The case
From the Sales Practices Investigation Report of the Independent Directors of the Board of Wells Fargo & Company, April 10, 2017 (LIT-1425, read in full in NOTE-1095). Page numbers are the report’s.
- What happened. Community Bank employees sold customers unneeded products, opened accounts without consent, moved customers’ money to make new accounts look funded, and falsified records (pp. 26, 35–36). About 5,300 employees were fired for sales practice violations between January 2011 and March 2016 (p. 16). The CFPB’s order covers “1,534,280 deposit accounts that may not have been authorized” (p. 26, n. 7).
- The system. Sales goals were set centrally, “commonly referred to as 50/50 plans” because only half the regions were expected to meet them (p. 19). They were pushed down to every branch, with daily rankings and scorecards, and pay and promotion turned on them (pp. 20–21). “Many employees felt that failing to meet sales goals could (and sometimes did) result in termination or career-hindering criticism by their supervisors” (p. 7).
- The structure. Under the “run it like you own it” model (p. 19), the Community Bank ran its own risk and HR functions, which reported to its head. The Chief Risk Officer “did not have any line authority or directive power to enforce changes on the lines of business” (p. 60).
- The leadership. Carrie Tolstedt, head of the Community Bank, and her inner circle “were insular and defensive and did not like to be challenged or hear negative information” (p. 8). John Stumpf, the CEO, was Wells Fargo’s “principal proponent and champion of the decentralized business model and of cross-sell and the sales culture” (p. 9).
- Outcome. Sales goals were abolished from October 1, 2016 (p. 51). Risk and HR were centralized (p. 12). Five Community Bank executives were fired for cause, and more than $180 million was forfeited, clawed back or cut from senior leaders’ pay (Overview).
What the report finds about the cause
Structure and culture, by its own verdict. “The root cause of sales practice failures was the distortion of the Community Bank’s sales culture and performance management system, which, when combined with aggressive sales management, created pressure on employees to sell unwanted or unneeded products to customers and, in some cases, to open unauthorized accounts” (Overview). No single ingredient is condemned: “there is nothing necessarily pernicious about sales goals, a sales-oriented culture or a decentralized corporate structure”, but “these same cultural and structural characteristics unfortunately coalesced and failed dramatically here” (p. 4).
Pressure more than reward. “Employees who engaged in misconduct most frequently associated their behavior with sales pressure, rather than compensation incentives, although the latter contributed to problematic behavior” (p. 7). Misconduct rose with the difficulty of the goals: allegations went from 288 in Q2 2007 to 1,469 in Q4 2013 (pp. 33–34). Explicit instruction from above was rare in the records reviewed. In nine of 1,341, a district manager was accused of directing misconduct (p. 37).
The individual-wrongdoer account is the report’s diagnosis of the leadership’s error, not its own finding. “It was common to blame employees who violated Wells Fargo’s rules without analyzing what caused or motivated them to do so. Effect was confused with cause” (p. 6). When the company found misconduct, its fix “generally was to terminate the offending employee without considering causes for the offending conduct” (p. 6). Stumpf’s “reaction invariably was that a few bad employees were causing issues” (p. 10). The Risk Committee was told in 2015 that “the root cause was intentional employee misconduct, not systemic issues arising from sales goals or compensation” (p. 105).
But individuals are faulted for keeping the system. The report does not treat the leaders as mere occupants of stations. Tolstedt “resisted change to the Community Bank’s sales model even when confronted with evidence that it led to low quality sales and improper sales practices” (p. 46). Stumpf “helped create the culture that resulted in sales practice abuses” (p. 9). Regional leaders in Los Angeles, Florida and Arizona are described applying extreme pressure (pp. 22–26). Its blame falls on choices about the system, by those with authority over it.
What the system pursued. It did not pursue profit directly. The leaders “were reluctant to take steps that they believed might have a negative impact on the Community Bank’s financial performance” (p. 5), but what they protected was the sales model and its growth. Only 1.7% of unfunded accounts incurred fees that were not reversed (p. 43, n. 18). Removing every suspect account moved the reported cross-sell metric by at most 0.04 in any quarter (p. 43, n. 19).
Signals of harm and who could act on them
This bears on CLAIM-349: access to a signal, the signal’s authority over action, and action on it are separable. Here the organization had access again and again. What was missing was a route to someone with authority, and that person’s willingness to act.
- Held where it could not act. Internal Investigations wrote in 2004 that “The incentive to cheat is based on the fear of losing their jobs for not meeting performance expectations” and recommended cutting sales goals. “There is no evidence that the report and its recommendations were further escalated” (pp. 89–90). In 2012 Community Bank HR’s own project told leadership to “stop raising sales goals”, and was largely not followed (p. 81). Regional leaders objected for years, and senior leaders “viewed the efforts to address goals by West Coast leadership as simply a cover-up for poor management” (p. 41).
- Reaching authority without being acted on. Stumpf “received numerous customer and employee complaints about sales practices and sales pressure, which he or his assistants referred to appropriate subordinates without further follow-up” (p. 55). Told that about 1% of employees were fired each year for sales integrity violations, he “reacted positively” (p. 55).
- Blocked or filtered on the way. Tolstedt told Lisa Stevens, a regional head, “not to talk to Loughlin anymore and that she needed to ‘toe the line’” (p. 65); Loughlin was the Chief Risk Officer. When Corporate Security reported “a concerning trend in the area of Sales Integrity – from the increase in EthicsLine reports, to the increase in executive complaint letters”, the Community Bank’s risk officer said it made the problem sound “so much worse than it is” (p. 50). Audit received the warning and “did not follow up” (p. 95). Before the May 2015 Risk Committee meeting, the 1% figure was deleted (p. 105). The committee left believing terminations were “in the range of 200-300 and were largely localized in Southern California” (p. 106).
- Seen but misclassified. In the A&E Committee’s materials before 2014, sales integrity matters were grouped with internal matters “viewed as having minimal, if any, customer impact” (pp. 99–100). Control functions handled “the specific employee complaint or individual lawsuit that was before them” (p. 13). The term “customer harm” was “narrowly construed to mean only financial harm such as fees and penalties” (p. 14).
- Supplied from outside. The Los Angeles Times articles of 2013 were “an accelerant to change” (p. 44). The board “learned for the first time” of the 5,300 terminations through the September 2016 settlements with the CFPB, the OCC and the Los Angeles City Attorney (p. 16). The sales model was abandoned only after them.
What it shows
A documented firm in which the board’s own investigation attributes the harm to structure, incentives and the culture that kept them, rather than to the character of the employees who did the harm. That is the shape the record’s reading of the “psychopathic corporation” thesis predicts. On that reading a corporation can be an agent fit to be held responsible (THEORY-131, THEORY-139), with structure and incentives fixing what it pursues. The remedies the report lists are structural too: abolish the goals, change the pay, centralize risk and HR, add board reporting lines (pp. 17–18, 51–52).
It shows the cost-registering half of the reading more precisely than the reading states it. The company had the signals. They sat with investigators, regional leaders, HR and Audit, who lacked the authority to change the model. Where they reached people with authority, those people dismissed them, or the signals were filtered on the way. The full scale came to the board from the regulators.
What it does not show
- An outside verdict. It is the company’s report on itself, commissioned by its independent directors, who were themselves among its subjects. Its judgments on the board are mild (“could have been improved in three respects”, p. 16). Its counsel relied on company data that FTI “did not independently test” (p. 26, n. 7).
- Intent. It does not establish why Tolstedt and her risk officer withheld information. Its view that they “likely” did so for freedom to handle it “on their own terms, rather than to encourage improper behavior” is an inference (p. 8), and Tolstedt declined to be interviewed (p. 8, n. 1).
- That no individual was culpable. The report names leaders, fires five for cause and claws back pay. It does not say the thousands of fired employees were blameless, and most admitted the misconduct (p. 37).
- That the corporation lacks any capacity to register costs. Parts of it registered them early (the 2004 report, the 2012 HR project). The case is about routing and authority, not absence.
- That profit drove it. The leaders protected a sales model and its growth; the unauthorized accounts earned little.
- That retaliation did not occur. The review was “limited” and “ongoing” (p. 87, n. 26).
- Anything about corporations in general. It is one firm, one business line, one decade.