Is the Wells Fargo board of directors responsible for the unauthorized accounts and insurance mess at Wells Fargo?
Earlier this month, the Federal Reserve Board answered with an emphatic yes.
The Fed imposed strong sanctions on Wells for opening “several million unauthorized retail customer accounts,” “firing thousands of employees for improper sales practices” and “charging hundreds of thousands of customers for unneeded, unauthorized, guaranteed collateral protection insurance for their automobile loans.”
Central to the Fed’s actions was Wells’ pursuit of a “business strategy that emphasized sales and growth” absent a sufficiently robust risk management process in place to assess and mitigate the risks of that strategy.
Remarkably, the Fed didn’t stop there. It turned to the duties of the Wells board, chair and lead director, describing important performance failures. The Fed made it clear that directors had failed to oversee and evaluate management’s implementation of an effective risk management system which had the stature, resources, authority and independence to assess and mitigate the risks of Wells’ rapid sales growth strategy. Further, the Fed stated that management’s reports to the board lacked detail, and faulted the board for failing to press management for greater specificity, initiating its own investigation or directing management to further investigate the matters of concern.
Then, in two very pointed letters to Wells’ board chair and lead director, the Fed turned its attention to the responsibilities and failures of both, concluding the performance of each amounted to “ineffective oversight.”
What we see in the Wells board leadership structure is a classic illustration of the risks of combining the chair/CEO role. Note that the Fed addressed the chair’s performance as chair, not as CEO, underscoring the critical importance of a board carefully reviewing the chair separately when the roles are combined.
We’ve known for years that boards are responsible for seeing that companies have ethical cultures which embrace legal compliance. They’re also responsible for having in place systems and processes that provide the board with information it needs to perform its oversight responsibilities. It’s not enough for directors to say, “We didn’t know.” They have a duty to know, and the Fed has made that clear.
At its core, the Wells Fargo matter is about corporate integrity. Unfortunately, Wells Fargo is far from alone in having integrity issues. Since Enron, there has been a long list of companies and nonprofit organizations with integrity problems. Recently, one only has to recall: Toyota, Volkswagen, Equifax, Kobe Steel, Mitsubishi, Fiat/Chrysler, Yahoo, Theranos, Uber, Fox News, SoFi, Weinstein Co., Toray Industries, the U.S. Olympic Committee, USA Gymnastics, and Michigan State University.
How can boards assure the integrity of their companies? First, boards have to own their responsibility for integrity, and reflect that ownership in their published values and governance documents. Then boards must actually seek information that would enable them to assess and address integrity issues. Below are some tools boards can use to get the information they need:
• Reviewing corporate values and determining and testing how those values are being observed and reinforced throughout the organization.
• Using the company’s internal audit group to obtain information on the adequacy of systems and processes.
• One-on-one candid conversations with key management and other personnel, who would be aware of integrity and culture issues.
• Conducting a robust assessment of strategy, and corresponding enterprisewide risk, as well as risk mitigation measures.
• Looking more carefully at employee, customer, supplier and others’ concerns for patterns, inconsistency with company values, etc., and the manner of addressing these.
• Looking at disputes, including litigation facing the organization and the approach to resolving those issues.
• Assessing the impact of organizational culture on decisions involving executive compensation, employee incentive programs, bonuses, perks, and other means of producing stronger operational and financial performance.
• Understanding the signals to employees and others that a board sends through the various actions it takes and priorities that it emphasizes.
• Periodic, rigorous performance evaluations of the board, committees, directors, the board chair and the lead director.
• Ensuring a board/management culture of absolute candor.
Bottom line, it’s about boards aggressively seeking the information they need to assure integrity, an ethical culture and legal compliance, and promptly addressing issues when they arise. It’s also about rigorous evaluation of board and director performance in the spirit of continuous improvement.
Let’s hope the Fed’s message to the Wells Fargo board is a message all boards will hear: Take responsibility for your organization’s integrity. You are accountable for it.
John Stout is a past chairman of the American Bar Association’s corporate governance committee and a shareholder at Fredrikson & Byron, Minneapolis.