Second of two parts. Read part one here.
By early 2006, Richard Kovacevich's legacy seemed secure.
The 62-year-old CEO's celebrated tenure at Wells Fargo was starting to wind down. Kovacevich, who was known for his sales prowess, had built one of the biggest, most profitable banks in the country.
Now he was signaling that he had chosen his successor. John Stumpf had been with the company for 24 years, and colleagues praised him for his deep understanding of Wells Fargo's corporate culture. By grooming Stumpf as the next CEO, Kovacevich was sending the message that there would be continuity at the top of the bank.
During a 2006 interview, Kovacevich spoke candidly about his hopes for Wells Fargo's future.
"In some sort of perverse way, maybe some CEOs want to see their successors fail, because it will make them look like a genius," he told the interviewer. "But if a company does better in the future, you shouldn't say the successor is better than the old fart. You should say the old CEO was a genius, because he selected someone better to follow."
During the early stages of Stumpf's tenure, Wells Fargo rose to new heights. The San Francisco-based firm waseven the world's most valuable bank for a time.
But the bank sustained a huge blow from the revelation that Wells fired roughly 5,300 employees between January 2011 and March 2016, in connection with the creation of as many as 2 million unauthorized customer accounts.
Indications that accounts were phony were found in all 50 states. Wells employees used falsified email addresses in at least 193,000 cases, according to authorities. How could this brazen fraud have happened on such a massive scale, and for so long?
Since the scandal surfaced, a great deal of attention has been paid to sales quotas and other incentives that influenced the fired workers' conduct. And it is certainly true that many low-level Wells employees faced aggressive sales requirements that helped set the stage for ethical breaches.
But to focus only on the tools that were used to motivate low-level workers is to lose sight of the big picture. At Wells Fargo, as at many large organizations, the tone was set at the top.
Much of this tone-setting happened in public view — in published interviews, live-streamed conference calls and annual reports that have largely been forgotten. The scandal casts these records in a new light.
They provide insight into a retail banking culture — led by Stumpf and another longtime Kovacevich deputy, Carrie Tolstedt — that prized sales above all else. The sales abuses happened in an environment where management spoke in euphemistic language that was at odds with on-the-ground realities, the company's own hype was deeply ingrained, and top executives refused to pivot away from a sales strategy that had hit the limits of its effectiveness, even amid evidence of widespread employee misconduct.
Stumpf and Tolstedt could not be reached directly for comment for this article. A lawyer for Stumpf declined to comment. A lawyer for Tolstedt did not respond to messages seeking comment.
The company said in a statement: "Wells Fargo's number one priority is making things right with our customers and restoring public trust. We are dedicated to ensuring that all aspects of the company's business are conducted with integrity, transparency and oversight."
"We regret and take full responsibility for the incidents in which customers received a product they did not request, as that is inconsistent with the values and culture we strive to live up to every day."
Wells has long touted itself as a company that puts its customers first. "We'll never put the stagecoach ahead of the horses," its website contends. The pervasiveness of the phony-accounts problem laid bare a different reality.
Stumpf and Tolstedt both grew up in small Midwestern towns, and once they'd risen to the highest ranks of the banking industry, both managed their homespun images.
Tolstedt, who was Wells Fargo's retail banking chief until her recent retirement at age 56, sometimes told stories about her father's bakery in Kimball, Neb. One day, her dad handed her a bottle of Windex and pointed to the shop's glass-paned front door, since that was where passers-by would form their first impressions.
Stumpf grew up with 10 siblings on a dairy farm just south of Pierz, Minn. When the embattled CEO faced hostile questions during a Senate hearing earlier this fall, he mentioned his rural upbringing and said, "I know right from wrong."
Those self-presentations are at odds with the media's frequent portrayals of Stumpf and Tolstedt as heartless and greedy bankers — depictions that some former colleagues called unfair.
One retired Wells executive described both Stumpf and Tolstedt as honest and straightforward.
"Boring Midwesterners," this onetime colleague called the two of them.
But Stumpf and Tolstedt were also products of the hard-charging sales culture at Norwest, where Kovacevich served as CEO prior to the company's 1998 merger with Wells Fargo.
Stumpf, who was forced to resign in October at age 63, joined Norwest in 1982. He spent much of the 1990sconsolidating banks in Texas for the Minneapolis-based bank. After the merger with Wells, he eventually became the head of the combined firm's retail banking unit.
By 2006, Stumpf was chief operating officer — and the heir apparent to Kovacevich. He pledged to continue the cross-selling strategy that Kovacevich had pioneered, saying that he wanted 75% of Wells Fargo's existing customers to buy their next product from the company.
Tolstedt joined Norwest in 1986. She worked in the company's Nebraska bank under John Cochran, who was one of Kovacevich's top-performing deputies. "That bank was used as a model throughout the Norwest franchise," one banking analyst would later recall.
In 1995, Cochran was hired as CEO of FirstMerit in Ohio, and Tolstedt was one of the Norwest executives who joined him. They sought to transport Norwest's sales culture to Ohio. By 1998, the bank's employees were selling an average of six products or services per day, up from four per day two years earlier.
Tolstedt returned to Norwest just prior to the merger with Wells. By 2003, she was viewed as a possible successor to Kovacevich.
That did not happen, of course. But in 2007, Tolstedt became the head of Wells Fargo's community banking division, which had more than 100,000 employees and accounted for more than half of the company's net income.
'Why are they able to do that?'
There were two different stories about Wells Fargo's sales philosophy — the version that the firm's high-level executives told, and the version that low-level employees heard. The gap between the two was wide.
The boardroom story was abstract and righteous. It straddled a line that Kovacevich had walked as CEO — attempting to resolve the tension between aggressive selling and good customer service by insisting that the products being sold were what customers needed.
"Our team members are talking to our customers and coming up with solutions to meet their needs," Tolstedt once said in an interview. "When you do that really well, your customers honor you with more business."
Speaking to an audience of investors in 2012, Tolstedt said: "I'm sure it won't be any surprise to any of you that we believe in cross-sell. Why? Because the virtuous circle of cross-sell continues. The more products that customers have with us, the better deal and greater value we can provide."
Tolstedt's narrative was underpinned by the assumption that Wells Fargo's interests were aligned with those of its customers. But the reality, as measured by outside evaluations of customer satisfaction at Wells Fargo, was more problematic.
The company's performance in the American Customer Satisfaction Index did get a boost from its acquisition of Wachovia in late 2008 — the Charlotte, N.C.-based bank had long outscored the industry average — but it was not enough to lift Wells out of the lower half of the banking industry in 2009 or in subsequent years.
In 2011, the consulting firm cg42 released a study on retail banking vulnerabilities at numerous large banks. Wells Fargo's customers were frustrated over the bank's efforts to sell them products they did not want or need, according to the study.
The study found that "Wells Fargo's biggest risk is letting their ability to cross-sell their customer base go too far," said Stephen Beck, the firm's managing partner.
Throughout 2011, the San Francisco bank's cross-sell ratio kept rising. "I believe that cross-sell model is more important than it has ever been before," Tolstedt said in May 2012.
Executives at other banks looked at Wells' cross-sell numbers with envy and asked, "Why are they able to do that? Why can't we do that?" recalled Scott Andrick, who works with retail banking clients for the software firm Pegasystems.
All the while, employees in Wells Fargo branches were allegedly being pressured to stay late and to work weekends to meet their sales quotas. Some employees who complained about sales abuses to senior management say their warnings went unheeded. Others allege that they were fired after lodging objections.
And to those at the bottom of the organizational pyramid, the company's sales philosophy was sometimes conveyed in more straightforward, less ennobling language than it was at the top of Wells Fargo.
One company document that was filed recently as part of a class action brought against Wells included instructions on preparing a five- to seven-minute presentation about how to sell three banking products to a new customer. The document's message was not about fulfilling customers' financial needs, unless those needs happened to overlap with Wells Fargo's own interests. Salespeople were instructed to demonstrate how they would avoid taking "no" for an answer.
"Include in this presentation details on how you would overcome objections from a potential customer who is currently banking with another financial institution and is receiving a product, service or benefit from our competitor that we don't offer," the document stated.
'We are bullish on cross-sell'
In 2010, Wells Fargo was inching up on six products per retail banking household, but the company's CEO was not satisfied.
"Even when we get to eight, we're only halfway home. The average banking household has about 16," Stumpf wrote in his annual letter to shareholders for 2010.
By this time, some on Wall Street took the cross-sell number with a grain of salt. After all, only Wells Fargo knew exactly how its ratio was calculated, and everyone understood that different banks used different formulas.
Jason Goldberg, an analyst at Barclays, said in a recent interview that investors were ultimately focused on the company's revenue and profitability, not on sales metrics. Referring to the cross-sell ratio, he said: "It by no means was the end-all, be-all."
When questioned by a reporter in 2011, even a top executive at Wells conceded that the cross-sell ratio was not a particularly good tool for evaluating the company's financial performance.
"Folks have been appropriately skeptical about cross-sell for years," Tim Sloan, who was then the firm's chief financial officer, said in the interview. "You don't report cross-sell as your primary financial reporting."
Still, the cross-sell ratio was important to Wells Fargo. It was not just hype. It served as a regular reminder — both to employees and to those on the outside — of the firm's longstanding sales strategy.
That strategy, which stretched across the entire company, aimed to take advantage of the fact that it is much less expensive to sell new products to existing customers than it is to find new prospects. The approach distinguished Wells from other big banks, which often tried to sell particular products to other banks' customers.
Wells Fargo's strategy was reflected in its ad campaigns, which frequently emphasized the company's brand, rather than any particular product. It was reflected in Wells Fargo's 6,200-plus branch network, which the bank did not pare as aggressively as some competitors did in the age of mobile banking; after all, branches were where sales to existing customers generally happened.
The strategy was also reflected in the company's credit card operations, which did not rely on the mass solicitation of new customers in the same way that the card-issuing arms of Citigroup and JPMorgan Chase did.
It would have been impossible for Wells Fargo to abandon the cross-selling strategy overnight, and even a gradual transition to a revamped business model would likely have been painful. But by 2013, there was growing evidence that change was needed.
Sometime late that year — the company did not provide a more specific time frame — Stumpf is said to have learned about the widespread fraud problem. At the time, Wells Fargo had already fired thousands of employees for their role in the misconduct.
In December 2013, the Los Angeles Times blew the lid on Wells Fargo's phony-product sales. But the company still denied that it had a widespread problem.
"I disagree with the L.A. Times story," Sloan told American Banker the following month. "I think that we continue to grow our customers. I think if we were doing that in an inappropriate way, that wouldn't be happening."
By May 2014, when the company held its biennial investor day, growth in the cross-sell ratio had slowed substantially. It's not clear why, but one potential explanation is that many consumers did not feel comfortable buying all of their financial products from the same company. Customers who were annoyed by Wells Fargo's hard-sell tactics may have also started to tune out the sales pitches.
When customers have negative feelings about their bank, "It's really hard to get customers to deepen their relationship," said Devon Kinkead, the CEO of Micronotes, a digital marketing firm.
Nevertheless, during Wells Fargo's 2014 investor day, executives mentioned cross-selling more than 60 different times.
"Our relationship focus and cross-sell capability is hopefully legendary at this point," Chief Financial Officer John Shrewsberry said. "It has been our vision for decades. We've stuck to it. You will hear about it all day today, woven through the presentations by my colleagues about each of their businesses, and it's a difference maker."
An industry analyst asked Tolstedt whether, in light of the recent slowdown in cross-sale growth, it had been easier to move from four retail banking products per household to six than it was to go from six to eight.
"We are bullish on cross-sell, we are confident on cross-sell, and we still believe that we can get to an eight cross-sell," Tolstedt responded.
Throughout 2014 and 2015, Wells Fargo fired approximately 2,000 additional employees for their role in fraudulent product sales. At the same time, evidence continued to mount that the firm's cross-sell strategy was no longer working like it once had.
In the first quarter of 2016, Wells Fargo sold 6.09 retail banking products per household, virtually unchanged from the same period three years earlier. The ever upward march was over, no matter how hard the company tried to avoid admitting the obvious.
'There are things that need to be fixed within our culture'
Even after Wells Fargo agreed to pay $185 million in penalties and $5 million to harmed customers, the company continued to circle the stagecoaches, placing blame on the fired employees.
"The 5,300 — for whatever reason, they were dishonest. And I'm not scapegoating, but that is not part of our culture," Stumpf told a congressional committee in September.
The embattled CEO even quibbled with the notion that Wells Fargo used sales quotas — insisting that the proper term is "sales goals" — despite mounting evidence showing that employees who failed to meet certain benchmarks would be fired or demoted.
The company formally got rid of its "sales goals" on Oct. 1. Stumpf resigned on Oct. 12 — he forfeited $41 million in compensation — and was replaced by Sloan.
In interviews with American Banker, other former high-ranking executives at the company expressed widely varying opinions about the scandal.
One retired Wells executive was defiant, contending that the sales abuses have been blown far out of proportion, and arguing that the company's good name has been unfairly smeared.
This person said that dishonest behavior is common among low-paid retail workers, both in the banking industry and elsewhere. The median annual base pay for a full-time teller at Wells Fargo in 2013 was $23,920; for a personal banker, it was $36,005.
"The bank opened in 1852," this former executive said, referring to Wells Fargo's Gold Rush-era roots. "In 1853, people cheated on their comp plans."
A second former Wells Fargo executive, who left the company prior to its 2008 merger with Wachovia, argued that the bank grew too big to sustain its earlier corporate culture. That culture had emphasized sales but did not push them at all costs, this person said.
"I just think that there was not enough horsepower from the old culture to keep the ethical foundation alive," this former executive said.
A third former executive, who joined Wells prior to the 1998 merger with Norwest and was put off by the Minneapolis firm's aggressive culture, professed not to be surprised by the scandal.
"I've had a number of friends and acquaintances ask," said the former executive, who left the combined company more than a decade ago. "And I typically tell them, not surprised entirely. Disappointed but not surprised."
Wells Fargo's board has hired a prominent New York-based law firm, Shearman & Sterling, to investigate what went wrong. The results of that probe will be made public, according to a source familiar with the investigation. A slew of government probes and private lawsuits have also been launched. If the full story ever emerges, it will likely take years.
One big unanswered question is when the fraudulent sales began. An initial review that the auditing firm PwC conducted for Wells Fargo looked back only as far as 2011. Wells later pledged to extend that review back to 2009. But there are allegations of misconduct as far back as 2005, when Kovacevich was still CEO.
Another key question is how many Wells employees were fired because they failed to meet their sales quotas.
The company hasn't said. But Jonathan Delshad, an attorney who brought a class action against Wells on behalf of former employees, said that more than 600 people have asked to be part of the case, alleging that they were either fired or suffered another adverse employment action after failing to meet their numbers.
Wells Fargo told American Banker that if any former employee has concerns about their termination, the company wants to hear from them. Wells said that it has created a dedicated human resources team for eligible former employees who want to rejoin the company.
The company also said: "Wells Fargo works hard to foster a culture that is centered on doing what is right for our customers and exhibiting high ethical standards and integrity, and the vast majority of our team members serve our customers' best interests every day in every interaction. We do not tolerate retaliation against team members who report their concerns."
Since Stumpf's departure, the company has been projecting a public tone that is more introspective and apologetic than it did initially. Television ads this fall featured a narrator who said, "Wells Fargo is making changes to make things right."
During a speech to Wells employees in late October, Sloan said: "There are things that need to be fixed within our culture. There are weaknesses within it that we must change."
"I think it all begins with understanding where things broke down, and where we failed — as a culture, a company and as leaders. And, honestly, we are still on the journey of figuring all of that out," he added.
Cultural change figures to be slow and difficult in a company that has 269,000 employees, especially since Wells Fargo's cross-sell strategy has such deep roots. Recent allegations that Wells employees also made unauthorized life insurance sales underscore the extent of the challenge.
"Words are easy," said Beck, the industry consultant who found customers dissatisfied with Wells' sales tactics back in 2011. "Actions will tell us actually whether the organization is going to change."