Wells Fargo: The Stage Coach Went Out of Control
Wells Fargo: The Stage Coach Went Out of Control
Until recently, Wells Fargo was the world’s largest bank. In 2015 Wells Fargo surpassed the Industrial and Commercial Bank of China with the highest market capitalization in the world. At $30 billion the Wells Fargo brand tops the list of most valuable banking brands. Wells Fargo’s victory was short lived, however, when J.P. Morgan overtook Wells Fargo in 2016. The loss of its place as the world’s biggest bank came in the wake of a large-scale cross-selling scandal when it was revealed Wells Fargo employees had faked 2 million customer accounts to meet short-term sales goals. Approximately 5,300 employees were fired, and the firm was slapped with a $185 million fine by the Consumer Financial Protection Bureau (CFPB).
The issue was further compounded by a corporate culture that seemed to know of and even encourage these illicit activities. Wells Fargo quickly became the poster boy for financial misconduct as its stock price dropped. Customer and government trust in the firm hit a low. In addition to the millions of dollars Wells Fargo will have to pay to clean up the scandal, new customer checking accounts and credit card applications plummeted. Executives are unsure whether the bank will ever achieve the growth it had attained prior to the scandal.
This case breaks down the Wells Fargo scandal to examine the decisions made that contributed to the scandal and the participants in the fraud. The case will look at Wells Fargo’s corporate culture and demonstrate how it led to a toxic ethical environment that encouraged illicit behavior. The immediate aftermath of the scandal will be discussed, as well as what alternatives Wells Fargo faces as it strives to restore its reputation. Whatever course it chooses, Wells Fargo must integrate ethical practices and principles into its operations to avoid similar misconduct in the future.
Wells Fargo has a long and lucrative history spanning over 150 years. In 1852 Henry Wells and William Fargo joined other investors to form financial services company Wells Fargo & Co. The first two offices were opened in San Francisco and Sacramento, California, later that year. Wells Fargo became emblematic of the American West after it helped finance the Butterfield Line and assumed control of the Pony Express. In 1866 Wells Fargo began acquiring stagecoach routes all across the West. The red-and-yellow stagecoach would become the iconic corporate logo of Wells Fargo recognizable by consumers worldwide.
One achievement of which Wells Fargo is particularly proud is its early emphasis on diversity. Within decades of its founding, Wells Fargo was printing financial information in Spanish and Chinese to reach a diverse customer base. In 1888 the firm adopted rules that advocated for the equal treatment of all customers no matter their race, social status, or gender. This reputation for diversity would continue into the twenty-first century, with Wells Fargo securing a place on DiversityInc’s Top 50 diverse companies in 2015. Today about 44 percent of its board members are comprised of women and 31 percent are of racial or ethnic minorities.
Over the next century, Wells Fargo was an early mover in adopting many innovative financial banking tools, including credit cards, bundled checking, ATMs, and access to online account information. Its success and innovative services allowed it to weather the 2008–2009 Great Recession while other banks struggled or went out of business. In 2008 Wells Fargo acquired Wachovia Corp. for more than $15 billion, increasing its number of locations to 10,000. Wells Fargo’s business, and its reputation, continued to grow. In 2016 Wells Fargo was listed 25th among Fortune’s Most Admired Companies, scoring particularly high on financial soundness, social responsibility, and product quality. However, none of these positive achievements were enough to prevent the loss of consumer confidence in Wells Fargo’s integrity after the massive scandal came to light.
September 2016 marked the unfolding of Wells Fargo’s entanglement in a widespread scandal that would implicate several high-level executives and thousands of employees. On September 8, the CFPB, the Los Angeles City Attorney, and the Office of the Comptroller of Currency levied a massive $185 million fine against Wells Fargo, claiming the firm had opened up and/or applied for more than 2 million customer bank or credit card accounts without permission from the customers. Furthermore, a bank official acknowledged that the company had terminated over 5,300 employees in relation to the allegations. Wells Fargo released a statement taking responsibility for the debacle.
Five days following the initial outbreak, the bank announced that it would be ending its controversial employee sales goals program effective January 1, 2017. Subsequent investigations revealed that controversial sales goals most likely encouraged employees to open accounts without customers’ permission and knowledge. Employees had continually engaged in fraudulent activities such as opening up fake bank accounts and falsifying signatures in order to satisfy sales goals and earn financial rewards under the bank’s incentive-compensation program. The CFPB claimed Wells Fargo imposed such goals on staff to become the leader in “cross-selling” banking products. In other words, they were given incentives for selling customers additional products. While offering incentives for additional selling is certainly not unusual, evidence shows that Wells Fargo had unrealistic sales goals and did not have systems in place to ensure employees were actually engaging in selling. Many Wells Fargo employees had adopted the teleological perspective that the ends (higher incentives) justified the means (fraudulent activity).
A day after the bank announced it would eliminate its controversial incentive program, the Federal Bureau of Investigation and federal prosecutors in New York and California began probing the bank over the alleged misconduct, which opened the door to possible criminal charges. By September 20, Wells Fargo’s Chief Executive, John Stumpf, appeared in front of the Senate Banking Committee, where Sen. Elizabeth Warren called on him to resign and said he should face criminal charges. Furthermore, Sen. Bob Corker claimed Stumpf would be engaging in “malpractice” if the bank did not “claw back” money that the company had paid to executives during the period that the accounts were being opened without customers’ permission. The rest of the month would put Wells Fargo through investigations, numerous lawsuits, employee and consumer backlash, and lengthy lectures from both political parties. October 12, over a month following the initial break of the scandal, marked the retirement of the CEO and Chairman Stumpf, effective immediately. Tim Sloan, an employee of the company for 29 years, took over as CEO, and Stephen Sanger became board chairman. Sloan was quoted as saying that Wells Fargo’s biggest priority would be to reestablish trust in the bank.
The attempt to reestablish trust occurred almost immediately. Wells Fargo began running an advertisement campaign on October 24 that was evocative of its long history in serving banking customers. The ads featured its signature horse-drawn carriage motif and pledged to address customer concerns. However, investigations continued. By November, Wells Fargo disclosed in regulatory filings that the U.S. Securities and Exchange Commission (SEC) was investigating the bank’s sales practices. Additionally, the U.S. Department of Justice, congressional committees, California state prosecutors, and attorneys general were also making formal inquiries into the bank’s practices. At the crux of the investigations was one question that still needed to be answered: what caused such a well-known, popular bank to engage in such blatant misconduct?
3-3a The Decision Makers
Although the accusations claimed Wells Fargo employees had opened 2 million fake customer accounts since 2011, managers at Wells Fargo claim these same practices had been occurring long before. Susan Fischer, a former Wells Fargo branch manager who worked at the bank for five years starting in 2004, joined almost a dozen Wells Fargo workers to confirm that these shocking sales tactics that encouraged employees to open unauthorized accounts had been around much longer than bank executives have acknowledged. A letter to the CEO was recovered from 2007 describing how employees were opening up fake accounts and forging customer signatures. CEO Stumpf claims he never received these letters. However, several employees are coming forward to claim that they reported the misconduct and had their employment terminated as a result. If true, the misconduct takes on a more sinister turn. Not only were executives aware of the misconduct, but anyone who protested was punished as a result. This would also directly violate laws that protect whistle-blowers from retaliation.
Although the employees themselves were the ones who made the ultimate decision to engage in fraudulent behavior, it is worth examining the corporate culture to determine why so many chose to do so. It soon became clear that Wells Fargo had established aggressive cross-selling sales quotas that employees must meet or risk being fired. What started off as a legitimate sales strategy became increasingly coercive as employees began to take short-cuts to meet sales goals and keep their jobs.
To reach its lofty sales goals, Wells Fargo also set up incentives to engage employees, which increased commissions around the product being emphasized. These products were cross-sold to customers with an aggressive sales incentive program tied to employee compensation. This incentive program suggests that Wells Fargo executives, managers, and employees forgot that a bank’s reputation is built on a basic cultural value of trust. Rather, it falsely became a leader in the banking industry through the utilization of unrealistic sales goals. With the desire to become a leader in the industry through achieving unrealistic sales goals, management became the relevant decision makers responsible for setting up a system that encouraged misconduct. Managers at many branches played a large role in the establishment of unauthorized accounts.
Yet the responsibility for the misconduct stemmed even further up the organization. After all, if the managers’ branches did not meet these new goals, not only could employees be terminated, but the managers could be as well. Although employees opened the accounts and managers implemented procedures to ensure goals were met, it was the high-level executives who initially set the goals that are the most relevant decision makers in this ethical dilemma. These executives were faced with the challenge of finding new ways to distinguish the bank as the leader in the banking industry. To do so, Wells Fargo executives made the decision to establish the sales of simple-to-understand, simple-to-use products such as credit and debit cards, coupled with traditional banking services such as car and home loans. These products were then cross-sold to customers with an aggressive sales incentive program. Once Wells Fargo branch employees realized they could not reach the high sales goals, many began opening unauthorized accounts so it would look like they were meeting these goals. In so doing, they betrayed the trust of their customers.
3-3b Relevant Ethical Values
The scandal had a far-reaching impact on Wells Fargo. The banking and financial services industry depends on a public perception of trustworthiness for its success. Due to public perception and weight on credibility, arguably the scandal could be more destructive to Wells Fargo than a business in a different industry. While ultimately the underlining goal for banks is to make a profit, the financial services industry has a duty to responsibly manage their clients’ assets. Thus, when a bank puts the company’s interests above the interests of its depositors, consumer trust rapidly shatters.
The scandal also cast significant doubt as to whether Wells Fargo believed in the vision and values it claimed to hold so dear. The illicit activities directly conflicted with Wells Fargo’s publicly expressed Vision and Values, which states that Wells Fargo strives to set “the standard among the world’s great companies for integrity and principled performance,” and goes as far as to express, “We value what’s right for our customers in everything we do.” This underlying value of honest business practices comes into direct conflict with the Wells Fargo scandal. Ultimately, the acts undertaken by Wells Fargo were not only unethical, but they were also highly illegal, opening Wells Fargo up to the possibility of criminal charges. While setting goals is a legitimate business practice, senior management failed to communicate the appropriate sales practices expected. Even worse, their failure to check to make sure employees were using appropriate practices seems to indicate an attitude of ethical indifference on the part of top leadership. Senior management’s lack of communication and their lack of action in making sure sales goals were reasonably achievable led branch employees to deal with company pressures in ways that would save jobs—even if it meant engaging in illegal behavior. These activities clearly compromised Wells Fargo’s value of honesty and the importance of its clients’ trust.
The facts point to a cultural failing on the behalf of Wells Fargo’s senior management. It was senior management that fostered a culture in which lying was acceptable. Over a long-term period, Wells Fargo issued credit cards without customers’ authorization, misusing the concept of assumed consent. Assumed consent occurs when customers imply consent through their actions or lack of actions, even if they do not consent verbally. There was no such consent in this case. In fact, customer signatures were often forged, making these activities an obvious example of fraudulent behavior.
Bank customers felt deceived. The bank reported that checking-account openings had fallen 43 percent and credit-card applications 55 percent from the year before. The Wells Fargo scandal has been compared to the Volkswagen emissions scandal due to the blatant deception of the company and massive loss in consumer trust. Since the Great Recession, the financial services industry has been struggling to recoup lost trust. The Wells Fargo scandal will likely not only affect its own business but could impact the level of trust for the entire industry.
3-3c What Next?
For years, Wells Fargo enjoyed a reputation for sound management. Its reputation was so intact that it emerged from the 2008–2009 financial crisis with one of the best reputations of any of the major retail banks. Wells Fargo sidestepped many of the errors of other banks and prospered on meaningful customer relations with a focus on sales. Yet today the bank finds its reputation in ruins thanks to unrealistic sales quotas and a coercive corporate environment. Even worse, sources claim that top executives were aware of these practices years ago, but instead of taking action they allegedly retaliated against whistle-blowers for speaking up. Once Wells Fargo’s illegal practices had been discovered internally, the company could have worked to amend these practices, re-emphasize its corporate values, and begin restoring trust with customers. Reporting the misconduct early might have actually enhanced Wells Fargo’s reputation as it would have shown the bank had no tolerance for unethical behavior whenever it was discovered. Greater senior management involvement and alignment with the values and mission statement of the company would have allowed Wells Fargo to make necessary changes to avoid the 2016 scandal.
Instead, Wells Fargo embraced short-term gains such as increased revenues and incentives even when it resulted in illegal activity. By adopting such stringent ambitious goals—and punishing employees who were unable to meet them in a legitimate manner—Wells Fargo also destroyed relationships with its employees.
With the above considered, it is no surprise that Wells Fargo is struggling to keep customers. Despite taking credit for the scandal, having the CEO step down, and implementing marketing campaigns targeted at rebuilding consumer trust, Wells Fargo’s business practices have been compromised in the eyes of consumers. In addition to government investigations, former Wells Fargo employees have filed lawsuits against the firm. Thus far, one whistle-blower has already won a lawsuit. Former CEO Stumpf was forced to pay back millions in compensation for allegedly turning a “blind eye” to the misconduct. The level of misconduct is so great that regulators are even considering holding the board of directors accountable, something which is rarely done unless it can be proved that the board of directors neglected their duties and was aware (or should have been aware) of the massive fraud taking place.
Ultimately, the stakeholders injured in this situation were the individuals who were victims of the creation of fake accounts, the stockholders, and the employees convicted of fraud. Wells Fargo chose to adopt a short-term perspective and abandoned a deontological approach for the temporary gains that came with committing fraud. Deontology focuses on the means used to achieve an end rather than the end itself. According to deontological moral theory, the means of attaining a certain outcome are just as important morally as the outcome itself. If Wells Fargo executives and managers had prioritized howemployees were making their sales goals, then they would have detected the fraud sooner and taken steps to correct it.
Wells Fargo had a duty to its customers and employees to operate in an ethical manner, but the company allowed lofty sales goals to get in the way of ethical business practices. The company had a duty to its depositors to manage their accounts honestly rather than opening fake accounts without depositors’ knowledge. Moreover, Wells Fargo also had a duty to its employees to create an environment where sales goals could be met without employees taking matters into their own hands. Instead, whistle-blowers are now coming forward to say they were punished for speaking up, which likely created a strong culture of distrust with employees and kept the misconduct hidden. While the company valued its position as a top retail bank in the United States, deontology states that Wells Fargo’s duty to its stakeholders carried significantly more weight than meeting sales goals.
In going forward, Wells Fargo must put its duty to its stakeholders above the company’s aim to make short-term gains. Taking a more long-term, ethical approach would benefit not only its stakeholders but the firm itself. Since the banking industry is built on trust, Wells Fargo has a duty to maintain that trust with depositors and employees even if it means sacrificing some profits in the short term. Developing a strong ethical culture that is intolerant of misconduct will not only allow Wells Fargo to avoid future scandals, it will allow the company to rebuild trust over time. Thoroughly embracing its ethical values will help Wells Fargo regain trust among regulators, consumers, and employees. Until Wells Fargo fully embraces its duties, the company will struggle to put the scandal behind it. Wells Fargo must adopt a renewed focus on its stakeholders to repair customers’ shattered trust and rebuild its reputation.
1. How did Wells Fargo’s focus on short-term gains violate the duties they owed to consumers, regulators, and employees?
2. Describe how the Wells Fargo scandal demonstrates that organizational leaders must not only establish goals but ensure that those goals are being acted upon appropriately.
3. Why are ethical values useless unless they are continually reinforced within the company?