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Do you have concerns about the number of external engagements Wells Fargo's board members have? If yes, why? Upon reading the LA Times story, what actions should Wells Fargo's board of directors take? Should there be a materiality threshold before the board expects to be informed about a potential problem? Post-LA Times Story After the LA Times report, the chair of the board's Risk Committee instructed Wells Fargo's Chief Risk Officer (CRO) to take the lead in addressing the sales practice issues and to keep the Risk Committee informed of Corporate Risk's efforts. Sales practices and the cross-sell strategy were identified as a noteworthy risk issue to the Risk Committee and the full board for the first time in February 2014, but they were not mentioned in the Executive Summary, which covers the most important enterprise risks. That same month, the HR director and the CRO reported to the board's Human Resources Committee that action plans were in place to address the issue and that further monitoring of sales practices was warranted. However, they also reported that they did not feel it was necessary to adjust executive compensation for the 2013 cycle for sales integrity matters, a recommendation which the board followed. At the full board meeting in April 2014, the CRO reported that sales practices had now become a current focus for the Corporate Risk Division, and at the August Risk Committee meeting, the CRO and CEO reiterated Wells Fargo's focus on ensuring its cross-sell strategies were consistent with the development of long-term customer relationships. Throughout 2014, the board and Risk Committee received assurances from the Corporate Risk Division, the Community Bank, and HR that sales practice issues were the subject of heightened attention, that the control environment was operating effectively, and that the situation was improving. Because of perceived improvements, in February 2015, the Noteworthy Risk Issues report reduced sales conduct from High to Medium risk, stating that management was "build[ing] out additional second line of defense oversight of Sales Practices." Also in February, the Audit Function reported that no issues were found in its audits of Wells Fargo's sales practices and cross-sell, which were rated effective with no reportable issues. That same month, the Human Resources Director and the CRO advised the Human Resources Committee that the Community Bank had taken appropriate actions to address sales integrity issues, and therefore, there was no need to adjust downward executive compensation for the 2014 performance cycle. In April of 2015, the head of the Community Bank addressed the Risk Committee for the first time. She discussed the improvements in risk management that had been made in the Community Bank and reiterated her view that the problem was a result of a few bad apples, and not a reflection of a broader cultural problem within the Community Bank In May of 2015, the Los Angeles City Attorney filed a lawsuit against Wells Fargo based on the Bank's alleged fraudulent and abusive sales practices. Post-Lawsuit After the lawsuit was filed, the chair of the Risk Committee demanded a presentation concerning the issues alleged in the lawsuit and the broader context of sales practices at Wells Fargo. An early draft of the presentation - which was never delivered to the Committee - disclosed that approximately 1% of employees in the Community Bank had been terminated for sales integrity violations in 2013 and 2014 After the community Bank's management questioned the validity of this number, it was removed from the final presentation that was delivered to the Risk Committee. Instead, during the May 2015 Risk Committee meeting the head of the Community Bank informed the committee that in 2013 and 2014 combined, 230 employees had been terminated for sales abuses, and that 70% of these employees had been terminated for intentionally inputting incorrect customer phone numbers into the systems, while the remaining 30% were terminated for improperly funding unauthorized customer accounts from authorized accounts. The Risk Committee was surprised by the presentation and considered the 230 number to be high. Some managers within Wells Fargo knew the actual number to be much higher. The head of Wells Fargo's Internal Investigations Division, who reported to the head of Corporate Security, had lobbled for the presentation to cite 2,500 employee terminations for sales practice issues in 2013 and 2014. The head of the Community Bank, along with the Community Bank's CRO, vigorously pushed back against these figures which were ultimately left out of the presentation At the full board meeting in June, the CRO - who was away on vacation during the May Risk Committee meeting - informed the board that Corporate Risk would be conducting a comprehensive review of the Bank's sales practices and that a third-party consulting firm would also be brought in to conduct an independent review of Wells Fargo's training, compensation, and sales practices. The results of the consulting firm's review were presented to the board at their October 2015 meeting. During this meeting, the board also received an update from the head of the Community Bank on her group's efforts to address the sales practice issues, as well as an update from the CRO on how Corporate Risk was bolstering oversight of Wells Fargo's sales practices. The board also discussed bringing in a consulting firm to conduct an analysis of customer harm resulting from improper sales practices. In December 2015, the chair of the Risk Committee and the board's lead independent director met with Wells Fargo's CEO - who was also the board chair at that time to express their view that the head of the Community Bank was unfit to continue serving in her current capacity. They felt as though she had misled the board on the severity of the sales practices issue and was resistant to change. By this point, the head of the Community Bank was now reporting directly to Wells Fargo's new Chief Operating Officer (COO), and he requested that the board grant him six months to assess her performance, a request which most board members considered reasonable. At the February 2016 Risk Committee meeting, the CRO reported on the growth of the Corporate Risk function and the new initiatives designed to address the sales practice issues. That same month, the board's Human Resources Committee met to determine compensation for 2015 for senior executives, including the head of the Community Bank. Although several board members were unhappy with her performance, most believed the sales practice issue was an isolated one, with only 230 employees in one region having been terminated for misconduct. Wells Fargo's CEO maintained his intense loyalty to the head of the Community Bank, and advocated that her compensation should be treated no differently from that of the other senior executives. Accordingly, no Wells Fargo executives had their compensation adjusted downward as a result of the sales practice issues The board finally received accurate numbers regarding sales integrity violations after asking the Chief Global Ethics Officer to provide a written report to the A&E Committee, which was delivered in May, 2016. The report indicated that 1,327 Community Bank employees in 2014, and 960 in 2015, were terminated for sales integrity violations Upon the conclusion of the Coo's review of the head of the Community Bank's performance, the board issued a resolution in July, which immediately removed her from her position and announced she would retire as of December 31, 2016 In September of 2016, Wells Fargo reached a settlement with the City of Los Angeles, the OCC, and the Consumer Financial Protection Bureau. For the first time, directors learned that approximately 5,300 Wells Fargo employees had been terminated between January 1, 2011, and March 7, 2016, for sales practice violations that included opening over two million unauthorized deposit and credit card accounts and charging some of their customers fees for these unauthorized accounts. The settlement required, among other things, that Wells Fargo pay $185 million in penalties. Questions What are the pros and cons associated with the role of board chair and CEO being held by the same person? What impact, if any, did the fact that the same person held both roles have in this situation? Do board members have an obligation to track external items (eg, news articles, blog posts, consumer complaints) on its own? What about internal items such as exam reports or internal audit reports? Should a board understand how lower level employees, not just executives, get compensated? How far should a board go in making determinations about the hiring and firing of senior executives? How would you assess the board's performance after the LA Times story was published? Post-Settlement