How do you sell money? This is a fundamental challenge for retail banks, and Richard Kovacevich had a solution. He saw banks as stores, bankers as salespeople, and financial instruments as consumer products. Much like a deli worker asks if youâ€™d like to upsize that combo or add dessert to your order, a banker should encourage you to add a credit card, savings account, or loan to your portfolio. Kovacevich called it â€œcross-selling,â€ and he based it on the fact that customers with several accounts are much more profitable to a bank than customers with a single account. How many accounts should a customer have? Eight, according to the â€œGoing for Gr-Eightâ€ initiative he launched as CEO of Norwest in 1997. Why eight? Because, Kovacevich said, â€œIt rhymes with GREAT!â€1
SALES PRACTICES AT WELLS FARGO
Norwest merged with Wells Fargo in 1998; the bank retained the Wells Fargo name, and Kovacevich took the helm as president and CEO. He saw revenue growth as the bankâ€™s most important goal and cross-selling as the way to achieve it.2Bankers could earn between $500 and $2,000 in quarterly bonuses for hitting sales targets, and district managers could increase their annual compensation by up to $20,000. According to former Wells Fargo worker Scott Trainor, â€œIf you could sell, you had a job.â€3
The strong sales culture transformed Wells Fargoâ€™s bottom line, as evidenced by a 67% increase in the bankâ€™s stock from 2006 to 2015.4 Unfortunately, the culture had a dark side. Steven Schrodt, who worked at a Wells Fargo branch in Lincoln, Nebraska, before resigning due to severe sales pressure in 2012, remembers managers encouraging those who hadnâ€™t reached sales goals to open accounts for their family members and friends. Other former employees describe searching for potential customers at retirement homes and local bus stops.5
Bankers who grew tired of asking friends, family, and strangers for business adopted more covert tactics. One former Wells Fargo employee recalls the day he discovered a high-performing co-workerâ€™s secret formula. A customer had applied for a home equity loan and somehow also ended up with a $20,000 personal line of credit. â€œSo then I realized how he was doing all his loans, because he was basically tagging on other loan products in the same application so they wouldnâ€™t really notice when they signed the documents.â€6
Problems started to emerge in 2009. At this point, Richard Kovacevich was gone, John Stumpf was president and CEO, and Kovacevichâ€™s sales culture was deeply embedded. To investigate potential problems in retail sales practices (RSPs) in the bankâ€™s branches, Wells Fargo established an internal task force in 2012. The task force concluded that the unethical behavior was due to a small set of â€œrogueâ€ individual branch workers.7 Wells Fargo subsequently fired more than 5,000 â€œrogueâ€ bankers between 2013 and 2016.8
WELLS FARGO ADMITS TO FRAUD: BLAMES PROBLEM ON WORKERS, NOT CULTURE
In September 2016, the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), and the Los Angeles City Attorney publicly fined Wells Fargo $185 million for opening millions of bank accounts without customersâ€™ knowledge. 9 The bank openly admitted to the fraud, but executives noted that Wells Fargo had official policies in place in their Sales Quality Manual requiring customersâ€™ consent â€œfor each specific solution or serviceâ€ and expressly prohibiting bankers from opening multiple accounts to increase incentive compensation.10 In an interview with The Wall Street Journal, CEO Stumpf maintained â€œthere was no incentive to do bad thingsâ€ adding â€œthe 1% that did it wrong, who we fired, terminated, in no way reflects our culture nor reflects the great work the other vast majority of the people do.â€11 Former workers tell a different story.
Former employees who worked at Wells Fargo between 2004 and 2011 told NPR the fraud was pervasive and that managers were heavily involved. One former banker recalled sitting at a conference table with her managers in a windowless, locked room and receiving a â€œformal warningâ€ to sign. Her managers told her that bankers who didnâ€™t meet sales goals were not team players, and poor team members would be fired and forced to carry the mark on their permanent records.12 Employees who played by the rules and reported their concerns were fired from their jobs within weeks of reporting for things like â€œexcessive tardiness.â€13
Stumpf resigned from Wells Fargo in October 2016, and Timothy Sloan took over as CEO. Sloan immediately discontinued labeling branches â€œstoresâ€ and overhauled the bankâ€™s incentive compensation plan, shifting the focus to customer satisfaction and drastically reducing the emphasis on sales goals. He restructured the organization to fully centralize the bankâ€™s risk and HR functions, consolidating â€œmuch of the vast risk-control bureaucracy into a new office of eth ics, oversight, and integrity, accountable to the boardâ€™s risk committee.â€14 In spite of Sloanâ€™s efforts, another scandal was brewing.
Earlier in 2016, executives at Wells Fargo had realized that hundreds of thousands of car loan customers had been charged for unnecessary auto insurance.15 An internal report revealed that the costs of the gratuitous insurance resulted in auto loan defaults for more than 270,000 customers and the repossession of approximately 25,000 vehicles.16 Federal probes into the insurance debacle shed light on yet another slew of internal issues with compliance, controls, and board oversight of operations at Wells Fargo.17 In a report released in October 2017, OCC regulators slammed managers at Wells Fargo Dealer Services (the bankâ€™s auto loan unit) for ignoring customer complaints, failing to monitor contractors, and general laziness in responding to problems that had been unfolding since at least 2015.18
In July 2017, Wells Fargo publicly admitted it became aware of the auto insurance scandal a year prior. Interestingly, when the Senate Banking Committee asked, as part of the September 2016 hearings related to RSP fraud, if executives were â€œconfident that this type of fraudulent activity does not existâ€ in other areas, the bank insisted problems were limited to individual employees in the community banking division.19 Senator Sherrod Brown has since alleged that Wells Fargo â€œpure and simple lied to this committeeâ€”and lied to the publicâ€ in failing to disclose the auto insurance problems during the 2016 hearings.20 Sloan has maintained there are fundamental differences between the RSP and auto insurance scandals, with only the former being fueled by sales incentives.21
In February 2018 the Federal Reserve capped Wells Fargoâ€™s growth and stated that the bank would not be allowed to accumulate any more assets until the Fed believed the bank had turned itself around.22 Two months later, the CFPB handed down a record $1 billion fine related, in part, to the auto insurance scandal.23 By early 2020 Wells Fargo agreed to a settlement with the DOJ, including a $3 billion fine related to the creation of three million fraudulent accounts between 2002 and 2016. The DOJ agreed to withhold criminal charges, provided that the bank continued to cooperate in investigations and comply with all relevant laws for three more years. As part of the settlement, Wells Fargo admitted to two criminal violationsâ€”identity theft and creating false bank records.24
By early 2020 the OCC had also fined eight of the bankâ€™s former executives a total of $59 million. Stumpfâ€™s $17.5 million portion of the total was the largest penalty the OCC had ever imposed on an individual. In addition, Stumpf received a lifetime ban from the banking industry.25
NEW LEADERSHIP, NEW STRUCTURE
The year 2019 brought a change in leadership when Sloan stepped down from his role as CEO. â€œIt has become apparent to me that our ability to successfully move Wells Fargo forward from here will benefit from a new CEO and fresh perspectives,â€ he said.26 Charles Scharf, the former CEO of Visa and Bank of New York Mellon, took over as CEO, and he quickly announced a plan to radically restructure the bank as part of his effort to implement changes. Scharfâ€™s reorganization split the bankâ€™s structure into five lines of business, with each line overseen by its own CEO, and each CEO reporting directly to Scharf. He said, â€œThese changes create the right structure to build our businesses over the long term and increase our ability to successfully execute on our top priority, which is the risk, regulatory and control work. I am confident that this organizational model and our strengthened risk and control foundation will bring greater focus and accountability to the company.â€27
1. Based on the competing values framework, Wells Fargoâ€™s strong sales-based environment between 2006 to 2015 portrays a ________ culture.
2. Based on the case, before Scharf took over at Wells Fargo, decision making at the bank was more
3. Based on what youâ€™ve learned about the flow of organizational culture, all of the following contributed to problematic group and social processes at Wells Fargo, except
human resource practices.
work attitudes and behaviors.
4.Which of the following is not a way for Scharf to inspire change at Wells Fargo?
organizational goals and performance criteria
slogans and sayings
5. Assume that as part of Scharfâ€™s reorganization of Wells Fargo many managers now report to both functional and divisional supervisors. What type of organizational structure does this portray?