Wells Fargo Board ‘Claws Back’ $75 From Former Execs
Wells Fargo & Co.'s board of directors has placed officially the bulk of the blame for its customer fraud account scandal on its former head of its community banking division and its retired top executive.
Wells Fargo agreed Sept. 8 to pay a combined $185 million in fines to resolve regulatory complaints about 1.5 million potentially fraudulent customer checking and 623,000 credit-card accounts.
John Stumpf, chairman and chief executive, retired in October as one ripple effect. The board said Carrie Tolstedt, former head of community banking, was fired with cause.
The board released Monday a 110-page report that represents its seven-month investigation into how the fraudulent sales practices occurred and persisted.
Those accounts were opened by branch employees and managers in customers' names to meet sales targets. Wells Fargo said its internal investigation goes back to 2009.
"The board and management have taken decisive action to address issues raised by investigation, promote accountability, strengthen oversight and rebuild trust," it said in a statement.
One repercussion was the board increasing the amount of executive compensation clawbacks from Stumpf and Tolstedt by an additional $75 million.
The board said "the investigation identifies cultural, structural and leadership issues as root causes of improper sales practices."
Tolstedt and other community bank leaders "were unwilling to change the sales model or recognize it as the root cause of the problem."
"(They) resisted and impeded scrutiny or oversight from corporate risk management and the board and, when forced to report, minimized the scale and nature of problems."
The board said the bank's "decentralized corporate structure gave too much authority and autonomy to the community bank's senior leadership without the necessary oversight and encouraged deference to the business units."
As for Stumpf, the board determined he was too focused on the "bank's decades of success with cross-sell and positive customer and employee survey results."
"(He) was too slow to investigate or critically challenge the sales practices at the community bank and to appreciate the seriousness and the substantial reputational risk to Wells Fargo."
Altogether, Stumpf lost $69 million in compensation and Tolstedt $67 million, which previously include $41 million from Stumpf and $19 million from Tolstedt in forfeited unvested equity awards.
Part of what led to Stumpf's immediate retirement likely was his downplaying to Congress and to the board the enormity of the fraudulent account scandal.
Stumpf was grilled by the U.S. Senate Banking committee on Sept. 28, drawing criticism from the committee for "failing to answer many questions."
"The board's goals in conducting the investigation were to understand the root causes of improper sales practices in the community bank, to identify remedial actions to ensure these issues can never be repeated, and to help rebuild the trust customers place in the bank," the board said.
The law firm of Shearman & Sterling LLP assisted the bank in the investigation, conducting 100 interviews of current and former managers, employees, board members and other relevant parties. The law firm searched more than 35 million documents.
It also reviewed information concerning more than 1,000 investigations of lower-level employees terminated for sales integrity violations, which Wells Fargo's internal investigations group conducted.
"This exhaustive investigation identified serious issues related to Wells Fargo's decentralized structure and the sales culture of the community bank, all of which the board and management have been working diligently to rectify," Chairman Stephen Sanger said in a statement.
It is not clear whether investors will respond overall favorably to the board's steps. At least two major shareholder services groups have called for the board to replace between six and 12 members as part of resolving the scandal.
In the aftermath of the scandal surfacing, the bank has: promoted Tim Sloan as chief executive; named Mary Mack as head of community banking; split the positions of chairman and chief executive; added two board members; eliminated retail product sales goals in community banking; and also terminating for cause on Feb. 21 four senior managers in the community bank.
On March 1, the board announced the bank's top eight executives will not receive cash bonuses for fiscal 2016.
The executives, including Sloan and David Carroll, head of wealth and investment management, also could see the value of stock awards received from 2014 to 2016 cut by as much as half.
The board said the combined compensation reduction for the eight executives is valued at $32 million "based on 2016 target bonuses and the current price of Wells Fargo shares."
For example, Wells Fargo said in its fiscal 2015 proxy report that Sloan, then president and chief operating officer, had been made eligible for more than $15 million in stock awards for 2014 and 2015, and was paid $1 million in cash incentives pay. Bank officials said the cash incentive pay is synonymous with cash bonuses.
"The board has total confidence in management, and while this investigation has concluded, our oversight of the company and commitment to accountability are stronger than ever," the board said.
Sloan said he supported the board's actions on the cash bonuses and believes "they are critical to Wells Fargo's commitment to our customers."
The bank has said it cannot rule out that 38,722 unauthorized customer accounts were established in North Carolina and 23,327 in South Carolina.
In December, nine Democratic U.S. senators scolded the board for what they consider the bank's foot-dragging on disclosing more details.
The issues that the banking committee want to know more about include:
Officially identifying the independent directors serving on the bank's internal investigative committee;
Why wasn't such an investigative committee in place before the settlement?
How will the bank make its report known to shareholders and the public?
What was the board's knowledge of the scandal before Sept. 8? And'
What other business lines had been affected by the fraudulent employee behavior?
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