Wells Fargo’s board clawed back an additional $75 million in stock awards from the bank’s former CEO and community banking head, as it released a report Monday blaming a massive sales scandal largely on a few top leaders who have already left the bank.
In its 113-page report, the board said the scandal stemmed from the bank’s sales culture and a decentralized corporate structure that gave too much authority to leaders in the community banking unit where the improper behavior took place.
Management was also slow to inform the board about the serious nature of the problem, including the firing of thousands of lower-level employees over sales practices, the report said.
The board has now taken back about $180 million in compensation from senior leaders and terminated five community banking executives, including the former head of the business, Carrie Tolstedt. The directors do not plan any further firings or clawbacks, board chairman Stephen Sanger said in a conference call with reporters Monday.
The report is the latest effort by the San Francisco-based bank to eradicate a sales culture that for years pushed employees to allegedly open millions of fake accounts to meet aggressive sales goals. In September, Wells Fargo agreed to pay $185 million in fines over the scandal, which has tarnished the bank’s reputation, led to former CEO John Stumpf’s exit and spurred multiple investigations.
The findings come about two weeks before the bank’s annual shareholder meeting on April 25, where all 15 directors will be up for re-election and executives are likely to face tough questions from investors.
Dennis Kelleher, CEO of Better Markets, called the board’s investigation and actions “grossly deficient,” urging shareholders to vote against all of the directors at the shareholder meeting.
“It is laughable to claim that only two senior executives should be terminated and meaningfully held accountable,” said Kelleher, whose group advocates for financial reform. “It is clear that the board was seriously and repeatedly misled by numerous officers, including a number who remain in senior positions at the bank.”
In the conference call with reporters, Sanger said the board “took the appropriate action with the information it had when it had it.” He acknowledged the board could have pushed more quickly for action, including the centralization of risk and human resources functions that could have helped identify the problem earlier.
The investigation was conducted by the board’s independent directors, with help from law firm Shearman & Sterling. The law firm conducted 100 interviews of current and former employees and other parties and searched more than 35 million documents. Stumpf, who was replaced by Tim Sloan last fall, gave an interview, but Tolstedt declined.
The board said the report was not shared with bank management until Saturday. The company, which has its biggest employment hub in Charlotte, cooperated by providing witnesses, documents and other information.
In a statement, Sloan said the bank accepts the board’s findings “as a critical part of our journey to rebuild trust.” He called the report an “important opportunity” to learn from the company’s mistakes and make improvements.
Wells Fargo’s sales culture was deeply rooted, with Stumpf and his predecessor, Dick Kovacevich, long in favor of cross-selling multiple products to consumers, the report says. As far back as 2002, the bank recognized an increase in sales practice violations and created a task force to promote training and to modify incentive programs.
Tolstedt rose to head of the community bank in 2007 and was held in high regard by Stumpf, who called her the “most brilliant” community banker he ever met, the report says.
But when questions arose about sales practices, Tolstedt “resisted and impeded scrutiny” from the bank’s risk management staff and the board, while minimizing the scale of the problem, according to the report. And Stumpf was too slow to investigate and did not appreciate the seriousness of the reputational damage to the bank, it added.
The report said management did not identify sales practices as a “noteworthy risk” to the board until 2014 – after a 2013 Los Angeles Times story on the issue. By early 2015, management told the board that corrective actions were working, the report says.
The board was “regularly engaged” on the issue in 2015 and 2016, but management did not “accurately convey the scope of the problem,” according to the report. The board did not learn that 5,300 employees had been terminated over sales practices until the settlement was reached in September 2016 with the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the Los Angeles City Attorney, the report says.
Even in 2015 and 2016, Stumpf continued to say that the bank’s sales goals were appropriate, the report says. After the Los Angeles City Attorney filed a suit over the bank’s sales practices in May 2015, he sent an email to Sloan vowing to fight.
“I have worked over the weekend with Carrie on the LA issue – I really feel for Carrie and her team,” he wrote. “We do such a good job in this area. I will fight this one to the finish.”
Stumpf added: “Did some do things wrong – you bet and that is called life. This is not systemic.”
The report said that Stumpf was hesitant to criticize Tolstedt and to let her go even after Sanger and another director urged him to do so in December 2015.
After his promotion to president in November 2015, Sloan discussed with Tolstedt that “she needed to be more open to change and to resolve the sales practice issues quickly,” the report says. In July 2016, he informed her that she no longer would lead the community bank and would retire, the report says.
Enu Mainigi, a Williams & Connolly attorney representing Tolstedt, issued a statement Monday that said: “We strongly disagree with the report, and its attempt to lay blame with Ms. Tolstedt. A full and fair examination of the facts will produce a different conclusion.”
Support for management
The $180 million in compensation taken back from executives includes $69 million from Stumpf and $67 million from Tolstedt. It’s not clear, however, how much in compensation they were allowed to keep after collecting millions in salary, bonus and stock awards during their lengthy Wells Fargo careers.
In the call with reporters, Sanger highlighted other actions taken by the bank, including the elimination of the sales goals that helped produce the scandal. He also expressed support for current management.
According to the report, current CEO Sloan had little involvement in sales practice matters in previous jobs as chief financial officer and head of the wholesale bank. However, he had heard complaints that Tolstedt was “a controlling manager who was not open to criticism,” the report says.
While the bank has terminated five community bank executives, two leaders referenced in the report are still with the bank.
John Sotoodeh, a former Los Angeles regional president, “displayed a high-pressure management style” but “made significant attempts to improve the sales culture” in the city, according to the report. His supervisor, then California Regional President Lisa Stevens, was also responsible for “areas with significant sales practice issues” but later discussed concerns about sales practices with Chief Risk Officer Michael Loughlin.
Sotoodeh currently leads the bank’s Desert Mountain region, reporting to Stevens, who heads the bank’s Western region, according to a reorganization announced in March by Charlotte-based executive Mary Mack, who replaced Tolstedt as head of the community bank.
In a conference call with reporters Monday, Sloan said the report fairly describes the roles of Stevens and Sotoodeh and that he looks forward to continuing to work with them. He said the bank has terminated additional leaders beyond the five referenced by the board, but didn’t provide details.
“There is not another large shoe to drop,” he said.
Sloan also said the bank has hired back more than 1,000 former employees, some of whom left the bank because they were uncomfortable with the sales culture or dismissed because they did not meet sales goals. “We’ll continue to do that,” he said.
The board is under pressure to show that it’s acting decisively. Last week, influential proxy advisory firm Institutional Shareholder Services urged shareholders to vote against the election of 12 of the 15 board members at the upcoming annual meeting, including Sanger. Another advisory firm, Glass Lewis, suggested shareholders vote against six directors, including four who sat on the corporate responsibility committee.