We are beyond being shocked by systemic governance, risk, and compliance issues in banks. After all, we did write a recent book called “What They Do With Your Money: How the Financial System Fails Us and How to Fix It.”
But the scandal at Wells Fargo does supply a ready, and outrageous, case study of widespread, systemic governance failing combined with tone deafness in senior management. As of this writing, Wells’ mishandling of the situation has enabled a relatively small financial problem—a $185 million settlement—to slice 100 times that, or some $19 billion, from its market capitalization. It is the scope of the problem that makes Wells Fargo’s issue noteworthy. Incented by aggressive sales goals, bank employees opened two new million phantom accounts that customers neither requested nor authorized. Why? Because sales bonuses were tied to aggressive cross-selling goals. Hence, the employees created those phantom accounts and charged the real customers fees related to cross-sold products they never wanted. The Los Angeles City Attorney’s complaint about Wells Fargo’s sales practices claimed that targets for cross sales to existing customers for each employee were reviewed by district managers multiple times a day. In other words, the sales pressure was intense and the goals unrealistic.
