The “retirement” last week of Wells Fargo’s chairman and CEO, John Stumpf, was not the end of this story; rather it’s just the first chapter of a thick book on crisis management, corporate governance and ethics. As a former President at First Bank System (now U.S. Bank) with responsibility for community banking and financial services, I am very familiar with cross-selling programs and Wells Fargo’s program is no different than those of other banks with the exception that they carried it to a fraudulent extreme by opening over two million phony bank and credit card accounts over the past five years without their customers’ knowledge or consent.

It’s too bad this situation happened since it not only hurt Wells’ and its customers, employees and investors, but it struck a severe blow to the entire banking industry.  Back in the 80’s and 90’s Minneapolis-based Norwest Bank (now Wells Fargo) enjoyed the highest degree of respect and they were a forceful, but friendly competitor of mine. They conducted their product sales with professionalism and a deep regard for their customers and their management was held in high regard.  In 1998 Norwest and San Francisco-based Wells Fargo merged and decided to retain the Wells Fargo’ name.  Some business leaders have suggested that the Midwest culture and values that used to guide Norwest has changed to a fast-paced, high-pressure, West Coast culture and values.  Regardless, there is no question that there is a systemic issue in the organization that resulted in an illicit scam that caused over two million customers to be duped by phony accounts and 5300 employees terminated for not complying with managements directives to sell such accounts or get fired.

How could this happen? Many are focusing on Wells Fargo's high-pressure sales program, but it’s now apparent that’s just a symptom of a much deeper problem. The systemic issue is an insular corporate culture fostered by executives with decades of tenure and by a board of directors that implicitly, or explicitly, appeared to condone wholesale fraud by bank employees and their supervisors. There is an old Chinese proverb that says, “A fish rots from the head down”, which metaphorically speaking, applies to the leadership of any organization, including Wells executive management and its board.

Proof is in the most recent action by their board of directors. Rather than naming an outsider as a CEO replacement who could help transform the company to a new culture, the board named 29 year Wells’ veteran Tim Sloan, as CEO.

Business leaders, customers and investors are questioning this move for the following reasons:

• Rushing to name a permanent CEO replacement instead of waiting until the board’s internal investigation is completed and Sloan’s role in managing the bank during the scandal is understood, seems premature at best.  And it’s quite common during a crisis to name an interim or acting CEO while an investigation is in process

  
  

• For most of this decade Sloan served on the company’s operating committee, where as a member of the inner-circle had full knowledge of the illicit activities…which happened on his watch.  According to the New York Times, “Investigations by the board and regulators may yet implicate Mr. Sloan and others.”  . 

• Sloan has been at Wells Fargo for 29 years and may be deeply inculcated in the same culture that Stumpf accommodated.  Lawmakers, regulators and investors are questioning whether Sloan will be able to sufficiently distance himself and the bank from the cultural collapses that facilitated the account scandal.  Why not have named him as Acting or Interim CEO for a year to see if he can indeed separate himself from the previous culture?

• For a company that needs to go in a different direction and demonstrate a commitment to cultural change by bringing in an outsider, Sloan’s appointment sent the wrong signal.  Sloan is not viewed as someone considered to be the transformational CEO.

• When Sloan was named Chief Operating Officer, Carrie Tolstedt, who ran the division where the phony account abuses occurred, reported to him for a short period of time before she was quietly ushered out the door, with a $125 million retirement package, which has caused some to question whether he was aware of the scope of the illicit activities and wanted it out of his responsibilities, so he bought out her leaving and not talking.

• And when he was named to President in November 2015, it was assumed that he was the heir apparent to eventually succeed Stumpf. Why would he ever raise issues with the board regarding fraudulent activities when he and Stumpf were both being showered with praise and outrageously rewarded by the board with tens of millions of dollars for their performance?  Wouldn’t it be in his personal best interest just to stay the course? 

 Further evidence of Wells Fargo’s insular corporate culture was illuminated during Stumpf’s testimony before Congress in September while still chairman and CEO. He was either “playing dumb” by not answering the lawmakers’ questions and rejected their notions that the scandal was a result of failure in leadership and corporate culture…or he just didn’t know.  However, it’s the CEO’s and the boards’ fiduciary duty to be fully informed about what is happening in their organization. They can’t claim ignorance --- unless, of course, they are ignorant!

Stumpf’s lack of action and accountability enraged the lawmakers, to the point where Senator Elizabeth Warren said Stumpf had practiced “gutless leadership”.  And according to a recent article in the StarTribune, Stumpf’s strategy of feigning ignorance was also employed during litigation in 2009 against Wells Fargo by several non-profits, accusing the bank of defrauding them by placing tens of millions of dollars into risky, complex investments.  In the article Mike Ciresi, a prominent local litigator, who represented the non-profits said that, “Stumpf’s idea of preparing (for his deposition) was to play stupid.”  That strategy cost the bank $57 million and Ciresi said he hoped that “the bank and Stumpf had learned a painful lesson.  But Stumpf used the same playing dumb strategy when testifying before Congress. “It’s just absolutely stunningly incompetent.”Ciresi said.

Stumpf and the Wells’ board claim they didn’t know about the scandal until  2013, nonetheless, governance best practices and federal law require Wells Fargo to disclose to its auditors any potential “material event” that could have a material negative impact on the company.  Consequently, the scandal and its potential impact should have been included in their regulatory filings.  Further, as CEO Stumpf was required to sign the company’s financial reports to the Securities and Exchange Commission certifying under the penalties of perjury, that the information contained in the reports fairly presents, in all material respects, the financial condition and results of operations of the company. Failure to address the problem when it was first reported three years ago will end up costing the organization millions, possibly billions, of dollars and could result in employee layoffs as the company shrinks. For example, the States of California, Illinois and Ohio have broken banking ties with Wells Fargo citing social irresponsibility. New accounts opened in September tumbled 30% from August and were down 25% compared to last year.  And the 5300 terminated employees have filed a class-action lawsuit for $2.3 billion.  But, there is no way to calculate the material reputational damage felt by Wells’ customers, employees, and other major constituents, which will last for years.  Seems like a material event to me!

Finally, the most telling symptom of Wells’ unhealthy corporate culture is demonstrated by its dysfunctional sales quota program and the irreconcilable disparity between the income levels of the 5,300 employees who were fired and the folks at the top. It’s often said in business that compensation is the best method of communication. So when employees are given sales quotas for which they will either get a bonus, or if they don’t, will get fired, it doesn’t take an IQ of 140 to figure out what they may do to survive --- especially when many of these employees are making about $25,000 to $35,000 a year.  On the other hand, Stumpf made $19.3 million and Sloan made $11.0 million respectively last year and Stumpf’s retirement package is $134 million, which may be more than the total salaries of the 5,300 terminated employees.  I support paying executives fairly and competitively, but this situation is outrageous.

I sincerely believe that the vast majority of Wells’ employees are good, ethical, hard-working, and oriented to serving customers, so I hope they will pull through this soon.  But they will not be able to do so without a changed culture, ethical leadership and a responsible, proactive board of directors who effectively discharge their fiduciary duties of oversight to assure that this debacle doesn’t repeat itself. 

My advice to the board is simple … convene a special committee meeting (excluding the CEO), close the boardroom door and focus on crisis management. Take bold actions to mitigate the damage to the company's reputation and convince customers to stay with the bank. And those actions should begin with an apology to the real victims of this scandal…the cheated customers and the terminated employees.  And until this matter is resolved, they should stop taking their own $350,000 annual director compensation. Regardless of the small effect this would have on the bank’s bottom line, the symbol that they are accepting responsibility will be huge. What leaders do speaks louder that what they say, and it’s time that the board shows they aren’t just playing the blame game. The time is right now to show accountability, apologies, and action on long-term correction of Wells’ corporate culture before the last chapter in this story can be written.