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Which specific steps did Wells Fargo take to establish a strong ethical X culture and organizational practices? I o Wells Fargo's Unauthorized Customer Accounts At its September 20, 2016, hearing, the Senate Banking Committee relentlessly grilled John Stumpf, chairman and CEO of Wells Fargo, about charges that the bank had fraudulently opened unauthorized accounts for millions of customers. Senator Elizabeth Werren (D-Mass.) began with the question, "Have you returned one single nickel of the millions of dollars you were paid while the scam was going on? As Stumpf fumbled in response, she concluded, "So you haven't resigned You haven't returned a single nickel of your personal carnings You haven't fired a single senior executive Instead, evidently, your definition of accountable is to push the blame to your low-level employees who don't have the money for a fancy PR firm to defend themselves. It's gutless leadership A few days later, on September 29, congressional members at a hearing of the House Financial Services Committee echoed the views expressed in the Senate. Congressman Gregory Meck (D-New York) said to Stumpf, "I can't believe what I'm hearing here. You're going to tell me there's not a problem with the bank's] culture?" Patrick McHenry (R-North Carolina) accused Stumpf of being "tone deat" for not grasping the scandal's impact on society's trust in the banking system The two congressional hearings followed shortly after the imposition of fines on Wells Fargo by the Consumer Financial Protection Barcau (3100 million), the Los Angeles City Attorney ($50 million), and the Office of the Comptroller of the Currency:($35 million) The reason for these finds was that the bank had opened more than two million unauthorized checking and credit card accounts without the consent of its customers between May 2011 and July 2015. Wells Fargo settled with these regulatory agencies without admitting or dessing the alleged misconduct. These fines were not the bank's only problems. Other lawsuits against Wells Fargo-from customers, former employees, and shareholders-had started piling up. Shareholders had filed a class action lawsuit alleging that the bank had misled investors about its financial performance and the success of its sales practices. The price of Wells Fargo's stock had fallen more than 10 percent since September 8, when it reached the settlement with regulators, wiping out more than $25 billion of market capitalization. Stumpf and his leadership team faced a major crisis. Page 454 By Samit Kumar Baria, Indian Institute of Management Alundabad, and Manendra & Gujarati Bentley C'hiversity Copstight 2017 by the search Journal and the authors, all rights reserved. This case has been revised and abridged by permission of the authors for publication in this textbook. The complete care appears in the Care Retearch Journal, 37), Spring 2017. under the title, "Wells Fargo Setting the Stagecoach Thundering Again. The case was prepared by the authors for the sole purpose of providing more Ri re Wells Fargo and Company Henry Wells and William Fargo founded Wells Fargo and Company on March 18, 1852. The company begen by offering banking and express services in California, and soon afterwards formed an overland mail service, becoming indelibly linked with the image of a stagecoach drawn by six thundering stallions. The bank survived the Great Depression as well as the difficult period of World War II. The prosperity of the 1960s saw the bank emerge as a malor regional bank in the western part of the United States. By the 1980s, when it started its online banking service, Wells Fargo had become one of the top ten U S. banks The bank weathered the financial crisis of 2007-2008 relatively unscathed. In fact, Wells Fargo ured it as an opportunity to grow by acquiring Wachovia, a bank weakened by the mortgage crisis in 2008. Wachovia's extensive retail network in the eastern United States, which complemented Wells Fargo's, enabled the bank to double both its number of branches and total deposits. By the end of 2015. Well Fargo had become a diversified banking and financial services company with assets of over $1.8 trillion and approximately 265,000 employees, serving one in three U.S. households In 2015, Wells Fargo was organized into three major relatively autonomous, segments. These were community Banking wholesale banking, and wealth and investment management. The community banking division offered a complete suite of diversified financial products and services to consumers and small businesses. Its loan products included lines of credit automobile inventory financing, equity lines, equipment loans, education loans residential mortgage loans, and credit cards, Consumer and business deposit products included checking accounts, savings accounts, money market accounts, Individual Retirement Accounts, and time deposits. The wholesale banking division provided financial solutions to businesses with annual sales exceeding $5 million. It provided a complete line of business banking commercial, corporate, capital markets, cash management, and real estate banking products and services. Finally, the wealth and investment management division provided a full range of personalized wealth management, investment and retirement products and services to high net worth and ultra-high net worth individuals and families Between 2010 and 2015, Wells Fargo's assets grew by 46 percent and net income by more than 85 percent. By early 2015, it had posted 18 consecutive quarters of profit growth. Wells Fargo performed better than its competitoru; during most of these years, the bank's return on assets and return on equity were higher than those of Bank of America, JP Morgan Chase, and Goldman Sachs. Its efficiency ratio (the cost incurred to generate a dollar of revenue) was low relative to that of its competitors. Of Wells Fargo's three major segments of business community banking contributed the most. In 2015, the community banking division contributed 57 percent of revenue, S9 percent of operating income and net income, and 51 percent of total assets Wells Fargo's financial performance was reflected in the increase in its stock orice I. Intus Corporate Governance and Senior Leadership At the time of the Congressional hearings, Wells Fargo's board consisted of 15 directors. Except for Stumpf, every board member was an independent director as defined by the rules of the New York Stock Exchange (NYSE). All standing committees of the board, including the human resources committee that determined the compensation of senior executives, consisted solely of independent directors. The board had also adopted Wells Fargo's Code of Ethics and Business Conduct for its members. In 2016, NYSE Governance Services, a subsidiary of New York Stock Exchange, bestowed the Best Board Diversity Initiative Award on Wells Fargo in recognition of the wide breadth of experience industry, age, ethnicity and gender the board possessed. In 2015, the annual compensation of board members consisted of cash and stock wirds ranging from $279,027 to $402,027 per director? John Stompa served as both chairman of the board and chief executive officer. Born in 1953, Stumpft grew up as one of cleven children om dairy and poultry farm in Minnesota. After earning an undergraduate degree from St. Cloud University and an MBA from the University of Minnesota, Stampf Joined Northwestern National Bank (later Norwest), where he worked his way up through a variety of positions, joining Wells Fargo after the bank acquired Norwest in 1998. In 2002. Stumpf was named group executive vice president of community banking and wan elected to Wells Fargo's board in 2006. Stumpf succeeded Richard Kovacevich us CEO in June 2007 and become chaltman in January 2010. AL CEO Stumpf instituted a policy of open debate on issues concerning the bank. "Around here if you have something to say, you it-nobody is poing to be offended," he said. "We've learned how to disagree without being disagreeable Carrie Totated headed Wells Fargo's community banking division where the unauthorized accounts had been opened-from June 2002 until July 2016. Tolstedt was a veteran in the financial services industry, with 27 years at Wells Fargo. A graduate of the University of Nobranke, she joined Norwest Bank in 1986, rising through the ranks to become a key associate of Stumpf first at Norwest and later at Wells Fargo. In ranking Tolstedt car the top of its list of the 25 Most Powerful Women in Banking in 2015, American Bunker magazine noted the challenges she faced during integration of Wachovia with Wells Fargo. "Onc risk of such a large integration would be that the company's internal service culture would begin to drift," the magazine opined, "but Tolstedt thinks up ways to communicate values to the front line 10 Wells Fargo's impressive financial and stock performance was reflected in the compensation packages given to its senior Pace 456 managers In setting executive compensation, the human resources committee of the board considered the bank's financial performance (including comparison with peers), progress on strategic priorities, strong and effective leadership, business line performance (for business line leaders), proactive assessment and management of risks, and an independent compensation consultant's advice. In 2015, Stumpf and Tolstedt received total compensation of S193 million and 89.1 million, respectively pw s a Wells Fargo's Values and Code of Ethics Wells Fargo described its primary values as follows First, we value and support our people as a competitive advantage and strive to attract, develop, retain and motivate the most talented people we can find Second we strive for the highest ethical standards with our team members, our customers our communities and our shareholden Third, with respect to our customers, we strive to bare our decisions and actions on what is right for them in everything we do. Fourth for team members we strive to build and sustain diverse and inclusive culturo-one where the feel valued and respected for who they are as well as for the soills and experiences they bring to our company, Fifth, we also look to each of our team members to be leaders in establishing, tharing and communicating our vision Wells Fargo's Code of Ethics and Business Conduct both described the importance of ethical behavior and emphasized employees responsibility to protect the reputation and integrity of Wells Fargo The bank also recommended a process for employees to follow when faced with an ethical dilemma: they were instructed to contact their manager, HR advisor, or Office of Global Ethics and Integrity for help Employees could also report any concern regarding accounting, internal accounting controls, and auditing matters directly to the audit and examinations committee of the board or could call the bank's ethics hotline (called "Ethiciline") if they awor suspected illegal or uncthical behavior 13 The "King of Cross-Selling" Many analysts attributed Wells Fargo's financial success in large part to its prowess in cross-selling. Cross-selling referred to the practice of marketing related or complementary products to un organization's existing customers (as contrasted with attracting new customers). Cross selling had several benefits. It increased a customer's reliance on the firm and decreased the likelihood he or she would switch to competitor. It allowed a firm to extract the maximum revenue potential from cach customer Servicing one account rather than several was also more efficient. In 2006, Richard Kovacevich, Stumpfs predecessor as CEO explained Wells Fargo's rationale for cross-selling this way Crow-selling or what we call "neede-based selling our most important strategy. Why? Because it is an increasing returns business model It's like the network effect of ecommerce It multiplies opportunities geometrically. The more you sell customers, the more you know about them. The more you know about them, the easier it is to sell them more products. The more products customers have with you, the better value they receive and the more loval they are. The longer they stay with you the more opportunities you have to meet even more of their financial needs. The more you sell them, the higher the profit because the added cost of selling another product to an existing customer is often only about 10 percent of the cost of selling that same product to new H customer. Under Stumpft and Tolstedt's Leadership, Welle Fargo continued to emphasize the importance of cross-selling. In addition to Page 57 signing up existing customeru for additional services, the bank offered customers a set of interrelated products with discounts lotegrated into the package. For example, its premier relationship package (called PMA) offered customers a free current account and free bill payments, together with options to add a savings account, credit card, mortgage loan, and u discount brokerage account About 63 preesent of new customers opted for such packages, with an average of four products per package 15 Exhibit A depicts the coursell ratio (number of accounts of products per customer) of Wells Fargo from 1995 to 2016. As shown, by 2009 Wells Fargo had recorded an increased cross-cli ratio for eleven consecutive years. At the time of the Wachovia acquisition in 2003, Wells Fargo's cross-sell ratio (5.95 per customer) was higher than Wachovia's (4.65) Wachovia's customers therefore provided an opportunity for Wells Fargo to offer additional products and services, further increasing the cross-sell ratio. In the 2010 annual report Stumpf proposed a goal of eight accounts per customer, declaring the number rhymed with great." He added. "Perhaps our new cheer should be: "Let's go again, for ten!" In the same report, he also mentioned the challenges of cross-selling "If anyone tells you it's casy to can more business from current customers in financial services, don't believe them We should know. We've been at it almost a quarter century We've been called truc or not, the king of cross-sell 16 Page 458 a Unauthorized Accounts While most Wells Fargo employees tried to sell the right products to the right customers, some responded to the intense pressure to meet sales targets by opening accounts that customers had not authorized. An internal investigation later revealed that bank employees had opened as many as 1,534,250 unauthorized deposit accounts and another 565,443 unauthorized credit card accounts between 2011 and 2015 ? How had they done this without the customers' knowledge? In some cases, employees had created phony PIN numbers and fake e mail addresses to enroll existing customers for "Net Banking services and had forged client signatures on paperwork 32 Some of the questionable accounts had been created by moving a small amount of money from an existing account to open a new one for a customer. Shortly thereafter, the employees would close the new account and move the money back to the original account thereby earning credit toward their quotas. Sometimes, customers were told by phone that Wells Fargo planned to send them a new credit card is "thank you for their business. If a customer didn't want the card, he or she was told to cut up the card when it arrived in the mail. However, most customer were unaware that issuing a new card required a credit check, which could potentially lower their credit scores In many cases, customers did not know that a new account had been opened in their name until they received a congratulatory Pape 159 terten. Sometimes, when the customers complained about unwanted credit cards, the branch manager would blame a computer stitch of the card had been requested by someone with a similar name. On several occasions, upon receiving the customer complaint Wells Fargo refunded the amount charged to the customer. However, such refund would not restore any deterioration in the creditworthinens 20 of the customer, who might face higher interest rates or be denied access to credit in the future. Opening unauthorized accounts clearly violated the bank's rules. A 2007 internal document titled Salet Dailey Manual stated that customer consent for each specific solution or service was required every time (including for each product in a package). The documentation stated that splitting customer deposit and opening multiple accounts for the purpose of increasing potential Incentive Compensation (IC) in considered a males integrity violation. 24 When the Senate Banking Committee questioned Stumpf about the unauthorized accounts, he repeatedly stated that the vast majority of employees did the right thing, and whenever an internal investigation had found that an employee had created an account and funded it on behalf of the customer without that customer's permission, the employee was terminated. He said employees who had opened unauthorized accounts had wolated the company's code of ethics were dishonest, and did not honor our culture Wells Fargo refunded the amount charged to the customer. However, much refund would not restore any deterioration in the creditworthiness complet, of the customer, who might face higher interest rates or be denied access to credit in the future 23 Opening unauthorized accounts clearly violated the bank's rutes A 2007 internal document titled Sales Quality Manual stated that customer consent for each specific solution or service was required every time (including for cach product in a package). The document also stated that splitting a customer deposit and opening multiple accounts for the purpose of increasing potential Incentive Compensation (1) is considered a ales integrity violation. When the Senate Banking Committee questioned Stumpf about the unauthorized accounta, he repeatedly stated that the vast majority of employees did the right thing, and whenever an internal investigation had found that an employee had created an account and funded it on behalf of the customer without that customer's permission, the employee was terminated. He said employees who had opened unauthorized accounts had "violated the company's code of ethics, were dishonest, and did not honor our culture Wells Fargo's external auditors, KPMG, did not raite any red flags in their audit reports or in their reports on the effectiveness of internal controls at the bank during the period covered by the settlements 25 However, top managers knew about the problem as early as 2011, when the bank fired 1,000 employees for opening unauthorized accounts (The board was informed of these terminations. 126 1. December 2013; the Los Angeles Times published an investigative article under the title. "Wells Fargo's Pressure Cooker Sales Culture Comes at a Cout, based on interviews with employees and a review of bank documents and court records, putting the issue in the public eye. At both the 2014 and 2015 annual meetings, employees had delivered petitions with over 10,000 signatures, urging the board to recognize the link between high-pressure salds quotas and the fraudulent opening of accounts without customer permission. In August 2015 Wells Fargo hired PricewaterhouseCoopers LLP (PwC) to carry out a detailed analysis of the sales practices pertaining to all of the 82 million deposit accounts and nearly 11 million credit card accounts that had been opened between 2011 and 2015 to quantify the remediation needed to compensate customers who had suffered because of accounts fraudulently opened in their names. About a dozen PwC employees worked on the assignment for about a year and confirmed the prevalence of fraudulent sales practices at the banke prim vide terminated 30 Employees Speak Out In the wake of the congressional hearings and fines levied against Wells Fargo, dozens of employees spoke to the media about their experiences The Wall Street Journal reported the story of one employee (Scott Trainor) who said that managers suggested that employees hunt Page 460 for sales prospects at bus stope and retirement homes The employees who refused to do so werd harassed, penalized, and even The New York Times reported that another employee (Dennis Russell) said that as a telephone banker, he handled incoming customer service calls and was expected to refer 23 percent of his callers to a sales representative for additional product sales. But the customers Russell spoke with were usually in dire financial shape Looking at their accounts, he could see mortenges in foreclosure, credit cards in collection, and care being repossessed for overdue toan payments. "The people catting didn't have assets to speak of Russell said "What products could you postibity offer them in a legitimate way? It's a crock, they established the culture that made this happen-it comes down from the top" Russell was fired in 2010 CBS neported that a former banker (Yesenin Guitron) sued Wells Fargo in 2010 claiming that intense sales pressure and unrealistic quotar drove employees to falsify documents and game the system to meet their saler goals. She did everything Wells Fargo bad asked employees to do to report much micconduct. She told her manager about her concerns. She catted Wells Fargo'r ethics hotino Wheo those steps yielded no results, she went up the chain, contacting an HR representative and the bank's regional manager. After month of retaliatory harus ment, Guitron was fired for insubordination 2 CNN Money reported that a Wells Fargo employee (Bill Bado) had called the ethics hotline and sent an email to human resources in September 2013, flagring sales he was instructed to execute that he believed to be unethical. Eight days after that email, he was terminated on the grounds of tardiness 33 Another employee (Christopher Johnson) told The New York Times that after he started working his manager began proseuring him to open accounts for his friends and family, with or without their knowledge. Following the instructions received during training, he called the company's ethics hotline. Three days later, Johnson was fired for "not meeting expectations Thic dismissals of Bado and Johnson occurred despite the bank's explicit non-retaliation policy outlined in a handbook that was given to every employce