Magazine article Strategic Finance

Lessons from the Wells Fargo Scandal: The Latest Ethics Scandal to Hit the Banking World Demonstrates the Importance of Ethical Influences in Regard to Company Culture, Risk Evaluation, Employee Incentives, and More

Magazine article Strategic Finance

Lessons from the Wells Fargo Scandal: The Latest Ethics Scandal to Hit the Banking World Demonstrates the Importance of Ethical Influences in Regard to Company Culture, Risk Evaluation, Employee Incentives, and More

Article excerpt

WELLS FARGO BANK (WFB) reached an agreement with regulatory agencies to pay $185 million in penalties for engaging in fraudulent marketing practices. Bank employees are alleged to have used existing customer names and accounts to (1) open new checking accounts and transfer funds to them (known as "simulated funding"), (2) create new credit cards, (3) enroll in online banking, and (4) order and activate debit cards--all without customer knowledge, authorization, or consent. Depositors who didn't need or want these products were hit with late fees, overdraft charges, annual fees, and other costs.

The wrongdoing appears to be spread throughout the retail operations of the bank. Blame is being placed on the bank's marketing incentive plan, which set extremely high sales goals for employees to cross-sell additional banking products to existing customers whether or not the customers needed or wanted them. WFB management had knowledge of the existence of the potentially unethical and illegal problem since 2013 but failed to make any public disclosures since, as WFB CEO John Stumpf told a U.S. Senate panel, the amounts involved were seen to be immaterial to the bank's size. Senior management also failed to make any changes to the incentive program before the regulatory actions.

Sen. Richard Shelby (R.-Ala.), chair of the Senate Banking, Housing and Urban Affairs Committee, said, "In a 2010 letter to shareholders, WFB CEO and Chairman John Stumpf wrote that Wells Fargo's goal was eight products per customer because eight rhymed with great. The result was a corporate culture that drove company team members to fraudulently open millions of accounts using their customers' funds and personal information without their permission." Since metrics like new accounts opened are relied upon by sell-side stock analysts, this practice helped to double Wells Fargo's stock price between 2012 and 2015, greatly impacting executive bonuses. Lawmakers at a Congressional hearing called WFB a "criminal enterprise."

According to the settlement agreement with the U.S. Consumer Finance Bureau, WFB employees submitted approximately 564,000 credit card applications, enrolled customers in online banking, and created and activated debit cards. WFB terminated around 5,300 employees for these unethical and allegedly unlawful acts.

California and Illinois have announced one-year suspensions of business relationships with WFB. California Treasurer John Chiang stated: "Wells Fargo's fleecing of its customers ... demonstrates, at best, a reckless lack of institutional control and, at worst, a culture which actively promotes wanton greed."

An October 12 Wells Fargo press release announced Stumpf's immediate retirement. A previous release had reported he will forfeit unvested awards of stock valued at $41 million. Carrie Tolstedt, the senior executive vice president and group head of community banking, resigned from the company in advance of her planned retirement at year's end. She will receive no severance compensation and forfeits unvested awards of stock valued at $19 million, but she will retain existing awards valued at $124 million. Neither Stumpf nor Tolstedt will receive a bonus for 2016.

The marketing practices in question conflict substantially with the publicly expressed Vision and Values of Wells Fargo, which states that Wells Fargo strives to set "the standard among the world's great companies for integrity and principled performance. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.