Will Wells Fargo’s board reclaim executives’ pay over accounts scandal?

Wells Fargo’s board is under an increasingly bright spotlight, as it determines whether to withhold bonuses for CEO John Stumpf and a top executive who ran a unit under fire for an unauthorized accounts scandal.

During a Senate hearing Tuesday on Wells Fargo’s sales practices, lawmakers hammered Stumpf on whether the bank will reclaim any pay awarded to him and other executives after the bank paid $185 million in fines to settle claims that employees secretly opened accounts for customers in order to meet aggressive sales goals.

Stumpf repeatedly deferred to the board on the question, agitating some senators pressing for his opinion on whether the executives should forfeit money.

The Wells Fargo board faces a unique challenge because it has been identified as part of the problem. The Office of the Comptroller of the Currency, in its prepared remarks to the Senate Banking Committee, noted that it had engaged with senior bank leaders for roughly five years over a range of risk-management and oversight issues.

Stumpf said at Tuesday’s hearing that he first learned of the fraudulent accounts in 2013 and that the board knew about the issue in late 2013 or 2014.

“The board is going to have to figure out, ultimately, who is responsible for this,” said Charles Elson, an authority on corporate governance and a professor at the University of Delaware. “The board is going to have to decide what’s the penalty. Somebody at the highest level of management is going to have to be accountable.”

Under harsh questioning about stock options, employee bonuses and his own compensation, Stumpf repeatedly told Congress he would recuse himself from board deliberations on the matter, even though he is chairman of the board of directors.

Since Tuesday’s hearing, Wells Fargo’s board continues to face calls from elected officials on both sides of the aisle to take back pay. Regulators have said the unauthorized account openings dated until at least 2011, resulting in the firing of 5,300 mostly lower-level employees.

“It would be malpractice for Wells Fargo not to claw back pay from executives who were involved,” Tennessee Republican Bob Corker tweeted after Stumpf’s Tuesday testimony to the Senate Banking Committee, on which Corker sits.

On the issue of claw backs, Stumpf told the committee Tuesday the board “has already met” without elaborating. The board has not issued any statements.

Corporate heavyweights

The Wells Fargo board is stacked with political and corporate heavyweights.

Federico Pena, the former transportation secretary and former mayor of Denver, sits on the audit, governance and risk committees among others. Former Labor Secretary Elaine Chao is a member of the finance and credit committees. She is married to Senate Majority Leader Mitch McConnell, R-Ky. Elizabeth Duke, a former Federal Reserve governor and Wachovia executive, sits on the credit, finance and risk committees.

The head of the Audit Committee is corporate heavyweight James Quigley, a CEO emeritus of accounting/consulting giant Deloitte. Given the controversy over bonuses and compensation, the Human Resources Committee is in the spotlight. It is headed by Lloyd Dean, the CEO of Dignity Health, a not-for-profit healthcare company.

Other Human Resources Committee members include John Chen, CEO of Canadian wireless phone company Blackberry; Susan Engel, retired CEO of online retailer Portero; Donald James, retired CEO of construction behemoth Vulcan Materials; and Stephen Sanger, retired chairman of food producer General Mills.

Sanger is arguably the board member under the most scrutiny since he is also the lead director for the Wells Fargo board and heads the Governance Committee. During his tenure at General Mills, he was the target of criticism from health advocates who complained he fought efforts to reduce sugar content in products, especially in junk food. When the New York Stock Exchange proposed in June 2002 having shareholders approve stock compensation plans, Sanger wrote to the exchange president, Richard Grasso, to say that management needed such incentive plans to “align their interest with shareholders.”

Total compensation for the directors’ work on the board in 2015 ranged from $279,027 to $402,027, according to the bank’s March proxy.

Two prominent firms that advise shareholders recommended they vote for all Wells Fargo’s directors when they were up for election this past spring. But both firms also flagged director Susan Swenson for serving on a total of four boards, including Wells Fargo, while also serving since October as CEO of San Diego-based technology company Novatel Wireless.

In its proxy filing, Wells Fargo said Swenson is evaluating a reduction in public company boards on which she serves in light of her CEO appointment. Stumpf serves on the boards of Chevron and retailer Target Corp., the only CEO among the six biggest U.S. banks to sit on boards of other public companies.

One of the proxy firms, Glass Lewis, recommended shareholders back a proposal to split the chairman and CEO role at the bank, but shareholders rejected the measure. A spokesman for the California State Teachers’ Retirement System said Wednesday that it would support a similar proposal at the spring 2017 shareholder meeting.

Board raised pay

Securities filings shows the board’s human resources committee has boosted total compensation each year for the past three years for the executive at the center of the account scandal: former community banking head Carrie Tolstedt, who in July announced plans to retire by the end of this year.

Stumpf disclosed Tuesday that Tolstedt decided to retire after Chief Operating Officer Tim Sloan told her the bank “wanted to go in a different direction” and that she hadn’t made enough progress on the sales practices matter.

Clawing back some of the past compensation for the period of 2011 to 2015 is likely to be prove difficult, said Elson, the corporate governance expert, because generally that happens when there is a restatement of a company’s refinances to effectively redo the accounting.

“Once the money is gone, the question is ultimately can you get it back?” he said, noting that Wells Fargo settled complaints with a penalty and was not required to restate its past earnings. “They settled this case, under what category does it fall under? It’s not a restatement, it’s something else.”

According to its proxy, Wells has “strong recoupment and clawback policies” that are designed to encourage “stable performance” and “discourage our executives from taking imprudent or excessive risks that would adversely impact the company.”

Stumpf could be peppered next week with more questions about the board’s plans to “claw back” executive pay during a House Financial Services Committee hearing. The committee, which launched its own investigation into Wells’ sales practices, has said it plans to call Stumpf to testify at the Sept. 29 hearing. A Wells spokeswoman did not immediately respond to a question about whether Stumpf will attend.

“The issue (on Sept. 29) will be whether the bank has answers on claw backs, bonuses and employment that can satisfy lawmakers,” Cowen and Company analyst Jaret Seiberg wrote in a report Wednesday.

This story was originally published September 21, 2016 at 6:29 PM with the headline "Will Wells Fargo’s board reclaim executives’ pay over accounts scandal?."