CEO John Stump Pays the Price of Establishing a "Sales at all Costs" Culture
I have previously blogged on my Ethics Sage website about the unconscionable actions of Wells Fargo and its CEO, John Stumpf. Much has happened in the last few weeks so the purpose of this blog is to update the story.
Wells Fargo employees opened more than two million unauthorized bank and credit card accounts to meet sales projections. It cost customers almost $2.5 million in fees. The company agreed to a record fine of $185 million and to set aside $5 million to repay customers. In a letter to employees, CEO John Stumpf called employees’ actions “inconsistent with the values and culture we strive to live up to every day.” However, Stump's own behavior belies the truth of the matter.
Wells Fargo has admitted to firing 5,300 workers over the past few years for their actions in creating phony accounts. Finally, last week the board of directors announced that CEO Stumpf has been fired and he will lose his bonus and unvested stock awards in the amount of $41 million. Still, the SEC should have stepped in and exercised a provision in the Sarbanes-Oxley act called "clawback" whereby executive compensation during the financial fraud at the bank is sacrificed to make bank customer and investors whole.
When we examine Stump’s recent actions, it’s clear Stump was a corrupt CEO and established a win at all costs environment at Wells Fargo. We now know that Stumpf sold $61 million worth of Wells Fargo shares in the month prior to settling a long-running investigation that charged the bank with falsifying millions of customer accounts to boost sales and fees. The following month on September 8, when regulators announced they had fined the bank $185 million for falsifying more than 2 million customer accounts to meet aggressive sales goals, the company’s stock price plunged and Stumpf was summoned to appear before Congress.
Stumpf pocketed $26 million in proceeds from that August sale – the shares in question were the incentive stock options that were purchased at a discount to Wells Fargo’s current market price and then immediately sold at a profit. This reflects only a small piece of the rich incentive pay that Stumpf collected during his tenure at the top of the bank.
The sale raises questions about possible “insider trading,” rules that prohibit company insiders from profiting on stock purchases and sales based on unpublished information. Insider trading is one of the most egregious actions a member of management can take and one that clearly demonstrates a pursuit of self-interests and not serving bank customers and the bank’s public mission.
As Wells Fargo is now learning, ethics comes from within – the culture of a company and tone set at the top. All companies should have in place internal controls to insure compliance with regulations and actions that conform to principles of ethical conduct. In this regard, the bank suffers from “ethical blindness” – an inability to see the ethical issues through the fog of the pursuit of profit at all costs. It’s an “ends justify the means” approach to ethics rather than one based on responsible behavior and a commitment to the truth in all decisions.
Who is to blame for the Wells Fargo fiasco? It starts with CEO Stumpf. But it really comes from the top. Stumpf served as CEO and chair of the board of directors thereby creating a conflict of roles. These days most responsible companies have divided these roles. Of course, Wells says it will do so now because of the public shaming of the bank.
Public companies have an audit committee of the board of directors with one member a financial expert. I would add a requirement for a second member to be an ethicist and task that person with assessing whether the actions of the company are consistent with ethical behavior.
Blog posted by Steven Mintz, aka Ethics Sage, on October 19, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at www.ethicssage.com.