Wells Fargo: A Question of Ethics

Beginning in 2011, Wells Fargo employees began systematically opening over 2 million unauthorized accounts for unwitting customers in order to hit aggressive sales targets. Feeling pressured by a bank-wide culture that set unreasonable sales expectations, employees created fake PIN numbers and email addresses in order to enroll customers in online banking services they never requested.

By the time it was flagged by government watchdog agency the Consumer Financial Protection Bureau (CFPB), 5300 employees were fired, CEO John Stumpf and several other executives either resigned or were fired, and tens of millions of dollars were clawed back from executive bonuses, in a scandal that cost the bank a record $185 million in regulatory fines.

If only this were the first time Wells Fargo had been pulled up short for ethics violations. Other actions against the company include a 2012 settlement with the Department of Justice for $175 million over the “discriminatory steering” of African American and Hispanic borrowers into high cost loans.

Wells Fargo has paid out hundreds of millions of dollars during the past decade for discriminatory and predatory lending practices that disadvantaged homeowners, members of the armed services, and student loan borrowers. Beyond the cost of regulatory settlements which has soared to well over a billion dollars in the past seven years, Wells Fargo has seen the steepest drop in the history of the Harris poll on corporate reputation, surpassing even Volkswagen, by falling over 20 points to 99th place – just above bottom-ranked Takata airbags.

ICCR members have a long history of engagement with Wells Fargo around responsible lending and risk management. Led by Sr. Nora Nash of the Sisters of St. Francis of Philadelphia, ICCR members have been engaging Wells Fargo since 2001 on predatory and discriminatory lending practices, including “payday” loan products and the marketing of subprime credit cards to financially struggling consumers. In 2013, ICCR conducted a survey of the top seven U.S. banks titled Ranking the Banks, benchmarking their performance in four key areas: risk management; responsible lending; executive compensation and the purchasing of influence via lobbying and political contributions.

Of the seven banks, Wells Fargo was ranked last with a particularly low score for responsible lending. As a result, ICCR members advocated for a business standards review in a “floor” proposal at Wells’ 2013 AGM but withdrew it when the board agreed to conduct the review. Shareholders, however, say that Wells never produced that review.

Said Sr. Nora Nash of the Sisters of St. Francis of Philadelphia, “At our meeting with Wells representatives last December, we pressed for disclosure and we were denied the truth. Now we are confronted with painful accounts of fraud including some 80,000 customers in Pennsylvania alone. As shareholders and customers ourselves we feel betrayed and have no choice but to call for a full review of business standards through this resolution which we hope other shareholders will support.”

Late last fall, ICCR members filed a shareholder resolution with the bank requesting a Review and Report on Business Standards including an analysis of the impacts the current scandal will have on customers, operations, reputation and shareholder value.

The resolution asked the Wells Fargo Board of Directors for enhanced disclosure on the steps it is taking to improve culture, ethics, reputation, aligning incentives with customers’ best interests, risk management, governance and control processes. Such information would help to rebuild trust in the bank and give assurance to its shareholders that risks contributing to the present scandal are now well understood and being properly managed to prevent future crises. At the annual meeting on April 25th, the resolution received 22% of the vote, a very strong endorsement by shareholders.

“Wells Fargo received a clear message from shareholders at today’s meeting – investors want more accountability and action. The shareholder proposal filed by ICCR members shaped the narrative at the meeting and effectively pushed the company to take significant steps, meeting many of the resolution’s requests. Yet more substantial action is needed to address the serious discontent among aggrieved customers and employees, rebuild trust and make meaningful changes to put customers first. ICCR members will continue our engagement with management to press for the systemic changes requested in our proposal,” said Mary Beth Gallagher, Executive Director of the Tri-State Coalition for Responsible Investment.

While the bank released a report just prior to the annual meeting about the accounts scandal, investors are concerned that it is restricted to a discussion of the bank’s retail sales division and further, that it places all the blame on a handful of since sacked executives, largely absolving the directors who were in place while the fraudulent activity was happening of blame.

The report also has left dozens of questions unanswered, including the extent of the practices and why they weren’t uncovered sooner. Even more critically, after reading the report, investors still don’t have a clear picture of how the bank intends to prevent a reoccurrence.

What risk management and board oversight protocols will be developed to guard against future ethical failures? How will incentive systems be modified and what employee training will be implemented to ensure customer suitability is properly vetted for all its products? How will a commitment to build a culture of service, stability and innovation be operationalized and nurtured by top management and the board going forward?

ICCR recently held a press conference (listen in, below) underscoring the need for a drastic change in direction for the bank.

These ethical questions will be in front of Wells Fargo management for some time to come.