If you were tasked with writing a “compliance 101” textbook, it might be very tempting to put Wells Fargo’s famous stagecoach logo on the cover. The story behind its recent $185 million in fines by various authorities, and the long list of questions it prompts, touch upon nearly every hot button issue in regulation, enforcement, ethics, and corporate governance.

On Sept. 8, the Consumer Financial Protection Bureau announced that Wells Fargo Bank, a subsidiary of Wells Fargo & Co., was fined $100 million for “the widespread illegal practice of secretly opening unauthorized deposit and credit card accounts.” There was also a $35 million penalty from the Office of the Comptroller of the Currency and $50 million by the City and County of Los Angeles for infractions that date back to 2011. Employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers.

Aside from the immediacy of the problem, the news should prompt any compliance officer worth their salt to reassess their own policies and procedures.

Banks face a convoluted complex and ever-growing regime of rules, regulations, and guidance that culminate in an overarching demand by regulators to ensure a “culture of compliance.”

Wells Fargo, unfortunately, serves as a lesson for how not to build culture and the perils of a “paper program” that is undermined by profit centers. In a statement, Chairman and CEO John Stumpf reiterated that “every Wells Fargo team member is expected to adhere to the highest possible standards of ethics and business conduct, which are spelled out in [the bank’s] Code of Ethics.” His message to employees: “If you ever see activity that is inconsistent with our Code of Ethics, please report it immediately to your manager, HR advisor, or our anonymous EthicsLine.”

What is emerging, at least anecdotally from employees and former employees, is that there was indeed plenty of training and admonishments against unethical behavior. Unfortunately, sales practices undercut those efforts.

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The bank’s current defense is the “bad apple” equivalency. Systemic failings? Nope. It was rogue employees, Stumpf says. That rationale does not hold water when we are talking about some 5,300 employees involved in the same misbehavior. That’s an awful lot of bad apples.

Critics argue that the unscrupulous activity was a badly kept secret and one that seems impossible for management not to either see or expect. A question: How many employees called that EthicsLine and what follow-up, if any, was the result? A company cannot establish a program only to ignore complaints when convenient and profitable.

The National Employment Law Project (NELP), a consumer advocacy group, has complained of predatory banking practices and aggressive sales metrics systems and urged Congress to step in.

Its recent report, “Banking on the Hard Sell,” makes the case that “low-paid bank workers are ultimately the ones who must directly grapple with the reckless demands of these executives, as predatory incentive programs force them to choose between the consumer’s best interests and earning a living wage.”

NELP’s investigation found that many bank workers have no viable avenue “to report unethical or illegal sales tactics in the U.S.” While many workers say they enjoy helping people in a customer service role, “these functions often have to take a back seat to selling various banking ‘solutions’ to earn critical incentive pay.”

One might reasonably argue that Wells Fargo made the critical mistake of talking the talk, but not walking the walk, when it comes to engineering the sort of culture regulators demand in the post-Financial Crisis environment. There were certainly plenty of red flags that ethics initiatives were not working.



Carrie Tolstedt, head of Community Banking at Wells Fargo, the unit at Ground Zero of the controversy, plans to retire at year’s end. Tolstedt announced this decision in July as the scandal was not yet news but on the CFPB’s radar.

Tolstedt’s unit’s troubles have not diminished kind words for her efforts and an impressive golden parachute of roughly $125 million. Tolstedt earned $9 million in annual pay and more than $7 million more in cash and stock bonuses in 2015.

“A trusted colleague and dear friend, [Tolstedt] has been one of our most valuable Wells Fargo leaders, a standard-bearer of our culture, a champion for our customers, and a role model for responsible, principled, and inclusive leadership,” Stumpf said in a statement that one must assume was crafted with full knowledge of the voluminous fines to come.

So, one might ask, can this “standard bearer” of culture expect a clawback of her compensation package under provisions established in either the Sarbanes-Oxley Act or Dodd-Frank Act?

Will there be a restatement of earnings, a requirement for mandatory clawbacks? Is the $5 million unearned income and restitution to customers enough to be defined as material for a multibillion-dollar bank?

In Wells Fargo’s most recent proxy statement it boasts of having “strong recoupment and clawback policies in place designed so that incentive compensation awards to our named executives encourage the creation of long-term, sustainable performance, while at the same time discourage our executives from taking imprudent or excessive risks that would adversely impact the company.”

Will the bank live up to its stated intent to claw back awards when evidence is presented that there was a failure to “identify, escalate, monitor, or manage” risk and impropriety? The broader question: How might your own company voluntarily live up to its policy?

The Wells Fargo situation also feeds into ongoing debate over the SEC’s pending pay ratio rule, a Dodd-Frank requirement to publicly disclose a ratio of CEO pay to that of the median employee.

A report by the National Employment Law Project claims that nearly three-quarters of bank tellers in the United States earn less than $15 per hour, averaging about $25,800 per year. Full compensation packages for executives can be as much as 455 times that amount.



If Wells Fargo becomes a poster child for imbalanced pay ratios amid tales of high-pressure sales incentives, expect activists to be on the hunt for similar stories to feed the press.

On the topic of “name and shame,” will Wells Fargo’s executives, notably its CEO, draw fire for past certifications of financial and operational controls, as mandated under Sarbanes-Oxley? Will they, or your company in a similar firestorm, face fraud charges for certifications that rely on either blind faith or looking the other way?

Want a corporate governance battle or shareholder uprising at an annual meeting? Of course not and you may want to closely watch how Wells Fargo handles battles born of its current woes.

The Needmor Fund, a non-profit family foundation based in Ohio, is now asking Wells Fargo & Co. to split the roles of CEO and chairman. It is also demanding answers on potential clawbacks and an assessment of what “changes need to be made to change the culture and accountability at the bank.”

Similarly, the consumer advocacy group Public Citizen has filed a first-ever shareholder resolution calling for a “breakup study in the wake of the bank’s massive fraud.” The resolution asks the Wells Fargo board of directors to retain independent experts to explore whether the company would be worth more in parts, with the FDIC-insured bank separate from other divisions.

“CEO John Stumpf blamed a minority of bad employees. He claimed there was no reason for the employees to commit the fraud,” says Bartlett Naylor, financial policy advocate for Public Citizen’s Congress Watch division. “Taking CEO Stumpf at his word, then, we believe he effectively argues that his firm is so large as to be unmanageable. Surely, Wells Fargo’s board should consider, given the urgency of its management problems, a study of whether it might more likely remain on the right side of the law under a trimmer organizational structure.”

With crisis, however, there is opportunity. The challenge for CCOs is not just to create policies; they must continually exam them. The recent headlines over Wells Fargo should be plenty of reason to reassess their effectiveness and whether they could withstand external scrutiny. That will certainly be the case for Wells Fargo, as it contends with this current crisis and strives to prevent others from occurring in the future.