How Far Would Wells Fargo Go? Thoughts on the "Gotcha" Moment

Sales Set to "Max"

As you might expect, the news about Wells Fargo’s sales practices launched strong reactions from members of our firm. Below, we share edited excerpts from internal emails sent by CEO Tom Quinn and Senior Portfolio Manager Ray Peebles.

Drawing on a collective 60+ years of experience—one as an entrepreneur and one as a former employee of a big bank—each has a unique point of view, ultimately highlighting the importance of aligning economic incentives with corporate values… to protect the client at all costs.

Tom Quinn, CEO

I have a bank account at Wells Fargo, so I received an email letter this morning from their CEO acknowledging the fraudulent behavior of some employees and explaining the corrective actions that the bank is taking.

At our firm, as in most other businesses, we write and talk about the behaviorally important stuff, like values and culture and ethics and service-before-self.  I found interesting the words that Wells Fargo’s CEO used to acknowledge and try to move past this horrendous "gotcha" moment:

  • “There is nothing wrong with our culture”
  • “There was no incentive to do bad things”
  • “It was the employees’ fault”
  • “I feel accountable”
  • “This conduct was not acceptable” (i.e. stealing)

Employees and branch managers were given high sales incentives for opening new accounts, selling CD’s, home equity lines, etc.  They had minimum goals in order to keep their jobs and higher goals for increased compensation.  These goals could be accomplished by finding new clients (tough) or cross-selling to existing clients (easier).  Or, they could cross-sell to existing clients without the client even knowing about it (fraud). 

Many ethical employees had been terminated for not making the minimum standard and many fraudulent employees had been retained and promoted. While the CEO’s words utter “accountability”, management’s policies and practices have clearly laid the blame on the employees … then to the branch managers … and then on up the line to some level. 

The key take-away here is that the blame is with senior management.  Management set the incentives.  They knew the pressure and occasional behavior that would result.  They did not supervise/manage that unavoidable behavior. 

What has this cost the bank?  They were charged a negligible $185 million fine by regulators, which is 0.2% of last year's revenue.  Of course, there is a material reputation hit for this bank, a bank that is generally perceived as higher quality than most others.  The CEO will be testifying before Congress; numerous damaging articles are being published; apology letters to all customers; etc. 

However, in my opinion, the long term effect will be immaterial for any too-big-to-fail bank.  This blip in the screen will pass.  A giant publicly traded company cannot avoid pushing sales incentives, cross-selling and other competitive practices.  Wells Fargo will establish additional behavioral controls as they ease back into these practices.  These bank/broker practices will not change.

John F. Kennedy once said:  “… we must never forget that the highest appreciation is not to utter words but to live by them.”  As you know, the CEO’s quotes are meaningless.  All that matters is what each of us decide on the behavior that we want to live by every day.

Ray Peebles, Senior Portfolio Manager

Management is doing things right.  Leadership is doing the right things. --Peter Drucker

5,300 workers were terminated for operating under conditions that management prescribed.  Were they specifically instructed to open fraudulent accounts?  Highly doubtful.  But to suggest that this behavior was simply the work of “rogue employees” including middle and lower management, strikes me as disingenuous.

This bank, famous for its cross selling reputation, faced an ever challenging environment in an era of suffocating regulation and stubbornly low interest rates.  In an effort to navigate this new world, management leveraged this culture by tying compensation to sales goals.  The results were revenue growth and increased profitability, metrics surely included in management’s compensation. 

Now that the fraud has been exposed and many lower level jobs were lost, the ramifications to those in upper management have been less than punitive.  In fact, the executive who ran community banking division where much of the fraud occurred is retiring this year with an estimated pay out of $125 million.  The CEO, whose job appears to be safe, even praised the executive as a “champion for their customers”. 

Economics and values can clash when misaligned. And unfortunately, economic incentives usually win.   

Credibility is an asset that can take years to achieve and only days to destroy.  As such, it should be valued and not placed at risk.  Before any decision is made at CornerCap, we strive to determine the effect it may have on the client.  We expect our senior leadership to provide the template that the rest of the CornerCap team will follow.  If mistakes are made, we strive to identify the problem and take ownership.  To do the right thing. 

If we follow that approach, the credibility that Tom, Gene, and the rest of the team have worked so hard to establish over the last 27 years will be in safe hands. This event is a great reminder that everyone in the industry should align economic incentives with corporate values, to protect the client at all costs.