How Wells Fargo's CEO Could Have Avoided His Senate Belly Flop
How Wells Fargo's CEO Could Have Avoided His Senate Belly Flop
John Stumpf managed to unite the usually discordant Senate Banking Committee in a chorus of outrage.
By: Jeffrey Sonnenfeld
When Wells Fargo CEO John Stumpf stepped into the hearing room on Tuesday, the usually politically discordant Senate Banking Committee was united in a chorus of outrage. In fact, the Senate chorus could have sung the lyrics of a hit song from the Broadway hit Music Man:
“O-ho the Wells Fargo man is a-comin’ down the street.
Oh, don’t let him pass my door….
O-ho the Wells Fargo man is a-comin’ down the street.
I wish I knew what he was comin’ for.”
Facing the Banking Committee, Stumpf was stumped by the most basic of questions. How could this pattern of corrosive misconduct of two million unauthorized new customer accounts have continued over more than five years despite public reports? Why was the problem surfaced by The Los Angeles Times before internal discovery? Why has there been no independent investigation?
The unanswered questions went on: Why were top leaders awarded unwarranted bonuses based upon fraudulent transactions? This includes consumer bank EVP Carrie Telstadt, a devoted career employee who had been tasked with cleaning up the mess and yet left with a $125 million exit package. Why were claw backs on these bonuses ruled out? Why were 5,300 lower level employees scapegoated and terminated? What does this pattern of misconduct say about the firm’s once cherished culture of integrity?
Sure, in an election year with a presidential election five weeks away, this was a time for political grandstanding. And sure, Sen. Elizabeth Warren’s assault crossed the line of respect and dignity. But there was little daylight in message between such high profile senators as Republicans Richard Shelby, Bob Corker, and Patrick Toomey, or Democrats Sherrod Brown, Robert Menendez, and Warren.
“Public trust in this once revered bank has been shattered,” Chairman Shelby despaired as he wondered why the hundreds of on-site federal regulators had not detected the problem sooner. “You are scapegoating people at the very bottom,” Sen. Jeff Merkley (D-Ore.) charged.
And Warren tore into Stumpf’s lack of explanation, stating, “I am asking about senior management and the compliance division. You’ve not returned a single a penny of the bonuses. This is gutless leadership.”
Stumpf rejected questions about bank culture. “I disagree that this is a massive fraud, ” he bristled, explaining he is not an attorney. To which Toomey retorted, “Most people understand the definition of fraud” as he read from a dictionary definition of fraud. “How does falsely signing a customer up for an account they don’t want not meet that definition?” Toomey added.
Sure, other imperiled CEOs have similarly self-immolated in Congressional inquiries over the years. Prominent examples include Enron’s Jeff Skilling pleading ignorance — which Senator Schumer labeled the “Sgt. Schultz defense,” after the 60s TV prison camp guard who regularly claimed “I know nothing!” — as well as BP’s disdainful Tony Hayward after the Deepwater Horizon environmental disaster. Then there was Ford’s one-time CEO Jacques Nasser, who said he was too busy to appear to explain the once recurring problem of tragic Ford Explorers rollovers.
But just as many CEOs have successfully responded to public inquiries despite the same risk of political grandstanding by congressional leaders. Such victorious CEOs include J.P. Morgan’s Jamie Dimon, for his responsiveness in the aftermath of the $9 billion “London Whale” trading scandal; and GM’s Mary Barra, for her deft handling of an inherited 10-year ignition switch problem that contributed to 12 driver deaths and many injuries.
In these cases, the CEOs and their boards were prepared to frame the problems to provide perspective. They provided company transparency, personal accountability, punishment, and third party reviews. They acknowledged shared outrage and showed contrition. They shared timelines of who knew what and when while independent objective investigations with outside counsel were already underway.
The results of those investigations were shared in extensive public reports. Misconduct was punished with terminations and significant punitive pay cuts at all levels. New initiatives to fortify the systems were led by genuine “A” teams of top executives who treated the issues as their primary assignment. Damages were paid to genuine victims and preventive measures were implemented to catch and correct the risks of future failures.
The Wells Fargo board — filled with CEOs, top public officials, accounting and finance experts, and so on — could not be better in terms of competence, experience, reputation, and independence. Yet somehow, despite the star-studded nature of the board and the respected reputation of CEO Stumpf, they failed.
They should have been out in the banks with employees, hearing first-hand information and not just pawing through formal sanitized management reports in boardrooms. At UPS, the board often meets in sorting hubs. At the Home Depot, directors have had requirements to be mystery shoppers in seven stores a quarter outside their home states.
Stumpf’s instincts were poor. He did not show contrition. He provided no evidence of atonement or genuinely corrective, preventive actions. He was wrong to scapegoat low-level employees and not show personal accountability at the top. Like many #2 lieutenants to charismatic CEOs, Stumpf was not prepared or skilled enough to take the reins from his mentor Richard Kovacevich, despite serving as his protégé for 30 years.
This succession pathology is not new. We have seen this before with Ken Lewis of Bank of America, an operations partner who stumbled on the heels of a visionary, his mentor Hugh McColl. Or Larry Rawls at Exxon, who dutifully served his predecessor Clifton Garvin but was spectacularly ill equipped to respond to the Valdez spill disaster.
Some minimize Wells Fargo’s problems, saying that the improper accounts were only .01% of the bank’s profits and the misconduct by employees was less than 2% of the bank’s total employment. This perspective is a misguided view of the damage to its priceless asset — its once sterling reputation. The Titanic’s iceberg gash was only 12 square feet — not even 1/1000th of that side of the ship.
The frailties of human character ensure that all companies risk misconduct despite best intentions. While the financial costs of Wells Fargo’s ill-conceived cross-selling incentive plans were low, the brand costs as a trusted institution were high. As Thomas More warned centuries ago, “Institutional character is as fragile as a liquid cupped in your hands. Once you separate your fingers, it’s gone.”