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Follow-up on Wells Fargo Scandal

May 2, 2017

The recent Wells Fargo scandal involved more than two million fake accounts that employees opened for customers without first obtaining their permission. This was done in efforts to drive up “cross-selling” of complementary retail banking products to customers and artificially boost sales numbers. A root cause of the problem was an overall culture of high-pressure sales tactics from management to employees, combined with a lack of accountability up and down the chain.

Effects of the Scandal on Wells Fargo

After several investigations, the company paid $185 million in fees to federal and California authorities. They will also be paying $110 million in order to settle a class action suit concerning the fraudulent accounts. After attorney’s fees, the settlement amount will first cover out-of-pocket losses or fees that customers incurred in connection with unauthorized accounts. The remaining amounts will be split among other affected customers. Company revenues have also dropped $200 million from the previous year. 

Wells Fargo also disclosed that its ratings had been downgraded by a federal regulator from “outstanding” to “needs to improve” under the Community Reinvestment Act. This law is designed to help monitor banking practices in low-income and minority communities. The Office of the Comptroller of the Currency has cited the faulty sales practices as a main catalyst for the downgrade. As a result of the downgrade, Wells Fargo needs to receive prior regulatory approval for various activities, including prepaying debts, opening/relocating branches, or making certain types of investments. 

Wells Fargo is also waiving its right to take customers into third-party arbitration, a practice which has previously been a source of controversy for the company. Until recently, the company had been seeking to invoke its right to arbitration for these matters. 

Possible Fixes

The question remains as to whether Wells Fargo has begun implementing satisfactory fixes for the conditions and factors that led to and supported the scandal. On April 10, the company released findings from an independent investigation regarding the fraudulent retail banking practices and other related matters. 

In essence, the investigation identified cultural, structural, and leadership issues as the root cause of the improper practices. The bank’s sales culture and performance management systems were particularly at fault here, as were the decentralized corporate structure, which granted too much authority to the bank’s senior leadership without the necessary oversights. Recognition of these factors is a crucial starting point for the company’s rebound. 

In response to the situation, Wells Fargo claims it has taken “several steps” to strengthen their merchant services, including:

  • Creation of an Office of Ethics, Oversight and Integrity
  • Elimination of product sales goals for retail banking staffers
  • Adjustments to the compensation structure within merchant services
  • Exploration of avenues for making merchant services simpler for customers
  • Termination of various directors and executives and slashing of executive bonuses

Even with these steps in place, some feel that directors should be more personally responsible to shareholders for the fines paid to regulators. The full 110-page report on the findings from the investigation can be found here

Wells Fargo Shareholders Vote to Keep Current Board

At Wells Fargo’s annual shareholder meeting on April 25, voting shareholders opted to keep all 15 of the bank’s current directors for another year term. However, only three directors received more than 90 percent support from voters. Some received support as low as 54 and 53 percent, which is essentially unprecedented for an S&P 500 company (director support for such companies usually measures around 95 percent). These percentages represent a clear expression of investor frustration and a call for changes in the board’s makeup.  

In addition, the meeting ran nearly three hours and was intermittently interrupted by shareholders voicing their opinions and asking questions regarding the board’s awareness of the situation. Half a dozen stockholder proposals failed to obtain majority support in the preliminary vote tallies. Some proposals included a request for a new report regarding root causes of the scandal and disclosure of the bank’s lobbying policies. 

Moving Forward

While it appears that Wells Fargo has begun instituting some changes, most of these are essentially clean-up of the direct effects of the scandal. If Wells Fargo is to regain the trust and loyalty of shareholders, employees, and customers, it needs to ensure that it has forward-looking governance policies that help to prevent future occurrences of such issues. 

Thus, the ongoing challenges that Wells Fargo face demonstrate the importance of transparency, accountability, and sound corporate governance policy. Wells Fargo’s ability to rebound effectively from its current struggles will depend largely on the way that the current board approaches matters moving forward. If you have any questions or inquiries regarding governance practices, shareholder engagement, and other important issues, contact us today at Kessler Topaz. As a leading U.S. firm representing shareholders in securities class actions, we have extensive experience in using the courts to achieve significant governance reform.