A problem solved begins as a problem acknowledged. This is why the first step in many addiction recovery programs is marked by a growing awareness that there is a problem. It often takes a family member or co-worker to point out that a problem exists and that it is negatively impacting job performance and/or personal relationships. These conversations are difficult, and rarely welcomed by the addict. Even after being confronted, the addict may refuse to acknowledge they have a problem and persist in their destructive behavior.
Companies can also struggle to admit they have a problem. Faced with negative news coverage or adverse regulatory action, a company may publicly apologize and promise to do better, all the while failing to address the underlying issue. For many companies, the occasional bad publicity is treated as the cost of doing business and something that can be managed away. And indeed, not every negative story requires wholesale changes (if this were the case, many large companies would be in constant flux). But, there are instances where negative attention is pointing to deep-seated issues that must be addressed. If they are not, problems will continue to arise and the company may suffer serious consequences at the hands of regulators, prosecutors, or Congress. While it may seem obvious ex-post, a fundamental challenge for the modern corporation is knowing which problems can be managed away, and which require aggressive action.
Wells Fargo is an example of a company that failed to understand the severity of their problems. When then-CEO John Stumpf testified before Congress in September 2016, shorty after it was revealed the firm had fired approximately 5,300 employees between 2011 and 2016 for sales practice violations that included opening over three million unauthorized deposit and credit card accounts, he downplayed the severity of the problem by repeatedly emphasizing that the terminated employees represented only 1% of the bank’s workforce.
To the public, 5,300 employees is a large number, and the fact these employees were dismissed for engaging in what is essentially fraud, reflects a corrupt corporate culture within Wells Fargo. Stumpf’s insistence on framing the problem as a few bad apples was the first indication that the firm felt this scandal could be managed away without making significant changes.
The second indication the public had that Wells Fargo didn’t believe they suffered from broader cultural issues was when they appointed a thirty-year company veteran, Tim Sloan, to replace Stumpf as CEO (Stumpf was forced to resign after his disastrous congressional testimony). While Sloan did shake-up the senior management ranks and revamp the firm’s sales incentives, these measures were designed to address the narrow problem of aggressive cross-selling and not the underlying cultural and risk management failings at the firm. As a result, problems continued to fester until they burst into public view one by one. In September 2017, I documented the litany of Wells Fargo misdeeds that had emerged in the past year. I said:
“Call it too big to manage, too big to jail, or whatever else you want; the fact is, Wells Fargo’s culture is rotten to the core. The bank’s management treats their customers like faceless piggy banks, just waiting to be cracked open with the hammer they call employees.”
Even the Federal Reserve came to agree with me, albeit with less inflammatory language. On February 2, 2018 – Janet Yellen’s last day as Fed Chair – the Federal Reserve Board (the Board) voted to issue a consent cease and desist order that prevents Wells Fargo from growing their assets beyond their current size. The Board also sent “letters to each current Wells Fargo board member confirming that the firm’s board of directors, during the period of compliance breakdowns, did not meet supervisory expectations. Letters were also sent to former Chairman and Chief Executive Officer John Stumpf and past lead independent director Stephen Sanger stating that their performance in those roles, in particular, did not meet the Federal Reserve’s expectations.”
At this point, Wells should have treated the Fed’s consent order as akin to an intervention. If they didn’t believe they had a genuine problem before, now was the time for an honest self-assessment. Instead, Wells continued to treat their problems as simply a public relations issue. Last May, Wells took out “double-page adverts in US newspapers claiming that the bank had been “re-established”, 166 years on from its birth” and launched a series of commercials acknowledging that they lost their customers’ trust and were committed to gaining it back.
Wells believed that if they could just stay out of the headlines long enough, public scrutiny would dissipate, the Federal Reserve would rescind their consent order, and they could return to business as usual. This naïve optimism is why Sloan, shortly after receiving the Fed’s consent order, indicated the bank was “on the fast track” to addressing the Fed’s concerns and that he expected the order to be rescinded within a year.
While Wells was attempting to convince customers that they had turned a page, the underlying risk management issues continued to go unaddressed. Last December, the Fed acknowledged the firm had made insufficient progress in remediating their deficiencies and rejected the firm’s “plans to prevent further consumer abuses and told the scandal-plagued lender it needs stronger checks on management” (this was after Wells missed a previous deadline for submitting a remedial plan). In January, Sloan was forced to admit that the asset cap would remain in place through the end of 2019.
The ongoing risk management failures at Wells led to increased calls for a board and senior management shake-up – most notably from Senator Elizabeth Warren. Yet, the firm’s senior leadership continued to believe their real problem was bad P.R. In a January Financial Times article, Perry Pelos, Wells’ head of wholesale banking, lamented that his firm “got treated worse than companies who have killed people, because it’s good political fodder.” In the same article, Mr. Sloan attributed calls for his ouster by politicians as mere political bluster: “When any politician is running for office that they’re trying to win, and when they do that they will either mention us or not mention us to the extent that it’s beneficial to their election.”
Apparently, it never occurred to Wells’ leadership that the reason they were losing the P.R. battle was because they failed to correct series deficiencies in their risk management program. This point was made perfectly clear last month when the New York Times reported that Wells Fargo “[w]orkers recently flooded the bank’s internal blog with hundreds of angry comments about Wells Fargo’s sales incentives, pay and ethics and leaders’ “doublespeak”.”
Last month, after Sloan failed to convince members (Democrat and Republican alike) of the House Financial Services Committee that Wells had fixed their risk management issues and that he was the right man to lead the firm going forward, the Office of the Comptroller of the Currency issued a rare public rebuke:
“We continue to be disappointed with [Wells Fargo’s] performance under our consent orders and its inability to execute effective corporate governance and a successful risk management program.”
Last week, bowing to public pressure, Tim Sloan resigned as CEO effective immediately. Unsurprisingly, Sloan indicated his resignation was yet another move in Wells’ failing P.R. campaign: “I could not keep myself in a position where I was becoming a distraction.” In a press release announcing the move, Wells Fargo board chair, Betsy Duke, praised Sloan for his efforts in transforming Wells and acknowledged that the firm has “many talented executives” who could lead Wells going forward. However, she noted that “the Board has concluded that seeking someone from the outside is the most effective way to complete the transformation at Wells Fargo.”
Hiring an outside CEO is what the Wells Fargo board should have done two-and-a-half years ago. The firm’s record in the intervening period is proof that senior management – most of whom were long-time employees – failed to grasp the severity of Wells Fargo’s cultural and risk management problems. But, if the decision to hire an outside CEO is yet another P.R. maneuver, designed to get politicians and the press off their back, Wells Fargo is destined to remain in the news for all the wrong reasons. This is because the evidentiary record suggests that Wells Fargo’s decentralized structure promoted an aggressive sales culture that emphasized cross-selling and revenue generation throughout all levels of the organization. Decentralization also applied to risk-management, which was underfunded, under-resourced, and undervalued by senior management. This strategy worked well and was very profitable for many years, but it also allowed problems to accumulate, undetected, until they burst into view in September 2016, where they have remained ever since.
It may be the case that what made Wells Fargo so successful – an aggressive sales culture – also facilitates widespread consumer harms. If it is, owning up to their problems may also requiring owning up to a future that isn’t as profitable as the past. Still, if Wells Fargo wants to truly move on from the scandals that have plagued them for the last two years, they need to stop pretending that their only problems are populist politicians and a sensational news media.