Wells Fargo CEO John Stumpf will get grilled by the Senate Banking Committee next week about what the government has described as the bank’s “widespread illegal practice of secretly opening unauthorized deposit and credit card accounts” for customers. With public and political outrage still radiating after the bank got hit last week with $185 million in fines for opening more than 2 million sham accounts, Stumpf has started to tease out his defense in an interview with The Wall Street Journal.
As the paper sums it up, the CEO’s story goes like this: It was the employees’ fault.
“There was no incentive to do bad things,” Stumpf told The Journal.
He sounded a similar note on CNBC: "There is nothing in our culture, nothing in our vision and values that would support that. It's just the opposite. Our goal is to make it right by a customer every time 100 percent, and if we don't do that, we feel accountable."
That line is in keeping with San Francisco-based Wells Fargo’s efforts to portray itself as different from Wall Street’s giants — as a bank that realizes that “culture counts” and strives to earn “lifelong relationships, one customer at a time.”
It’s true that the bank has fired some 5,300 employees over five years for their role in the creating fraudulent accounts, and you could potentially dismiss those thousands of workers and millions of fake accounts as just a small fraction of Wells Fargo’s total corporate workforce (about 268,000 as of June 30) and account base. Or your alarm bells could be tripped by the fact that you’ve had to fire the rough equivalent of 2 percent of your employees and try to understand why so many workers have been engaging in fraud that cuts directly to the heart of the reputation you’ve long tried to cultivate with customers and investors.
In an interview with CNBC Tuesday, Stumpf said that about 1,000 people a year in the retail banking division of about 100,000 employees were to blame. “Of 100,000, a vast majority do the right thing,” he said. “Every year on average for the last five years, 1,000 did not do the right thing. That is still 1,000 too many."
Stump's argument that there was no incentive for employees to open these fake accounts is undercut by the horror stories employees have told about the pressure they felt to sell customers additional accounts to earn bonuses or avoid having to work extra hours. Wells Fargo had set a goal of selling each customer at least eight financial products — a credit card or savings account on top of an existing checking account, for example — up from its current average of 6.27 per customer.
“When cross-selling is based on efforts to generate more business from existing customers based on strong customer satisfaction and excellent customer service, it is a common and accepted business practice,” the Consumer Financial Protection Bureau said last week in announcing its action against Wells Fargo. “But here the bank had compensation incentive programs for its employees that encouraged them to sign up existing clients for deposit accounts, credit cards, debit cards, and online banking, and the bank failed to monitor the implementation of these programs with adequate care.”
Stumpf’s attempt to pin blame only on employees is not helped by the bank’s belated decision, announced Tuesday, to do away with those “cross-selling” sales targets brought to light by the scandal.
“This is like McDonald’s saying that now there is ‘real meat’ in chicken nuggets. Comforting, perhaps, but what was in them before?” says Julie Ragatz, director of the Center for Ethics in Financial Services at The American College of Financial Services.
In Wells Fargo’s case, the practices in place up until now were clearly putting pressure on branch workers. Employee reviews on jobs site Glassdoor repeatedly cite the demands to generate sales. “The ‘higher ups’ are ALWAYS putting sales pressure on the branch managers which then the branch managers put pressure on the bankers and tellers for sales,” one post from July said. Other employees have said they routinely signed up family members for additional accounts to meet their sales goals.
Stumpf seems to be arguing that the fired employees responded to those pressures in a way that was out of line with Wells Fargo’s culture, but how much can you really blame them? Imagine your boss threatening that you will have to work extra hours to meet your new account quota, or suggesting that you might not get your bonus or even keep your job if you don’t do your part to help the branch open seven new checking accounts and sell 42 other products every day. "If you do not make your goal, you are severely chastised and embarrassed in front of 60-plus managers in your area by the community banking president," one former branch manager told the Los Angeles Times in 2013.
The chain of responsibility cannot be allowed to stop at low-level employees. “To say that no one is responsible for the behavior of thousands of employees besides the employees makes no sense,” says Ragatz. “If the leaders were not complicit (which is doubtful) this is a classic example of a failure to supervise.”
The Senate Banking Committee and Sen. Elizabeth Warren will surely hammer those points next week, looking for some measure of executive accountability. Wells Fargo has said that about 10 percent of the 5,300 workers fired were at the level of branch manager or higher, but it’s not clear whether top-level executives will be held accountable for the problematic practices.
Carrie Tolstedt, the executive in charge of the community banking division that generates most of the bank’s revenue and where much of the fraudulent activity happened, is retiring from Wells Fargo at the end of the year. She’ll leave with $124.6 million in stock and options earned over her 27 years at the bank. In the July 12 statement announcing Tolstedt’s departure, Stumpf called her “one of our most valuable Wells Fargo leaders, a standard-bearer of our culture, a champion for our customers, and a role model for responsible, principled and inclusive leadership.”
In light of the scandal, that statement only raises questions about just what Wells Fargo’s culture has been — questions that Stumpf must address, and quickly.
"This is a wake-up call and should remind all of us that culture and compensation make a difference,” Treasury Secretary Jack Lew said Tuesday, according to CNBC. “How you reward people, how you motivate people and what values you hold people to matters."
Based on some of his comments thus far, the CEO has yet to hear that call.