MBA 635 Wells Fargo Stakeholder Management & Fake Account Scandal Paper The following case study, located in the Harvard Business Review area of your cours

MBA 635 Wells Fargo Stakeholder Management & Fake Account Scandal Paper The following case study, located in the Harvard Business Review area of your course, illustrates the profound impact unethical and illegal business practices have on stakeholders: Wells Fargo: Setting the Stagecoach Thundering Again. Read the case study and respond to the following: Discuss the role of culture in the fake-account scandal.Identify the affected stakeholders.Reflect how, as an organizational leader, the stakeholder management approach promotes ethical and legal decision making. Use citations and references in APA style. Discuss three ways Wells Fargo may use the stakeholder management approach (referenced in Module Three’s overview) to rebuild relationships and trust with stakeholders. NA0467
Wells Fargo: Setting the
Stagecoach Thundering Again
Mahendra R. Gujarathi, Bentley University
Samir Kumar Barua, Former Director, IIMA
“The reason we wake up in the morning is to help our customers
succeed financially and to satisfy all their financial needs. The result is
we make money because of our focus on serving customers, not the
other way around. This time-tested vision will forever be what matters
to Wells Fargo. We’ll never put the stagecoach ahead of the horses.”
— John Stumpf, in the 2011 annual report of Wells Fargo1
The September 20, 2016 hearing of the Senate Banking Committee2 will be
remembered for the relentless grilling of John Stumpf, Chairman and CEO of Wells
Fargo (hereafter, Wells Fargo, or the Bank). Senator Elizabeth Warren (D-Mass.) began
with the question, “Have you returned one single nickel of the millions of dollars you
were paid while the scam was going on?” As Stumpf stuttered and fumbled in
responding to a series of incisive questions, she concluded, “So you haven’t resigned.
You haven’t returned a single nickel of your personal earnings. You haven’t fired a
single senior executive. Instead, evidently, your definition of accountable is to push the
blame to your low-level employees who don’t have the money for a fancy PR firm to
defend themselves. It’s gutless leadership.”3
The Senate Banking Committee hearing followed imposition of fines on Wells
Fargo on September 8, 2016 by the Consumer Financial Protection Bureau ($100
million), the Los Angeles City Attorney ($50 million) and the Office of the Comptroller
of the Currency ($35 million). The reason for the fines (totaling $185 million) was that
the Bank had allegedly opened over two million unauthorized checking and credit card
accounts without the consent of the customers between May 2011 and July 2015. Wells
Fargo settled with the regulatory agencies without admitting or denying the alleged
misconduct.4
The hearing of the House Financial Services Committee5 on September 29, 2016
echoed views expressed in the Senate Banking Committee hearing. Congressman
Gregory Meeks (D-New York) said to Stumpf, “I can’t believe what I’m hearing here.
You’re going to tell me there’s not a problem with the culture” at Wells Fargo. Patrick
McHenry (R-North Carolina) accused Stumpf of being “tone deaf” for how he didn’t
—————————-Copyright © 2017 by Case Research Journal and by Samir Kumar Barua and Mahendra R. Gujarathi. All rights
reserved. The case was prepared by the authors for the sole purpose of providing material for classroom
discussion. It is not intended to illustrate either effective or ineffective handling of a managerial situation. The
authors would like to thank Professors Nader Asgary, Jill Brown, Atul Gupta, Mike Hoffman, and Joseph
Weiss for their comments on earlier drafts of the case. Research and editorial assistance of Richard Garwood,
Megan Pitkin, and Diane Wilson is gratefully acknowledged, and so are the helpful and insightful comments
of three anonymous reviewers and the editor John Lawrence.
Wells Fargo: Setting the Stagecoach Thundering Again
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grasp the impact the scandal could have on societal trust in the banking system. Stumpf
was clearly on the defensive as he confirmed that Wells Fargo had fired 5,300
employees in the last five years and that customers had been refunded $2.6 million of
the wrongfully charged fees. However, he insisted: “We never directed nor wanted our
employees, whom we refer to as team members, to provide products and services to
customers they did not want or need.”6
Under relentless criticism, Stumpf revealed to the House Financial Services
Committee that he had recommended that Wells Fargo’s board rescind $41 million of
unvested stock awarded to him, and $19 million to Carrie Tolstedt, who led the bank’s
community banking unit where the wrongful sales practices (aggressive “cross-selling”
of products without customer authorization) occurred.7 Would that be an adequate
atonement for what had transpired under their watch at Wells Fargo? “You have
broken long-standing ethical standards inside the company. How can you rebuild
trust?” asked Congressman Patrick McHenry (R-North Carolina).8
EVOLUTION OF WELLS FARGO
Wells, Fargo and Company was founded on March 18, 1852 by Henry Wells and
William Fargo. It began by offering banking and express services in California. Over
the years, Wells Fargo got indelibly linked with the striking image of a stagecoach drawn
by six thundering stallions. In 1857, it formed an Overland Mail Company to deliver
mail using its stagecoach network. In 1905, Wells Fargo established banking as a
separate business. The Bank survived the Great Depression as well as the difficult
period of World War II.9 The prosperity of the 1960s saw the Bank emerge as a major
regional bank in the western part of the U.S. By the 1980s, when it started its online
banking service, Wells Fargo had become one of the top ten banks in the U.S.
The Bank weathered the financial crisis of 2007-08 relatively unscathed. In fact,
Wells Fargo used it as an opportunity to grow inorganically, by acquiring Wachovia,
another bank which was facing unprecedented financial troubles as a result of the
mortgage crisis. On October 3, 2008, in a dramatic takeover battle, Wells Fargo
triumphed over Citigroup to acquire Wachovia for $15.1 billion. The acquisition
allowed Wells Fargo to double the number of its branches, and more than double its
total deposits. Wachovia’s extensive retail network in the eastern U.S. complemented
Wells Fargo’s presence primarily in the western U.S., and allowed it to become North
America’s most extensive distribution network for financial services. In a conference
call10 announcing the acquisition of Wachovia, Richard Kovacevich, the then chairman
of the board of Wells Fargo said, “Wachovia’s number one industry position in service
with Wells Fargo’s number one ranking in sales and cross-selling is unbeatable. But,
most importantly our competitive advantage is our people. We share a common culture
with strong ethical values of doing what’s right.”11 Although the Wachovia acquisition
was completed by December 31, 2008, it took three years to fully integrate the
operations of Wells Fargo and Wachovia.
By the end of 2015, Wells Fargo had become a diversified banking and financial
services company with assets of over $1.8 trillion and approximately 265,000
employees. It provided banking, insurance, investments, mortgages, consumer and
commercial finance through 8,700 locations, 13,000 ATMs, and internet and mobile
banking. Wells Fargo’s vision and values statement12 in 2015 alluded to the size and
scope of its activities:
“We’ve become one of the nation’s largest financial institutions, serving one
in three U.S. households and employing approximately one in 600 working
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Americans. We have team members in 36 countries, serving 70 million
customers in more than 130 countries around the world. Forbes magazine
ranks us among the top 10 publicly traded companies in the world based on
a composite of sales, assets, profits, and market value.”13
The three major, fairly autonomous, segments of Wells Fargo’s business in 2015
were: Community Banking, Wholesale Banking, and Wealth and Investment
Management. The Community Banking Division offered a complete suite of diversified
financial products and services to consumers and small businesses with annual sales of
up to $5 million. Its loan products included lines of credit, automobile inventory
financing, equity lines, equipment loans, education loans, residential mortgage loans
and credit cards. Consumer and business deposit products include checking accounts,
savings deposits, money market accounts, Individual Retirement Accounts, time
deposits, global remittance, and debit cards. The Wholesale Banking Division provided
financial solutions to businesses with annual sales exceeding $5 million. It provided a
complete line of business banking, commercial, corporate, capital markets, cash
management and real estate banking products and services. These included traditional
commercial loans and lines of credit, letters of credit, asset-based lending, equipment
leasing, international trade facilities, trade financing, collection services, foreign
exchange services, and treasury management. The Wealth and Investment Management
Division provided a full range of personalized wealth management, investment, and
retirement products and services. It also delivered financial planning, private banking,
credit, investment management and fiduciary services to high-net worth and ultra-highnet worth individuals and families.
FINANCIAL PERFORMANCE,
STOCK RETURNS, AND EXECUTIVE COMPENSATION
The financial performance of Wells Fargo for six years (2010-2015) is presented in
Exhibit 1. During this period, although its net revenues did not change much, Wells
Fargo’s assets grew by 46% and net income by over 85%. By early 2015, it had posted
18 consecutive quarters of profit growth. Wells Fargo performed better than its
competitors. As can be seen in Exhibit 2, compared to Bank of America, J. P. Morgan
Chase and Goldman Sachs, Wells Fargo’s Return on Assets (ROA) as well as the
Return on Equity (ROE) were higher in most years. Historically, its efficiency ratio –
the cost incurred to generate a dollar of revenue – had also been low. In Q1 of 2016,
while the Bank’s efficiency ratio was 58.7%, that of JPMorgan, Citigroup, and Bank of
America was 60.5%, 61.4%, and 75.9%, respectively.14
Of the three major segments of business, Community (i.e., Retail) banking
contributed most to the revenues, operating income and net income of Wells Fargo
(see Exhibit 3). In 2015, the Community Banking division contributed 57% of the
revenues, 59% of operating income and net income, and 51% of the total assets of
Wells Fargo. In his letter to the stockholders in the 2015 annual report, Stumpf said,
“Our time-tested business model – which produced a balanced mix of net interest
income and noninterest income across more than 90 businesses – allowed us to deliver
consistent performance despite the challenging environment.”15
Wells Fargo’s financial performance was reflected in the increase in its stock price.
In July 2015, with market capitalization of about $300 billion, Wells Fargo became the
most valuable bank in the world. Its stock outperformed the broader benchmark KBW
NASDAQ Bank Index (BKX) consisting of about 24 leading national and regional
Wells Fargo: Setting the Stagecoach Thundering Again
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banks. An investment of $100 in the Bank’s stock at the end of 2009 would have
fetched $230 by the end of December 2015, earning investors a compounded annual
return of 12.4% over the six-year period. For the same period, an investment of $100
in the Bank Index, BKX would have netted investors $171, a compounded annual
return of only 9.4%.16 Wells Fargo stock had also outperformed the broader stock
market index over longer periods of time. For the decade ending December 2015, its
stock yielded a 14.3% compounded annual return to the stockholders compared with
the 7.3% for S&P 500 index.
The impressive financial and stock performance of Wells Fargo was reflected in
the compensation packages given to its senior management. The Human Resources
Committee (HRC) of the Board took into account the Bank’s financial performance
(including comparison with peers), progress on strategic priorities, strong and effective
leadership, business line performance (for business line leaders), proactive assessment
and management of risks, and independent compensation consultant’s advice in
determining executive compensation.17 In 2015, Stumpf (CEO and Chairman) and
Tolstedt (head of community banking) received total compensation of $19.3 million
and $9.1 million, respectively.
Wells Fargo’s exceptional performance stemmed, in part, from its success in crossselling. In the Senate hearings, Senator Elizabeth Warren (D-Mass.) referred to a
sample of reports from stock analysts, all recommending a buy on Wells Fargo stock
because of the strong cross-sell numbers year after year. The senator noted that Ms.
Tolstedt received more than $20 million in annual bonuses during 2010 to 2015,
“justified by the company in certain instances because of the ‘strong cross-sell ratios’
in her division. That is a direct reference to the extraordinary number of accounts
created by her division, many of which were never authorized by customers.”18
WELLS FARGO’S VISION, VALUES AND CODE OF ETHICS
The vision of Wells Fargo was enunciated on its website as follows:
“We aspire to create deep and enduring relationships with our customers by
providing them with an exceptional experience and by discovering their needs
and delivering the most relevant products, services, advice, and guidance.”19
The five primary values that defined the foundation for Wells Fargo’s actions were
described as follows:
“First, we value and support our people as a competitive advantage and strive
to attract, develop, retain and motivate the most talented people we can find.
Second, we strive for the highest ethical standards with our team members,
our customers, our communities and our shareholders. Third, with respect to
our customers, we strive to base our decisions and actions on what is right for
them in everything we do. Fourth, for team members we strive to build and
sustain a diverse and inclusive culture – one where they feel valued and
respected for who they are as well as for the skills and experiences they bring
to our company. Fifth, we also look to each of our team members to be leaders
in establishing, sharing and communicating our vision. In addition to our five
primary values, one of our key day-to-day priorities is to make risk
management a competitive advantage by working hard to ensure appropriate
controls are in place to reduce risks to our customers, maintain and increase
our competitive market position, and protect Wells Fargo’s long-term safety,
soundness and reputation.”20
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Wells Fargo’s Code of Ethics and Business Conduct21 reiterated the employee
responsibility to protect the reputation and integrity of Wells Fargo and asked them to
contact their manager, HR advisor, or Office of Global Ethics and Integrity for help.
Employees could also report any concern regarding accounting, internal accounting
controls and auditing matters directly to the Audit and Examinations Committee of
the Board, and could call the Bank’s ethics hotline (called “EthicsLine”) if “you see or
suspect illegal or unethical behavior involving Wells Fargo”22 The Bank’s Code of
Ethics and Business Conduct not only described the importance of ethical behavior
but also provided a systematic approach for employees when faced with an ethical
dilemma (see Exhibit 4).
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE23
In 2016, Wells Fargo’s Board of Directors consisted of 15 directors. Except for John
Stumpf, every board member was an independent director as defined by the rules of
the New York Stock Exchange (NYSE). All standing committees of the Board,
including the Human Resources Committee (HRC) that determined the compensation
of senior executives, consisted solely of independent directors. The Board had also
adopted Wells Fargo’s Codes of Ethics for its members. In 2016, NYSE Governance
Services, a subsidiary of New York Stock Exchange, bestowed the Best Board Diversity
Initiative Award on Wells Fargo in recognition of the wide breadth of experience,
industry, age, ethnicity, and gender the Board possessed. In view of the financial
performance of the Bank and of Wells Fargo’s stock, the shareholders approved
generous compensation to the Board of Directors. For 2015, the compensation to
board members consisting of cash and stock awards ranged from $279,027 to
$402,027.24
The offices of the Chairman of the Board and the Chief Executive Officer were
combined, with Mr. Stumpf serving as Chairman and CEO. On several occasions,
including the 2016 proxy statement, shareholders had proposed a separation of the role
of CEO and Chairman of the Board. The justifications for the proposal included: (a)
the worldwide trend of separating the positions of Chairman and CEO of companies,
(b) weakening of leadership due to over-extension of duties that may result in
inadequate oversight and (c) fundamental differences between the roles of Chairman
and CEO and therefore the incongruity if the positions were held by one person. The
Board advised the shareholders to vote against the proposal by arguing that the Bank’s
governance structure was working effectively, and that the Board’s Lead Director
provided effective independent oversight of management and Board accountability and
responsiveness to shareholders. The Board also pointed out that such a proposal had
been rejected by the shareholders eleven times in succession already. The Proxy
Statements of the Bank from 2012-2016, which included some proposals pertaining to
the efficacy of internal controls at the Bank, reveal that the Board advised to vote
against every proposal from the shareholders in every year because (a) the changes
required in the proposals were considered unnecessary and (b) the policies and
practices of the Bank were robust and were reviewed and monitored adequately.
JOHN STUMPF, CHAIRMAN AND CEO25
Life for John Gerard Stumpf, who received several accolades, such as inclusion in
Bloomberg’s list of 50 Most Influential Business people in 2012, and Banker of the
Wells Fargo: Setting the Stagecoach Thundering Again
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Year in 2013, started rather modestly. Born on September 15, 1953, he grew up as one
of eleven children on a dairy and poultry farm in Minnesota. Stumpf would rise at 4:30
a.m. to collect eggs and would milk cows after school. “Even though we were very
poor financially we learned the value of plural pronouns—us, we and ours,” said
Stumpf. “There wasn’t a lot of time for I, me and my.” 26 Mediocre grades and limited
family finances required Stumpf to work as a bread-maker while getting a bachelor’s
degree in finance from St. Cloud State University. After graduation, he worked as
a repossession agent at First Bank in St. Paul, Minnesota before completing an MBA
degree in finance from the Carlson School of Management at the University of
Minnesota.
In 1982, Stumpf joined Northwestern National Bank where he held a number of
management positions before assuming responsibility for Norwest Bank Arizona in
1989. He became regional president for Norwest Banks in Colorado and Arizona in
1991. During the four years (1994-98) in which he was regional president for Norwest
Bank Texas, he led Norwest’s acquisition of 30 Texas banks with total assets of more
than $13 billion. In 1998, following the merger of Norwest Corporation with Wells
Fargo, Stumpf became head of the combined entity – Southwestern Banking Gr…
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