"The buck stops here." – Harry Truman
Another week has passed since the inaugural volume of the Ethical Capitalist was released. If there was ever a time for bad behavior among capitalists, now would be that time. Most people of sense have become so overwhelmed by the presidential race, there is limited bandwidth for us to consume and consider the daily drum beat of corporate shenanigans. How can opening fraudulent accounts for customers at Wells Fargo compete with Hillary Clinton fainting? And how can any corporate fraud compare to Duplicitous Donald, the fraudmaster general? In addition to fraud, Trump demonstrated this week that he is not just satisfied with character assassination, but needs to plant seeds for the actual assassination of Secretary Clinton (does he not know that that there are crazy people who actually believe that responding to that dog whistle might land them a seat next to Sean Hannity at a State dinner?).
For those of you that missed the Wells Fargo story, let’s review. Wells Fargo is one of the biggest and most successful commercial banks in the United States. It features relationship banking where bankers “cross sell” multiple products to its customer base. For the layman, that means if you have a checking account, Wells tries to sell you credit cards, mortgages, insurance, wealth management, etc. Apparently, they created sales goals for new accounts and tied employee compensation to those accounts. In order to meet those sales goals, bankers opened up fake accounts in customer names. It is either 115,000 of them (Wells Fargo’s number) or 2mm (the New Yorker’s number). Either way that’s a lot of fraudulent accounts and the practice has been going on for over 5 years. Wells has instituted ethics training, fired 5,300 employees associated with the fraud, paid $185mm in a civil settlement (with more likely to come) and $5mm in restitution for fees fraudulently collected. And yet the practice continues (albeit at a lower rate than before) and employees are still being fired this year.
Wells Fargo is run by John Stumpf who has worked at the bank for 34 years. He is generally regarded as a good CEO, and Wells Fargo is considered to be among the best-run financial companies in the United States. It navigated the financial crisis better than any other big bank, and enjoys a good reputation among customers and shareholders (with Warren Buffet being the largest shareholder at nearly 10%). Mr. Stumpf has built a lot of goodwill over the years and will need to spend some of it now to repair his and the company’s reputation. His first interview on the matter was with Jim Cramer and it was a mixed bag. On the positive side, he said he was sorry (are you reading this Mr. Trump). He also said that he was ultimately “accountable”, but what exactly does that mean? They are just words unless he resigns (which he won’t do and I don’t think is appropriate) or takes a pay cut (he made $19mm last year so even a $1 dollar comp package would not impoverish him, but don’t hold your breath).
On the negative side, he featured the company’s ethics training and blamed the fraud on the bad acts of a small fraction of employees, claiming that he could not “explain human behavior”. Really? You would only need to read the online discussions of employees to see that employees struggled to reconcile their ethics training with the pressure to meet sales goals and keep their jobs. I would think it quite simple to explain this behavior - $12/hour tellers and other employees wanted to please their supervisors and keep their jobs.
One person not making $12/hour is Carrie Tolstedt, who up until this summer ran the consumer bank. If the buck stopped with anyone, then it stopped with her. Unlike the 5,300 other employees who were fired, she was moved out of her job with a plan to gracefully retire from the company at the ripe old age of 56. Tolstedt got paid $27mm over the last 3 years and will retire with $125mm of Wells Fargo stock. In 2008, after the financial crisis, new regulations were put into place to allow companies to claw back compensation for fraud and other bad acts. This seems like a textbook case of the use of that statute. But when Cramer pressed Stumpf on this possibility he said it was a “board process”. Mr. Stumpf is the chairman on the board and has been CEO long enough to have a hand in the selection of every member of that board. He is not merely someone added to the board for PR heft. Surely he could have weighed in more strongly instead of hiding behind HIS board.
Just this week, Mr. Stumpf testified in front of Congress and in a rare show of bipartisanship, was excoriated by Sen. Elizabeth Warren and others. Mr. Stumpf again apologized and took personal responsibility but confirmed that he would not resign, take a pay penalty and on the matter of Ms. Tolstedt he would leave that to the board. Sen. Warren characterized his leadership as “gutless”. While I am not a fan of name calling in public, I was scratching my head of how a capable CEO could not have regained the trust of lawmakers, employees, customer and the public by just saying the following:
- As the CEO, I take full responsibility and apologize to anyone who has been hurt by the fraud perpetrated by the bank and I will do everything possible to restore trust in Wells Fargo.
- We have formed a special committee of the board, who will engage outside specialists, to address the important matters surrounding this fraud
- First, we will do everything necessary to adjust our practices and culture such that we have a zero defect policy regarding the fraudulent opening of accounts. There will be ongoing monitoring and full transparency of the results of this exercise. We will work with the Consumer Financial Protection Bureau and other regulators on this.
- Second, we will evaluate the culpability of senior executives, myself included, in this fraud and will use all available tools to enforce the proper punishment, that includes claw back of compensation, forfeiture of stock and termination.
- Third, we will work with the victims of this fraud to make sure they are properly compensated for any loss they may have incurred. We will ask any customer who left us for another chance and to prove to them that it was worth doing so.
- Finally, we will work with regulators and city attorneys to make sure we do what we need to remain in the best standing possible with them.
But alas he did not say that, and because he did not he has a slight chance to keep his job and his money, but no chance to keep that reputation (and his “keep the job” prospects have dimmed by a recent $2.6B class action lawsuit brought by employees who did not open fraudulent accounts but were fired for missing sales targets). And for Ms. Tolsted? This is the textbook case of a system-wide fraud that a senior executive should be held accountable for. She knew of it, was tasked with fixing it, but did not. $125mm in stock and $30mm in cash seems like a lot of money for someone who couldn’t stop a known fraud. I would advise her not to rush out and spend it all just yet.