Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a recent paper by Mr. Tayan. Show Recently, attention has been paid to corporate culture, “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. 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.” The tensions between corporate culture, financial incentives, and employee conduct is illustrated by the Wells Fargo cross-selling scandal. Wells Fargo Culture, Values, and ManagementWells 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 (Exhibit 1). Fortune magazine praised Wells Fargo for “a history of avoiding the rest of the industry’s dumbest mistakes.” American Banker called Wells Fargo “the big bank least tarnished by the scandals and reputational crises.” In 2013, it named Chairman and CEO John Stumpf “Banker of the Year.” Carrie Tolstedt, who ran the company’s vast retail banking division, was named the “Most Powerful Woman in Banking.” Wells Fargo ranked 7th on Barron’s 2015 list of the “Most Respected Companies.” Wells Fargo’s success is built on a cultural and economic model that combines deep customer relations and 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:
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.” … “If I have any one job here, it’s keeper for the culture.” 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 (Exhibit 2). According to Stumpf:
Conservative Stable Management. Stumpf’s senior management team consisted of 11 direct reports with an average of 27 years of experience at Wells Fargo. Decisions were 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.” Although the company maintains independent risk and oversight mechanisms, all senior leaders are responsible for ensuring that proper practices are embedded in their divisions:
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 ScandalIn 2013, rumors circulated that Wells Fargo employees in Southern California were engaging in aggressive tactics to meet their daily cross-selling targets. 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.” According to another representative, “This is something we take very seriously. When we find lapses, we do something about it, including firing people.” 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.” 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.” 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 the cases where they were inappropriately earned (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. 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. 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 (Exhibit 4). Richard Cordray, director of the Consumer Financial Protection Bureau, criticized the bank for failing to:
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.” 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.” 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 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. 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. The company also developed new procedures for verifying account openings and introduced additional training and control mechanisms to prevent violations. Nevertheless, in the 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.” They also asserted that these actions were not indicative of the broader culture:
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:
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. According to one executive, “The story line is worse than the economics at this point.” 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. Senator Elizabeth Warren of Massachusetts told Stumpf:
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. 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. 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 ReportIn April 2017, the board of directors released the results of its independent investigation which sharply criticized the bank’s leadership, sales culture, performance systems, and organizational structure as root causes of the cross-selling scandal. 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.” Employees “feared being penalized” for failing to meet goals, even in situations where these goals were unreasonably high:
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.”:
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,
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.” The board report also criticized control functions for not understanding the systemic nature of sales practice violations:
The chief operational risk officer:
The legal department focused:
Human resources:
The internal audit department:
The report concluded that:
Leadership. Furthermore, the board report criticized CEO John Stumpf and community banking head Carrie Tolstedt for 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:
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.”
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:
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. Long-Term OverhangThe 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). The bank subsequently announced the resignations of 6 directors, including Sanger, who was replaced by Elizabeth Duke as board chair. 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. 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:
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
The complete paper is available for download here. What are the requirements to open an account?What you need to open a bank account. A valid, government-issued photo ID, such as a driver's license or a passport. ... . Other basic information, such as your birthdate, Social Security number or Taxpayer Identification Number, or phone number.. An initial deposit is required by some banks, too.. What is the minimum deposit to open an account at Wells Fargo?Wells Fargo makes it fast and easy to open a bank account online. Gather the required personal information and the $25 opening deposit.
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