The internal report to the Wells Fargo board of directors on the causes of the bank’s sales practices scandal has laid the greatest share of the blame partly on company practices—a decentralized organizational structure and a sales-driven culture—and partly on the managers of the community bank organization. Former community bank head Carrie Tolstedt came in for substantial personal criticism, as did several other community bank senior managers. Former board chairman and CEO John Stumpf was criticized principally for having too much confidence in Tolstedt and being too slow to rectify problems. The report largely absolved Wells Fargo’s board of responsibility other than for not having centralized the bank’s risk function earlier and not being assertive enough in demanding information and action when problems became apparent.
According to the company, more than $180 million in compensation has been clawed back from various executives, including compensation valued at $69 million from Stumpf and $67 million from Tolstedt. Incentive compensation for eight members of the bank’s operating committee was reduced by a total of $32 million based on "senior leadership’s collective accountability for operational and reputational risk."
The report also noted that, in addition to Stumpf and Tolstedt, four officers in the community bank group have been discharged: the group risk officer, the head of strategic planning and finance, and regional leaders in two locations where the problems were seen as being particularly severe and who were said to have encouraged the illegal practices.
Sales-driven culture. The sales-driven business model and accompanying performance management system demanded significant growth in products each year, the report said. Some regional managers challenged the targets, but community bank leaders refused to "appreciate or accept that their sales goals were too high and becoming increasingly untenable." Senior management came to accept that low quality accounts—accounts that customers didn’t want, didn’t use, and didn’t even fund—were "a necessary by-product of a sales-driven organization."
Maintaining sales growth led to increasing pressure on employees to meet or exceed their goals, the report said. The result was "an atmosphere that prompted low quality sales and improper and unethical behavior." As sales goals became increasingly difficult to achieve, the number of complaints and discharges rose and account quality fell.
Efforts to address the problems that began in 2013 were too small and were implemented too slowly, according to the report. Also, community bank management continued to perceive the problem as misconduct by individual employees, not as a systemic issue.
Prior warning. The report includes an account of a Wells Fargo Internal Investigations manager’s 2004 report, titled "Gaming," warning that employees covered by the company’s Corporate Sales Incentive Plan felt they could not achieve their goals without "gaming the system." These employees feared losing their jobs if they did not cheat.
While the manager’s report was submitted to higher managers and discussed at a subsequent meeting, there was no evidence that any action was taken, the independent report said. A memo on the task force’s work that was sent to Tolstedt apparently did not mention the manager’s report.
Decentralized organization. The report described Wells Fargo’s organization as decentralized, with strong deference being given to line of business managers who were encouraged to act in an entrepreneurial manner. "Run it like you own it" was a commonly used phrase.
Wells Fargo was only in the process of developing an enterprise-wide risk management structure, the report said. Line-of-business risk managers reported to their division heads, not to a centralized risk management function.
Tolstedt and her "inner circle" were unwilling to listen to unpleasant information, the report asserted. She and her risk officer actually interfered with the escalation of developing problems to those higher in the bank.
The ability of risk management, human resources, and Wells Fargo’s law department to recognize the problems resulting from the sales goals was reduced due to the decentralized organization, according to the report. In particular, the HR and the legal departments had information on the problems but were unable to combine what was known into a meaningful whole. Rather, they again addressed the problems from a "transactional" perspective, focusing on the activities of individual employees.
The decentralized structure and leeway given to line of business managers contributed to the continuation of the abusive sales and performance management culture, the report concluded.
Remedies. The report describes a number of steps Wells Fargo has taken to prevent similar problems in the future. These include:
- eliminating product sales goals;
- changing the compensation structure to include customer service and other non-sales factors;
- creating an Office of Ethics, Oversight, and Integrity;
- enhancing the ability of employees to report concerns safely;
- centralizing and elevating the importance of risk and HR functions; and
- making significant changes in management.
Companies: Wells Fargo
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