Financial news outlets tonight gave prominent play to the fact that Wells Fargo CEO John Stump is giving up $41 million in compensation, and the former head of community banking, Carrie Tolstedt, who ran the unit that perpetrated the creation of over 2 million in fake accounts, will sacrifice roughly $19 million in pay. Even though the board was trying to assert that it was taking responsible action in the face of the widening crisis, it didn’t help that the Labor Department had just announced it has opened a “top-to-bottom review” of how Wells treated workers tasked to meet unrealistic sales targets. In addition to covering these developments, we’ll also discuss how an influential commentator went wide of the mark on this story, and why that matters.
Wells’ board, awfully late in this drama, has hired Sherman & Sterling to conduct an investigation, which in effect calls into question the adequacy and completeness of an internal probe performed earlier, on behalf of the bank and not the board, by Skadden Arps and Accemture, which provided much of the information on which the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Los Angeles City Attorney based their joint $185 million settlement.
While the Bloomberg takes up the face saving line that Stumpf took in a letter to employees, that “that he offered to give up $41 million in unvested stock, which reflected his performance back to 2013, and the board accepted,” Andrew Ross Sorkin of the New York Times reports that the board did in fact claw back Stumpf’s and Tolstedt’s pay, relying on the bank’s clawback policies:
The action represented one of the first times since the 2008 financial crisis that a chief executive has been forced to give up compensation. Many large companies have adopted clawback provisions at the urging of regulators and shareholder advocates, but boards have been hesitant to invoke them….
Only a relatively small portion of the compensation of Wells Fargo’s executives can be clawed back. The bank’s clawback provisions are specific about the circumstances in which it can recoup money from executives — most hinge on misconduct that forces the company to significantly revise its financial results or pay that was received based on inaccurate financial information. Neither is the case here.
But it took advantage of a clause that allows the company to retract performance-based stock awards if an executive causes significant “reputational harm” to the company….
The $41 million Mr. Stumpf is forfeiting represents all of his unvested equity awards, but he already held nearly 5.5 million shares of stock owned outright or vesting imminently as of March, when Wells Fargo filed an annual disclosure of his holdings.
Based on Tuesday’s closing share price of $45.09, those 5.5 million shares would be worth nearly $247 million.
Ms. Tolstedt stepped down this year in what the company said was a retirement — a move that left her eligible for as much as $125 million in stock and options.
The Financial Times noted: “Ms Tolstedt…agreed to not cash in any outstanding options during the review. Ms Tolstedt will not be paid severance, and neither she nor Mr Stumpf will receive a bonus for this year.”
The board’s action appears to reflect Stumpf’s claim that he didn’t find out about the fake accounts until 2013, which as more than one Senator pointed out in the Senate Banking Committee hearing last week, looks an awful lot like Stumpf is owning up to knowing about the abuses just as the Office of the Comptroller of the Currency and the Los Angeles Times started sniffing around. In fact, as the Wall Street Journal reported, a senior manager told Stumpf by e-mail in February 2011 that the sales targets were producing at best churn rather than growth:
Former branch manager Rasheeda Kamar says her Wells Fargo office in New Milford, N.J., had a goal of selling about 15 new products or services a day. If the branch didn’t hit the goal, the shortfall would be added to the next day’s goal, she says.
Ms. Kamar says laggards were threatened with termination and sometimes criticized in conference calls. In February 2011, she wrote to Mr. Stumpf in an email: “For the most part funds are moved to new accounts to ‘show’ growth when in actuality there is no net gain to the company’s deposit base.” She says she got no reply.
After working for Wells Fargo and its predecessor banks for 22 years, she was let go in 2011 for failing to meet sales targets, she says.
Elizabeth Warren also pointed out that Stumpf’s then larger share holdings had appreciated over $200 million from 2011 to 2015, and the bank is investigating whether the abuses started earlier. So there’s a case to be made that the clawback needs to start earlier than 2011.
The Department of Labor’s announcement yesterday morning of its probe makes it easy to think that this development pushed the board to act. However, the clawback decision required consultation with the board’s counsel, and that doesn’t happen overnight. So this move was almost certainly in play before the bank got word of the Department of Labor’s investigation. But it gives the House Financial Services Committee more grounds for going after Stumpf and the bank. From the Los Angeles Times account:
A working group that includes officials from five Labor Department enforcement divisions has been established to conduct a “thorough and expedient review” of complaints against Wells Fargo in recent years alleging failure to pay overtime and other possible infractions, Labor Secretary Tom Perez said….
And the agency has set up a special website for current and former Wells Fargo employees to instruct them how to file complaints about labor law violations. Workers with questions also can call the department’s toll-free hotline ( 4USADOL) or send an email to firstname.lastname@example.org….
The department’s Occupational Safety and Health Administration whistleblower program “has received a number of complaints from Wells Fargo employees” over the past five years, Perez said. The majority of cases have been concluded “through settlement or other actions” and some were determined to have no merit, he said.
But OSHA still is investigating “at least a handful of complaints” from current or former Wells Fargo employees, Perez said. He is asking OSHA to review all open and closed cases against Wells Fargo since 2010.
This review is the result of a letter from Elizabeth Warren and seven other Senators. And perhaps more important, the board must have finally gotten the big message: the Federal government is in the process of bringing its full enforcement weight down on the bank.
Some analysts complained that the bank’s board had been too slow to act and the response looked to be to try to appease the House Financial Services Committee, which will interrogate Stumpf on Thursday. While that may be the case, it appears more likely that influential board members (and in groups like this, some typically have more sway) were blindsided by revelations in the media, or worse, saw information that contradicted what Stumpf, other C-level execs, or the Skadden Arps report had told them (if the Skadden report was inaccurate or incomplete, it would likely be the result of management withholding information or deliberately circumscribing the scope of the inquiry so as to keep dirty laundry hidden). In other words, it seems improbable that Elizabeth Warren’s blistering lectures to Stumpf would galvanize the board to act. It seems more likely that the history of his interactions with the board has led them to lose trust in him.
As we said earlier, far and away the most damning new information that has come out in the last week is the CNN report that former employees reported that they were fired for using internal ethics hot lines and other whistleblower channels to report on the scam accounts, and that a former HR official stated that the department worked with business units to trump up charges so as to create a paper trail that the employee was being fired for a performance failing, and not outing misconduct. As we wrote:
The fact that a former HR staffer confirmed that the bank set out to fire whistleblowers is deadly. It means that the internal ethics line and other channels that John Stumpf piously cited to claim that nothing was wrong with Wells Fargo’s culture were in fact cynical shams designed to get rid of troublemakers who’d question shoddy practices. The fact that Bado was canned a mere eight days after sending an e-mail to human resources also supports the charge of the anonymous HR source that Wells Fargo had established procedures for firing whistleblowers. There is no way any serious investigation would take place in only eight days.
Punishing whistleblowers, particularly on a systematic basis, is flagrant misconduct. This implicates a large number of executives, including the general counsel, the head of HR, and potentially outside counsel and board members, as well as Stumpf and Wells Fargo’s president and COO, Timothy Sloan. How could anyone have signed off on this arrangement?
As we discussed, and the CNN article confirmed, punishing whistleblowers violates numerous laws. And far ore important from the board’s perspective, this implicates Stumpf directly.
With the fake accounts scandal alone, Stumpf can claim and it might even be true, that he really didn’t know, that Wells (as we’ve stated) had bad controls. Carrie Tolstedt should have stopped it but didn’t. He still can throw her under the bus and possibly save his hide, but as we said, his odds of riding this out would have been much higher if he’d made her the scapegoat before or at the very latest at the Senate hearings.
But there is no way to pin blame on making legally-mandated whistleblower processes into a sham any lower than the C-level. While many companies nevertheless do punish whistleblowers, most of the time some sort of investigation takes place, and whether or not that’s adequately dressed up, the number of whistleblowers improperly terminated is not that large (although the dollar amounts often are). And perhaps most relevant, they don’t have CNN saying former senior staffers reporting that the bank’s normal practice was to fire whistleblowers. If I were a board member, I’d want Stumpf’s head.
I’m also of two minds in broaching another issue. I’m reluctant to call out the work of other writers who are solidly on the case of reform, although I’ve done that in the past, most prominently with Matt Taibbi. And I’m even more reluctant in the case of one I’ve worked with personally and that NC readers know and respect.
Nevertheless, yesterday before Links went live, I was surprised, and not in a good way, to read an article by Dave Dayen titled Why Wells Fargo’s Executives Will Keep Their Bonuses, Even After Fake Accounts Scandal. I wrote several close contacts about it immediately, and as I expected, Dayen’s call turned out to be wrong: The Wall Street Journal reported later that morning that Wells Fargo’s Board Is Considering Whether to Claw Back Pay From CEO After Sales-Tactics Scandal.
The reason I was disturbed wasn’t only that Dayen was out over his skis (it was obvious that Carrie Tolstedt was going to have her pay clawed back) but that he was selling resignation, selling the premise that the board would not act despite the unprecedented outrage and drumbeat of continuing media revelations of more sordid details from Wells. I’ve watched post-crisis hearings on bank misconduct. Attendance by committee members is usually spotty and the room is often empty save the panelists. By contrast, every Senator was there for Stump’s testimony and nearly all were loaded for bear. As Senator Jon Tester put it, Wells had managed the seemingly impossible feat of unifying the Senate Banking Committee, “and not in a good way”.
Dayen’s misleading call matters because he’s seen as an authority in progressive circles and has clout among Congressional staffers. I have to confess to being disturbed by his story because it was anti-reform, contrary to his normal position. I hope this was just a bad day for Dayen, because his stance here was troublingly reminiscent of the posture of ProPublica’s Jesse Eisenger, who has broken many important financial services industry exposés, such as the secret recordings of New York Fed whistleblower Carmine Segarra, yet has disturbingly also maintained that it was just too hard to punish financial services industry executives for crisis-related misconduct.
Although I am sure it was not his intent, Dayen was effectively telling staffers on the House Financial Services Committee that they shouldn’t expect their bosses’ ire to go very far. That in turn could have the effect of deterring them in taking the sort of aggressive follow up that Senator Warren and other members of the Senate Banking Committee are taking, of pressing Stumpf and Wells for responses to questions where the answers weren’t adequate. This isn’t just a matter of prurient interest. If Stumpf or Wells gave too clever by half information to investors or regulators, it could pave the way for private suits or even lead the regulators to reopen their settlements if they deem Wells provided inaccurate or materially incomplete information.
Dayen seems to have fallen short here in not recognizing the limits of his expertise: While he’s deeply steeped in the Beltway’s inside baseball, corporate governance isn’t one of his beats. And on this piece, he didn’t compensate for that by contacting a corporate governance or corporate crisis management expert, or apparently even consulting guides on the web from top law firms on recommended board conduct when a CEO is implicated in a major scandal.
Early on, I said Stumpf wasn’t likely to survive this scandal, but that the timing of the House hearings had the perverse effect of delaying the board taking a final decision, since they’d want him still in Wells’ employ when he made his testimony. Perhaps Stumpf will promise more contrite actions by Wells on Thursday, but it’s hard to see that concessions made under such duress will be taken as a bona fide desire to turn a new leaf.
More broadly, the elites increasingly recognize that the popularity of Sanders and Trump shows that they are in the midst of a legitimacy crisis. They need to start policing their own much more effectively to regain any semblance of public trust. Stumpf is a fine place to start.