(originally published on Linked In on September 29, 2016)
Wells Fargo Bank was one of America’s best companies.
Jim Collins profiled Wells Fargo in Good to Great. Legendary value investor Warren Buffet owns approximately 2,000,000 shares and his Berkshire Hathway holds a 9.5% stake in the company. Wells Fargo easily weathered the financial crisis of 2008 and its quality of management was rewarded with a national footprint when the government forced it to acquire Wachovia to avoid the latter’s collapse.
What Went Wrong?
What madness drove such a well-run and well-respected financial institution to open more than 2,000,000 unauthorized sham accounts for its customers? Are CEO John Stumpf, Carrie Tolstedt, who ran the bank’s retail banking division, and other executives at fault because they established employee compensation policies based on accounts opened? Or does blame belong to the 5,300 fired Wells Fargo employees, who allegedly opened those sham accounts? And why did Wells Fargo’s fabled culture of courtesy fail to stop such practices?
As Gretchen Morgenson said in Tuesday’s column in the New York Times, Wells Fargo’s board of directors has “some ‘splaining to do.” After Mr. Stumph made Wells Fargo look even worse by failing to hold himself accountable for the scandal when grilled by Senator Elizabeth Warren at a Senate committee hearing last week, the bank’s board of directors has begun to take appropriate action to find out what happened. For starters, the bank’s independent directors hired Shearman & Sterling to conduct an internal investigation, and Mr. Stumpf and Ms. Tolstedt will forfeit $60 million of stock awards and their 2016 bonuses.
Shearman & Sterling will do a fine job as an ombudsman for the conscience of the bank. Hopefully, the investigation will reveal why Wells Fargo’s fabled courtesy oriented culture devolved to the point that the bank forced accounts on unwitting customers. Most likely, however, Wells Fargo will pay its $185,000,000 settlement, make a few changes to its operations in addition to those already announced and return to business as usual, hoping that the scandal, like so many corporate scandals before it, will soon be forgotten.
The Hidden Cause of “Eight to Great”
The root cause of the problem, however, as Justice Stevens said in Citizens United v. Federal Election Commission, is that “the corporation has no conscience.” As long as we accept the sponsoring thought of modern capitalism that the corporation, whether by law or custom, exists solely to maximize profit for stockholders, public corporations such as Well Fargo will remain under constant and enormous pressure to do just that by every available means. This including exporting jobs to China, re-domiciling in Ireland to avoid US taxes, and opening unauthorized accounts for customers.
This sponsoring thought drives good people like Mr. Stumpf, Ms. Tolstedt, and Wells Fargo’s other directors to replace the golden rule that runs their personal lives with the rule of gold in the board room. As a result, instead of doing unto others what they would like done unto themselves, corporations often do unto others whatever it takes to maximize their own profits, including forcing unwanted accounts on hapless customers. The default moral compass that guides corporate behavior is the belief that it is morally acceptable to foist as many as possible of the negative consequences of corporate behavior on society, the environment and, in Wells Fargo’s case, customers in order to maximize profit.
How Wells Fargo Can Return to Great
There is a bold way that Wells Fargo could re-affirm its commitment to its culture and more importantly, to its customers: reincorporate as a Delaware public benefit corporation and adopt a new corporate charter that makes a legal commitment to embody its core value of courtesy. Since Wells Fargo is already a generous supporter of the arts and other community causes, becoming a Delaware public benefit corporation would actually be in alignment with its historical culture and values. Becoming a benefit corporation would give Wells Fargo a path to go from discourteous to great, re-positioning the bank as a global leader in corporate governance.
In the interest of full disclosure, I have been a satisfied Wells Fargo customer since 1975 and am a small Wells Fargo stockholder. My fondness for the bank grew after I recently moved to west Marin County north of San Francisco. My Wells Fargo branch in Point Reyes Station is the only bank serving the entire western half of the county. Service Manager Jeffrey Schroth and his team know me and most of their customers by name. They exemplify courtesy and model community banking at its best.
If it were up to me, I’d require Mr. Stumph and each of Wells Fargo’s officers and directors to spend a month working for Mr. Schroth in his branch to help each of them
remember the true purpose of their bank: to serve customers like me with courtesy.
What would you do to make Wells Fargo great again?