In an independent investigation report released this week into the Wells Fargo’s fraudulent account scandal, the board was supposed to accomplish three goals: get at the “root causes” of the company’s sales scandal, identify solutions so it would never happen again, and restore trust in the bank. On all three measures, the board’s report has failed miserably because, with minor exceptions, the report ignores the board’s central role in contributing to the scandal while offering no substantive remedies for the board’s own failures.
Negative reaction to the report has been swift. The LA Times called the report a “whitewash” for the directors and the San Francisco Chronicle labelled it “a perfunctory legal ...cover for the directors, who already face lawsuits for breach of fiduciary duty.” The New York Times Editorial board condemned the report saying that the Wells Fargo board cast blame on ex-employees but had itself “failed in its oversight duty for a long period of time.” Bloomberg said the company would be better off with the current directors gone and the Charlotte Observer’s Editorial Board said it was difficult to see how the company could move forward effectively with the current board “at the helm.”
The Wells Fargo board of directors deserves the bad rap it is getting for three other reasons:
The board had fair warning years ago and failed to act.
Since at least 2002, the Board’s Audit and Examination committee received quarterly reports that detailed suspicious activity related to sales, employee misconduct and related calls to ethics hotlines, the board’s independent investigation found. In 2002, there were “mass terminations” due to sales conduct and the Community bank created “a sales integrity task force” that year.
In 2004, Northstar Asset Management raised issues related to Wells’ loan sales and asked the bank’s board to “conduct a special executive compensation review” because, according to banking regulators at the time, Wells Fargo had “not adjusted compensation policies to discourage abusive sales practices” and did not have adequate audit procedures in place. The board dismissed the request, saying that Wells Fargo’s “compensation and commission policies are designed to encourage appropriate sales practices” and that the bank had “comprehensive monitoring and audit procedures.”
It wasn’t until 2016 that the board began its own formal investigation into sales practices at the bank. With what we know about the scandal today, it’s clear the board should have launched an investigation much sooner.
The board’s investigation does not address member’s general sluggishness.
It sidesteps the board’s systemic failures to properly assess the company’s and the CEO’s performance, ensure adequate financial and operating controls, oversee risk appropriately, ensure employees were protected from unfair retaliation, assess customer harm, and fire personnel who lied to the board.
The report also omits relevant discussions on the board’s general sluggishness and the failure of its members to read all materials carefully, ask relevant questions and review outside sources of information, such as Glassdoor, which shows that the number one complaint of employees about the company is its sales pressure.
In addition to failing to adequately address its own central role in wrecking the bank’s reputation, the board also failed to deliver a report that addressed the whistleblower cases and the retaliation against employees who raised red flags. Without addressing those issues in depth, the board cannot deliver a report with remedies to make sure this never happens again.
The board fails to inspire a new corporate culture.
In summing up remedies for past misdeeds, the board’s report described changes in reporting relationships and punishments in the forms of managerial firings and claw backs. The board did not discuss changing the board’s focus to better understand the needs of all its stakeholders, including concerns of employees, customers, regulators, shareholders and the community. Nor does it describe any recompense by board members for their own lapses in the form of reorganization, resignations, claw backs or other reimbursement to injured parties.
In so doing, the board missed an important opportunity to signal a new culture of openness and shared accountability, rather than retaliation. Instead, the report strongly suggests that an emphasis on blame will continue to permeate the culture as long as the current board rules. As a result, the board did not meet its third objective: re-establishing trust.
Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance, an independent board and executive educational and advisory firm she founded in 1999.