Looking at the case as a whole, what steps would you recommend Wells Fargo, its senior managers, and its board of directors do now to prevent such events from occurring again in the future?

Case:

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 Warren (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 earnings. 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 Meeks (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 deaf" 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 Bureau ($100 million), the Los Angeles City Attorney ($50 million), and the Office of the Comptroller of the Currency ($35 million). The reason for these fines 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 denying the alleged misconduct. These fines were not the bank's only problems. Other lawsuits against Wells Fargofrom customers, former employees, and shareholdershad 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.

Wells Fargo and Company

Henry Wells and William Fargo founded Wells Fargo and Company on

March 18, 1852. The

company began 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 major

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 used 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, Wells 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 competitors;

during most of these years, the

bank's return on assets and return on equity were higher than

those of Bank of America,

J. P. 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 revenues, 59 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 price. In

July 2015, with market capitalization of about $300 billion,

Wells Fargo became the most

valuable bank in the world. Its stock outperformed the broader

benchmark, consisting of about 24 leading national and regional banks. An

investment of $100 in the bank's stock at the end of 2009 would have been worth

$230 by the end of 2015, earning investors a compounded annual return of 12.4

percent over the six-year period. By contrast, for the same period, an

investment in BKX (a bank index) would have produced a compounded annual return

of only 9.4 percent. Wells Fargo stock had also outperformed the broader stock

market index over longer periods of time. For the decade ending December 2015,

its stock yielded a 14.3 percent compounded annual return to the stockholders,

compared with the 7.3 percent for S&P 500 index.

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 awards ranging from $279,027 to

$402,027 per director.

John Stumpf served as both chairman of the board and chief executive officer. Born in

1953, Stumpft grew up as one of eleven children on a dairy and

poultry farm in Minnesota.

After earning an undergraduate degree from St. Cloud University

and an MBA from the

University of Minnesota, Stumpf 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 was elected to Wells Fargo's

board in 2006. Stumpf succeeded Richard Kovacevich as CEO in June 2007 and become

chairman in January 2010. As CEO, Stumpf instituted a policy of open debate on

issues concerning the bank. "Around here if you have something to say, you

say itnobody is going to be offended," he said. "We've learned how

to disagree without being disagreeable."

Carrie Tolstedt headed Wells Fargo's community banking divisionwhere the unauthorized accounts had been openedfrom June 2007 until July 2016. Tolstedt was a veteran in the financial services industry, with 27 years at Wells Fargo. A graduate of the University of Nebraska, 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 near the top of its list of the 25 Most Powerful Women in Banking in 2015, American Banker magazine noted the challenges she faced during integration of Wachovia with Wells Fargo. "One 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."

Wells Fargo's impressive financial and stock performance was

reflected in the compensation packages given to its senior 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 $19.3 million and $9.1 million,

respectively.

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 shareholders. Third, with respect to our

customers, we

strive to base our decisions and actions on what is right for

them in everything we

do. Fourth, for team members we strive to build and sustain a

diverse and inclusive

cultureone where they feel valued and respected for who they

are as well as for the

skills and experiences they bring to our company. Fifth, we also

look to each of our

team members to be leaders in establishing, sharing 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 "EthicsLine") if they saw or

suspected illegal or unethical behavior.

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 an 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 a competitor. It allowed a firm to extract the maximum

revenue potential from each customer. Servicing one account rather than several

was also more efficient. In 2006, Richard Kovacevich, Stumpf's predecessor as

CEO, explained Wells Fargo's rationale for cross-selling this way:

Cross-sellingor what we call "needs-based" sellingis our most important strategy.

Why? Because it is an "increasing returns" business

model. It's like the "network

effect" of e-commerce. 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 loyal they

are. The longer they

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 a new customer.

Under Stumpft and Tolstedt's leadership, Wells Fargo continued to

emphasize the importance of cross-selling. In addition to signing up existing

customers for additional services, the bank offered customers a set of

interrelated products with discounts integrated 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 a discount brokerage account. About 63 percent

of new customers opted for such packages, with an average of four products per

package.

Exhibit A depicts the cross-sell ratio (number of accounts or products per customer)

of Wells Fargo from 1998 to 2016. As shown, by 2009 Wells Fargo

had recorded an

increased cross-sell ratio for eleven consecutive years. At the

time of the Wachovia

acquisition in 2008, 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 easy to earn 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, true or not, the 'king of cross-sell.'"

Wells Fargo was not alone in using cross-selling as a marketing

tool. Several other

large and regional banks, including Bank of America, Citizens

Bank, PNC Bank, SunTrust

Bank, and Fifth Third Bank, also used this strategy. However,

Wells Fargo's success in

cross-selling was unparalleled. In the second quarter of 2016,

the cross-sell ratio (number

of products or accounts per customer) for U.S. banks in 2016

averaged 2.71; Wells Fargo's

was 6.27.

To improve its cross-sell ratio, Wells Fargo developed a system

of incentives for its

employees. Employees who cross-sold successfully were rewarded

with extra compensation. Branch employees who hit sales targets could earn

bonuses of $500 to $2,000 per quarter, on top of base salaries of about $25,000

to $30,000 a year.18 District managers could earn bonuses of $10,000 to $20,000

a year. In addition to providing bonuses, the bank mandated quotas for the

number and types of products to be sold by employees. One employee remarked,

"If we did not make the sales quotas, we had to stay for what felt like

after-school detention, or report to a call session on Saturdays."19

Employees reported that branch managers routinely monitored their progress

toward meeting their sales goals, sometimes hourly, and sales numbers at the

branch level were reported to higher-ranking managers as many as seven times a

day. If an employee did not meet their quota, he or she was reportedly

chastised by the community banking president in front of other staff.

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 1,534,280 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. 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 as a "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 customers 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 letter. Sometimes, when the customers complained about unwanted credit cards, the branch manager would blame a computer glitch or say 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 creditworthiness 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 Sales Quality Manual stated

that customer consent for each specific solution or

service was required every time (including for each 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 (IC) is considered a sales integrity violation." 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 "violated the company's code of ethics, were dishonest, and did not

honor our culture."

Wells Fargo's external auditors, KPMG, did not raise 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. 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.) In December 2013, the

Los

Angeles Times

published an investigative article under the title, "Wells

Fargo's Pressure-Cooker Sales

Culture Comes at a Cost," 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 sales 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 bank.

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 for sales prospects

at bus stops and retirement homes. The employees who refused to do so were

harassed, penalized, and even terminated. 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 mortgages in foreclosure, credit cards in collection, and cars

being repossessed for overdue loan payments. "The people calling didn't

have assets to speak of," Russell said. "What products could you

possibly offer them in a legitimate way? It's a crock, they established the

culture that made this happenit comes down from the top." Russell was

fired in 2010.

CBS News reported that a

former banker (Yesenia Guitron) sued Wells Fargo in 2010

claiming that intense sales pressure and unrealistic quotas

drove employees to falsify documents and game the system to meet their sales

goals. She did everything Wells Fargo

had asked employees to do to report such misconduct. She told her manager about her

concerns. She called Wells Fargo's ethics hotline. When those

steps yielded no results, she went up the chain, contacting an HR representative

and the bank's regional manager. After months of retaliatory harassment,

Guitron was fired for insubordination.

CNN Money reported that a

Wells Fargo employee (Bill Bado) had called the ethics

hotline and sent an e-mail to human resources in September 2013,

flagging sales he was

instructed to execute that he believed to be unethical. Eight

days after that e-mail, he was

terminated on the grounds of tardiness. Another employee

(Christopher Johnson) told

The New York Times that after he

started working, his manager began pressuring 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."

The dismissals of Bado as well as

Johnson occurred despite the bank's explicit non-retaliation

policy outlined in a handbook

that was given to every employee.

Wells Fargo's Response

At the congressional hearings, Stumpf apologized several times,

stating, "We recognize

now that we should have done more sooner to eliminate unethical

conduct or incentives

that may have unintentionally encouraged that conduct." He

accepted full responsibility

and said that the bank would take steps to address any

underlying problems and restore its customers' trust. But he also insisted that

"we never directed nor wanted our employees, whom we refer to as team

members, to provide products and services to customers they did not want or

need."

The bank had already taken several remedial actions. Stumpf

testified that since 2011

Wells Fargo had fired 5,300 employees who had opened

unauthorized accounts, but he

also emphasized that this number represented a small percentage

of the bank's employees most of whom had done nothing wrong. The bank had

refunded to customers $2.6 million of wrongfully charged fees. Stumpf also

revealed that he had recommended that Wells Fargo's board rescind unvested

stock awards of $41 million to him and $19 million to Carrie Tolstedt, who led

the bank's community banking division where the wrongful sales practices had

occurred. He said that the bank would eliminate sales goals

("quotas") for cross-selling, but would not back away from

cross-selling completely. He also noted that although the settlements involved

conduct that began in 2011, the bank's investigation was going back to 2009 and

2010, when Wachovia was being absorbed, to determine whether misconduct was

taking place then.

But Stumpf's statements did little to appease the members of

Congress. Many Senators

and congressional members demanded Stumpf's resignation and the

claw-back of his compensation of about $200 million during the years of

misconduct. They also demanded a clawback from Tolstedt, who was set to retire

at the end of 2016 with a $124 million paycheck (a mix of shares, options and

restricted stock). "You have broken long-standing ethical standards inside

the company," said Congressman Patrick McHenry (R-North Carolina).

"How can you rebuild trust?"