The Wells Fargo Banking Scandal case study analyzes the Wells Fargo account fraud scandal which came to the forefront of the public eye in September 2016. It is one of the biggest scandals of the financial world in which 3.5 million unauthorized bank accounts had been created by Wells Fargo employees to achieve unrealistic sales targets set by senior management.
Luann J. Lynch; Cameron Cutro
Harvard Business Review (UV7267-PDF-ENG)
October 27, 2017
Case questions answered:
- Identify the relevant corporate governance issues and practices and problems at the Wells Fargo.
- Apply corporate governance theory relevant to that industry/profession and the identified issues and problems.
- Provide recommendations for improving the corporate governance practices of Wells Fargo in order to resolve the identified problems.
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Case answers for The Wells Fargo Banking Scandal
Executive Summary – The Wells Fargo Banking Scandal
This report analyses the Wells Fargo account fraud scandal which came to the forefront of the public eye in September 2016. It is one of the biggest scandals of the financial world in which 3.5 million unauthorized bank accounts had been created by Wells Fargo employees to achieve unrealistic sales targets set by senior management.
The corporation has paid hefty fines since then and has undergone corporate restructuring to a great extent due to pressure from the Government and increased legal regulations in the industry.
After thorough analysis, the major causes of this scandal have been identified as decentralization of management, the Principal-Agent problem, and the dual role of Chairman and CEO which was played by the same person, John Stumpf.
The authority is given to local managers with the absence of a formal plan to reach sales targets and the intense pressure faced by employees to reach their targets led to a number of employees adopting fraudulent practices. Such actions clearly portray that the employees did not have the best interests of the business owners on their mind, suggesting a principal-agent problem. The dual role played by John Stumpf led to poor governance, design, and implementation of corporate strategies and also led to one man holding too much power in the organization.
In response, we recommend Wells Fargo to empower its Board of Directors to centralize the key decision-making process, align divergent interests of employees and shareholders to mitigate the agency problem, and hire different executives for the positions of Chairman and CEO. A better organizational culture needs to created and a set of independent directors need to be hired who can share an unbiased view about different strategies and techniques adopted by the organization.
This shall prevent a similar mishap from happening and ensure that Wells Fargo ethically moves ahead on a growth trajectory in the future.
Fierce competition emerged in the American Financial Sector due to Global Market and Technology Developments, macroeconomic pressures, and deregulation of the sector (Hawkins & Mihaljek, 2001) which led to the use of immoral techniques to attain greater profit and market share. It is needless to say that it is extremely important for organizations to follow an ethical approach to achieve their objectives, which shall not just lead to healthy competition in the market but manage customer and stakeholder expectations.
Different problems arising as a result of poor Corporate Governance mechanisms combined with an extremely aggressive sales practice, unscrupulous corporate culture and inadequate supervision, can be delved into using the Wells Fargo Scandal.
2. Background to the Case
Wells Fargo & Company is one of the biggest financial services firms in the world, third biggest in terms of assets in the USA, which caters to all customer groups across all major industries (Wells Fargo and Company SWOT Analysis, 2019). The company headquarters are in San Francisco, California, USA, and is presently operating across North America, Europe, Asia, and UAE.
It has an extremely strong market position in the USA, and the main challenges it is facing today are intense competition and growing legal regulations in the country. Owing to the intense competition in the Banking Industry, the senior management started using strong-arm sales tactics and pressuring employees to achieve unrealistic sales quotas. Employees were threatened about the security of their jobs and had to work unpaid hours if unable to meet these sales quotas (Levine, 2016).
In 2016, Wells Fargo employees were found guilty of opening 3.5 million (Mehrotra & Keller, 2017) fake accounts, on behalf of their customers creating one of the biggest scandals of the financial world. They were fined approximately $185 million in 2016 and have borne fines of about $1.7 billion as a result of this Financial Scandal (Colvin, 2017). Despite sounding like a mortgage crisis, the Wells Fargo scandal seems different as it was not carried out by the 1% wealthy investment bankers but rather carried out by $12 per hour employees (Delshad, 2016).
The decentralized management structure led to less governance from senior management and more autonomy for local managers, which they misused by unethical sales methods to achieve their targets. The dual role of the chairman and the CEO, played by John Stumpf is another key issue; separate roles could have proven beneficial in mitigating such a disaster. Boyd (1995)has stated that the dual role has a negative weak relationship with firm performance. Having a single role in the organization as a CEO would have resulted in effective corporate governance and allowed Stumpf to focus on operations and strategy execution completely. It would have nullified disagreements in regards to executive compensation, recruitment of directors, or an independent board.
Thus, this case provides a clear example of a disaster, poor Corporate Governance, and risk management combined with aggressive and unethical policies that can lead to an organization.
3. Root Causes for The Wells Fargo Banking Scandal
A fraud of this scale accumulated various perspectives, opinions, and reasons for what had gone wrong. Analyzing these with deeper insights, we have highlighted three root causes that led to the Wells Fargo Account Fraud Scandal.
3.1. CEO Duality
Studies have given no positive inference on the effects of CEO duality. Fama and Jensen (1983) have suggested that duality may affect the ability of the board of directors to monitor their management, thereby increasing the agency cost whereas Donaldson and Davis (1991) have argued that duality would help in better designing and implementation of strategies, thereby leading to better firm performance.
Since 2007, John Stumpf has been the Chairman and the Chief Executive Officer for Wells Fargo, until his resignation in 2016. CEOs of large firms in the US are typically not the major stakeholders (Boyd B. K., 1994). In case of issues, corporations tend to leave the decision management task to the CEO and the decision control task to the board, giving CEO the responsibility for initiating and implementing the strategic decisions while leaving the board with the responsibility to ratify and monitor those decisions, making the board as the internal controller (Walsh & Seward, 1990).
However, by serving as the chairman, the CEO gets a wider power and control (Hambrick & Finkelstein, 1987), weakening the board’s decision controlling authority (Morck, Shleifer, & Vishny, 1989).
In 2010, Stumpf decided to impose extremely aggressive sales goals on their employees in order to live up to their reputation of being the best cross-sellers, addressing the following statement: