What Are the Real Lessons of the Wells Fargo Case?
Wells Fargo has suffered a series of setbacks—fake customer
accounts, an auto insurance imbroglio, replacement of the CEO—that challenge
the bank's core employee values. James Heskett asks his readers what
went wrong and how can the damage be repaired?
Case studies used in business schools portray dilemmas faced by
managers. Students diagnose the problem and recommend actions. They are thought
to learn at least as much from failure as from success. If that’s the case,
there must be an educational treasure trove in the recent experiences at Wells
Fargo, regarded as one of the best-managed banks in the world. A case about
Wells Fargo might well contain some of the following.
For years, Wells Fargo has prided itself on
putting “culture first, size second.” Its culture is built around the idea of
One Wells Fargo, “imagining ourselves as the customer.” Its vision includes the
mission of helping its customers succeed financially. This vision is supported
by values such as “people as a competitive advantage, ethics, and what’s right
for customers.” The organization even has gone so far as to define its culture
as “understanding our vision and values so well that you
instinctively know what you need to do when you come to work each day.” That’s
all pretty impressive.
Given this context, it made sense that incentives were put in
place several years ago to encourage frontline employees to develop “deeper”
relationships—defined by the number of the bank’s services utilized--with
existing customers. However, the goals on which the incentives were based were
so daunting that they raised the temptation to cheat by establishing fake new
accounts and even transferring token amounts of funds between these accounts
without customers’ knowledge. When the practice became so prevalent—2.1 million
accounts from 2011 to 2015—that it began to generate numerous customer
complaints and evidence surfaced regarding systematic cover-up of the practice
in the ranks.
Wells Fargo announced in September 2016 that some 5,300
employees were fired. The action was taken by leaders who claimed they were
unaware of the practice; nevertheless, the board replaced CEO John Stumpf and
clawed back some of his compensation. The monetary and non-monetary costs to
the financial institution in penalties, fines, and loss of trust began to
mount.
Months before the fraud was disclosed, Tim
Sloan, then president and COO (and now CEO), was quoted as saying: “People
are our competitive advantage, so we care for our team members and want them to
enjoy what they’re doing. Customers tell us they do business with Wells Fargo
because our people care about them—that is our Vision.”
But the problems didn’t stop there. In August 2017, the bank
found that the fraudulent activity affected 1.4 million more accounts between 2009
and 2016, and perhaps additional accounts before 2009 for which, “it did not
have sufficient data,” according to Sloan.
When the bank’s largest shareholder, Warren Buffett, was asked
about the matter, he commented in a CNBC interview, “There’s never
just one cockroach in the kitchen. Once you put a spotlight and start looking
at everything, you’re likely to find something additional.” Other events were
proving Buffett to be right.
It was disclosed this past July that an insurance company with
which Wells Fargo had a contractual relationship had, over a period of nearly
12 years, been requiring as many as 800,000 of the bank’s auto loan recipients
to take out insurance on autos that were already insured. Wells Fargo
management claimed that it was unaware of customer complaints collected by the
insurance company. Further, when made aware of the problem—including thousands
of borrowers who could not make the extra payments and subsequently had their
autos repossessed—management made provision to reimburse only those customers
taking out auto loans in the last five of the twelve years, according to the
Federal Office of the Comptroller of the Currency.
Wells Fargo announced last month that four executives had left
in connection with a regulatory investigation into the bank’s foreign-exchange
operations. It also announced what was described as “disappointing revenues and
higher legal costs,” triggering at least a short decline in its share price.
by James
Heskett
https://hbswk.hbs.edu/item/what-are-the-real-lessons-of-the-wells-fargo-case?cid=spmailing-17470619-WK%20Newsletter%2011-01-2017%20(1)%20B-November%2001,%202017
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