What Created Wells Fargo’s Corrupt Cross-Selling Culture? Toxic Execs

An internal audit into the bank's fraudulent cross-selling culture lays blame squarely at the feet of top execs. Apparently everyone from the top down at Wells Fargo knew what was going on and how bad it really was... everyone, that is, except for the board.

John Stumpf and Carrie Tolstedt were once the darlings of the banking industry. Stumpf, the ex-CEO of Wells Fargo, and Tolstedt, the former head of Wells Fargo’s community banking unit, were widely respected as two of the most accomplished and successful executives in the financial industry.

But an internal report released by the board of directors at Wells Fargo essentially destroys their legacy, placing them in a category usually reserved for corporate America’s most loathsome characters.

The scathing 113-page post mortem on what is arguably the biggest banking fiasco in decades was commissioned by a special committee of Wells Fargo board members. The committee retained an independent law firm, Shearman & Sterling, to conduct an investigation of the bank’s sales culture and figure out what led to the creation of over two million fraudulent accounts.

The investigation included 100 interviews of current and former employees, reviewed information involving more than 1,000 existing and past incidents, and encompassed more than 35 million documents.

The investigators summarized their conclusions in a final report (which you can read for yourself here) that was delivered to the bank’s board before being released publicly.

“Wells Fargo’s misdeeds have at least temporarily become a more widely recognized symbol of the bank than its signature stagecoach.”
— New York Times

The report paints an unflattering picture of life inside Wells Fargo, accusing managers and top executives of fomenting a culture that ultimately turned one of America’s oldest and most venerated banking brands into a boiler room.

Senior leaders brewed up a toxic mix of both carrots and sticks to realize their cross-selling ambitions, slapping frontline staff with aggressive sales goals and incentivizing staff who reached their targets while firing those who didn’t.

This is a big reversal from earlier claims Wells Fargo offered in its defense. Back when news of the scandalous activity first started leaking out, Wells Fargo had initially used the “bad apple” argument to dump blame on what they labeled “rogue employees.” Stumpf and Tolstedt had vigorously denied there was anything wrong with the bank’s sales culture at a systemic level, and asserted that management and senior leadership had no culpability for the creation of any fake accounts.

Read More: Wells Fargo Hits Rock Bottom in Wake of Cross-Selling Debacle

Top Down: Sales Culture Corrupted By The C-Suite

Two executives in particular were singled out in the report: CEO Stumpf and Tolstedt, both of whom were enthusiastic champions of the bank’s cross sales strategy.

In the report, Stumpf was slammed for turning a blind eye on a problem that he apparently was aware of for decades. According to the report, Stumpf knew there were significant, systemic problems with the bank’s cross-selling strategy as early as 2002 — more than a decade before taking any action. Or even admitting anything was wrong.

Stumpf was by nature an optimistic executive who refused to believe that the sales model was seriously impaired. It was convenient instead to blame the problem of low quality and unauthorized accounts and other employee misconduct on individual wrongdoers. His reaction invariably was that a few bad employees were causing the issues, but that the overwhelming majority were behaving properly. He was too late and too slow to call for inspection of- or critical challenge to the basic business model.

Even when challenged by regional leaders, senior leadership failed to appreciate or accept that their sales goals were too high and becoming increasingly untenable.

Effect was confused with cause. When Wells Fargo did identify misconduct, its solution generally was to terminate the offending employee without considering causes for the offending conduct or determining whether there were responsible individuals who, while they might not have directed the specific misconduct, contributed to the environment that increased the chances of its occurrence.

— Report prepared by Shearman & Sterling

The report was harshly critical of Tolstedt and the cross-selling culture she built, mentioning her by name roughly 150 times vs. Stumpf who was only mentioned 81 times. Tolstedt obsessed over sales targets while withholding information from her boss and the board, the report said.

Retail scorecards — euphemistically known as “Motivator” reports — were instituted by Tolstedt. These scorecards “generated significant sales pressure,” causing some employees so much stress that they “lived and died” according to their numbers.

Investigators said Tolstedt and her senior staff “paid insufficient regard to the substantial risk to Wells Fargo’s brand and reputation from improper and unethical sales practices.”

“Tolstedt resisted and rejected the near unanimous view of senior regional bank leaders that the sales goals were unreasonable and led to negative outcomes and improper behavior,” the report said. Tolstedt and others found it “convenient instead to blame the problem of low quality and unauthorized accounts and other employee misconduct on individual wrongdoers and poor management in the field.”

Read More: Huge Cross-Selling Scandal Sends Warning to Entire Banking Industry

Bad Apples Don’t Fall Far From The Tree

“Certain managers explicitly encouraged subordinates to sell unnecessary products to customers to meet sales goals.”
— Report prepared by Shearman & Sterling

When the cross-selling scandal comes up, Wells Fargo frequently cites the 5,300 employees who lost their jobs for opening phony accounts. But these “bad apples” were overtly and directly encouraged to engage in such fraudulent behavior by the bank’s senior leaders, according to the report.

One story in the report described how Shelley Freeman, a regional manager in Los Angeles, was particularly aggressive with her “Jump into January” promotions. Witnesses described the practice of “running the gauntlet,” in which Freeman had district managers dress up in themed costumes and form a gauntlet. Then each manager had to run down the line to a whiteboard where they reported the number of sales they achieved.

“Jump into January,” a program created in 2003, aimed to motivate employees to “start the New Year strong by achieving and exceeding January goals.” The community bank imposed higher daily sales targets on bankers in the month of January and emphasized and rewarded higher levels of sales activity.

While many witnesses suggested that the initial impetus for the campaign was appropriate, witnesses almost universally agreed that the campaign was distorted over time and became a breeding ground for bad behavior that helped cement the sales culture’s negative characteristics.

Witnesses recalled that bankers were encouraged to make prospect lists comprising the names of friends and family members who were potential Jump into January sales targets and often would “sandbag” (temporarily withhold) December account openings until January in order to meet sales targets and incentives.

The pressure associated with the campaign manifested itself in a higher incidence of low-quality accounts, as confirmed by the “Rolling Funding Rate,” a quality metric used by the community-bank unit to track the rate at which its customers “fund” (place more than a de minimis amount into) new checking or savings accounts.

— Report prepared by Shearman & Sterling

Another regional manager, Pam Conboy in Arizona, devised new ways in which the bank could keep the pressure-cooker hot — “Fly into February,” March into March,” etc.

Witnesses accused managers like Freeman and Conboy of prodding subordinates to sign customers up for products they didn’t want, need or know about. Wells Fargo was ultimately forced to fire both Freeman and Conboy.

“Friends and family” accounts were frequently referenced in the investigation. Employees often described opening accounts for family and friends in order to meet sales goals. For example, a branch manager had a teenage daughter with 24 accounts, an adult daughter with 18 accounts, a husband with 21 accounts, a brother with 14 accounts, and a father with four accounts.

— Report prepared by Shearman & Sterling

Do Board Members Get a Free Pass?

As a result of the report, the Wells Fargo board decided it would claw back more than $75 million in compensation previously awarded to both Stumpf and Tolstedt. In total, Wells Fargo will have clawed back more than $180 million in pay, almost enough to cover the $185 million fine that regulators slapped the bank with in September 2016. According to the New York Times, the clawbacks — including both pay and stock grants — are the largest in banking history and among the largest in corporate America.

But the report notably shirks any responsibility among the bank’s board, suggesting that they were either duped or misled by senior leaders.

This seems pretty implausible, however. Reading through the report, it seems that everyone at Wells Fargo — from the C-suite all the way down to frontline staffers — understood there was something afoul with the bank’s cross-sales strategy. So you could assert that either the board was tacitly complicit in the scam (much like Stumpf), or downright negligent in their duties. After all, the most important thing any board of directors is expected to do is protect an organization from risks just like this.

Reality Check: Heads have rolled. Fines have been levied. Employees have been fired. There’s plenty of blame to go around, and Wells Fargo’s board deserves its share.

As tempting as it may be for Wells Fargo’s competitors to relish in the blistering report prepared by the legal team at Shearman & Sterling, you really have to question its veracity. How could the board be so clueless? Did Shearman & Sterling — who was hired by the board — simply choose to avoid the issue of the board’s guilt? (We’ve all heard the canine cliché: “Don’t bite the hand that feeds you.”)

Is This The Death of Cross-Selling?

Some in the financial industry have overreacted to the “cross-selling crisis” that Wells Fargo created, promising to eliminate anything that might have the faintest waft of pushy sales.

Is there anything wrong with setting sales goals? No.

Will employees behave badly if offered incentives? No, not if the program is managed correctly.

Should banks and credit unions eliminate their cross-selling strategy? Absolutely not. Doing so would be a huge mistake. After all, the widely accepted maxim is that it’s 4-5 times easier to sell something to an existing customer than to a new one. So what are financial institutions to do — leave all that money just sitting on the table? No! Certainly not just because one megabank allowed its sales culture to be corrupted purely by self-interests and quarterly shareholder reports.

Even the investigators who conducted the Wells Fargo post mortem concede there is a place for cross-selling in corporate America. The situation with Wells Fargo simply illustrates how important it is to manage a sales culture responsibly, and what inevitably happens when a company’s priorities begin to trump those of its customers.

“While there is nothing necessarily pernicious about sales goals, a sales-oriented culture or a decentralized corporate structure, these same cultural and structural characteristics unfortunately coalesced and failed dramatically here,” the Wells Fargo sinvestigators concluded.

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