What Are the Real Lessons of the Wells Fargo Case?

Wells Fargo has suffered a series of setbacks—fake customer accounts, an auto insurance imbroglio, replacement of the CEO—that challenge the bank's core employee values. James Heskett asks his readers what went wrong and how the damage can be repaired.
by James Heskett

Case studies used in business schools portray dilemmas faced by managers. Students diagnose the problem and recommend actions. They are thought to learn at least as much from failure as from success. If that’s the case, there must be an educational treasure trove in the recent experiences at Wells Fargo, regarded as one of the best-managed banks in the world. A case about Wells Fargo might well contain some of the following.

For years, Wells Fargo has prided itself on putting “culture first, size second.” Its culture is built around the idea of One Wells Fargo, “imagining ourselves as the customer.” Its vision includes the mission of helping its customers succeed financially. This vision is supported by values such as “people as a competitive advantage, ethics, and what’s right for customers.” The organization even has gone so far as to define its culture as “understanding our vision and values so well that you instinctively know what you need to do when you come to work each day.” That’s all pretty impressive.

Given this context, it made sense that incentives were put in place several years ago to encourage frontline employees to develop “deeper” relationships—defined by the number of the bank’s services utilized--with existing customers. However, the goals on which the incentives were based were so daunting that they raised the temptation to cheat by establishing fake new accounts and even transferring token amounts of funds between these accounts without customers’ knowledge. When the practice became so prevalent—2.1 million accounts from 2011 to 2015—that it began to generate numerous customer complaints and evidence surfaced regarding systematic cover-up of the practice in the ranks.

Wells Fargo announced in September 2016 that some 5,300 employees were fired. The action was taken by leaders who claimed they were unaware of the practice; nevertheless, the board replaced CEO John Stumpf and clawed back some of his compensation. The monetary and non-monetary costs to the financial institution in penalties, fines, and loss of trust began to mount.

Months before the fraud was disclosed, Tim Sloan, then president and COO (and now CEO), was quoted as saying: “People are our competitive advantage, so we care for our team members and want them to enjoy what they’re doing. Customers tell us they do business with Wells Fargo because our people care about them—that is our Vision.”

But the problems didn’t stop there. In August 2017, the bank found that the fraudulent activity affected 1.4 million more accounts between 2009 and 2016, and perhaps additional accounts before 2009 for which, “it did not have sufficient data,” according to Sloan.

When the bank’s largest shareholder, Warren Buffett, was asked about the matter, he commented in a CNBC interview, “There’s never just one cockroach in the kitchen. Once you put a spotlight and start looking at everything, you’re likely to find something additional.” Other events were proving Buffett to be right.

It was disclosed this past July that an insurance company with which Wells Fargo had a contractual relationship had, over a period of nearly 12 years, been requiring as many as 800,000 of the bank’s auto loan recipients to take out insurance on autos that were already insured. Wells Fargo management claimed that it was unaware of customer complaints collected by the insurance company. Further, when made aware of the problem—including thousands of borrowers who could not make the extra payments and subsequently had their autos repossessed—management made provision to reimburse only those customers taking out auto loans in the last five of the twelve years, according to the Federal Office of the Comptroller of the Currency.

Wells Fargo announced last month that four executives had left in connection with a regulatory investigation into the bank’s foreign-exchange operations. It also announced what was described as “disappointing revenues and higher legal costs,” triggering at least a short decline in its share price.

A complete case study would, of course, contain much more information about the problem and the thinking behind decisions. That more complete case will, I’m sure, be written and studied. But in the meantime, we can at least ask ourselves what we might learn from what we know. Of course there will be the obvious lessons concerning the cost of management greed, dishonesty, and cover-up.

What are the real lessons of the Wells Fargo case? What do you think?

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