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Navigating the Choppy Waters of Unethical Behavior at Wells Fargo

Message From John Stumpf, CEO of Wells: Do What I Say, Not What I Do

Wells Fargo is the poster child of an unethical company. We now know its employees opened more than two million unauthorized bank and credit card accounts to meet sales projections. It cost customers almost $2.5 million in fees. The actions of the bank can be attributed to an unethical corporate culture, as I have previously discussed in a blog.

On September 9, 2016, Wells Fargo agreed to pay a record $185 million fine for the actions of employees. The bank agreed to set aside $5 million to repay customers. In a letter to employees, CEO John Stumpf called employees’ actions “inconsistent with the values and culture we strive to live up to every day.” Seriously?

Wells Fargo may have a set of values on paper but the bank doesn’t incorporate into the its daily activities. This is not the first rodeo for the bank. On April 8, 2016 Wells agreed to pay the U.S. government $1.2 billion for hiding most of its bad loans in the years leading up to the 2008 housing market crash. The bank admitted certifying thousands of subprime mortgage loans that were eligible for Federal Housing Administration insurance.

Why did the bank play fast and loose with the lending rules? The answer is the risk of loss was transferred to the U.S. government. This is another example of the “moral hazard” effect whereby one party takes a questionable action when the risk of loss can be transferred to another party.

Ethics is all about what we do when no one is looking. Wells Fargo thought it could get away with illegal actions because no one would notice. It didn’t count on some of its employees raising issues about bogus customer accounts.

During a recent Congressional investigation, we learned that six former workers were retaliated against for calling the bank’s ethics hot line about opening fake accounts. One such employee, Bill Bado, said he was fired eight days after sending an email in 2013 to HR about unauthorized accounts. Wells Fargo’s actions to suppress Bado’s claims violates the whistleblower protections under the Sarbanes-Oxley Act.

Wells Fargo admitted to firing 5,300 workers over the past few years for their actions in creating phony accounts. But, what should happen to the CEO of the bank? Some in Congress believe he should resign or be fired. Others claim the government should exercise the “clawback” provision in Sarbanes-Oxley that requires a disgraced CEO like Stumpf to repay executive compensation during the period of the fraud.

Last month the board of directors announced that Stumpf will lose his bonus and unvested stock awards in the amount of $41 million. The problem is since the stock options haven’t vested Stumpf can’t buy the stock right now and pay below market for the shares so only a paper loss exists.

The beat goes on for Wells Fargo. A week ago the bank was charged by the U.S. Justice Department with as many as 413 alleged violations of the Servicemembers Civil Relief Act because it unlawfully repossessed cars from hundreds of members of the military. The bank’s regulator, the Office of the Comptroller of the Currency, fined the bank $20 million for its transgressions that went on for a decade. So, now we learn Wells Fargo doesn’t have a heart or a soul.

Today we hear a lot about breaking up mega-financial institutions because they are too big to fail. Many in Congress would like to reinstate the Glass-Steagall Act that prohibited commercial banking institutions from engaging in investment banking activities. I doubt this is the answer because the banks will find other ways to broaden their services to customers who want one-stop-shopping for financial services.

Examples of irresponsible behavior occur all too often in business and these are not minor incidents. Whether it’s Wells Fargo or automobile companies like VW that sold thousands of diesel cars in the U.S. with software specifically designed to evade government pollution tests, corporate greed crowds out ethical behavior. Corporate social responsibility is easily tossed aside for the pursuit of profit. Top management does not “walk the talk” of ethics and then blames its employees who engage in the very actions the organization promotes.

I believe corporate compliance is a concept in name only. Many companies apply an “ethical legalism” philosophy that as long as an action is legal, it’s ethical. Still, I don’t want more government oversight because existing regulations haven’t stopped the continuing flow of despicable actions.

Ethics comes from within – the culture of a company and tone set at the top. The answer is for the board of directors to take a more active role in insuring compliance not only with regulations but the organization’s ethics code. It must be a proactive approach to ethics compliance and not based on what the CEO or CFO tells the board.

Public companies have an audit committee of the board of directors with one member a financial expert. I would add a requirement for a second member to be an ethicist and task that person with assessing whether the actions of the company are consistent with ethical behavior.

Blog posted by Steven Mintz, aka Ethics Sage, on October 11, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at:

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