Wells Fargo scores a pyrrhic victory amid shareholder revolt

You know your company’s annual meeting is not off to a very good start when a shareholder is ejected for repeatedly interrupting a nun.

Things went downhill from there when the disrupted nun, Sister Nora Nash, director of corporate responsibility for the Sisters of St. Francis of Philadelphia, echoed many of the same concerns shouted out by the protestor.

Heading into the Wells Fargo annual meeting on April 25, there was little doubt that a contingent of shareholders would be out for blood. The question was whether they had enough sway to remove directors and impose new managerial demands. While the banking giant ultimately prevailed, critics may ultimately have plenty to celebrate.

Earlier this year, the OCC, City of Los Angeles, and the Consumer Financial Protection Bureau announced that Wells Fargo Bank, a subsidiary of Wells Fargo & Company, was fined $185 million for creating phony accounts its customers never asked for.

Wells Fargo had compensation incentive programs in place for employees that encouraged them to sign up existing clients for deposit accounts, credit cards, debit cards, and online banking. Spurred by aggressive cross-selling targets, employees boosted sales figures by covertly opening accounts. According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers.

In response to the scandal, the bank fired nearly 5,300 employees. The bank’s CEO and a top executive also resigned and surrendered millions of dollars in compensation.

MEET THE DIRECTORS

John D. Baker II
Director since 2009
Audit and Examination Committee, Corporate Responsibility Committee, and Credit Committee
Baker is currently executive chairman and a director of FRP Holdings, Inc. (successor to Patriot Transportation Holding), a real estate company located in Jacksonville, Florida. From February 2008 until October 2010, he served as the president and chief executive officer of Patriot. Before joining Patriot, Baker was president and chief executive officer of Florida Rock Industries.
Baker is also chairman of Panadero Aggregates Holdings, and a senior advisor for Brinkmere Capital Partners, a private equity firm. He is a member of the board of trustees of KIPP Schools Jacksonville and chairman of the board of trustees of the YMCA of Florida’s First Coast.
John S. Chen
Director since 2006
Human Resources Committee
Chen has served as executive chairman and chief executive officer of BlackBerry Limited, a global leader in wireless innovation based in Waterloo, Ontario, Canada, since November 2013.
Prior to joining BlackBerry, he served as chairman and chief executive officer of Sybase, Inc. from July 2010, when SAP AG acquired Sybase, until he retired in November 2012. From November 1998 until July 2010, he served as chairman, chief executive officer and president of Sybase.
Prior to Sybase, Chen held positions as the president of the Open Enterprise Computing Division of Siemens Nixdorf, and president and chief operating officer of Pyramid Technology Corporation.
Chen is also a director of BlackBerry Limited and The Walt Disney Company and serves as a Special Adviser of Silver Lake Partners, a private investment firm. He was a member of the President’s Export Council and was the Chairman of the Committee of 100 from May 2009 until May 2011.
Currently he is a member of the Board of Governors of the San Francisco Symphony Association and of the Board of Trustees of the California Institute of Technology.
Lloyd H. Dean
Director since 2005
Corporate Responsibility Committee, Governance and Nominating Committee, Human Resources Committee and Risk Committee
Dean has served as the president and chief executive officer of Dignity Health, a not-for-profit healthcare system located in San Francisco, California, since April 2000. He also held positions as the executive vice president and chief operating officer of Advocate Health Care, and various management positions with The Upjohn Company.
Dean is also a director of McDonald's Corporation and Navigant Consulting. He previously served as chair of the Bay Area Council and chairperson of the Catholic Health Association of the United States and was a member of its board of trustees. 
Elizabeth A. Duke
Director since 2015
Credit Committee, Finance Committee, and Risk Committee
Duke was elected vice chair of Wells Fargo’s Board of Directors in October 2016.  Previously, she served as a member of the Board of Governors of the Federal Reserve System from August 2008 to August 2013, where she served as Chair of the Federal Reserve’s Committee on Consumer and Community Affairs and as a member of its Committee on Bank Supervision and Regulation, Committee on Bank Affairs, and Committee on Board Affairs.  
She served on the board of directors of the American Bankers Association from 1999 to 2006, becoming the first woman to serve as chair of the ABA in 2004, and as a member of the board of directors of the Federal Reserve Bank of Richmond.
Enrique Hernandez, Jr.
Director since 2003
Corporate Responsibility Committee, Finance Committee and Risk Committee
Hernandez has served as the chairman, president and chief executive officer of Inter-Con Security Systems, a provider of security services located in Pasadena, California, since 1986. He was previously a litigation attorney with Brobeck, Phleger & Harrison in Los Angeles.
Hernandez is also a director of Chevron Corporation, Nordstrom, and chairman of the board of McDonald’s. He is also a member of the board of trustees of the University of Notre Dame, and a member of the Harvard College Visiting and Harvard University Resources Committees and The John Randolph Haynes and Dora Haynes Foundation.
Donald M. James
Director since 2009
Finance Committee and Human Resources Committee
James is the retired Chairman and CEO of Vulcan Materials Company, a construction materials company located in Birmingham, Alabama. Before joining Vulcan Materials, he was a partner at the law firm of Bradley, Arant, Rose & White in Birmingham, Alabama.
James is also a director of The Southern Company. He also serves on the boards of a number of regional and national organizations focused on civic and community service, economic development, health care, charitable giving and higher education.
Cynthia H. Milligan
Director since 1992
Corporate Responsibility Committee, Credit Committee, Governance and Nominating Committee and Risk Committee
Milligan served as Dean of the College of Business Administration at the University of Nebraska-Lincoln, located in Lincoln, Nebraska, from June 1998 until May 2009, when she was named Dean Emeritus of the College of Business Administration.
Before joining the University of Nebraska, Milligan served as president of Cynthia Milligan & Associates, a consulting firm for financial institutions, and before that was a senior partner of a law firm in Lincoln, Nebraska. She is the former Director of Banking and Finance for the State of Nebraska.
Milligan is a director of Calvert Funds and Kellogg Company. She is also a member of the board of directors of The Gallup Organization, Teammates Foundation, Teammates Mentoring Program, and W.K. Kellogg Foundation and is a trustee of Colonial Williamsburg Foundation, University of Nebraska Foundation, and Nebraska Humanities Council Foundation.
Karen B. Peetz
Director since 2017
Finance Committee and Human Resources Committee
Peetz is the retired President of The Bank of New York Mellon Corporation, a global financial services company headquartered in New York.
Before joining the Bank of New York Mellon, Peetz served in a variety of leadership positions at JPMorgan Chase & Co., and its predecessor companies. 
Currently, she is a member of the Board of Trustees of Johns Hopkins University and a member of the Financial Business Advisory Board at the Carey Business School of Johns Hopkins University, a member of the Board of Directors of The Global Lyme Alliance, and a member of the Business Committee of The Metropolitan Museum of Art.
Peetz is a former chair and emeritus trustee of Pennsylvania State University.
Federico F. Peña
Director since 2011
Audit and Examination Committee, Corporate Responsibility Committee, Governance and Nominating Committee, and Risk Committee
Peña has been a Senior Advisor to the Colorado Impact Fund since July 2014. He previously served as a senior advisor of Vestar Capital Partners, a global private equity firm headquartered in New York, from January 2009 until October 2016, and as a managing director of Vestar from 2000 to 2009.
Prior to joining Vestar in 1998, he led the Department of Energy from 1997 to 1998 and the Department of Transportation from 1993 to 1997.
He founded and was president and chief executive officer of Peña Investment Advisors, an asset management firm, from 1991 to 1993. Peña also served as the mayor of the city and county of Denver, Colorado from 1983 to 1991 and in the Colorado House of Representatives from 1979 until 1983.
He is a member of the board of directors of Sonic Corporation and a member of the board of trustees of the University of Denver. 
James H. Quigley
Director since 2013
Audit and Examination Committee, Credit Committee and Risk Committee
Quigley is a retired partner and CEO Emeritus of Deloitte. Prior to retiring in June 2012, he served as chief executive officer of Deloitte Touche Tohmatsu (DTTL, the Deloitte global network), from 2007 to 2011, and as chief executive officer of Deloitte, the U.S. member firm of DTTL, from 2003 until 2007.
He currently is a trustee of the International Financial Reporting Standards Foundation and a member of the board of trustees of The German Marshall Fund of the United States.
Quigley is als chairman of the board of directors of Hess Corporation and Merrimack Pharmaceuticals. He previously was co-chairman of the TransAtlantic Business Dialogue, a director of the Center for Audit Quality, a trustee of the Financial Accounting Foundation, a member of the U.S. Securities and Exchange Commission Advisory Committee on Improvements to Financial Reporting, and a member of numerous committees of the American Institute of Certified Public Accountants.
Stephen W. Sanger
Director since 2003
Governance and Nominating Committee, Human Resources Committee and Risk Committee
Sanger was elected chairman of Wells Fargo’s Board of Directors in October 2016. Previously, he served as the chairman of General Mills from May 1995 until he retired in May 2008.
Sanger joined General Mills in 1974 and, progressing through a variety of positions, was named president in 1993 and chief executive officer in 1995. He is also a director of Pfizer Inc.
Ronald L. Sargent
Director since 2017
Governance and Nominating Committee and Human Resources Committee
Sargent is the retired chairman and chief executive officer of Staples. He joined Staples in 1989 and progressed through a variety of management positions before he was named chief executive officer in 2002 and chairman in 2005, positions he held until June 2016 and January 2017, respectively. 
Before joining Staples, Sargent served in a variety of management positions at The Kroger Co. He is also a director of The Kroger Co. and Five Below, Inc. 
Currently, Sargent is a member of the Board of Governors of the Boys & Girls Clubs of America, the Board of Directors of the John F. Kennedy Library Foundation and City of Hope, and the Board of Trustees of Northeastern University.
Timothy J. Sloan
Sloan was elected chief executive officer of Wells Fargo & Company and a member of the Board of Directors in October 2016. He became president in November 2015. Previously he served as chief operating officer from November 2015 to October 2016. In that role, he was responsible for the operations of the company’s four main business groups:  Community Banking, Consumer Lending, Wealth and Investment Management, and Wholesale Banking.
A 29-year company veteran, Sloan had led the company’s Wholesale Banking business beginning in 2014—overseeing approximately 50 different businesses, including Capital Markets, Commercial (middle market) Banking, Commercial Real Estate, Asset Backed Finance, Equipment Finance, Corporate Banking, Insurance, International, Investment Banking, and Treasury Management.
Prior to that, Sloan served as Wells Fargo’s chief financial officer, responsible for financial management functions including controllers, financial reporting, asset liability management, treasury, investor relations, and investment portfolios. From September 2010 to February 2011, he served as chief administrative officer and managed Corporate Communications, Corporate Social Responsibility, Enterprise Marketing, Government Relations, and Corporate Human Resources.
He also is a member of the Board of Trustees at California Institute of Technology and a member of the University of Michigan’s Ross School of Business Advisory Board.
Susan G. Swenson
Director since 1981
Audit and Examination Committee and Governance and Nominating Committee
Swenson has served as a director since June 2012, chair of the board of directors since April 2014, and chief executive officer since October 2015 of Novatel Wireless. 
She previously served as president and chief executive officer of Sage Software, the North American division of The Sage Group located in the United Kingdom, a business management software and services supplier, from March 2008 until her retirement in April 2011.
Before joining Sage Software, Ms. Swenson held positions as the chief operating officer of Atrinsic (formerly known as New Motion), Amp’d Mobile, and T-Mobile USA, president and chief operating officer of Leap Wireless International, and president and chief executive officer of Cellular One.
She also serves as a director of Harmonic Inc. and Spirent Communications plc, and as chair of the board of directors of the First Responder Network Authority.
Suzanne M. Vautrinot
Director since 2015
Audit and Examination Committee and Credit Committee
Vautrinot is currently President of Kilovolt Consulting, a cyber security strategy and technology consulting firm located in San Antonio, Texas.  She retired from the United States Air Force in October 2013 after 31 years of distinguished service, including as Major General and Commander, 24th Air Force, Air Forces Cyber and Air Force Network Operations from April 2011 to October 2013 where she oversaw a multi-billion dollar cyber enterprise responsible for operating, extending, maintaining, and defending the Air Force portion of the Department of Defense global network.
Vautrinot is a member of the boards of directors of Ecolab, Inc., Symantec Corporation, Parsons Corporation and the Battelle Memorial Institute.
Source: Wells Fargo

Even before the annual gathering of shareholders—held this year in the resort town of Ponte Vedra, Florida—shareholders were demanding the resignation of directors.

Proxy advisory firms Glass Lewis and Institutional Shareholder Services both recommended votes against longstanding board members. The California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) also announced they would be withholding votes for several director nominees, both as a reaction to the scandal and because board members with tenures of 12 years or more could compromise director independence.

Three hours of discontent

“You’re saying we’re out of order. Wells Fargo has been out of order for years.”

That was among the invectives shouted out by Bruce Marks, chief executive of the advocacy group Neighborhood Assistance Corporation of America, prior to being escorted out of the meeting during a hastily called recess.

“You say there is a process in place, but it leaves us without a voice,” Marks said as he berated board members who had their backs turned to the audience during the meeting. (This was because they were seated in the front row, rather than on the stage, but such surprisingly bad optics only fueled shareholder ire.)

Marks sarcastically reminded the directors that they were “not royalty” and had a duty to directly answer questions posed by shareholders and to address their concerns.

Marks complained that red flags regarding the sales incentive programs dated back to 2015. “If somebody wanted to know, they could have known,” he said. “Why didn’t you see it? If you did see it, why didn’t you address it?”

“The Wells Fargo board has suffered from mushroom management. In other words, like mushrooms, the board has been kept in the dark and fed horse manure,” said Brandon Rees, deputy director of the Office of Investment for the AFL-CIO, voting 1.6 million shares. “In my opinion, the board needs to refresh itself with new directors, new blood.”

“There are 12 directors standing for reelection at this meeting,” Rees added. “These are 12 directors who failed to act on, or prevent, the cross-selling sales scandal until it was in the newspapers. I find that shocking and disappointing. Given that more than 5,000 of Wells Fargo’s rank-and-file employees were terminated in connection with the cross-selling sales scandal, isn’t it time for the board of directors to turnover as well? Don’t we deserve fresh faces on the board? We need directors, not mushrooms on this board.”

Ultimately, despite the steady airing of complaints, all 15 directors were re-elected with a majority of the votes cast, ranging from 53 to 99 percent in favor. The final tally:

John D. Baker II: 70 percent

John S. Chen: 70 percent

Lloyd H. Dean: 62 percent

Elizabeth A. Duke: 75 percent

Enrique Hernandez, Jr. (chairman of the bank’s finance and risk committees): 53 percent

Donald M. James: 77 percent

Cynthia H. Milligan (chairman of the credit committee): 57 percent

Karen B. Peetz: 99 percent

Federico F. Peña (chairman of the corporate responsibility committee): 54 percent

James H. Quigley: 65 percent

Stephen W. Sanger: 56 percent

Ronald L. Sargent: 99 percent

Timothy J. Sloan: 99 percent

Susan G. Swenson: 67 percent

Suzanne M. Vautrinot: 80 percent

Directors may have garnered the majority of votes, but dissident shareholders may ultimately get their wish for board refreshment.

At most S&P 500 companies, director support averages around 95 percent of votes cast; in pre-controversy voting Wells Fargo directors enjoyed an average of 90 percent.

Most governance experts say that anything below 80 percent is a bad sign. Wells Fargo’s governance practices stipulate that directors should offer to resign if they fall short of a majority of the votes cast.

There is certainly a precedent for directors with underwhelming votes of support to step down after a scandal. For example, it happened in 2013, after the so-called “London Whale scandal,” when two narrowly elected directors voluntarily stepped down.

Also, aiding the cause of critics demanding fresh faces on the board is the fact that six of Wells Fargo's directors will reach a mandatory retirement age in the next four years. Recent controversies and shareholder outrage may, at the very least, trigger a reconsideration of those retirement timelines.

“Wells Fargo stockholders today have sent the entire board a clear message of dissatisfaction,” Chairman of the Board Stephen Sanger said following the vote. “Let me assure you that the Board has heard that message, and we recognize there is still a great deal of work to do to rebuild the trust of stockholders, customers and employees.”

“In our conversations with stockholders, many have told us they support the substantial and wide-ranging actions taken by the board and management over the last seven months to address the root causes of sales practice issues, enforce accountability, and ensure that such improper behavior is not repeated,” Sanger said. “Yet they also feel the understandable need to hold the entire board accountable for not moving quickly enough before that to address these issues—and that is the reason why all except our newest directors received support from 80 percent or less of shares voted today.”

“The board is steadfast in our commitment to continue to strengthen oversight and accountability while working closely with management to keep improving Wells Fargo,” he added.

Shareholders at the annual meeting also approved the 2016 compensation of the company’s executives named in its proxy statement (by a 96 percent margin), ratified the appointment of KPMG as the company’s independent auditor for 2017 (97 percent), and voted to have future votes on named executives’ compensation every year (92 percent).

Accusations and accountability

The advocacy group Public Citizen failed in its efforts to demand a business report focused on “divesting non-core business.” It received only 3 percent support from shareholders in attendance.

The study would have demanded consideration of a Glass-Steagall-inspired approach to separating government-insured deposits from the bank’s investment arms.

“The company is too big to manage,” said Rachel Curley, democracy associate with the consumer advocacy group Public Citizen, sponsor of the proposal. “Wells Fargo holds nearly $2 trillion in assets and has 250,000 employees. These dimensions are simply too large for a management team with a single CEO to have effective due diligence.”

“The massive cross-selling fraud attests to this problem,” she added. “Despite the fact that this problem festered for more than a decade and involved thousands of employees, the board of directors only began investigating the problem in 2014.”

A “Shareholder Resolution to Wells Fargo on Business Standards Review” received only 22 percent support.

It was submitted by 16 shareholder organizations, including the Sisters of St. Francis of Philadelphia, under that title. The name, however, was changed by Wells Fargo to a “Retail Banking Sales Practices Report” in printed proxy materials.

Sister Nora Nash expressed her displeasure with the name change and stressed that it was not approved by her organization.

As originally envisioned, the report would seek “enhanced disclosure on the steps taken to improve culture, ethics, reputation, aligning incentives with customers’ best interests, risk management, governance and control processes in order to rebuild trust and give assurance to shareholders that risks contributing to the present scandal are now well understood and will be properly managed to prevent future crises.”

“While the bank recently released a report about the accounts scandal, we are concerned that it was restricted to a discussion of the retail sales division and, further, that it places all the blame on a handful of executives—who have since been sacked—largely absolving the directors who were in place while the fraudulent activity was happening,” a statement by the order says. “Even more critically, after reading the report, investors still don’t have a clear picture of how the bank intends to prevent a reoccurrence.”

Among the questions the report would have answered:

What risk management and board oversight protocols will be developed to guard against future ethical failures?

How will incentive systems be modified, and what employee training will be implemented to ensure customer suitability is properly vetted for all products?

How will a commitment to a culture of service, stability, and innovation be operationalized and nurtured by top management and the board going forward?

CalSTRS was among the shareholders urging its peers to vote against the continued use of KPMG as the bank’s external auditor. “We have concerns over a potential lapse of internal controls during the extended period of abusive sales tactics at the company,” it wrote. “Additionally, KPMG has a tenure of 86 years and we believe the company should explore auditor rotation to ensure a fresh perspective.”

The request followed similar concerns about KPMG’s role as the bank’s auditor that were expressed earlier in the month in a letter by Sen. Elizabeth Warren (D-Mass.) to standard setters at the Public Company Accounting Oversight Board.

Despite the push, KPMG’s reappointment was ratified with 97 percent shareholder support.

While management and directors shake off the numerous attacks waged at Wells Fargo’s annual meeting, fresh allegations regarding its fake accounts scandal emerged in filings connected to a shareholder lawsuit that were made public that same week.

Attorney Mark Molumphy, of the law firm Cotchett, Pitre & McCarthy detailed the allegations as part of a shareholder derivative action “based on a corporate governance breakdown of epic proportions.”

“Unfortunately for Wells Fargo, its shareholders, and its customers, the company’s board of directors chose to act as the lap dog, rather than the watch dog, of senior management, and repeatedly turned a blind eye to obvious ‘red flag’ warnings of illegal conduct—warnings from every direction, including from employees, customers, regulators, and even third-party lawsuits,” the brief, filed on behalf of shareholder William Sarsfield in the San Francisco Superior Court, adds.

Among the noteworthy allegations:

A former banker in California routinely observed his branch management instruct employees to “round up” undocumented day laborers waiting for work at the local 7-Eleven and to bring them back to sign up for accounts in exchange for “waiving” check-cashing fees.

A former teller and branch manager in Pennsylvania reports that upper management instituted a program called “Hit the Streets Thursday,” where management directed tellers of Latino descent to patrol the streets and local social security offices to “force” random people of the streets and into branches to open unauthorized accounts.

A former employee in Wisconsin recounts that her branch employees would travel to college campuses with pre-filled forms to sign students up for accounts and use signature cards from the students to later open additional unwanted accounts.

A former employee in Utah recounts that her management required tellers and bankers to keep daily written logs of customer interactions and efforts used to convince customers to sign up for unnecessary accounts and also targeted undocumented workers at nearby construction sites and a factory to create additional accounts.

A former wellness call center employee recounts that more than 90 percent of callers were Wells Fargo employees who reported experiencing extreme stress, anxiety, and depression because of the sales pressure and practices.

Wells Fargo has denied the validity of the latest batch of plaintiff accusations.