Chat with us, powered by LiveChat Provide a detail case overview? Identify the problems? Identify the causes of the problems? Identify leadership roles? Recommendations? Conclusion? Include at least two Quotatio | Wridemy

Provide a detail case overview? Identify the problems? Identify the causes of the problems? Identify leadership roles? Recommendations? Conclusion? Include at least two Quotatio

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

The Wells Fargo Cross-Selling Scandal

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

The Wells Fargo Cross-Selling Scandal

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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