The Wells Fargo Scandal

The Wells Fargo Scandal

            The Wells Fargo scandal is a controversy that was a result of the creation of millions of fraudulent savings and checking accounts without the Wells Fargo clients being informed about it. News of the fraud became rampant after various regulatory bodies fined the company due to the illegal activity. Wells Fargo clients noticed the fraud after being charged unexpected fees and receiving unexpected lines of credit. Reports show that Wells Fargo branch workers and managers were blamed for the problem, as well as sales incentives associated with selling multiple financial products. This blame was later shifted to pressure from higher-level management to employees to open as many accounts as possible through cross-selling. The bank tarnished its reputation due to the widespread fraud.

Cross-selling, the cause of the fraud, is the act of attempting to sell multiple products to consumers. For example, a customer with a checking account might be encouraged to take an online banking account. The success of retail banks was measured by the average number of products owned by a customer, and Wells Fargo was, for a very long time, considered the most successful cross-seller. Richard Kovacevich, the former CEO of Wells Fargo, invented the strategy. Kovacevich likened mortgages, checking and savings accounts, and credit cards offered by the company to more typical consumer products. He considered branch employees to be salespeople and consumers to be customers.

The company’s incentive system contributed to the scandal in that the bank’s practice of setting daily sales targets put excessive pressure on employees. Branch managers were assigned quotas for the number and types of products sold, and if the branch did not hit its targets, the shortfall was added to the next day’s goals. Branch employees were provided financial incentives to meet cross-sell and customer service targets, with personal bankers receiving bonuses of up to 15 to 20 percent of their salary and tellers receiving up to 3 percent. The system would have worked better if coupled with additional metrics or controls if the company maintained an ethics program to instruct bank employees on spotting and addressing conflicts of interest. It would have also maintained a whistleblower hotline to notify senior management of violation

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The systems which should have been put in place to identify and escalate potential problems earlier are include; the senior management incentive system should have had protections consistent with best practices for minimizing risk, including bonuses tied to instilling the company’s vision and values in its culture, bonuses tied to risk management, prohibitions against hedging or pledging equity awards, hold-past retirement provisions for equity awards and numerous triggers for clawbacks and recoupment of bonuses in cases where they were inappropriately earned. Cross-sales and products-per-household were not included as specific performance metrics in senior executive bonus calculations even though they were for branch-level employees. The steps that senior management should have taken to better contain the fallout are: The company should have hired an independent consulting firm to review all accounts openings since 2011 to identify potentially unauthorized accounts, Wells Fargo should have eliminated product sales goals and reconfigured branch-level incentives to emphasize customer service rather than cross-sell metrics. The company also should have developed new procedures for verifying account openings and introduced additional training and control mechanisms to prevent violations.

An inside CEO successor is better positioned to help the bank because he or she knows the company’s culture and operating philosophy. Culture is a set of processes in an organization that positively affects the total motivation of its employees. Potential, purpose and play are the direct motives that improve performance to different degrees. However, indirect motives tend to reduce.

Although Wells Fargo got over a major scandal that led to the mistrust of millions of its long-time customers, human resources have a good opportunity to regain trust by hiring new employees and retraining current employees. In order to fix the situation, management can hire new people. The only challenge Wells Fargo faces is trying to work through the reputation it has gained in the last ten years. By employing new people in lower-level positions, management can rebuild the employee structure and start afresh.

References

https://corpgov.law.harvard.edu/2016/12/19/the-wells-fargo-cross-selling-scandal/