Learning Nothing and Forgetting Nothing: the Wells Fargo Residuals

Once one begins thinking about the recurrent failings of corporate governance, particularly of large public companies, it is hard to stop thinking about the many, repeated occurrences of corporate misgovernance, “disorganized crimes,” as we have so titled them.

The Wells Fargo charade is only the latest, but sadly, not the last one in this recurring story. Without the special knowledge that will inevitably be dredged up over many months by investigative reporters and public displays of Congressional mourning for account holder losses, we are forced to merely conjecture about how the Wells Fargo saga took place and to explain how long it lasted.   Surely, some of the executive management team, and certainly some of its ‘distinguished’ Board of Directors were familiar with the many occurrences of pas corporate misgovernance, particularly since the Enron affair. “Learned nothing and forgot nothing, as Talleyrand once remarked about the Bourbons of the French revolution

Perhaps the Board was blinded by the apparent ease of Wells’ passage through the financial crisis of 2007/2008 or mesmerized by its former CEO’s railing against Wells Fargo’s forced acceptance of Government funding in 2008[1]   Wells had an enviable post-crisis record of earnings growth and was the darling of investors such as Warren Buffett.

Undoubtedly, such an exalted status creates sizeable insulation from thoughtful probing by a Board. But, that is precisely the point. Shareholders who are lulled by apparent earnings prowess and “above suspicion” accolades are those most vulnerable to the shock of corporate misgovernance. So are Boards of such impeccably credentialed public corporations.  Being lulled is not an excuse.   Weakening earnings are not the usual antecedents of corporate shock. It is almost always just the reverse. A firm that “stands out’ among its peers should evoke some thoughtful examination. ‘How does my company do so well when its competitors struggle’

It is a rare Board that will question the sources of apparent and long-standing success, ignoring the proverbial wisdom of “pride goeth before a fall.” Sadly, that is when the common shareholders need their Boards to work especially hard in understanding the daily operations and risks taken by corporate management.

Cross selling was not the sin. The failing was using a highly publicized incentive program for employees to do the cross selling and such incentives were bound to push excessive and perhaps illegal behavior on the part of the ‘cross-sellers” without a very careful examination of the details of that cross selling program. When an employee is incentivized to induce customers to take on additional “features,” even when they have no interest in such opportunities, there is an implicit warning sign that should not be ignored by the Board.   Incentives are powerful behavioral devices. Without constant supervision and a careful delineation of proper responsibility, it is simply obvious that some employees and some of their managers will overlook how the cross sale is achieved

Employees and managers are not angels. They are human and subject to greed and avarice. So are we all. Boards surely must know that from their own, individual experiences. Why believe otherwise that each employee and each manager, rewarded for increased cross selling, would not step over the line Apparently some managers knew where the line was and employees were indeed “fired,” for behaving irresponsibly and possibly illegally.

It is far more likely that excesses were known to top management and judging by previous cases of corporate misgovernance were at a loss as to how to put the genie back in the jug. I personally know of one case of an employee resigning because he felt that Wells was behaving improperly.   Surely, there will be many others that will come forth to tell a story about how Wells managed to induce their employees to cross sell, rewarded their achievements and ignored internal protests that there was “fire in the hole.”

All of this brings to our attention once again what we should expect our Boards to do: look closely, ask hard questions and report fairly to the shareholders that seemingly wonderful earnings stories are founded on truly good corporate behavior.   And, when there is smoke, look intensively for the fire and not be afraid to pull the alarm when the fire is detected.

The clawbacks of corporate rewards have begun. Shouldn’t the Wells Fargo Board be subject to the same mechanisms ‘No pain, no gain.” It is time to assess penalties on the watchdogs whose job it is to police issues of corporate governance.  Quis custodiet ipsos custodies














[1] Former CEO and Chairman Kovacevich (allegedly raged against Henry Paulson, the US Secretary of the Treasury, forcing the 9 largest banks to take in multi-billion dollar infusions in 2008 under the Secretary’s threat that a bank’s refusal to accept such funds would trigger severe reactions by particular regulators. (See Andrew Ross Sorkin, Too Big To Fail, p.525. Sorkin quotes Kovacevich as follows. “”I’m not one of you New York guys with your fancy products. Why am I in this room, talking about bailing you”’ At which point Paulson replied, “Your regulator is sitting right there.” Later, “And you’re going to get a call tomorrow telling you you’re undercapitalized and that you won’t be able to raise money in the private markets.”