Next Tuesday, April 25 is a fateful day for the board of directors of Wells Fargo.
That’s the date set for the company’s annual shareholder meeting in Ponte Vedra Beach, Florida. Due to recommendations to vote against most of Wells’ board members by two shareholder advisory services – ISS and Glass Lewis – shareholders will have to decide whether to support the Wells Fargo board in its efforts to overcome fraudulent actions in its community banking division, or to reject their reelection.
My recommendation is to reelect the Wells Fargo board members, trusting them to continue restoring the bank to its former position of integrity and commercial success. Here’s why:
Since the board became fully aware of what happened in Wells’ community banking division six months ago, it has stepped up to its responsibilities with a series of aggressive actions, both to punish the wrongdoers and to rebuild its culture with new leadership.
As a Wells Fargo customer since 1970, I was shocked by last fall’s revelations that 5,300 Wells employees had been terminated for establishing 2.1 million false accounts for unsuspecting customers. Until then, I viewed Wells Fargo as the role model commercial bank. Even more unsettling was the way former CEO John Stumpf blamed first-line employees for the problems, saying, “If they're not going to do the thing that we ask them to do—put customers first, honor our vision and values—I don't want them here." Meanwhile, he continued to protect community banking head Carrie Tolstedt, praising her as “a standard-bearer of our culture” and “a champion for our customers.” Blaming people making $12-14 per hour for such widespread fraud was preposterous. Meanwhile, Tolstedt walked away with a $125 million “retirement” payout.
The Board Wheels into Action
There was a public uproar when these misdeeds were announced, followed by Stumpf’s disastrous performance before the Senate Banking Committee. It was then that the Wells Fargo board realized Stumpf and Tolstedt had misled the board, so it belatedly wheeled into action. It terminated Stumpf immediately, replacing him with chief operating officer Tim Sloan and appointing Mary Mack as head of community banking. Later, it revoked Tolstedt’s retirement and terminated her for cause. In addition, it “clawed back” $41 million of Stumpf’s compensation, $19 million from Tolstedt, and $48 million from other senior executives – a total of $108 million.
But the board didn’t stop there. It amended its bylaws to require the separation of the roles of chairman and CEO. Former General Mills CEO Steven Sanger, who had been the board’s lead director, stepped up to the chair’s role and Elizabeth Duke, former member of the Federal Reserve Board, became vice chair. It also reorganized its risk and corporate responsibility committees.
The Wells Fargo board then launched a major independent investigation of what had happened, appointing law firm Shearman & Sterling to do the detailed work. The board’s 113-page report, released in its entirety on April 10, 2017, was highly revealing. It pulled no punches in its extreme criticism of Stumpf, Tolstedt, and Wells’ community banking culture. Based on this report, the board extracted an additional $28 million from Stumpf’s compensation and $47 million from Tolstedt, bringing the total clawback to $183 million – the largest such action in U.S. banking history.
The investigation singled out Tolstedt 142 times for creating the wrong culture in her unit and covering up its misdeeds. It noted she intentionally misled the Wells board as she “minimized and understated problems,” saying only 230 of her employees had been terminated when the regulatory settlement acknowledged the actual number was 5,300 employees. When Tolstedt began reporting to Sloan in late 2015, he wanted to terminate her, but Stumpf refused, saying she was “the best banker in America.” Lead director Sanger and other board members also pushed unsuccessfully for her removal at that time.
How could things have gone so awry at Wells Fargo with the controls placed on large banks by the Federal Reserve and other regulators? Stumpf seems to have disengaged from the day-to-day conduct of bank affairs. He clearly had a blind spot regarding Tolstedt, giving her far too much latitude in Wells’ decentralized structure. According to the board report, she ran her unit in an “insular and defensive” way, not letting corporate officials examine what was going on. As some former employees have alleged, Wells’ community banking had a “soul-crushing” culture of fear and daily intimidation. When alerted to the sales fraud, Stumpf refused to believe Tolstedt’s business model was seriously impaired and that the fraud could be systemic. He actively discouraged critical feedback from his subordinates, as he continued to tout Wells’ “culture of caring.”
How Could the Board Not Know Wells Was So Far Off Track?
Given the extent of wrongdoing, how could the board not have seen what was going on? In retrospect, it is clear that both Stumpf and Tolstedt were actively misleading the board until the blowup occurred in 2016. As the board’s report noted, “the Board should have been more forceful in pushing Stumpf to change leadership.”
However, I strongly disagree with ISS’s and Glass Lewis’s recommendations to get rid of the board members who are solving the problems, namely chairman Sanger and the bulk of the board. When there is blood in the water, count on these sharks to attack because they have nothing to lose. It is an easy shot for these two advisory firms – neither of which holds shares in Wells Fargo – to recommend against the board, but doing so would ignore and punish the board’s aggressive actions since the debacle became public.
While I am critical of Wells’ board for not acting earlier, it has taken more aggressive action than any commercial bank to correct its problems – actions for which it should be applauded, not attacked. Having served on 10 corporate boards including Goldman Sachs, I know just how difficult it is to know what is going on in the trenches. Board members are dependent on the veracity and transparency of their chief executives and their subordinates. In the Wells Fargo case, they were sorely misled.
Many other boards would have “circled the wagons” and used lawyers to protect and defend themselves. Not the Wells board. That is thanks to the leadership of chairman Sanger and CEO Sloan, who showed their confidence in Wells Fargo by purchasing $3 million and $2 million, respectively, of Wells Fargo stock last week. They are moving as aggressively as they can to solve the cultural problems in community banking with an entirely new management team, revised sales incentives, and centralized risk processes. While this is a work-in-progress – organizations with 268,000 employees don’t turn around overnight – their intentions are clear and their progress in the last six months is very noteworthy.
For these reasons, I recommend that Wells’ shareholders give its board members a vote of confidence next Tuesday by reelecting all of them.
Bill George is Senior Fellow at Harvard Business School, former Chair & CEO of Medtronic, and author of Discover Your True North. He serves on the boards of Goldman Sachs and Mayo Clinic. He has no connection with Wells Fargo other than as a customer.