Wells Fargo hits two milestones on road to fix corporate governance
Wells Fargo's efforts to prove that it is fixing its highly scrutinized corporate governance shortcomings returned to the spotlight Thursday.
The embattled bank received some good news when its outside auditor gave it a thumbs-up regarding its financial reporting. Meanwhile, it announced that four senior board members who have repeatedly borne the brunt of outside critics will step down at the annual meeting this spring.
In a filing with the Securities and Exchange Commission, the accounting firm KPMG stated that the San Francisco bank maintained effective control over its financial reporting as of the end of 2017.
The typically routine annual audit drew more attention this year because of the Federal Reserve Board’s recent decision to restrict Wells Fargo’s growth until it improves its governance and controls.
Under the Fed’s Feb. 2 order, Wells will be required to maintain its current asset size of $2 trillion until at least the fourth quarter of this year. The order, which followed a slew of revelations about the bank’s mistreatment of consumers and pressure applied to employees to meet corporate goals, also requires Wells Fargo to adopt an improved, companywide risk management program.
KPMG has been Wells Fargo’s auditor for decades. Sen. Elizabeth Warren, D-Mass., has questioned why the accounting firm failed to head off a scandal in which as many as 3.5 million accounts were opened at Wells Fargo without the customers’ permission.
KPMG’s favorable verdict on Thursday did not surprise Jeff Johanns, a lecturer in accounting at the McCombs School of Business at the University of Texas. It is rare for an outside auditor to conclude that a public company has a material weakness in its controls, in the absence of an error in its accounting statements, according to Johanns.
“We’re not talking about objective internal controls,” he said. “We’re talking about the subjective tone of the board and management.”
For its own part, Wells Fargo’s management also concluded in Thursday’s securities filing that its internal control over financial reporting was effective as of the end of last year.
Separately, Wells announced the names of the four directors — John Chen, Lloyd Dean, Enrique Hernandez and Federico Pena — who will leave the board this year.
The announcement followed the Fed's announcement last month, concurrent with its enforcement order, that Wells would replace four directors. The company did not name the four departing directors at the time.
In a press release Thursday announcing the departures, the board chair, Betsy Duke, thanked the directors for their service. The directors will officially step down at the company’s annual meeting on April 24. No replacements were named in the release.
“The leadership and insight that these directors brought to the board and its committees, including the board’s human resources, finance, risk and corporate responsibility committees are just some of the many ways they served our board with distinction over the years,” Duke said, noting that they are Wells’ longest-serving directors.
Hernandez, who has served on the board since 2003, barely won support from a majority of shareholders, with just 53% of the vote. Hernandez led the company’s risk committee during the phony-accounts scandal.
Pena, who chaired the corporate responsibility committee, won just 54%. He has served on the board since 2011.
Dean, meanwhile, won just 62%. He has served on the board since 2005. He was head of the human resources committee, making the target of investor ire given the complaints that many employees felt pressure to create phony accounts by bosses who were managing to metrics.
Chen won 70% of the vote. He has been a director since 2006.
In an article published Thursday, Wells Fargo CEO Tim Sloan expressed a desire to move beyond the scandals that have weighed on the company throughout his 17-month tenure.
“I don’t think we have a culture problem,” Sloan told Bloomberg Businessweek. “When you look at the mistakes we made, we had an incentive plan in our retail banking business that drove inappropriate behavior. That’s been changed.”