Wells Fargo CEO Forgoes Leadership
After almost three years of scandals and the mounting wrath of Capitol Hill, the president and CEO of Wells Fargo & Co., Timothy Sloan, stepped down on Thursday, March 28th. While Sloan lasted sixteen days before he declared his resignation, his predecessor, Chief Executive John Stumpf, stepped down thirteen days after a pitiless Congressional appearance. In 2016, Stumpf appeared before the House Financial Services Committee after the eruption of a massive sales scandal at the bank. The company was forced to pay a $185 million fine for “widespread illegal” sales practices, such as opening an estimated two million credit-card and deposit accounts without the knowledge of its customers. At the time of scandal, Wells Fargo—which boasted forty million retail consumers—assigned personal identification numbers to unwitting clients. Staffers fraudulently created fake Wells Fargo email addresses to enroll unknowing and fictitious individuals in online-banking services as a means of achieving aggressive sales targets. In describing the corporate culture at the organization during the time of the scandal, SAM Advanced Management Journal elucidates that “if the banking system at Wells Fargo can be construed as a society, there is evidence that the moral norm of that society excused or even promoted fraud and deceit for monetary gains” (Cavico & Mujtaba, 2017 ). Even two years after the scandal, the beleaguered bank, with its rustic stagecoach logo, has struggled to rebuild its reputation “as a solid, main Street lender that avoided the excesses of the financial crisis and other missteps on Wall Street.”
However, Wells Fargo’s blunders do not end with the 2016 sales scheme. In July of 2017, the bank charged approximately 570,000 customers for unneeded car insurance. The lender purchased auto loans on customers’ behalf, albeit the individuals who were involved had previously purchased the company’s insurance policy. Thus, due to these exorbitant insurance costs, customers defaulted on their car loans and had their vehicles repossessed by the bank. Furthering the turmoil of the bank’s reputation, in October of the same year, Wells Fargo blamed and charged mortgage borrowers for missing a deadline to lock-in interest rates, although the paperwork delays were the bank’s own fault. Former CEO Timothy Sloan assured the Senate that following this scandal, “we are resolving past problems even as we make changes to ensure nothing like this happens again at Wells Fargo.” While the bank claims to have renewed its commitment to its customers, such promises appear devoid of truth.
Despite Sloan’s commitment to the company for over thirty years—for he tirelessly worked his way to the top of the ranks—the leader reminded customers of Wells Fargo’s scandal-riddled past. The 167-year-old bank claims that its next CEO will be an outsider to the organization, a change that should have been made following the eruption of the fraudulent sales scandal in 2016. The bank’s culture of toxicity and corruption trickles down from the top, as evidenced by the fact that Sloan once defended the bank’s infamous cross-selling tactics. Despite promises to revitalize the bank’s deteriorating culture and restore consumer confidence, new problems continued to burden the bank. Due to “widespread consumer abuses” this past February, the Federal Reserve imposed an asset cap on the lender to limit its growth. Timothy Sloan’s resignation has further fueled the unraveling of the once-golden institution. Currently, general counsel C. Allen Parker is serving as the interim leader; however, the upcoming decisions of the company will determine its fate. In fact, Tom Sedoric, a previous Wells Fargo and A.G. Edwards employee, emphasizes that “you don’t rebuild trust in a matter of weeks or days by naming a new CEO…You rebuild trust by putting your money where your mouth is, and this may be an opportunity to do that.”
Since Timothy Sloan’s departure from Wells Fargo, the bank is officially ranked as the worst performer among other U.S. banks, dropping 1.8 percent as the KBW Bank Index increased 3.3 percent (as of April 3, 2019). The KBW Bank Index tracks the performance of the leading thrifts and banks that are publicly-traded within the United States. The index includes 24 National Market System stocks, thus representing national regional banks, thrift institutions, and money centers.
By the same token, S&P Global Ratings cut Wells Fargo & Co.’s credit outlook following Sloan’s resignation. On Monday, April 1st, S&P lowered its stable credit rating of the bank to negative. In a NASDAQ article from this past February, Zacks Equity Research reported that the bank’s short-term issuer credit rating had been decreased from “A-1” to “A-2,” changing Wells Fargo’s “A+” credit profile to an “A.”
Furthermore, a spokeswoman for the lender, Arati Randolph, upholds Wells Fargo’s renewed customer-focus and commitment to innovative efficiency. Chair Betsy Duke explained that the bank’s board is acting swiftly to fill the vacant leadership position. Nevertheless, the search committee is conducting a thorough appraisal process to ensure that the candidate fits with the institution’s core objectives and company values. Wells Fargo’s statements are falling on the deaf ears of previous investors, for they have heard these hopeful assurances since 2016. This is the same bank that, while fleecing millions of clients, ironically claimed to “value what’s right for our customers in everything we do” (Verschoor, 2016).
The new CEO will be faced with a formidable job description. In addition to over a dozen investigations concerning many of the bank’s business lines, the next leader may also inherit growth obstructions due to the company’s “Needs to Improve” Community Reinvestment Act (CRA) rating, escalated legal fees as a result of Wells Fargo’s slew of scandals, and fourteen outstanding consent orders. While Sloan feels justified in his leaving, defending that the “focus on [him] has become a distraction” that impacts the lender’s ability to “move Wells Fargo forward,” his departure has incited further disarray within the company. Perhaps Sloan’s absence is the managerial change that will restore the bank to its once former glory, or, at the very least, prevent the bank from being run into the ground. Senator Elizabeth Warren certainly was relieved upon the news regarding Timothy Sloan, writing that it was “about damn time” on Twitter.
Election of an outside Chief Executive has the potential to rid the bank of its tainted ethical system. But, it is not until Wells Fargo is able to abolish its deep-seated toxic culture that investors will once again jump on the stagecoach.
Cavico, F. J., & Mujtaba, B. G. (2017). Wells Fargo's fake accounts scandal and its legal and ethical implications for management. SAM Advanced Management Journal, 82(2), 4-21. Retrieved from https://search.proquest.com/docview/1926580720?accountid=8576
Verschoor, C. C. (2016). Lessons from the Wells Fargo scandal: the latest ethics scandal to hit the banking world demonstrates the importance of ethical influences in regard to company culture, risk evaluation, employee incentives, and more. Strategic Finance, 98(5), 19-20. Retrieved from https://search.proquest.com/docview/1838498304?accountid=8576