Is Wells Fargo stuck in the denial stage of recovery?

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Since Wells Fargo's phony-accounts scandal broke in 2016, the bank's public and private reactions have diverged significantly.

After an initial bout of blame directed at the thousands of employees who opened the fake accounts in an effort to meet aggressive sales goals, the bank pivoted to a public position of contrition, saying it was dedicated to fixing its corporate culture to ensure nothing like that could happen again. That line was offered by then-CEO Tim Sloan last month when he testified to Congress, in which he said the bank had made significant progress in atoning for its mistakes.

Yet in private, bank executives and many rank-and-file employees have taken the view that the bank's problems are largely not of its own making and have been overblown by overbearing regulators, scoop-hungry reporters, hostile members of Congress, and a system that has put its actions under an (unfair) microscope.

In short, the bank has appeared to be in denial that it has a problem at all, some argue.

"Denial is one of the hardest issues for a company to address after a crisis," said Davia Temin, president and CEO of the management consulting firm Temin and Co. "It’s not over just because Wells is ready for it to be over."

From time to time, the bank's apparent private views have drifted into the open. Sloan, for one, has taken several digs at the media, commenting on the many negative headlines.

“It’s been very tiresome for us, to be honest with you, not only this team but the entire team, to have to live through some of the sensational headlines that, in many cases, just aren’t true,” Sloan said last year at the company’s annual investor day.

At the hearing last month, Rep. Patrick McHenry, R-N.C., asked Sloan, "Is this the end of scandal at Wells? Are we going to see more headlines?"

Sloan's answer — "I don't control reporters" — struck some observers as blaming the scandals more on the media than the bank.

Behind the scenes, Wells has also sought to put some of the blame on lawmakers executives believe are hostile to them, particularly Sen. Elizabeth Warren, D-Mass., a presidential hopeful. Warren called for Sloan's ouster as soon as he was named to replace John Stumpf, arguing that as an internal hire he was too tied to the culture that created the original bogus-accounts scandal.

But the bank's perceived enemies included more than Democratic presidential candidates. The Office of the Comptroller of the Currency issued a rare public rebuke of Sloan just an hour after he finished testifying, which may have sealed his fate. Some inside the bank see the Federal Reserve and OCC as having essentially taken control.

Some say Wells appears to be trapped in a siege mindset.

“It’s natural to have a circle-the-wagons mentality when lawmakers are calling you criminals," said Douglas K. Chia, executive director of the Conference Board’s Governance Center. But it's "not constructive" to what Wells Fargo is trying to accomplish, he said.

To be sure, Wells has made changes. It has revamped the organization, beefed up its compliance and risk management and increased protections for whistleblowing employees who fear retaliation. A long list of its reforms were included in a 103-page business standards report released in January.

And Wells is under a microscope. Any mistake it makes, and sometimes those errors are self-reported, quickly becomes big news.

"There are aspects of this that are innately unfair to the organization," Temin said, referring to the dogpiling effect. "They have become more than what they actually did. They have become the lightening rod, or the symbol, for abuses in the industry.”

Yet even taking that into account, some say that Wells hasn't done enough to change its culture.

“Clearly if people are in denial, the corporate communication has not penetrated that this is everybody’s problem,” Chia said. “They are saying all the right things in a very direct way and taking responsibility, but somehow that’s not getting down into the ranks.”

Wells' corporate culture was shaped over decades by Richard "Dick" Kovacevich, the former CEO of Norwest Bank, who took over Wells Fargo in a 1998 merger. Kovacevich became a banking industry legend by pushing employees to "cross-sell" multiple products to existing customers to fuel the bank's internal growth. Stumpf, Kovacevich's longtime deputy, continued the strategy but with disastrous consequences.

"The public presentation of the cross-sell issue drove all kinds of behavior— but what was initially a good idea became toxic over time," said Todd Baker, a managing principal at Broadmoor Consulting. "Stumpf never would have gotten the job had he questioned Kovacevich's cross-sell theory. The big scandal over false accounts was driven by not questioning the incentive structure down to the branches."

Sloan also repeated many of Stumpf’s mistakes after the first scandal came to light. He failed to fire top executives early on, fought back against claims of abuse, downplayed the extent of the problems and sent mixed messages to consumers who were harmed. For example, when Wells self-reported that 25,000 car loan buyers had their vehicles wrongly repossessed from 2012 to 2016, the bank blamed its outsourced insurance provider, National General Insurance, which underwrote policies for Wells.

When 545 mortgage borrowers were denied loan modifications, Wells blamed a computer glitch as the reason some borrowers ended up in foreclosure, and then claimed it had not caused the foreclosures.

Even though Sloan has consistently said the bank would make harmed customers whole, Wells sought to keep dozens of customers from filing lawsuits after the fake accounts scandal, claiming they were bound by arbitration agreements for accounts they never authorized. Wells has maintained its position on arbitration for years even after paying $100 million to regulators in 2016 for the fake accounts scandal.

Temin said Wells does not understand that the public, in the age of social media and increased anger, wants real atonement.

“The public wants its pound of flesh,” she said. “They want the organization and the industry to suffer more than they perceive that organization or industry has caused suffering to others. They want to see them bleed and until that happens, the damage to their reputation will persist.”

Yet Wells' board also made a critical error early on, some expects said, by elevating Sloan, a 31-year insider who was being groomed to take over from Stumpf. Sloan was never able to shake allegations that he knew about the scandal early and failed to act.

Betsy Duke, who chairs Wells’ board, said this time around the board would field an outside candidate.

That could help turn things around at the bank.

“Bringing someone from the outside sends a very strong message that they are doing things differently this time, and that person will have the opportunity to turn over every rock,” said Chia.

Experts said Wells' next CEO needs to listen to rank-and-file employees and completely address misaligned incentives.

"What you have to do is listen to the voices you least want to hear," said Temin.

The board’s appointment of C. Allen Parker, Wells’ general counsel, as interim CEO signals that corporate compliance and regulatory issues are the bank’s top priorities. But whoever is named as Parker’s replacement also will have to address cutting costs, investing in technology, improving operations and finding ways for Wells to grow revenue.

Some suggest that Wells' next CEO will also have to start by apologizing all over again.

“The new person who comes in has to start with the deepest and most compelling apology, and he or she is going to have to get everyone at Wells to continue that trend," said Temin. "No more rationalization. They have to say they are sorry and that it was an endemic problem."

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Financial crimes Employee turnover Succession planning Risk management Compliance Bonuses and incentives Corporate governance Tim Sloan Wells Fargo