REVIEW AND REPORT ON BUSINESS STANDARDS
In September 2016, Wells Fargo reported a $185 million settlement with the Consumer Financial Protection Bureau due to long-term and widespread consumer fraud, including setting up two million deposit and credit-card accounts for clients without their permission.
Wells Fargo dismissed 5,300 employees for these illegal acts over 5 years, mostly sales employees with approximately 10% at the branch manager level.
The bank faced a firestorm of public criticism and CEO John Stumpf was required to testify before the Senate Banking Committee and House Financial Services Committee where he faced sharp bipartisan criticism. The U.S. Department of Justice is currently investigating the company which could lead to civil or even criminal charges. Additionally, the U.S. Department of Labor is conducting a “top-to-bottom review” for possible violations of federal labor laws. Separately, the Comptroller of California and Treasurer of Illinois have suspended their business relationships with the bank as a result of the scandal.
This is not the first time that lack of oversight of policies and practices led to systematic, ethical lapses and alleged illegal activities at Wells Fargo. In 2012 the bank entered into a $175 million settlement with the Department of Justice over allegations of widespread “discriminatory steering” of African-American and Hispanic borrowers into high-cost loans.
Multiple charges of discrimination and fraud have resulted in significant financial penalties and reputational repercussions that will undermine the confidence of customers, investors, and the public. Further, these impacts are expected to result in a loss of shareholder value.
While the Board initiated compensation clawbacks, for CEO Stumpf and Carrie Tolstedt totaling $60 million, investors and customers still do not have a clear understanding of the scope of the fraud or the strategies in place to address it in order to determine whether they are sufficient to prevent future lapses.
Shareholders request that the Board commission a comprehensive report, available to shareholders by October 2017, on the root causes of the fraudulent activity and steps taken to improve risk management and control processes. The report should omit proprietary information and be prepared at reasonable cost.
Shareholders believe a full accounting of the systemic failures allowing these unethical practices to flourish are critical to rebuilding credibility with all stakeholders and will strengthen risk management systems going forward.
The review and report should address the following:
- An analysis of the impacts on the bank, its reputation, customers, and investors;
- Changes implemented or planned to strengthen corporate culture and instill a commitment to high ethical standards at all employee levels;
- Improvements in risk management and controls, including new or revised policies and investment in people or technological solutions;
- Evidence that incentive systems are aligned with customers’ best interests.
- Changes in Board oversight of risk management processes;
- Assessment plans to evaluate the adequacy of changes instituted over time;
- Other steps to rebuild trust with key stakeholders—regulators, customers, and shareholders.