It’s no surprise that the board members of Wells Fargo & Co. have taken a pounding since the fake account scandal unfolded last year. A handful of them almost lost re-election at the last shareholder meeting even when running against nobody.
So when board Chairman Stephen Sanger and two other directors announced their retirement last week, the headlines were utterly predictable, about a “shake-up” that was part of “continuing fallout” over the fake accounts scandal.
Long overdue, corporate governance experts will tell you, maybe with a sigh. The Wells Fargo directors really blew it, failing in what’s called the duty of obedience by neglecting to make sure the company followed the rules.
The board richly deserved its criticism, no question about that. On the other hand, there seems to be more to this story. Somebody on that board did a lot of hard work trying to fix this problem, and Sanger was lead independent director and later board chairman.
Remember that CEO John Stumpf lost his job, the board went after bonuses and stock grants for Stumpf and others and it fired four senior managers in the Wells Fargo community bank group. Among other actions, the board later took away about $32 million in pay from members of the operating committee who had nothing to do directly with the scandal, punishing them just for not looking out for the whole company.
It’s also worth pointing out that much of what we know about the scandal came when the independent directors’ released a 113-page report on their own investigation.
Sanger did not respond to a message to explain why he’s stepping down, but he was due to retire from the board anyway, as next year he’ll turn 72. He joined the Wells Fargo board in 2003, during a long run of success as CEO of General Mills.
It’s not exactly true that big companies pack boards with the buddies of the CEO, but it’s certainly true that what the board learns about the operations and plans for the company comes from the CEO and the other senior officers.
So the role of the director isn’t to choose between competing stories about how things are really going at the company. They only really hear one story. The job of a director is to decide whether to believe it.
That’s a structural weakness that’s hardly unique to Wells Fargo. And at Wells Fargo there was no reason to distrust the story the CEO had been telling. The company was an industry leader.
It wasn’t until 2014, after articles in the Los Angeles Times, that the board even got word from management that there really was a problem of unauthorized customer accounts brewing in the Wells Fargo retail banking operations.
The board had already blessed a beefed up centralized organization to manage and monitor risk. One obvious problem for the board, though, was that the Wells Fargo risk management group hadn’t really been set up to care much about a victimless crime like customers getting issued a debit card they didn’t ask for. After all, there wasn’t even a fee for that.
In one particularly telling anecdote, the chief risk officer assured the board’s risk committee chairman after the issue first surfaced that the bad behavior had already started to subside, a “good story.” And he assumed the risk committee wouldn’t want to hear more about it, only about things that were more worrisome.
The risk associated with this problem even got downgraded by management in 2015.
Then the city of Los Angeles sued the company alleging abuses, and it’s unclear just how concerned the independent directors became at this point. What is clear is that their CEO really wasn’t.
One fact seemed to stick in Stumpf’s mind and color his thoughts. That’s that just 1 percent of employees had been getting fired for cheating on sales. To him it meant 99 percent had no trouble following the rules and meeting expectations.
Even that 1 percent figure would have been useful information for the directors, of course. They were smart people; they would have known right away that firing 1 percent of everybody in an organization as big as Wells Fargo’s community bank had to mean at least hundreds of employees. They may have grasped that this was no bad apple problem, it was a management problem.
Wells Fargo executives took that number out of a draft presentation meant for the risk committee of the board.
Sanger and Enrique Hernandez, chair of the board’s risk committee, sure seemed to know better. They told Stumpf in late 2015 that he needed to replace Carrie Tolstedt as head of the community bank. Not only did she keep her job, though, Stumpf later went to bat for her in an argument over pay.
The scandal didn’t blow up until September 2016, with news of regulatory and litigation settlements. That’s obviously when the scandal blew up in the Wells Fargo boardroom, too.
That was when the full board finally learned that it wasn’t just a couple of hundred employees who had been fired for sales practice violations. The real number, from January 2011 through early March 2016, was more than 5,300.
Now there was no reason to trust any story the CEO was telling. Management said it would discontinue sales targets, but the board insisted it be done immediately. The independent directors launched an investigation, decided to claw back stock awards to Stumpf and Tolstedt, eliminated Stumpf’s salary and so on.
Stumpf hung onto his job long enough to make a disastrous appearance in Washington, D.C., then was gone. The board gave him no severance pay. In April, the board announced that it had gone back for more stock awards from Stumpf and Tolstedt and retroactively fired Tolstedt for cause.
Taking those steps would have required some heavy lifting by members of the board, but Sanger won’t get much credit for any of it.
That doesn’t mean he didn’t do his job.