The “Independent Directors of the Board of Wells Fargo & Company Sales Practices Investigation Report” was issued on April 10, 2017. It is truly one of the most damning reports of complete leader corporate failures that has recently been seen. Buried with the 110 pages are numerous leadership lessons.
The internal investigation was headed by the law firm of Shearman & Sterling LLP, who were assisted by FTI Consulting, Inc. (FTI).
The principal findings were “the root cause of sales practice failures was the distortion of the Community Bank’s sales culture and performance management system, which, when combined with aggressive sales management, created pressure on employees to sell unwanted or unneeded products to customers and, in some cases, to open unauthorized accounts. Wells Fargo’s decentralized corporate structure gave too much autonomy to the Community Bank’s senior leadership, who were unwilling to change the sales model or even recognize it as the root cause of the problem. Community Bank leadership resisted and impeded outside scrutiny or oversight and, when forced to report, minimized the scale and nature of the problem.”
However, with any catastrophic failure, there were numerous other control and human failures leading to the fraud.
John Stumpf, the former Chief Executive Officer (CEO), “was too slow to investigate or critically challenge sales practices in the Community Bank. He also failed to appreciate the seriousness of the problem and the substantial reputational risk to Wells Fargo.”
There was also a catastrophic failure of the company’s control functions, specifically Human Resources (HR), internal audit and legal. They all apparently had one response to the knowledge something was very wrong: Not My Job!
The decentralized structure of the organization led to a silo mentality.
However, it was not around data and information where this silo effect was so detrimental but the deference given the business units.
The report went on to state, “a transactional approach to problem-solving obscured their view of the broader context. As a result, they missed opportunities to analyze, size and escalate sales practice issues.”
Moreover, this decentralized nature led to a conflict between the business unit which engaged in fraud, Wells Fargo’s Community Bank group and the company’s self-espoused cultural values of not breaking the law.
There are multiple lessons for every CEO, Board of Directors, compliance committee, and Executive Leadership Team (ELT) from the Wells Fargo fraud and this Report.
The first lesson is that everything is tied together. Wells Fargo had no operationalization of leadership. But more than simply not being in burned into the fabric of the organization, the structure of the company did not allow leadership visibility into the bank’s illegal practices.
A decentralized corporate structure can and does work for many businesses, yet it must have control oversight, which was clearly not present at Wells Fargo. If a corporate structure is so unwieldy that compliance cannot have oversight the simple fact is the structure must be tightened up.
The Wells Fargo fiasco should end (yet again) once and for all time who a CCO should report to. They must report directly to the Board of Directors.
The Wells Fargo law department and HR functions, the two corporate functions with the most knowledge of the negative impacts of the high pressure sales requirements which led to the illegal tactics, did not view it as their role to bring up integrity or even culture issues. Remember the Wells Fargo legal department identified the reputational risk to the bank from the high number of litigation, unemployment claims and ancillary legal issues. Yet the CRO did nothing about it when he was briefed on it.
When the City of Los Angeles filed its lawsuit, the legal department did what legal departments do, they circled the wagons to defend the company. A legal department does not exist to prevent, detect and remediate. It exists to protect the entity from all attacks; even if those attacks are merited.
The corporate compliance function must be given a governance charter which allows it to provide oversight and the ability to prevent, detect and remediate illegal and unethical conduct. The compliance function cannot be over-ridden by a business unit head who tells the group compliance representative not to speak with the head of the compliance function.
There are many other lessons to be learned from this matter and actions Wells Fargo can take to remediate its culture, structure and values; all of which led to the illegal conduct. However, some of the issues I have explored this week should provide insight to a CCO or compliance practitioner on how to move forward to structure the compliance function and inculcate their compliance program into a company.