Only two weeks ago, I penned an article entitled: A thousand cuts: Let's hope not, about the continuing conduct issues facing Wells Fargo, an otherwise bellwether leader in US financial services. Well, I may have been somewhat optimistic but perhaps we are finally getting near the bottom of the barrel. On Thursday this week, CNBC and other news sources reported a further rise in fake (a popular word these days) accounts at WFC. In fact, perhaps up to a further 70% in new small business and retail fake accounts (or according to Fortune 1.4 million) may have been unearthed by the lender according to an independent party brought in to bottom out this issue in an expanded review. This review considered a broader time period than was previously carried out by the board of directors and in the words of Moody's "revealed extensive additional potentially un-authorised accounts" including credit card and on-line banking products. The rating agency indicated this weekend as other bank's litigation risks are declining, the profile at Wells is moving in the opposite direction.
This may be a sign we are getting close to the end of the beginning (e.g., a phase defined as measuring the impact of the conduct shortfalls). Warren Buffet, whose firm Berkshire Hathaway owns just under 10pct of this powerhouse, apparently said this week on Squawk Alley that: What you find is there's never just one cockroach in the kitchen when you start looking around. He must be less that overjoyed with the firm's share performance; I had a quick check of other large BHC shares over the past 1-year: mainly up some 20-30% such as Citi, PNC and JPM, whereas Wells is at the same level over a similar time period. The company is known to have good values, an ethics program/staff and historically good oversight. However, somehow, the tone and targets of its cross-selling program (and its sales efforts in general) appear to be out of kilter with the principles it has tried to embrace. One really big step for the board is to not defend actions of the past but acknowledge the existence of these cockroaches, followed by a plan to rid them from kitchen and house for that matter altogether.
Further, it raises the role of incentives. Incentives in corporate governance studies tend to focus on the CEO, the board and sometimes the C-Suite. This episode calls for further empirical analysis by academics and consideration of firm-wide incentives, right down to the sales and telemarketing teams and consultants if any. Ferrell, Johnston and Ferrell (2007) and in other literature identify an ethical decision-making framework which the board could cascade down to the business units, along with a zero tolerance risk appetite statement for ethical breaches. FJF (2007) for example highlight the role sales role and its environment, ethical issue intensity, and organizational culture and climate, sub-cultures and individuals features as key factors. I have been thinking a lot about how financial services firms can better reach a sensible balance balance between sales targets and culture.
This article is about banks but this subject applies equally to FinTech, wealth management and insurance as well. My professional experience resonates with a recent article from Forbes which indicated to reach that balance, incentives can aim to achieve activities and behaviours, not simply financial sales targets.1
Adjusting culture is no easy thing for a firm like WFC with over 7,000 branches. Decentralization can facilitate subcultures and presents a host of management challenges. Wells however is up to the task, there is little doubt about that. Wells named new senior ethics leaders recently. Hopefully these business leaders have the energy, drive and a framework that is up to these challenges but holding the rank and file accountable with the right blend of incentives appears key.
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