Wells Fargo Sales Abuses and Decentralization

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 decentralized structure. The investigation identified the autonomy provided to each business unit as a major factor in the sales abuse scandal. These findings offer rich insights for companies in how ethics and compliance education can guard against such problems.

Tracing from Wells Fargo’s merger with Norwest Bank around 1998, the new company began operating with a decentralized business structure. The mantra was “Run it like you own it”, which allowed business unit leadership to determine each unit’s own activities. The business unit senior leader served as the “king” or “queen” of the business. This structure also dictated that each unit exercised control functions, such as Risk and Human Resources. Each unit’s leaders and risk and HR officers were the “first line of defense”.  Wells Fargo’s senior leadership believed that this model was the superior method for managing risk, as long as it functioned according to the bank’s Vision & Values Statement. The bank’s 2013 annual report stated: “Our risk culture is strongly rooted in our Vision and Values, and in order to succeed in our mission of satisfying all our customers’ financial needs and helping them succeed financially, our business practices and operating model must support prudent risk management practices.”

Many companies have found great success with decentralized business structures. Insurance behemoth AIG (before its fall off during the Great Recession) built a worldwide business based on a decentralized model during the early part of the 20th century when communication with headquarters and between offices was difficult. In fact, for many years, Wells Fargo was successful with this structure.  According to the report, decentralization was attributed for helping the bank to weather the 2008 financial crisis. CEO John Stumpf credited Wells Fargo’s continued success with the structure’s agility in managing risk by spreading decision-making among the business units to getting important decisions closer to the customer. Stumpf was the principal advocate for the decentralized structure. For the Community Bank that later suffered the sales abuse scandal, this success ratcheted the up the reputation and authority of its senior leader, Carrie Tolstedt.

At the same time, the decentralized organizational structure also presents risk. Any time leadership amasses a great deal of power, the organization is at risk in how leadership exercises this power. The ensuing culture that this structure fostered whereby the business unit leader was viewed as a “king” or “queen” of their domain raised this risk. This structure created a culture of deference to business unit leadership whereby limited opportunity or encouragement existed to challenge or comment on significant issues under the leadership. In return, the report found, business unit heads could be insular and defensive and lack the willingness to share information with Corporate. In fact, in this instance, the report identified that the Community Bank’s “senior leadership resisted and impeded outside scrutiny or oversight and when forced to report minimized the scale and nature of the problem.”

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Nevertheless, the bank’s past success with the decentralized structure led CEO Stumpf to stand back and let business units fix their own problems. With respect to the Community Bank’s sales abuse problems, Stumpf relinquished this control even as situation aggravated and threatened substantial reputational harm to the Wells Fargo enterprise.

Successful financial institutions are in the risk management business—understanding, constantly evaluating and managing risks that could harm their operations, capital structure, business-to-business relationships, and viability. So, control functions typically are well structured and staffed if a bank wants to safeguard its assets and reputation. However, in Wells Fargo’s case, the decentralized business structure also fostered a coordinate decentralized control structure. Each business unit maintained parallel control functions with that of Corporate, principally Risk Management and Human Resources. This meant that Corporate Risk and HR functions had reduced power over and insight into business unit activities and had to rely on these business unit functions for Corporate’s information. Little to no coordination existed among Corporate and the business units, specifically related to the emerging sales abuse scandal.

Because of this, as information on the sales abuse scandal slowly emerged, Stumpf and Corporate had little way to learn about what was unfolding—they had to rely on the Community Bank’s leadership for their information—and for responsive actions to emerging problems. Stumpf trusted the Community Bank’s leadership to fix the problem, partly because he counted on them to run their business—in any event, he had limited recourse to learn about what was happening.

As the scandal gradually unfolded and more and more information began to bubble up to Corporate, Stumpf began to both recognize the problem and local leadership’s unwillingness to acknowledge the extent of the problem and take appropriate action to stop and correct it. In response, Stumpf began instituting cross-business collaboration and increased centralization and authority for risk and control systems. But his actions came too late for the ensuing scandal and the comfort of the Board of Directors.

The Value of Education

It’s difficult to know how to respond to a situation that one hasn’t either experienced or learned about. This can be especially taxing for leadership that may be writing the book on new and innovative business approaches where seemingly no precedent exists from which to learn. Nonetheless, if leadership wants to avoid the pitfalls of turncoat organizational structures and broken business models, it must find a way to identify these lessons and quickly learn from emerging problems.  This is where certain educational approaches can provide value, including:

  • Case study discussions – While certain business approaches may be new, much can be learned from situations others have faced—and how to assess and respond to similar ones. The decision recognition/analysis/response method can take leadership a long way to building competencies that will assist with handling new business approaches.
  • Scenario planning – This more sophisticated approach to the ‘what if’ educational model involves foreseeing possible risks and their outcomes and then learning how to recognize and avoid them.
  • Stress testing – Leaders need to understand just how far they can stretch business strategies and processes before they show risk of failure—and what signs to look for regarding trouble.

Ethics and compliance education is not just for the masses. Individuals at all levels, including senior leadership, have something to learn respective to their roles. In fact, a strong case exists for why leaders need more education requisite to their level of responsibility. Great influence requires heightened awareness of and competencies with managing that influence. As the Wells Fargo report demonstrates, the bank’s leadership across the board would have been well served from training to recognize, evaluate and respond to the emerging risks it encountered.

 Do you have questions about your current anti-harassment or code of conduct training program? Contact us and we can work with you to make recommendations to augment and/or improve your current offering.

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

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