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Leadership Matters: What Boards Can Learn from the Wells Fargo Calamity

by Abby Adlerman and Kaitlin Quistgaard

We’re living in times when what we say and what we do matters. We want our leaders to be role models. And no leadership role is more important or influential in the corporate world than that of the board.  Thus, the bar for boards is high and getting higher.  Given the access to information, expectations of transparency, and significant dollars at stake, the onus is on boards to get it right. And the penalties for not – well, they’re very real.

Enter: Wells Fargo. The bank was roiled this fall by an ethics scandal that defrauded customers, cost thousands of employees their jobs, resulted in millions of dollars in fines, caused a precipitous drop in stock price, and culminated in the CEO stepping down.  Many looked to the board for leadership through the crisis.

By examining the events at Wells Fargo, other directors can learn from this board’s experiences: What went right? What went wrong? How should a board fulfill its responsibilities?

For context, let’s review the ten tough weeks that put the bank under siege:

  • September 8, 2016 — The Consumer Financial Protection Bureau announced that it had fined Wells Fargo $100 million “for the widespread illegal practice of secretly opening unauthorized deposit credit card accounts.” The bank agreed to pay an additional $35 million penalty to the Office of the Comptroller of the Currency (the OCC); $50 million to the City and County of Los Angeles; and some $2.5 million in refunded customer fees. The bank was also required to hire an independent consultant to review its procedures regarding ethical sales practices and appropriate sales goals.
  • September 20th & September 29th Congress called Wells Fargo’s then-Chair & CEO John Stumpf to testify twice, once before the Senate (September 20) and once before the House (September 29), about the bank’s sales culture and how it was that 2 million unauthorized accounts had been opened in customers’ names and 5,300 employees had been fired, with no one in senior management being held accountable.
  • September 27thThe Wells Fargo board announced it was launching an independent investigation into the retail sales practices at the bank.
  • During this period of inquiry, the bank’s stock dropped 14%, losing nearly $35 billion of value in the month of September.
  • October 12thStumpf resigned and the board announced it had elected 29-year Wells Fargo veteran Tim Sloan as CEO and 12-year board veteran David Sanger as Chair.
  • November 18thThe OCC announced further restrictions on Wells Fargo, requiring that the bank get approval prior to making changes to its board of directors or executive officer team, and before authorizing any compensation packages for departing executives.


While the events of Fall 2016 are attention-getting, they are, in fact, just the most visible elements of issues that developed over years. Looking back, are there areas where the board might have done some things differently?  After examining what we know about Wells Fargo’s challenges, we’ve identified four governance pillars that we would advise boards to approach with extra vigilance:

1. Information: What should a board know? What sources should it use? To what lengths should a board go to stay informed?

2. Independence: How does a board maintain its objectivity? What makes a board member truly independent? How can boards ensure that management doesn’t have inadvertent influence?

3. Oversight: What is expected of a board when it comes to providing oversight of a leadership team? What checks and balances are appropriate to assure that everyone performs to their highest level?

4. Culture: How does the board align itself around goals and values? How does it ensure that management is also aligned around what is most important? Can a board ever be sure that certain lines will never be crossed?

These are difficult questions for any board member to answer in the abstract or even for a specific circumstance. And, despite all that has been written about the company, as outsiders, it’s impossible for us to know how the Wells Fargo board would answer these questions. Nonetheless, we believe there is much to be learned by considering these issues through the lens of the bank’s challenges.


1. On the Critical Topic of INFORMATION

Put simply, a board can’t fulfill its responsibilities without having access to quality information. Financial data and regulatory compliance reports are the tip of the iceberg. Directors need to look beneath the surface to stay current on everything from employee matters (whistleblower reports, employee turnover stats, team feedback, etc.) to investor perceptions, competitor fundamentals, and media coverage—good and bad. And, in a world obsessed with data, boards must consider the integrity of their information sources and whether the data presented is actually the most relevant to the questions that need to be answered.

Having access to information is of little value if you don’t use it to gain insight and inform your decisions. Good governance requires directors to think critically about the data at hand, ask hard questions, get thoughtful answers, and sometimes to stick their necks out to ensure that all stakeholders’ interests are protected.

What We Know About Information Access at Wells Fargo:

  • Numerous reports indicate that, as early as 2011, employees wrote letters to management and the board and called the company’s whistleblower hotline about the false accounts.
  • Between 2011 and 2015, Wells Fargo filed various Finra disclosures about the false account openings and reported firing 200+ employees for participating in the scheme.
  • In 2013, the Los Angeles Times published an exposé of Wells Fargo’s “pressure-cooker” sales culture, alleging that employees were opening false accounts in order to meet quotas and keep their jobs.
  • In 2015, the LA Times and Wall Street Journal reported that the City of Los Angeles, Office of the Comptroller of the Currency and San Francisco Federal Reserve were investigating the bank’s aggressive sales culture and its impact on customers, including unauthorized fees and damage to credit reports.
  • In September 2016, the Consumer Financial Protection Bureau announced that Wells Fargo had agreed to pay $185 million in fines and settlement monies, and to refund some $2.5 million in customer fees related to the unauthorized opening of accounts.
  • This public record suggests that the Wells Fargo board knew or should have known about the false-account openings for several years.

Perhaps the numbers didn’t seem material at the time: while 5,300 employees is a sizable group, the bank employs around 265,000 people. And while the bank allegedly earned $2.5 million in fees for the fake accounts, its annual revenues for 2015 were $86 billion. Arguably the numbers don’t tell the whole story. Yet, the regulatory inquiries, legal investigations and media accounts were all publicly reported and should have been accessible to the board. Thus, the fact that the board did not act on the matter until late September 2016 was an understandable cause for concern by customers, employees, and shareholders.

The Takeaway: This public record suggests that the Wells Fargo board knew or should have known about the false-account openings for several years. Perhaps the numbers didn’t seem material at the time: while 5,300 employees is a sizable group, the bank employs around 265,000 people. And while the bank allegedly earned $2.5 million in fees for the fake accounts, its annual revenues for 2015 were $86 billion. Arguably the numbers don’t tell the whole story. Yet, the regulatory inquiries, legal investigations and media accounts were all publicly reported and should have been accessible to the board. Thus, the fact that the board did not act on the matter until late September 2016 was an understandable cause for concern by customers, employees, and shareholders.


2. On the Critical Topic of Independence

Arguably the single most important attribute of a highly functioning board is its objectivity. Independence is fundamental to objectivity and critical to a board’s success as both overseer and strategic thought-partner to the leadership team. The SEC defines “independent director” as someone who is not a current or past employee of the company and who does not, in the board’s estimation, have relationships that would interfere with their objective judgment. Regrettably, the SEC doesn’t offer more detailed guidelines to help determine when a relationship could cloud judgment.

Objectivity and judgment can be influenced by many factors, such as ownership, prior business dealings and relationships. Human nature suggests that the more time you spend with someone, the more you come to trust them and, thus, the less likely you are to challenge their assertions. As a result, tenure is a double-edged sword in governance – it enables directors to have extensive knowledge of a company, but also creates the possibility of relaxed vigilance. Notably, term limits are optional in the U.S. and maintained by less than 5% of S&P 500 companies. Other countries are less flexible, such as the U.K. where a board member’s designation as “independent” comes under review after nine years or if they sit on another board with a fellow director.

The Commonsense Corporate Governance Principles, published earlier this year by a group of prominent executives and investors including Warren Buffet and Jamie Dimon, states: “Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level.”

What we know about independent relationships at Wells Fargo:

  • 20% of Wells Fargo directors have served on the board since the 1990s; these directors originally sat on the board of predecessor company NorWest Bank.
  • The average duration of board service is 9.7 years.
  • The former Lead Independent Director and current Non-Executive Chair has served on the Wells Fargo board since 2003 (13 years) and concurrently served on a different board with John Stumpf while he was Chair & CEO.
  • While serving as Chair & CEO of Wells Fargo, Stumpf served on two other boards: one as a peer with the bank’s lead independent director and one as a peer with another Wells Fargo director.
  • Two Wells Fargo directors also sit together on another board

Wells Fargo’s board exceeds the average tenure of S&P 500 boards by 14% (9.7 years vs. 8.5 years.) If the company were listed in the U.K., many of the directors would not meet the standards for independence, including the new Chair. While there is clearly value that longstanding directors bring to their role, the issue of independence has been raised by major investors in the company.

The Takeaway: Good governance requires board members, both individually and collectively, to actively assure their independence. Meeting regulatory standards is just the beginning. U.S. boards should consider the benefits that term-limits offer, review other standards for independence and take guidance from the Commonsense Corporate Governance Principles including regular meetings without the CEO and with other leaders within the company. More than anything, directors need to prioritize their ability to maintain objectivity. Healthy boundaries enable directors to think through issues objectively and freely challenge ideas without jeopardizing relationships.


3. On the Critical Topic of OVERSIGHT

One of the board’s primary duties is oversight – to create a separation of powers, when guiding the management team. When properly employed, these checks and balances can provide management with guardrails, preventing costly mistakes and delivering better outcomes through carefully considered decision-making. An arm’s length relationship between the board and executives is key to healthy checks and balances and serves everyone in the organization. Board committees, most of which operate without management’s participation, are a clear example. To be effective and oversee the critical decisions often made at this level, the committee members must have the expertise, information and independence needed to do their work. 

Another explicit opportunity to provide oversight comes from the separation of the CEO and Chair roles.  Arguments for and against splitting the roles are a common feature of governance conversations. While some studies show a lack of correlation between separation and stock performance, there are other good reasons to consider dividing the roles:

First, separating the roles means a single person cannot control the agenda. The weight of the CEO and the Chair roles, when inhabited by two strong individuals, establishes a manageable, healthy tension between two pillars of power: executives and governors. This sets the stage for diverse perspectives to be heard and minimizes the likelihood of groupthink.

Second, the work of the Chair, particularly in a large, complex, pubic company is meaningful in the time that it takes and energy that it requires. Undermanaged governance processes and outcomes can badly damage a company’s reputation, morale and trustworthiness. For these reasons alone, two people handling the two distinct roles of CEO and Chair should be the rule, not the exception.

The Commonsense Corporate Governance Principles stops short of explicitly advocate for splitting the roles but makes the case for distinct participation by strongly independent voices: “Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of Chair and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities.”

What we know about oversight at Wells Fargo:

  • John Stumpf became CEO of Wells Fargo in 2007 and board Chair in 2010.
  • After serving on the board for nine years, Stephen Sanger was named Lead Independent Director in 2012, then Non-Executive Chairman in 2016.
  • The Wells Fargo board has seven committees, each composed of five to seven board members. That’s 40 positions held by the 15 board members. 
  • When testifying to Congress, Stumpf said he had recused himself from firing and compensation decisions affecting executives implicated in the cross-selling scandal; while he shouldn’t have been involved in decisions about his own compensation, there was confusion about how, as Chair, he could defer decisions about other executives to a board that he presided over.
  • When Stumpf resigned in October 2016, the Wells Fargo board elected a new CEO: Tim Sloan, a 29-year veteran of the bank, and gave Sanger the role of Chair.

The Wells Fargo board seems to have been organized for a strong oversight role in some ways and for challenges in other ways. Board members were more active at the committee level than many public company boards, with the former Chair & CEO suggesting that he deferred certain accountabilities to committees. The vagaries around the different roles and responsibilities appear to have caused confusion at the Congressional level and beyond.

The Takeaway: Boards can never relax their oversight responsibilities. To be effective on any committee, board members must stay current on relevant aspects of the organization and set aside whatever time is necessary to fully meet their obligations. The Chair position demands even more time and attention – this role is best served by addressing governance issues independent of a company’s day-to-day business issues. Maintaining that independent perspective is a huge ask of someone who spends most of his time in the CEO’s seat. Each role requires a person to act in two very different capacities – combining them can degrade the value of one or both roles. More than that, though, there is clear benefit in having an outside, independent voice leading the governance and oversight process. The CEO and board Chair are two different jobs with two different mandates. It serves a board well to fill them with different people.


4. On the Critical Topic of CULTURE

Highly functioning boards promote a culture around purpose and principles – directors are aligned around the mission, values, and goals for the organization. The boardroom should embrace a tone that is often collegial, though never cozy.  Rather, like a well-mannered debate forum, it is filled with thoughtful constructive challenge and welcomes many perspectives.

As the board periodically considers the organization’s goals and the ownership of them by management, it must ensure that all stakeholders are considered. Where do customers, employees, business partners, and investors fit in? Intentional discussions about long-term value and planned outcomes are necessary and expected by all of those constituents. Further, a board must foster a culture of continuing to challenge and improve itself, taking time to check its own goals, strategies, and assumptions along the way. While we do believe that the Wells Fargo board takes its responsibilities quite seriously, little has been documented about the culture of the governing body. We do note, however, that John Stumpf discussed culture frequently when serving as Chair of the company.

What we know about the culture from John Stumpf:

In a July 2015 Fortune commentary, the CEO & Chair wrote: “Of course, a company’s culture is rooted in how people behave. And believe me, they notice what you do as much as what you say.”

and after the crisis hit….

  • “There was no incentive to do bad things,” Stumpf said in an interview with The Wall Street Journal as reported on September 13.
  • Three days later, The Journal documented a 17-year history of the bank promoting “eight is great” as a cross-selling strategy and organizational culture, detailing various employee disciplinary, regulatory, legal, and investigative matters related to cross-selling that have ensued in the last 10 years. To check it out, look up “Gr-eight” to “Gaming” on the WSJ blog.
  • On September 18, Stumpf appeared on Jim Cramer’s Mad Money and said: “We deeply regret any situation where a customer got a product they did not request. That has never — there is nothing in our culture, nothing in our vision and values that would support that.“
  • Stumpf, in testimony to the Senate Banking Committee on September 20, said:
  • “I accept full responsibility for all unethical sales practices in our retail banking business, and I am fully committed to doing everything possible to fix this issue, strengthen our culture, and take the necessary actions to restore our customers' trust."
  • On September 27 the Wells Fargo board announced its independent investigation into the retail sales practices at the bank and on October 12 John Stumpf resigned.

John Stumpf’s quote on the Wells Fargo website before he left the company fascinated us: "Integrity is not a commodity. It’s the most rare and precious of personal attributes."  Perhaps rare was not the right word choice. As we blogged in September, our hope is that the Wells Fargo board replaces it with the word common.  

The Takeaway: Culture sets the tone for any organization. And it starts at the top. Whether an organization has a culture of putting shareholders first or customers first, of winning or collaborating, of being mission driven or outcomes driven – it’s up to the leadership to decide. Nonetheless, without alignment on priorities and values, and other key drivers of behavior, the most important decisions will go unchecked. Take the time to ask your fellow board members, “What is the culture of our board? Do we act with intention? Is the ‘tone at the top’ appropriate and working?”  The standards you set will be seen by others – make it for better, not worse.


Abby Adlerman is Boardspan’s CEO & Founder. Kaitlin Quistgaard is Boardspan’s Vice President, Content Strategy.

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