, either within

the Community Bank or in Corporate HR, to track, analyze or report on sales practice issues.

The fragmentation and decentralization of control functions needs to be and is being addressed. …

Second, and relatedly, the culture of substantial deference accorded to the lines of business carried over into the control

functions. Even when senior executives came to recognize that sales practice issues within the Community Bank were a serious

problem or were not being addressed timely and sufficiently, they relied on Tolstedt and her senior managers to carry out

corrective actions. This culture of deference was particularly powerful in this instance since Tolstedt was respected for her

historical success at the Community Bank, was perceived to have strong support from the CEO and was notoriously resistant

to outside intervention and oversight.

Third, certain of the control functions often adopted a narrow “transactional” approach to issues as they arose. They focused

on the specific employee complaint or individual lawsuit that was before them, missing opportunities to put them together in a

way that might have revealed sales practice problems to be more significant and systemic than was appreciated. As an example,

while HR had a great deal of information recorded in its systems, it had not developed the means to consolidate information on

sales practice issues and to report on them.

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exhibit 5 — continued

Source: Independent Director of the Board of Wells Fargo & Company: Sales Practices Investigation Report, (April 10, 2017).

Similarly, attorneys in the Law Department’s Employment Section had visibility into the scope and causes of sales practice

misconduct and in fact made commendable attempts to address it through, among other things, work on various committees.

However, the Law Department, particularly at its senior levels, did not discuss or appreciate the seriousness and scale of sales

practice issues within the Community Bank or fully consider whether there might be a pattern of illegal conduct involved.

Rather, the Department’s focus was on advising on discrete legal problems as they arose and on managing Wells Fargo’s exposure

to specific litigation risks.

The same holds true for Audit. Audit reviewed relevant controls and processes and largely found them to be effective; however,

while it had access to information regarding sales practice concerns, it did not view its role to include analyzing more broadly

the root cause of improper conduct.

Finally, until as late as 2015, even as sales practices were labeled a “high risk” in materials provided to the Risk Committee of

the Board, there was a general perception within Wells Fargo’s control functions that sales practice abuses were a problem

of relatively modest significance, the equivalent of a tolerable number of minor infractions or victimless crimes. This under

reaction to sales practice issues resulted in part from the incorrect belief, extending well into 2015, that improper practices did

not cause any “customer harm”; and “customer harm” itself was narrowly construed to mean only financial harm such as fees

and penalties. This flawed perspective made it easy to undervalue the risk to Wells Fargo’s brand and reputation arising from

the misuse of customer information and the breaches of trust occasioned by

improper sales practices. …