Insider was wrong person to fix Wells Fargo's biggest problem — its culture

It's actually possible to feel a little sorry for Tim Sloan, the departed chief executive of Wells Fargo & Co.

Like the time Tim Sloan's own lawyers argued in federal court that what he said publicly was nothing more than classic "corporate puffery" that no sensible investor would take seriously.

Sloan probably didn't find this argument all that funny when he first heard about it, which appeared to be while the Wells Fargo CEO was getting pounded at a congressional hearing.

The legal argument appeared in a kind of lawsuit that's barely worth mentioning, yet it seems to perfectly illustrate why putting Sloan into the CEO job in the first place was a mistake.

It wasn't long after that congressional hearing that he abruptly gave up the CEO job. Last week he seemed to acknowledge that it would've been a lot better when he got promoted in 2016 to find a leader from the outside.

The corporate puffery argument was one response to investors who were mad at Sloan, in part, for what he said after he got the job. He'd been with the company almost 30 years and was the clear successor, yet it was still something of a battlefield promotion to CEO.

After Wells Fargo's fake account scandal erupted, Sloan had provided assurances of transparency and trustworthiness. Yet the bad news kept coming months into his tenure, including that about 800,000 Wells Fargo car loan borrowers had gotten saddled with insurance they didn't need and might not have been able to afford.

Sloan was right to say rebuilding trust was a top priority. It's what anybody new to the top job would say. Yet he was the wrong messenger.

He'd been there while millions of dummy accounts were opened up, fees were charged improperly for mortgage loans and thousands lost their cars to the repo man because of insurance they didn't need.

And maybe the biggest problem with turning to an insider for leadership after these problems first surfaced was that it reinforced the idea that Wells thought it had a compliance problem, that there hadn't been enough rule-following.

Instead Wells had a problem with its work culture, the broadly shared understanding of what's important, how decisions get made and how people get treated. The rules and expectations not only didn't fix the culture problem, they helped create it, going back more than 30 years to Minneapolis and the predecessor of the modern Wells Fargo, called Norwest.

The Wells Fargo approach to banking took root here because Norwest had gone outside for new leadership. Lloyd Johnson was brought in as CEO to lead a turnaround, and he hired former Citigroup executive Richard Kovacevich to be his right-hand man.

The shorthand for this approach is cross-selling, and a measure that really came to matter was the number of financial products per customer — mortgages, savings and checking accounts, credit cards and so on.

Kovacevich followed Johnson as CEO, as Norwest used acquisitions to grow. While other bankers might have sought deals to grow assets or deposits, Norwest looked at acquisitions as the best way to get more customers it could sell more stuff to.

In the late 1990s, Norwest had an opportunity to take over Wells Fargo in California, which had a more traditional model. As the two companies merged and took the Wells Fargo name, the all-important average products-per-customer number initially slipped, given how far behind the old Wells Fargo had been in cross-selling compared with Norwest.

Kovacevich, by the way, had implemented a fundamentally good idea, widely followed in the industry. Doing more business with existing customers can work well. But what happened with the tracking of accounts per customer looks a little like a problem sometimes called Goodhart's law, named for a British economist.

As it's usually explained, this is what happens when some measure becomes the target, making the measure no longer very useful.

But if senior management really wants more accounts — and lets the frontline staff get micromanaged to get them — then that's what the bosses will get.

This year employees have still been complaining to the New York Times about a high-pressure work environment of quotas and goals.

Some of this seems entirely reasonable for a normal workplace, like expecting a specific number of loan files to get processed in a month. The only thing that makes this stuff news is that it's coming from inside Wells Fargo, where sales management once went so far off the rails that all over the company employees tried to game the system.

As Wells Fargo seeks a new leader from the outside, what's important is how the candidates will explain how the language to describe the work will have to continue to change. How people are hired, trained and promoted will have to change some more, too.

Wells doesn't seem to have the option of a new fundamental strategy. Unlike its peers at the very top of the American bank rankings, Wells is much more like a giant community bank. It really needs its millions of customers to keep doing business there.