Corporate Compliance and Governance Failures at Wells Fargo

How can we explain why a bank allowed its employees to open more than 2 million unauthorized accounts, sticking customers with almost $2.5 million in fees? The answer is Wells Fargo has a corporate culture that enabled its employees to put their own interests ahead of its customers and a “sales at all costs” culture provided the backdrop for the deed.

Fines for Illegal Practices

On September 9^th Wells Fargo agreed to pay a record $185 million fine for the actions of its employees. The bank also must set aside $5 million to repay customers. In a letter to employees, CEO John Stumpf called the employees’ actions “inconsistent with the values and culture we strive to live up to every day.” This is hard for me to believe because it’s not the first rodeo for Wells Fargo.

On April 8, 2016, Wells Fargo agreed to pay the U.S. government $1.2 billion for hiding most of its bad loans in the years leading up to the 2008 housing market crash. The bank admitted it certified thousands of faulty home mortgage loans that were eligible for Federal Housing Administration insurance. Why, you may ask, did the bank follow these policies? The answer is the risk of loss was transferred to the U.S. Government (i.e. you and me) so that Wells felt free to make risky, subprime loans because of a “moral hazard” effect. Moral hazard holds that a questionable action might be taken where the risk of loss can be transferred to another party.

Wells Fargo’s Rationalization for Unethical Actions

So, how did Wells Fargo justify its actions? In the subprime situation it said: The settlement resolves “potential claims going back as far as 15 years” and lets the bank “put the legal process behind us.” It took 15 years for the bank to accept responsibility for its actions. This smacks of a corporate culture that plays lip service to corporate governance.

How did Wells Fargo react to the news that its employees opened unauthorized accounts? It fired 5,300 employees. A bank spokesperson, Mary Eshet, is quoted in a Wall Street Journal article as saying “both managers and team members were affected” by the firings. The fact that management was involved adds fuel to the fire of an unethical culture that penetrated throughout the organization.

Eshet is also quoted as saying “the firings should be seen in the context of the bank’s size -- it had 268,000 employees at the end of June – and that they happened over five years.” I guess we are supposed to dismiss the bank’s unethical practices because “only” 5,300 workers were involved, 2 percent of its total staff. The fact it took five years to fire the guilty employees speaks volumes about the failure of Wells Fargo to take the matter seriously and meet its corporate compliance obligations.

Corporate Culture

It seems the underlying cause for the unauthorized accounts with customers’ monies was a sales culture that provided an incentive structure that rewarded employees on the more products they sold. Some employees did not open accounts requested by customers and, instead, accumulated a number of account applications to be opened at a later date. This is called “sandbagging.” Another example is some employees would tell customers that certain products were only available as a package with other ones such as additional accounts, insurance or retirement plans, a practice known as “bundling.”

To me, as an ethicist, the culture at Wells Fargo enabled an incentive-compensation program to foster sales practices without proper oversight. We should blame management for failing to establish internal controls that helps to prevent such practices in the first place.

Wells Fargo has $1.9 trillion in assets and is the third largest bank in the U.S. The total monetary settlement with the government of about 1.4 billion is a drop in the bucket. This is mainly a ‘slap on the wrist’ for the bank and woefully inadequate to send the message that fraudulent banking practices will not be tolerated.

Blog posted by Steven Mintz, aka Ethics Sage, on September 12, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at www.ethicssage.com.