Wells Fargo, Part I: How This Happened

Wells Fargo reached a $3 billion settlement with the Justice Department and the Securities and Exchange Commission last week, to resolve civil and criminal charges into its unauthorized account scandal from the 2010s. Let’s take a look, since the facts here are a powerful example of how a company can engineer its culture and operations to run totally counter to the ethical values the company claims to have.

First, for or any compliance officers who just returned from a five-year exile on Mars or something, a recap of what the scandal was. Throughout the 2000s and first half of the 2010s, Wells Fargo executives placed impossibly high sales goals on its community bank employees. So, fearing for their jobs, the employees ended up cheating. 

As the Justice Department’s statement of facts depicts, their abusive sales practices were longstanding and widespread. Employees opened accounts without customer authorization. They forged customer signatures. They falsified documents. They used customers’ personal data improperly and without permission. All of this, to give the appearance that employees were selling more consumer products than they actually were. 

This went on for years. The scandal finally exploded into public view in 2016, when several banking regulators hit Wells Fargo with a $185 million fine. Since then, Wells has fired two CEOs, had its asset level capped by the Federal Reserve, endured myriad hearings in Congress, seen a quarter of its board directors sacked, and spent kingly sums building a new ethics and compliance function. 

Just last month, the Office of the Comptroller of the Currency filed civil charges against five former Wells Fargo executives; and announced a settlement with former CEO John Stumpf where he agreed to pay a $17.5 million penalty and accepted a lifetime ban from banking

Now we have these latest sanctions. The Justice Department imposed $2.5 billion in penalties plus a three-year deferred-prosecution agreement; the SEC tacked on another $500 million in civil penalties.

What are the lessons here? Lots. We can learn things practical around SEC filings, and we can learn things strategic about how a corporate culture can veer away from the company’s supposed ethical values. Today we do the strategic issues. Strap yourselves in.

Setting Up Strategic Flaws

To understand how Wells Fargo fundamentally went astray, you need to know the history here. 

The scandal actually started circa 1998, after Congress deregulated the banking industry. Banks were suddenly able to merge with other financial services firms like broker-dealers or insurance firms, and the thinking was that a bank like Wells could be a one-stop-shop for customers. The dream was that you’d do everything with a bank teller from depositing a paycheck, to doing some stock trading, to buying insurance — plus refinance the mortgage, buy certificates of deposit, and lord knows what else.

That was the environment lawmakers and regulators created, and that’s important to understand because Wells Fargo then adopted a strategy of selling multiple products per person. Wells executives made strategic choices in response to their environment. 

So Wells Fargo began telling investors about that strategy of selling multiple products per customer. Then Wells invented a way to measure its progress on that strategy: the cross-sell metric. 

That’s the first point for compliance and audit professionals to appreciate. Once you decide on strategy and business objectives, you create metrics to chart your progress toward them. 

Everything around your misconduct risk assessment has to start with how that metric could be gamed; and how likely is it that the metric might be gamed?

Because once the company has a metric, it starts tying compensation to employees moving that metric forward. That’s what Wells Fargo did. Pay raises and job security were tied to employees driving up that cross-sell metric, which Wells included in its SEC filings and touted to investors as proof that its strategy was working. 

Wells Fargo Flowchart

The logic chain to assess misconduct risk in strategy.


And thanks to poor leadership, pressure picked up to keep seeing progress on the cross-sell metric, even though specific sales targets were “far too high to be met by selling products that customers actually wanted, needed, or would use,” to use the Justice Department’s words.

We all know what happened next. Wells employees, fearing for their jobs and working under ferocious pressure from managers, began to cheat. 

Um, Whither the Vision and Values?

While all these seeds of destruction were being sown, Wells Fargo was also telling the public that it was a values-based company. For example, in its Vision and Values statement from 2012, the bank said: “We do not view any product in isolation, but as part of a full and long-lasting relationship with a customer and with that customer’s total financial needs. We start with what the customer needs — not with what we want to sell them.”

So how did a pleasant mission statement like that go so wrong? Go back to the strategy. 

If Wells decided to pursue a growth strategy based on cross-selling products, and charted its success based on pushing that cross-sell metric upward, then by definition Wells needed to implement a volume-based sales model — which is opposite of the need-based model cited in the mission statement

That’s how you end up with a company sporting a super-cool mission statement to the public, yet totally ignoring it in practice. When we talk about how strategy and ethical values must align — this is what those words mean, and Wells Fargo is a stellar example of how ethical values and strategy don’t align. 

To be sure, Wells Fargo executives were at fault because they allowed that divergence to happen. Later this week we’ll get into more specific facts and examples about executives misleading the board, misleading investors, piling on the pressure to employees, and whatnot. 

But foremost, consider the original sin here. More than 20 years ago, the regulatory environment for banking changed dramatically. Wells Fargo responded to that change by adopting a growth strategy, complete with flawed metrics and compensation schemes, that was pretty much destined to clash with ethical values rooted in prudence and duty of care. 

And when push came to shove, those crass growth interests pushed aside leadership too weak and too divorced from reality to see the misconduct iceberg looming ahead.

That’s the dynamic compliance professionals should understand here, because that’s the disaster that could strike anyone.

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