26 Oct Provide a detail case overview? Identify the problems? Identify the causes of the problems? Identify leadership roles? Recommendations? Conclusion? Include at least two Quotatio
Wk1: Case StudyReview the attached Wells Fargo Case Study. Wells Fargo Case Study. – Alternative FormatsFocus on the leaders, followers, and context of the article. Using APA 7th Edition guidelines, write a minimum of 1,000-1,500 word paper including the following headings and content.
- Provide a detail case overview
- Identify the problems
- Identify the causes of the problems
- Identify leadership roles
- Recommendations
- Conclusion
Include at least two Quotations, Citations, and References – one from the Wells Fargo case and one from Leadership for Organizations. Take a few minutes and review the APA Style 7th Edition link: https://extras.apa.org/apastyle/basics-7e/?_ga=2.224503570.90060233.1588025033-1466818724.1585697917#/ Additional guidance for APA Style 7th Edition link https://apastyle.apa.org/style-grammar-guidelines/paper-format/title-page
google finance academy 1
By Brian Tayan january 8, 2019
The wells fargo cross-selling scandal
Stanford cloSer looK SerieS
introduction
In recent years, more attention has been paid to corporate
culture and “tone at the top,” and the impact that these have on
organizational outcomes. While corporate leaders and outside
observers contend that culture is a critical contributor to
employee engagement, motivation, and performance, the nature
of this relationship and the mechanisms for instilling the desired
values in employee conduct is not well understood.
For example, a survey by Deloitte finds that 94 percent
of executives believe that workplace culture is important to
business success, and 62 percent believe that “clearly defined
and communicated core values and beliefs” are important.1
Graham, Harvey, Popadak, and Rajgopal (2016) find evidence
that governance practices and financial incentives can reinforce
culture; however, they also find that incentives can work in
opposition to culture, particularly when they “reward employees
for achieving a metric without regard to the actions they took to
achieve that metric.” According to a participant in their study,
“People invariably will do what you pay them to do even when
you’re saying something different.”2
The tensions between corporate culture, financial incentives,
and employee conduct is illustrated by the Wells Fargo cross-
selling scandal.
Wells Fargo culture, Values, and ManageMent
Wells Fargo has long had a reputation for sound management.
The company used its financial strength to purchase Wachovia
during the height of the financial crisis—forming what is now the
third-largest bank in the country by assets—and emerged from
the ensuing recession largely unscathed, with operating and stock
price performance among the top of its peer group (see Exhibit 1).
Fortune magazine praised Wells Fargo for “a history of avoiding
the rest of the industry’s dumbest mistakes.”3 American Banker
called Wells Fargo “the big bank least tarnished by the scandals
and reputational crises.”4 In 2013, it named Chairman and CEO
John Stumpf “Banker of the Year.”5 Carrie Tolstedt, who ran the
company’s vast retail banking division, was named the “Most
Powerful Woman in Banking.”6 In 2015, Wells Fargo ranked 7th
on Barron’s list of “Most Respected Companies.”7
Wells Fargo’s success is built on a cultural and economic model
that combines deep customer relations with an actively engaged
sales culture. The company’s operating philosophy includes the
following elements:
Vision and values. Wells Fargo’s vision is to “satisfy our
customers’ needs, and help them succeed financially.” The
company emphasizes that:
Our vision has nothing to do with transactions, pushing products, or getting bigger for the sake of bigness. It’s about building lifelong relationships one customer at a time. … We strive to be recognized by our stakeholders as setting the standard among the world’s great companies for integrity and principled performance. This is more than just doing the right thing. We also have to do it in the right way.8
The company takes these statements seriously. According to
Stumpf, “[Our vision] is at the center of our culture, it’s important
to our success, and frankly, it’s been probably the most significant
contributor to our long-term performance.”9 … “If I have any one
job here, it’s keeper for the culture.”10
Cross-selling. The more products that a customer has with
Wells Fargo, the more information the bank has on that customer,
allowing for better decisions about credit, products, and pricing.
Customers with multiple products are also significantly more
profitable (see Exhibit 2). According to Stumpf:
To succeed at it [cross-selling], you have to do a thousand things right. It requires long-term persistence, significant investment in systems and training, proper team member incentives and recognition, [and] taking the time to understand your customers’ financial objectives.11
Conservative, stable management. Stumpf’s senior
management team consisted of 11 direct reports with an average
The Wells Fargo Cross-Selling Scandal
2GooGle finance academy
of 27 years of experience at Wells Fargo.12 Decisions are made
collectively. According to former CEO Richard Kovacevich, “No
single person has ever run Wells Fargo and no single person
probably ever will. It’s a team game here.”13 Although the company
maintains independent risk and oversight mechanisms, all senior
leaders are responsible for ensuring that proper practices are
embedded in their divisions:
The most important thing that we talk about inside the company right now is that the lever that we have to manage our reputation is to stick to our vision and values. If we are doing things for our customers that are the right things, then the company is going to be in very good shape. … We always consider the reputational impact of the things that we do. There is no manager at Wells Fargo who is responsible for reputation risk. All of our business managers in all of our lines of business are responsible.14
Wells Fargo has been listed among Gallup’s “Great Places to Work”
for multiple years, with employee engagement scores in the top
quintile of U.S. companies.
cross-selling scandal
In 2013, rumors circulated that Wells Fargo employees in Southern
California were engaging in aggressive tactics to meet their
daily cross-selling targets.15 According to the Los Angeles Times,
approximately 30 employees were fired for opening new accounts
and issuing debit or credit cards without customer knowledge,
in some cases by forging signatures. “We found a breakdown in
a small number of our team members,” a Wells Fargo spokesman
stated. “Our team members do have goals. And sometimes they
can be blinded by a goal.”16 According to another representative,
“This is something we take very seriously. When we find lapses,
we do something about it, including firing people.”17
Some outside observers alleged that the bank’s practice of
setting daily sales targets put excessive pressure on employees.
Branch managers were assigned quotas for the number and types
of products sold. If the branch did not hit its targets, the shortfall
was added to the next day’s goals. Branch employees were
provided financial incentive to meet cross-sell and customer-
service targets, with personal bankers receiving bonuses up to 15
to 20 percent of their salary and tellers receiving up to 3 percent.
Tim Sloan, at the time chief financial officer of Wells Fargo,
refuted criticism of the company’s sales system: “I’m not aware of
any overbearing sales culture.”18 Wells Fargo had multiple controls
in place to prevent abuse. Employee handbooks explicitly stated
that “splitting a customer deposit and opening multiple accounts
for the purpose of increasing potential incentive compensation is
considered a sales integrity violation.”19 The company maintained
an ethics program to instruct bank employees on spotting and
addressing conflicts of interest. It also maintained a whistleblower
hotline to notify senior management of violations. Furthermore,
the senior management incentive system had protections consistent
with best practices for minimizing risk, including bonuses tied to
instilling the company’s vision and values in its culture, bonuses
tied to risk management, prohibitions against hedging or pledging
equity awards, hold-past retirement provisions for equity awards,
and numerous triggers for clawbacks and recoupment of bonuses
in cases where they were inappropriately earned (see Exhibit 3). Of
note, cross-sales and products-per-household were not included
as specific performance metrics in senior executive bonus
calculations even though they were for branch-level employees.20
In the end, these protections were not sufficient to stem a
problem that proved to be more systemic and intractable than
senior management realized. In September 2016, Wells Fargo
announced that it would pay $185 million to settle a lawsuit filed
by regulators and the city and county of Los Angeles, admitting
that employees had opened as many as 2 million accounts without
customer authorization over a five-year period.21 Although
large, the fine was smaller than penalties paid by other financial
institutions to settle crisis-era violations. Wells Fargo stock
price fell 2 percent on the news (see Exhibit 4). Richard Cordray,
director of the Consumer Financial Protection Bureau, criticized
the bank for failing to
… monitor its program carefully, allowing thousands of employees to game the system and inflate their sales figures to meet their sales targets and claim higher bonuses under extreme pressure. Rather than put its customers first, Wells Fargo built and sustained a cross-selling program where the bank and many of its employees served themselves instead, violating the basic ethics of a banking institution including the key norm of trust.22
A Wells Fargo spokesman responded that, “We never want products,
including credit lines, to be opened without a customer’s consent
and understanding. In rare situations when a customer tells us
they did not request a product they have, our practice is to close it
and refund any associated fees.”23 In a release, the banks said that,
“Wells Fargo is committed to putting our customers’ interests first
100 percent of the time, and we regret and take responsibility for
any instances where customers may have received a product that
they did not request.”24
The bank announced a number of actions and remedies,
several of which had been put in place in preceding years. The
company hired an independent consulting firm to review all
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3GooGle finance academy
account openings since 2011 to identify potentially unauthorized
accounts. $2.6 million was refunded to customers for fees
associated with those accounts. 5,300 employees were terminated
over a five-year period.25 Carrie Tolstedt, who led the retail
banking division, retired. Wells Fargo eliminated product sales
goals and reconfigured branch-level incentives to emphasize
customer service rather than cross-sell metrics.26 The company
also developed new procedures for verifying account openings
and introduced additional training and control mechanisms to
prevent violations.27
Nevertheless, in subsequent weeks, senior management
and the board of directors struggled to find a balance between
recognizing the severity of the bank’s infractions, admitting fault,
and convincing the public that the problem was contained. They
emphasized that the practice of opening unauthorized accounts
was confined to a small number of employees: “99 percent of the
people were getting it right, 1 percent of people in community
banking were not. … It was people trying to meet minimum goals
to hang on to their jobs.”28 They also asserted that these actions
were not indicative of the broader culture:
I want to make very clear that we never directed nor wanted our team members to provide products and services to customers that they did not want. That is not good for our customers and that is not good for our business. It is against everything we stand for as a company.29
If [employees] are not going to do the thing that we ask them to do—put customers first, honor our vision and values—I don’t want them here. I really don’t. … The 1 percent that did it wrong, who we fired, terminated, in no way reflects our culture nor reflects the great work the other vast majority of the people do. That’s a false narrative.30
They also pointed out that the financial impact to the customer
and the bank was extremely limited. Of the 2 million potentially
unauthorized accounts, only 115,000 incurred fees; those fees
totaled $2.6 million, or an average of $25 per account, which the
bank had refunded. Affected customers did not react negatively:
We’ve had very, very low volumes of customer reaction since that happened. … We sent 115,000 letters out to people saying that you may have a product that you didn’t want and here is the refund of any fees that you incurred as a result of it. And we got very little feedback from that as well.31
The practice also did not have a material impact on the company’s
overall cross-sell ratios, increasing the reported metric by a
maximum of 0.02 products per household.32 According to one
executive, “The story line is worse than the economics at this
point.”33
Nevertheless, although the financial impact was trivial, the
reputational damage proved to be enormous. When CEO John
Stumpf appeared before the U.S. Senate, the narrative of the
scandal changed significantly. Senators criticized the company for
perpetuating fraud on its customers, putting excessive pressure
on low-level employees, and failing to hold senior management
responsible. In particular, they were sharply critical that the board
of directors had not clawed back significant pay from John Stumpf
or former retail banking head Carrie Tolstedt, who retired earlier
in the summer with a pay package valued at $124.6 million.34
Senator Elizabeth Warren of Massachusetts told Stumpf:
You know, here’s what really gets me about this, Mr. Stumpf. If one of your tellers took a handful of $20 bills out of the cash drawer, they’d probably be looking at criminal charges for theft. They could end up in prison. But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multimillion dollar bonuses, and you went on television to blame thousands of $12-an-hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability. You should resign. You should give back the money that you took while this scam was going on, and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission.35
Following the hearings, the board of directors announced that
it hired external counsel Shearman & Sterling to conduct an
independent investigation of the matter. Stumpf was asked to
forfeit $41 million and Tolstedt $19 million in outstanding,
unvested equity awards. It was one of the largest clawbacks of
CEO pay in history and the largest of a financial institution. The
board stipulated that additional clawbacks might occur. Neither
executive would receive a bonus for 2016, and Stumpf agreed to
forgo a salary while the investigation was underway.36
Two weeks later, Stumpf resigned without explanation. He
received no severance and reiterated a commitment not to sell
shares during the investigation. The company announced that
it would separate the chairman and CEO roles.37 Tim Sloan,
chief operating officer, became CEO. Lead independent director
Stephen Sanger became nonexecutive chairman; and Elizabeth
Duke, director and former Federal Reserve governor, filled a
newly created position as vice chairman.
independent inVestigation report
In April 2017, the board of directors released the results of its
The Wells Fargo Cross-Selling Scandal
4GooGle finance academy
independent investigation which sharply criticized the bank’s
leadership, sales culture, performance systems, and organizational
structure as root causes of the cross-selling scandal (see Exhibit 5).
Performance and incentives. The report faulted the company’s
practice of publishing performance scorecards for creating
“pressure on employees to sell unwanted or unneeded products to
customers and, in some cases, to open unauthorized accounts.”38
Employees “feared being penalized” for failing to meet goals, even
in situations where these goals were unreasonably high:
In many instances, community bank leadership recognized that their plans were unattainable. They were commonly referred to as 50/50 plans, meaning that there was an expectation that only half the regions would be able to meet them.
The head of strategic planning for the community bank was
quoted as saying that the goal-setting process is a “balancing act”
and recognized that “low goals cause lower performance and high
goals increase the percentage of cheating.”
The report also blamed management for, “tolerating low
quality accounts as a necessary by-product of a sales-driven
organization.” …
Management characterized these low quality accounts, including products later canceled or never used and products that the customer did not want or need, as “slippage” and believed a certain amount of slippage was the cost of doing business in any retail environment.
The report faulted management for failing to identify “the
relationship between the goals and bad behavior [even though]
that relationship is clearly seen in the data. As sales goals became
more difficult to achieve, the rate of misconduct rose.” Of note, the
report found that “employees who engaged in misconduct most
frequently associated their behavior with sales pressure, rather
than compensation incentives.”
Organizational structure. In addition, the report asserted that
“corporate control functions were constrained by [a] decentralized
organizational structure” and described the corporate control
functions as maintaining “a culture of substantial deference to the
business units.”
Group risk leaders “took the lead in assessing and addressing
risk within their business units” and yet were “answerable
principally to the heads of their businesses.” For example, the
community bank group risk officer reported directly to the head
of the community bank and only on a dotted-line basis to the
central chief risk officer. As a result,
Risk management … generally took place in the lines of business,
with the business people and the group risk officers and their staffs as the “first line of defense.”
John Stumpf believed that this system “better managed risk
by spreading decision-making and produced better business
decisions because they were made closer to the customer.”39
The board report also criticized control functions for not
understanding the systemic nature of sales practice violations:
Certain of the control functions often adopted a narrow “transactional” approach to issues as they arose. They focused on the specific employee complaint or individual lawsuit that was before them, missing opportunities to put them together in a way that might have revealed sales practice problems to be more significant and systemic than was appreciated.
The chief operational risk officer
did not view sales practices or compensation issues as within her mandate, but as the responsibility of the lines of businesses and other control functions (the law department, HR, audit and investigations). She viewed sales gaming as a known problem that was well-managed, contained and small.
The legal department focused
principally on quantifiable monetary costs—damages, fines, penalties, restitution. Confident those costs would be relatively modest, the law department did not appreciate that sales integrity issues reflected a systemic breakdown.
Human resources
had a great deal of information recorded in its systems, [but] it had not developed the means to consolidate information on sales practices issues and to report on them.
The internal audit department
generally found that processes and controls designed to detect, investigate and remediate sales practice violations were effective at mitigating sales practices-related risks. … As a general matter, however, audit did not attempt to determine the root cause of unethical sales practices.
The report concluded that
while the advisability of centralization was subject to considerable disagreement within Wells Fargo, events show that a strong centralized risk function is most suited to the effective management of risk.
Leadership. Furthermore, the board report criticized CEO
John Stumpf and community banking head Carrie Tolstedt for
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5GooGle finance academy
leadership failures.
According to the report, Stumpf did not appreciate the scope
and scale of sales practices violations: “Stumpf’s commitment to
the sales culture … led him to minimize problems with it, even
when plausibly brought to his attention.” For example, he did
not react negatively to learning that 1 percent of employees were
terminated in 2013 for sales practices violations: “In his view, the
fact that 1 percent of Wells Fargo employees were terminated
meant that 99 percent of employees were doing their jobs
correctly.” Consistent with this, the report found that Stumpf “was
not perceived within Wells Fargo as someone who wanted to hear
bad news or deal with conflict.”
The report acknowledged the contribution that Tolstedt made
to the bank’s financial performance:
She was credited with the community bank’s strong financial results over the years, and was perceived as someone who ran a “tight ship” with everything “buttoned down.” Community bank employee engagement and customer satisfaction surveys reinforced the positive view of her leadership and management. Stumpf had enormous respect for Tolstedt’s intellect, work ethic, acumen and discipline, and thought she was the “most brilliant” community banker he had ever met.
At the same time, it was critical of her management style, describing
her as “obsessed with control, especially of negative information
about the community bank” and faulting her for maintaining “an
‘inner circle’ of staff that supported her, reinforced her views, and
protected her.” She “resisted and rejected the near-unanimous
view of senior regional bank leaders that the sales goals were
unreasonable and led to negative outcomes and improper
behavior.”
Tolstedt and certain of her inner circle were insular and defensive and did not like to be challenged or hear negative information. Even senior leaders within the Community Bank were frequently afraid of or discouraged from airing contrary views.
Stumpf “was aware of Tolstedt’s shortcomings as a leader
but also viewed her as having significant strengths.” … He “was
accepting of Tolstedt’s flaws in part because of her other strengths
and her ability to drive results, including cross-sell.”
Board of Directors. Finally, the report evaluated the process
by which the board of directors oversaw sales-practice violations
and concluded that “the board was regularly engaged on the issue;
however, management reports did not accurately convey the
scope of the problem.” The report found that
Tolstedt effectively challenged and resisted scrutiny from both
within and outside the community bank. She and her group risk officer not only failed to escalate issues outside the community bank, but also worked to impede such escalation. … Tolstedt never voluntarily escalated sales practice issues, and when called upon specifically to do so, she and the community bank provided reports that were generalized, incomplete, and viewed by many as misleading.
Following the initial Los Angeles Times article highlighting potential
violations, “sales practices” was included as a “noteworthy risk”
in reports to the full board and the board’s risk committee.
Beginning in 2014 and continuing thereafter, the board received
reports from the community bank, the corporate risk office,
and corporate human resources that “sales practice issues were
receiving scrutiny and attention and, by early 2015, that the risks
associated with them had decreased.”
Board members expressed the view that “they were
misinformed” by a presentation made to the risk committee in May
2015 that underreported the number of employees terminated
for sales-practice violations, that reports made by Tolstedt to the
committee in October 2015 “minimized and understated” the
problem, and that metrics in these reports suggested that potential
abuses were “subsiding.”
Following the lawsuit by the Los Angeles City Attorney, the
board hired a third-party consultant to investigate sales practices
and conduct
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