Wells Fargo's board said Monday it would claw back an additional $75 million in incentive pay from former CEO John Stumpf and ex-community banking chief Carrie L. Tolstedt, blaming both for failing to realize the seriousness of a growing problem with unauthorized customer accounts.
The actions were detailed in a report following a months-long probe into sales practices that ultimately led to the San Francisco-based bank's $185 million settlement with federal and local regulators over more than 2 million credit card and deposit accounts that clients hadn't requested. The services were set up by employees working to meet an aggressive goal of selling eight different products to each customer household.
More than 5,000 employees were dismissed over a five-year period for their involvement, and the September disclosure led to customer and employee lawsuits as well as the loss of lucrative government bond deals. Growth in consumer accounts has dropped significantly since, as Wells Fargo works to restore its tarnished reputation.
The unauthorized accounts failed to raise sufficient red flags over a span of several years partly because of a decentralized corporate structure in which division chiefs were encouraged to run their department "like they own it," according to the board's report, compiled by law firm Shearman & Sterling.
The system gave Tolstedt too much leeway in operating so-called retail branches as if they were retail stores focused solely on sales, and the effects were compounded by Stumpf's admiration for his long-time colleague and the growth numbers she delivered.
"The Community Bank's senior leaders distorted the sales model and performance management system, fostering an atmosphere that prompted low-quality sales and improper and unethical behavior," the report said. "It was convenient instead to blame the problem of low-quality and unauthorized accounts and other employee misconduct on individual wrongdoers and poor management in the field rather than on the Community Bank's sales model."
Much of the misconduct was concentrated in Los Angeles and Arizona, the report highlighted.
Stumpf himself retired in October after two Congressional hearings in which at least one lawmaker accused the bank of fraud. The board said it would take an additional $28 million in incentive pay from the former chairman and CEO, who had already given up $41 million of unvested awards and forfeited his bonus for last year.
An optimistic leader, Stumpf had "refused to believe that the sales model was seriously impaired," according to the report. "His reaction invariably was that a few bad employees were causing issues, but that the overwhelming majority of employees were behaving properly. He was too late and too slow to call for inspection of, or critical challenge to, the basic business model."
Tolstedt, who left the bank in June, "effectively challenged and resisted scrutiny" both from within her division and outside of it, and kept from the board the total number of employees fired for setting up fake accounts, according to the report.
As a result, the board reclaimed an additional $47.3 million of her stock options; Tolstedt had already forfeited $19 million in equity awards as well as her bonus and severance pay.
Stumpf's successor, Tim Sloan, had little involvement with the bank's sales practices before becoming COO in November 2015. Roughly seven months later, he decided to remove Tolstedt from her position, the report said.
Since he was promoted to CEO last year, Sloan has focused the bank on rebuilding the trust of its customers.
"The practices and pressures that harmed our customers, our team members, and our brand and reputation will never be allowed to occur again," Sloan said in a statement. "We've changed leadership; held executives accountable; changed how we compensate and lead our retail bankers; centralized key control functions, such as risk management and human resources; and taken steps to promote a workplace where team members are encouraged to raise concerns."
Wells Fargo stock, hammered in the fall by the fake-accounts scandal, later rebounded. In the months since, the shares have climbed almost 10% to $54.64.
The damage, though, is still apparent, said TheStreet's Jim Cramer, whose Action Alerts PLUS charitable trust holds Wells Fargo stock: The price should be close to $64.
"Stumpf looked the other way," Cramer said. "This bank was famous for opening more accounts. Now when you look at what they were famous for and you wonder how much of it was phony, you take away their primary advantage over all other banks, and that is something that is going to weigh on the bank."
This article, originally published at 9:46 a.m. on Monday, April 10, 2017, has been updated with commentary.