Today we continue to examine the misconduct at Wells Fargo by examining the failures of leadership that allowed its unauthorized accounts scandal to happen. After all, poor leadership is the sort of dysfunction that could happen at any company, so what happened here is important to understand.
In our first post about Wells Fargo earlier this week, we looked at flaws in the bank’s strategy that slowly, inexorably peeled company behavior away from its values and mission statement. That tension is inherent in almost any company. The key to keeping the tension in check — to keeping corporate behavior in alignment with ethics and values, rather than giving way to greed and profit demands — is strong commitment from leadership.
So how did the leadership fail at Wells Fargo?
The Justice Department’s statement of facts paints an unflattering picture of Carrie Tolstedt, head of Wells Fargo’s community banking division from 2007 to 2016, when the abusive sales practices and unauthorized accounts scandal reached their zenith. Tolstedt left Wells Fargo in 2016 just before regulators took their first big sanction against the bank, and the Office of the Comptroller of the Currency filed civil charges against her in January.
For example, in 2010 Tolstedt (dubbed “Executive A” in the Justice Department statement) told participants at an Investors Day conference that “our cross-sell focus starts with customer needs.” At another Investors Day conference in 2016 she said: “As we think about products per household or cross-sell, the first thing we anchor ourselves on is our vision of satisfying our customers’ needs.”
Those were Tolstedt’s statements to the public, to sing a song about how much Wells Fargo valued the well-being of its customers. Meanwhile, as the Justice Department said:
From at least as early as 2002 to approximately 2013, Community Bank leadership, including [Tolstedt], directly and/or indirectly encouraged, caused, and approved sales plans that called for aggressive annual growth in a number of basic banking products, such as checking and savings accounts, debit cards, credit cards, and bill pay accounts…
Throughout the Community Bank, managers responded to the increasing difficulty of growing sales by exerting extreme pressure on subordinates to achieve sales goals, including explicitly directing and/or implicitly encouraging employees to engage in various forms of unlawful and unethical conduct to meet increasing sales goals.
One might fairly ask — um, where was the board and Wells Fargo’s CEO during all this? Tolstedt ran regional banking from 2002 to 2007, and then community banking from 2007 to 2016, and all this misconduct happened under her watch for years. Was anyone watching her?
Well, as the Justice Department also stated: Tolstedt and other senior executives in the community banking division “gave assurances to the company’s management and board of directors that minimized the scope of the sales practices problem, and led key gatekeepers to believe the root cause of the issue was individual misconduct rather than the sales model itself.”
Yes, Blame the Board
I keep coming back to that accusation — that Tolstedt and others blew smoke up the board’s backside, so corporate directors wouldn’t give sufficient scrutiny to what was really happening at the bank — because I hear that complaint from compliance and audit professionals all the time.
The board didn’t know what was going on. And therefore it couldn’t maintain the proper balance over that fundamental tension we mentioned earlier, between lofty ethical values on one side and grubby business practices on the other.
Just last week I received an email from an internal audit executive who accepted a job, and soon discovered that the company’s financial controls had more holes than a wheel of Swiss cheese. When he tried to bring those concerns to the board, the audit committee sided with management and the internal auditor was muscled out of his job.
As this person told me: “Many board members are only from investment banking (and related fields) who have never spent a day in compliance or risk, or audit (internal and external), not even financial reporting. They are clueless about what management is truly doing behind the scenes.”
Sound familiar? It does to me.
That’s the second deep lesson we can take away from Wells Fargo: board members must take their duties to oversee culture seriously, because in-house executives are always tempted to pursue business performance at the expense of good business conduct — and in the final analysis, the board and CEO are responsible for keeping those base impulses in check.
None of that is to excuse Tolstedt from the allegations against her, which are egregious. We can say the same for everyone else at Wells Fargo charged by the OCC: the bank’s former general counsel and former chief auditor; plus the former chief risk officer and executive auditor for the community bank division that Tolstedt ran.
The charges against those executives, detailed in a 100-page filing from OCC, sound terrible. The OCC accuses all four of acting hapless, helpless, complicit, or all three; as Tolstedt kept up the pressure for impossibly high sales goals that drove so many employees to abusive sales practices.
We can dive into the specific allegations against Wells Fargo executives some other day, and frankly, the specifics of how a mega-bank misleads its customers and investors might not be applicable to your company and its own travails.
The tension between desire for growth and ethical business conduct, on the other hand — that’s universal. Compliance and audit functions are the instruments to keep that tension in check, and to warn senior executives when it isn’t.
But your programs are only instruments to get that job done. The determination to do it, and to make doing it a priority, comes from savvy board directors and CEOs who have a strong ethical backbone and a nose for management baloney. That’s where Wells Fargo failed.