When Cross Selling Crosses the Line: Wells Fargo and Unintended Consequences

The paper follows the series of publicly available events and ensuing actions by Wells Fargo and various stakeholders that underscore the impact of strategic practices that may not robustly consider a broad and integrated view of intended and unintended outcomes. Founded in 1852, Wells Fargo has grown organically and through mergers be the third largest bank in the United States (following JPMorganChase and Bank of America.) Headquartered in San Francisco, its storied history began with the Gold Rush and evolved into a high growth sales culture that heavily pursued cross selling to clients. This underlying drive to cross sell products resulted in a scandal that included fraud charges, regulatory fines, management changes and thousands of dismissed employees. Clearly this could not have been the desired outcome, so how did this scandal happen? According to former LA Times Reporter E. Scott Reckard, the scandal was leaked by a “whistleblower” at a Wells Fargo branch in California in December 2013. The employee who had been fired, claimed that Wells Fargo’s aggressive sales culture and unrealistic sales goals pressured employees to execute on sales targets at any cost. The whistleblower indicated that lines had been crossed including the misuse of customer information to open accounts and in some cases, moving customer funds without their knowledge to do so. This initial lead triggered a lawsuit by the city of Los Angeles that would bring Wells Fargo into the cross hairs of their customers, regulators, legislators, and impact their reputation in the marketplace. At the final tally, over two million unauthorized accounts and credit card applications are estimated to have been opened across the menu of products generating millions of dollars in fees. These actions were executed due to the “Eight is Great” strategy to sell “eight products to customer households.” The strategy per se was well known, and while aggressive, may not have been an issue if it was executed within the context of defined risk taking, balanced with an appropriate system of internal controls that would have raised the red flags on the consistent pattern of wrong doing. Instead, this strategy generated a toxic brew of sales pressure and fear of termination that was a ripe scenario for unintended consequences. The consequences included the oxymoronic actions of firing some low wage level employees for both meeting sales goals, but also for violating policies. These terminations of 5,300 front line employees (some making $12 per hour), occurred while Wells Fargo recorded record stock prices and paid millions to executives as bonuses. This mixed message continued to cross the wires of accountability, ethics and the bank’s articulated mission statement, and thus pressure mounted on the Board of Directors and Senior Management to step forward. Both regulator and legislator demands for leadership accountability was a dominant bipartisan theme at both the Senate panel on Banking and the House of Representatives Financial Services Committee when CEO John Stumpf testified. These contentious hearings profiled the bank executives as “squeezing employees to the breaking point” (WSJ: Warren, October 13, 2016) and “gutless leadership.” This severe and public scrutiny of the Wells Fargo culture and governance practices eventually led to a $185 million settlement with the Banking Regulators, Mr. Stumpf’s retirement, and compensation/bonus claw backs for several executives that are still being finalized. The actions taken by the Banking Regulators are far from over given the pending investigations by and among others, including The Securities and Exchange Commission, U.S. Departments of Justice and Labor, various offices of States Attorneys General and private lawsuits. What are the lessons learned from this bad scenario and how were they made worse? While Wells Fargo neither admitted or denied the accusations, they have a long road to rebuild their position in the marketplace. Under the direction of the new CEO Tim Sloan, Wells Fargo has taken steps to reinstate confidence in their business practices by abolishing the sales goals on January 1, 2017 (Wells Fargo website). It remains to be seen how this will impact growth given that new account openings plunged 44% in November 2016 (CNN Money, November 16, 2016). Under the watchful eye of the regulators (and their imposed sanctions), the Board of Directors and Management will have to face the challenge of managing growth and the stock price, while heightening governance, transparency and accountability at the top of the organization. Perhaps the growth and stock price are easier to measure than the impact on the culture, employees and public perception. Migrating to a new culture that encourages compliance with business practices and the customer’s best interests aligns with Wells Fargo’s mission statement, but will be challenging to achieve. It will require an updated strategy with supporting policies and compensation practices, as well as the right people at all levels of the organization. Oversight from the regulators may be a helpful, but not painless accelerator for these new goals, but this is the price of crossed wires from unencumbered cross-selling. In closing, banks are part of the structure that drives economic growth and preserves the safety and soundness of the financial systems as well as public trust. Due to this well-defined and regulated role, banks must align their strategy with a risk profile and transparent limits on risk taking that will meet the expectations of stakeholders. For Wells Fargo, the scrutiny will continue and only time will tell if they can remove the tarnish from their reputation. As noted investor Warren Buffett states, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently”.