Years ago we heard the dreaded words from space, “Houston, we have a problem.” Well, now it appears Wells Fargo CEO John Stumpf did not hear similar words directed to the bank’s San Francisco headquarters. He should have.

Already reams have been written and the airwaves filled with reports of how employees created “sham” accounts that customers neither asked for nor knew about. The bank paid $185 million in a civil settlement, Stumpf has been grilled in Congressional hearings, 5,300 lower-level employees were fired, and the bank’s reputation has taken a hit. Accusations abound of a failed corporate culture, widespread mismanagement, and the board of directors not doing its job. There have been calls for Stumpf to step down, adding new directors to the board, executive pay clawbacks, and breaking up the bank. Employee class-action lawsuits have been filed, one of which is demanding $2.6 billion for demoting or ousting employees who failed to meet “unrealistic quotas.”

I’ve been hesitant to cover this fiasco in a column, not being sure there’s enough that hasn’t already been said. A closer look, however, points to some themes that do indeed warrant attention. Here we’ll focus on a couple of lessons to be learned, or more precisely, relearned.

Managing incentivized behavior. Executives know well that sales people and other workers respond to clear goals, supported by monetary incentives for achieving targets. There’s no problem with rational, attainable goals. But in the sales arena it’s particularly important to combine such incentives with clear direction on which actions are acceptable—along with close management of behaviors. There need to be effective risk management and compliance processes in place, identifying in advance where risk of misconduct exists, with relevant actions and controls to prevent and early detect problems. Along with extensive training, trusted hotlines are to be in place to enable and encourage reporting of bad actions.

Well, according to reports, Wells Fargo indeed did have extensive training for branch sales workers outlining what activities are illegal, unethical, or otherwise prohibited by codes of conduct. Workers who broke the rules have been said to agree that they had the training and were urged to use the hotline. But we can wonder about the effectiveness of the risk management and compliance processes, based on what transpired over several years. We have reports of employees who witnessed the fraudulent or unethical behavior and reported it on the hotline and upstream to managers, only to find themselves retaliated against and fired from their jobs.

Among the most relevant questions is, where were the managers? The lawsuits and other reports say branch managers knew about the sales practices and either turned a blind eye or even encouraged them. And if they didn’t know, why didn’t they have a clue as to what their staff was doing? If they did know and the management layer above didn’t know, the same questions apply. Managers at every level need to know what their staff is doing and deal with improper behavior immediately and forthrightly—and inform the people to whom they report.

It’s fair to question not only the culture, but also the effectiveness of the Wells Fargo management process, where relevant information apparently never made it upstream past a certain managerial level. The alternative—that the highest levels of management knew what was happening and did nothing to stop it—would be tough to swallow, and worse.

If the sales staff knew full well the difference between right and wrong, then why did 5,300 employees engage in blatant misconduct? Reports say the answer is clear: They wanted to keep their jobs and knew that if they didn’t cross the line into misconduct they’d be out. We’re talking here about workers who could not be classified as anything other than “low wage.” One worker making $11.75 an hour said he had no choice but to open accounts for customers who didn’t want them. Another added, “I got threatened to be fired [for] not meeting my numbers.” For workers living paycheck to paycheck, the evident reality is there wasn’t much practical choice—either go along with the bad stuff, or be out on the street.

So one of the major problems here is that workers were incented to engage in improper behavior. Is this the first time we’ve seen this? Certainly not. We’ve seen far too many instances where staff were told, “make the numbers—we don’t care how you do it—just do it.” Some were operating people and others accounting staff, but history is lined with tales of misreporting and other illegality due to those kinds of directives.

“Rogue” employees. It’s been reported that Stumpf said the problem was due to “rogue” employees! If he indeed said this, it would be absolutely laughable except for the seriousness of what transpired.

We’ve seen over and over, especially in the banking industry following large trading losses, where top management or the board said they were not to blame—it was just one bad person. I wrote back in 2008 of Société Générale trader Jérôme Kerviel, who as then reportedly made $73 billion in unauthorized trades which ultimately cost the bank $7.2 billion (the numbers subsequently were lowered somewhat). The bank’s responses then were fascinating: Kerviel was “an impudent employee,” “mentally weak,” and “a terrorist.” I outlined how the bank said he was a “rogue” employee, with such comments as: “research has not shown any link with anyone else at Société Générale.” This is particularly interesting now in light of Kerviel’s success a few months ago in winning a wrongful dismissal suit against the bank, and reports of a few weeks ago that an appeals court in Versailles handed down a decision cutting Kerviel’s fine from €4.9 billion (U.S. $5.4B) to €1 million (U.S. $1.1M), with the court finding that Société Générale itself bore most of the responsibility for the losses, which were worsened by the weaknesses of the bank’s internal oversight and control systems.

At the time the bank added, “We have no explanation for why he took these positions, and we have no reason to believe he benefited from a financial point of view”—and that management was at a loss to describe Kerviel’s motivations because “the trader didn’t earn a dime on his actions.” These statements are hard to fathom, inasmuch as anyone who’s been in the business world for more than five minutes should know there are two kinds of motivations for frauds: one to put money in somebody’s pocket, the other to make the performance of the individual, unit, or business look better than it is. This was the latter.

Which brings us back to Wells Fargo, whose management didn’t seem to get it—that employees fighting to save even their low-paying jobs would do almost whatever was necessary to avoid being fired. And clearly these could not be categorized as “rogue” employees. There might be one “rogue” employee, or perhaps two, but saying there were 5,300 rogue employees is an oxymoron—and makes no sense.

Broader failures. It’s fair to question not only the culture, but also the effectiveness of the Wells Fargo management process, where relevant information apparently never made it upstream past a certain managerial level. The alternative—that the highest levels of management knew what was happening and did nothing to stop it—would be tough to swallow, and worse.

As for the directors, a board has an obligation to know what kind of risk management and compliance processes are in place, and how they’re working. But a board is an oversight body, not day-to-day management, and we’d need to know a lot more about what went on in the Wells Fargo boardroom to know whether the board failed to carry out its responsibility. At the time of this writing, the board announced it is launching an investigation and is stripping Stumpf of stock awards, salary, and bonus for the current year; the executive in charge of the unit where the malfeasance occurred also will forfeit stock awards and won’t see this year’s expected bonus or severance or certain enhancements in retirement pay.

Clearly the bank’s reputation has been badly damaged. On top of everything else, as Stumpf was being raked over the coals at the House Financial Services Committee, a video screen reminded viewers of Wells Fargo’s recent year’s failings with a list including sub-prime loan abuses, foreclosure violations, and discriminating against mortgage borrowers, with fines totaling $10 billion! And committee members further castigated Stumpf when news broke that day that the bank was just fined millions more for breaking rules on lending to members of the U.S. military.

Events are moving quickly. California’s Treasurer recently announced he’s suspending Wells Fargo’s involvement in municipal bond underwritings and as a broker-dealer and halting additional investments in the bank’s securities. And he’s going to push for a consumer ombudsman, anonymous ethics reporting process, and whistleblower protection program, as well as separation of the chairman and CEO roles, a review of compensation practices, and clawbacks of “ill-gotten” compensation.

It will be interesting to see what the forthcoming investigations uncover, and we’ll be waiting and watching.

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