Monday’s release of a 113-page report examining the Wells Fargo sales scandal is an important step in the bank’s efforts to learn from the ordeal and start anew. But by heaping most of the blame and punishment on two people who are no longer with the company, the board of directors minimizes its own role and hinders a complete resolution.
The report was produced by the independent directors themselves (with help from a New York law firm). So perhaps it is not surprising that the board is largely portrayed as having been left out of the loop through no fault of its own. As a result, though, it will be difficult for customers, employees and shareholders to believe the bank fully owns its misconduct.
The directors’ probe says the root of the problem was a decentralized structure that empowered individual executives such as community banking leader Carrie Tolstedt to operate unchecked. Once problems surfaced, executives were slow to respond and Tolstedt and other leaders understated to the board the degree of risk and problems, the report says.
The board, however, should have been more vigilant long before Tolstedt downplayed problems at an October 2015 board meeting. Nearly two years earlier, on Dec. 1, 2013, Los Angeles Times reporter Scott Reckard published a 2,000-word article detailing the creation of fake accounts and describing the enormous pressure low-level employees were under to hit impossible sales goals.
His reporting clearly described a wide-ranging problem with significant risk. Yet in the years following, the board failed to push hard enough to rectify the situation. That, in the end, caused much worse damage to Wells’ reputation than might have been.
The directors do admit some fault in Monday’s report. They say:
▪ The board should have moved toward centralization of the risk function earlier than it did.
▪ Reports to the board lacked specificity, plans to fix the problem and ways to measure performance. The board “should have insisted on more detailed and concrete plans, a practice initiated this year.”
▪ The board should have been more forceful in pushing then CEO John Stumpf to fire Tolstedt in 2015.
Two shareholder advisory firms are urging shareholders to vote against the reelection of some or all directors at the bank’s April 25 board meeting in Florida. Institutional Shareholder Services recommends a vote against all 12 longer-serving directors. Glass Lewis urges a vote against six.
The bank has taken a series of steps to address the scandal, including ousting Stumpf, Tolstedt and a handful of other regional executives and clawing back $180 million in executive compensation.
But directors make more than $300,000 a year and their most important job may be to identify and address risk to the bank. Their failure, particularly those on the corporate responsibility committee, to do so devastated the bank. It’s hard to see how it opens its next chapter effectively with them still at the helm.