Wells Fargo Sales Abuses and the Business Model

Wells Fargo Sales Abuses and the Business Model

Shearman & Sterling’s April 2017 “Sales Practices Investigations Report” for Wells Fargo’s independent directors addressed numerous deficiencies, one of which was the bank’s business model. The investigation identified the bank’s business model (sometimes called “sales model”) as a major contributory factor to the sales abuse scandal. These findings offer rich insights for companies in how ethics and compliance systems, especially educational efforts, can guard against such problems.

The Business Model and Its Role

A company’s business model serves as the go-to-market strategy for how it will compete—informed from an understanding of the market, customers’ needs, the company’s competencies and available resources, among other considerations. Consider the following examples:

  • Apple’s heavy focus on product design and user interface to attract a groundswell of customers.
  • AIG’s entrepreneurial mindset that led its companies and offices to quickly innovate insurance products to meet local needs.
  • Ritz Carlton’s ‘customer first’ approach that pushed it to the top of the major market hotel chains.
  • McDonald’s franchise model that allowed its restaurants to quickly proliferate across the country—and the world.

Critical to a business model is ensuring its ongoing viability as market forces, customer expectations, internal operations, and other factors change. A danger also exists in blind adherence to a business model. Leadership’s job is to regularly assess whether a business model is working, tweak it to generate better performance or change it to turn around performance if troubling signs indicate doing so.

The Wells Fargo Community Bank Business Model

As the report states: “Senior management in the Community Bank [Wells Fargo’s retail operations] had a deep-seated adherence to its sales model. The model generally called for significant annual growth in the number of products, such as checking accounts, savings accounts, and credit cards, sold each year.” The report added that the bank’s decentralized structure put too much control with business unit leadership, with corporate seemingly only concerned with results, not how they were achieved.

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As reported in many press articles, Stumpf and the bank bought into the notion that an appropriate average number of accounts per person would be eight, because “eight is great”—he liked the rhyme. At the time of the scandal, the bank had been, through cross-selling, incrementally raising this ratio in the upper 5’s and lower 6’s—still not too close to the goal of eight. (See: “How The Wells Fargo Phony Account Scandal Sunk John Stumpf,” Forbes, Sept., 23, 2016.)

When the business model began to break down under stress, the report states that the Community Bank’s senior leadership “distorted the sales model and performance management system, fostering an atmosphere that prompted low-quality sales and improper and unethical behavior.” Over time, this led to employees pushing customers to open accounts they didn’t ‘need and, in many cases, opening accounts without the customer’s authorization. “Keeping the sales model intact and sales growing meant that the Community Bank’s performance management system had to exert significant, and in some cases extreme, pressure on employees to meet or exceed their goals.”

The report adds: “Even when challenged by their regional leaders, the senior leadership of the Community Bank failed to appreciate or accept that their sales goals were too high and becoming increasingly untenable . . . Community Bank leadership resisted and impeded outside scrutiny or oversight and, when forced to report, minimized the scale and nature of the problem.”  

Interestingly, an important control over the business model would seem to be that same separation between corporate and business units. If the business units would operate independently, this could provide corporate with the independence and objectivity to properly review the Community Bank’s sales model. But, the report continues, CEO Stumpf “was Wells Fargo’s principal proponent and champion of the decentralized business model and of cross-sells and the sales culture . . . [but was] too late and too slow to call for inspection of or critical challenge to the basic business model.”

On this point, the report concludes: “It was convenient instead to blame the problem of low quality and unauthorized accounts and other employee misconduct on individual wrongdoers and poor management in the field rather than on the Community Bank’s sales model.” As this investigation confirmed, “the only way definitively to address the broken sales model and the root cause of sales practice abuses was to emphasize other metrics for performance and to abandon exerting pressure through sales goals and sales-driven incentive programs.”

The Value of Education

As stated previously, it seems reasonable that a principal duty of leadership is to ensure the company operates with a sound business model and one that pivots where needed to adjust to market conditions. No one else in the organization will have the overall perspective to perform this role. It must reside with leadership. In exercising this responsibility, leadership needs to:

  • Understand the business model and how it’s intended to work.
  • Understand and have the ability to exercise the tools that promote the business model, such as performance management systems.
  • Have the ability to regularly assess the business model for success, or how to adjust or change it if found to be losing its effectiveness or is improperly applied through the requisite tools and resources.

There’s an old notion that the vast majority of people are ethical, which they develop in their early years, and that only a very small fraction of people are ‘bad eggs’.  The regular scandals that we read about in the news, most recently Wells Fargo, Volkswagen, Takata, Toshiba, and many others, argue against this. Rather, it appears that all levels of management face ethical challenges; one’s ability to successfully resolve these increasing challenges the higher up one goes requires increased levels of knowledge and skills. The entry level employee may not understand a company’s code of conduct and so requires this training. And the higher up one goes, the greater mastery of ethical issue recognition, evaluation, and resolution that is needed to respond to increasingly subtle, difficult and vexing problems.

In Wells Fargo’s case, leadership needed the skills manage the business model, not simply set it in motion and hope for the best. These leaders required an ability to ensure the model’s ongoing viability, manage performance systems in line with the model and respond to the bank’s other control systems (such as its code of conduct and policies) and identify when the model or performance systems were off kilter from objectives (and not just financial objectives). These skills are sometimes gained on the job, during lower-risk problems, but also can come from well-designed training that incorporates ethics and compliance elements to challenge operational practices and alternatives.

In short, ethics and compliance training is not just about knowledge of legal and corporate standards of conduct. In its best, this training involves applying these standards and related instruction to situations that a company is likely to face (to address the high-probability risks) and that may be existential risks (perhaps low probability in occurring but high probability in harming the company or others). Meaningful training is about building skills and influencing behaviors related to one’s specific responsibilities.

The Wells Fargo scandal provides one more compelling reason why senior leadership needs to take ethics and compliance education relevant to its specific responsibilities very seriously.


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Syntrio is a leader in both the ethics and compliance field, as well as human resources and employment law, and is prepared to help your company implement a compliance program aimed at reducing the potential impact of compliance violations within the organization. Syntrio takes an innovative philosophy towards compliance program design and strives to engineer engaging, entertaining, and thought-provoking content. Contact www.syntrio.com for more information about our ethics and code of conduct online courses and remember to follow us on Facebook, TwitterGoogle Plus and LinkedIn for daily updates on employment law and compliance that impact your company!


Written by Jason Lunday, Vice President of Product Development, Syntrio

Posted in Code of Conduct, Compliance Training, Ethics, Ethics, Fraud and tagged , , , , , , , , , , , , , .