4 The Corporation and External Stakeholders      265

Case 12
The Crisis at Wells Fargo Bank: Then and Now

Charles Scharf, the third chief executive of Wells Fargo in just four years since
the firm’s 2016 crisis, told Congress in March 2020 that “­there’s much the bank
needs to do to fix its cultural prob­lems, and ­isn’t expecting it to be done ­until
2021” (Marketwatch, 2020 ). The com­pany paid $3 billion in February 2020 for
past illegal sales practices, in addition to $1.2 billion in fines also previously paid.
Moreover, the com­pany was still restricted by the Federal Reserve to grow past
a $1.95 trillion asset cap ­until it fixed its cultural prob­lems (Truong, 2020). What
happened at Wells Fargo in 2016, and before, and why are issues still lingering
with this once name-­brand firm?

Wells Fargo: Flashback

Wells Fargo was founded in 1852, offering banking and express ser­vices to indi-
viduals in California. By 1905, banking had been established as a separate divi-
sion within the com­pany. Wells Fargo continued to grow throughout the de­cades
by acquiring other banks in the United States. In 2015, the com­pany was a diversi-
fied banking and financial ser­vices firm with over $1.8 trillion in assets.
Wells Fargo had a reputation for sound management. In 2013, American
Banker named then Wells Fargo CEO John Stumpf as “Banker of the Year,” and
Carrie Tolstedt, head of the retail division, was named to the “Most Power­ful
­Woman in Banking” list. In addition to its strong management, Wells Fargo was
also known for allowing collective decision making among se­nior leaders. One
former executive even stated that “no one person runs Wells Fargo and no one
person ever ­will” (Tayan, 2019). Although Wells Fargo used collective decision
making, all se­nior leaders ­were individually responsible for ensuring that proper
practices ­were followed in their divisions.

The Vision and Shortsightedness

Wells Fargo’s vision is to “satisfy our customers’ needs and help them succeed
financially” (Tayan, 2019). According to CEO Stumpf, vision is key to its culture:
“[Our vision] is at the center of our culture, it’s impor­tant to our success, and
frankly, it’s been prob­ably the most significant contributor to our long-­term per­
for­mance” (Gujarathi and Barua, 2017).
However, in 2013, rumors circulated that Wells Fargo employees in South-
ern California ­were engaging in aggressive tactics to meet their daily cross-­selling
targets (Tayan, 2019). Cross-­selling was how the firm deepened relationships in
the community. The practice consisted of selling other financial ser­vices and
products to existing customers rather than recruiting new ones. Cross-­selling was
cheaper than recruiting new customers and allowed Wells Fargo to increase its
current customer retention rate.
Richard Kovacevich, the CEO of Wells Fargo before Stumpf, referred to
cross-­selling as “needs based selling” and said that it was Wells Fargo’s most

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impor­tant strategy. When Stumpf became CEO, he continued to place empha-

sis on cross-­selling and developed incentives to do so. Financial incentives of-
fered to employees for cross-­selling ­were significant. Branch employees could
earn up to $2,000 per quarter while district man­ag­ers could receive up to
$20,000 a year in bonuses (Gujarathi and Barua, 2017).
Se­nior management had placed so much emphasis on cross-­selling that quo-
tas ­were implemented for the number and type of products to be sold by em-
ployees (Gujarathi and Barua, 2017). To ensure that cross-­selling quotas ­were
met, branch man­ag­ers pushed down hourly quotas to employees and routinely
monitored their pro­gress to meet t­hose quotas. Failure to meet goals could and
did result in employees being publicly chastised by se­nior leaders. Widespread
pressures to meet unrealistic sales targets that w ­ ere a­ dopted and enforced in
financial statements by se­nior man­ag­ers contributed to Wells Fargo’s crisis. An
employee wrote to the chief executive’s office and another se­nior leader in 2013,
saying, “I was in the 1991 Gulf War. . . . ​This is sad and hard for me to say, but
I had less stress in the 1991 Gulf War than working for Wells Fargo” (Merle, 2020).

The Sales Strategy Unravels

In ­later court filings, prosecutors revealed that the bank hid the prob­lem from in-
vestors by changing the public description of its sales practices over several
years, with the intention of not letting investors know about the prob­lems with
cross-­selling strategy that se­nior executives had uncovered (Flitter, 2020).
Wells Fargo’s “Sales Quality Manual” stated that customer consent was
needed for each ser­vice offering and that splitting customers’ deposits and open-
ing multiple accounts was a violation of sales integrity (Gujarathi and Barua,
2017). Even with written standards in the firm’s quality manual, se­nior manage-
ment continued to push unrealistic quotas to branch man­ag­ers. Not only was the
“tone at the top” corrupt in supporting the adoption and enforcement of ­these
draconian sales targets and policies, but reporting false results to shareholders
and treating clients with disdain was common practice. Several employees fur-
ther down the organ­ization also suffered.
Former employees claimed that despite a no-­retaliation policy, they ­were dis-
missed ­after reporting unethical be­hav­ior and practices. For example, one em-
ployee, Yesenia Guitron, reported on the firm’s ethics hotline that unrealistic sales
quotas encouraged forgery. She was l­ater terminated for insubordination. Another
employee, Mr. Bado, a former Wells Fargo banker in Pennsylvania, called the eth-
ics hotline to report unethical sales and was terminated for tardiness. Still an-
other, Mr. Johnson, reported that his man­ag­er asked him to open accounts for
members of his f­ amily without their knowledge. Mr. Johnson was also l­ater termi-
nated for not meeting expectations (Gujarathi and Barua, 2017). Other findings
of such practices showed that Ms. Toldstedt, a Wells Fargo officer during that
period, ignored concerns that other executives had raised about cross-­selling,
lied to regulators and Wells Fargo’s board, and tightly controlled the bank’s pub-
lic disclosures (Flitter, 2020).

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 4 The Corporation and External Stakeholders      267

The Fraud Fi­nally Exposed

A timeline of the fraud showed the following: On December 13, 2013, a Los An-
geles Times investigation revealed—­using then employees’ internal bank docu-
ments, court rec­ords, and interviews—­the effects their supervisors’ pressure had
on them to start unnecessary “checking, savings and credit card accounts with-
out customers’ permission and forged signatures” (Dwyer, 2017).
On May 4, 2015, again this newspaper’s investigation revealed that then–
Los Angeles City Attorney Mike Feuer filed a lawsuit in civil court ­after his search
into the issues. A domino effect occurred when the Consumer Financial Protec-
tion Bureau and the Office of the Comptroller of the Currency started their
probes that showed Wells Fargo had fired 1,500 employees for opening 2 mil-
lion unauthorized accounts.
On September 8, 2016, Wells Fargo agreed to pay $185 million in fines to
regulators and $5 million in refunds to customers; on September 16, 2016, a
class action lawsuit was filed in the U.S. District Court in Utah, charging Wells
Fargo bank with invasion of privacy, fraud, negligence, and breach of contract.
Several days l­ater on September 27, 2016, “six former Wells Fargo employees
file a class action lawsuit in federal court, seeking $7.2 billion for ­those who they
say ­were fired or demoted ­after refusing to open fake accounts. Louis Supina, of
Lower Macungie, says he and his wife, Mary, ­were among the thousands of un-
witting consumers who had bank accounts secretly opened in their names by
Wells Fargo” (Dwyer, 2017). On July 10, 2017, in San Francisco, a U.S. District
Court judge approved a settlement that would compensate t­ hose customers who
had unauthorized accounts created in their name.
Wells Fargo CEO John Stumpf resigned on October 12, 2016, and was re-
placed by Timothy J. Sloan, “an insider who was named president of the com­
pany in 2015” (Dwyer, 2017). The bank then settled a class action lawsuit totaling
$142 million, with additional claims in 10 other class action lawsuits, designed
to compensate customers with unauthorized accounts from May 2002 (Dwyer,
2017).

The Senate Hearing

During the U.S. Senate hearing, no leader from Wells Fargo took owner­ship of
the cross-­selling scandal. Stumpf seemed pleased that only 1 ­percent of employ-
ees ­were terminated b ­ ecause of the scandal, seemingly happy that 99 ­percent
­were d­ oing the right t­ hing. Chief financial officer Tim Sloan stated: “I’m not aware
of any overbearing sales culture.” Another executive stated: “The story line is
worse than the economics at this point” (Tayan, 2019).
Following the hearing, some changes ­were made at Wells Fargo. The CEO
and board member positions ­were separated. An in­de­pen­dent investigation was
conducted and resulted in John Stumpf resigning and Tim Sloan being named
the new CEO. In addition, $47.3 million in outstanding stock options ­were taken
back from Tolstedt, and $28 million from Stumpf w ­ ere also clawed back. T ­ hese
changes had ­little effect on the culture inside Wells Fargo.

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 268      Business Ethics

In 2017, Wells Fargo increased its estimate of the number of potentially un-
authorized consumer accounts to 3.5 million. In 2018, the Federal Reserve Board
put a strict limit on the com­pany’s assets ­because of widespread consumer
abuses. Timothy Sloan abruptly stepped down as CEO; and Charles Scharf, an
outsider, was Sloan’s replacement.
Wells Fargo continues to stay in the headlines for all the wrong reasons. In
2020, the Trea­sury Department released a report and said that the community
bank business model “imposed intentionally unreasonable sales goals and unrea-
sonable pressure on its employees to meet ­those goals and fostered an atmo-
sphere that perpetuated improper and illegal conduct” (Peters, 2020). The bank
was fined $25 million, and Stumpf was fined $17.5 million and agreed to a lifetime
ban from working in banking. Civil cases have been filed against five other employ-
ees, including Toldstedt, who was fined $25 million (Merle, 2020). Since the alle-
gations came to light, the bank has also admitted to charging mortgage customers
unnecessary fees and forcing auto loan borrowers to buy insurance they did not
need (Flitter, 2020). “As part of the settlements, the former executives did not ad-
mit or deny wrongdoing, but agreed to cooperate with the OCC [Office of the
Comptroller of the Currency] in any investigation, litigation or administrative pro-
ceeding related to sales practices misconduct at the bank” (Truong, 2020). Three
separate cities sued the bank for giving unfavorable mortgage terms to Black and
Latino voters, and in 2020, current CEO Charles Scharf told employees that the
bank had failed to diversify its executive core b ­ ecause “the unfortunate real­ity is
that ­there is a very ­limited pool of Black talent to recruit from” (Peters, 2020).

Next Steps
In order to right the stagecoach, Wells Fargo needs to change the culture as well
as the perception of the com­pany. Since culture is a strong indicator of f­uture
per­for­mance, it is a leader’s responsibility to promote a cohesive culture that ­will
position the organ­ization for ­future success. The leader w ­ ill need to be coura-
geous, establish a sense of urgency, and be able to articulate the vision for the
­future. In Wells Fargo’s case, the pro­gress of repairing its image has been slowed
by the com­pany’s recent admission of mistakenly foreclosing on hundreds of cli-
ents and repossessing the cars of thousands of ­others (Merle, 2020).
The sense of urgency for creating change must start at the top. Although ­there
is no indication that the board of directors knew about the cross-­selling scam,
they ­were tasked with the duty of providing oversight and failed to do so. The
board should not be able to hide ­behind their statements that they ­were misled.
Keeping the board intact or with only superficial changes ­will prohibit the neces-
sary lasting change that Wells Fargo needs.
The culture that permeated throughout the bank went through many levels.
By default, any senior-­level executive who was with the com­pany during the scan-
dal ­will not have the trust of associates to change the culture. A transformational
outside leader is needed to lead the change.
Fi­nally, Wells Fargo needs to acknowledge and admit to wrongdoing and un-
ethical be­hav­ior. From the Senate hearings to recent events, Wells Fargo is giv-

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 4 The Corporation and External Stakeholders      269

ing the perception that the com­pany did not do anything wrong; it was just a few
bad apples who ­were eventually terminated. Without the acknowl­edgment of
wrongdoing, employees and the public ­will not believe in any actions the com­
pany wishes to take.
It has yet to be seen if Charles Scharf is the transformational leader needed
to right the stagecoach. In January 2020, Scharf told analysts that he is spend-
ing nearly all of his time addressing the regulatory headaches that have dogged
Wells Fargo. “We are committing all necessary resources to ensure that nothing
like this happens again, while also driving Wells Fargo forward” (Merle, 2020).
Considering his comments about the recruitment of Black executives, Scharf is
continuing to tarnish the reputation of the com­pany instead of galvanizing the
workforce. A Wells Fargo spokeswoman said in a statement, “We are consis-
tent with our belief that we should hold ourselves and individuals accountable
and that significant parts of the operating model of our Community Bank ­were
flawed at that time. At the time of the sales practices issues, the com­pany did
not have in place the appropriate ­people, structure, pro­cesses, controls, or cul-
ture to prevent the inappropriate conduct.” She continued, “Over the past four
years, the bank has made fundamental changes in its business model, compen-
sation programs, leadership, and governance. We are committing all necessary
resources to ensure that we operate with the strongest business practices and
controls, maintain the highest level of integrity, and have in place the appropriate
culture. The com­pany is dif­fer­ent ­today, and we are ­doing what’s necessary to
regain the trust of all stakeholders” (Truong, 2020).

Concluding Comments
The brand of Wells Fargo was once associated with possibility, strength, com-
munity, and heritage. T ­ oday it is still associated in part with scandal. While the
com­pany’s stock shares have almost kept pace with its peers, Citi and JPMor-
gan, as of April 2021, its “executive pay plan won approval . . . ​from a scant 57%
of shareholders, based on a preliminary count at the lender’s annual meeting—­a
level so low that it’s tantamount to failure” (Foley, 2021). Rebuilding trust ­will take
time, but without com­pany cultural and operational transformation and real
changes in its leadership and daily practices, its reputation remains at risk.

Questions for Discussion

1. What went wrong at Wells Fargo that led to the crisis that was exposed?
2. Who was to blame, and why?
3. What was “unethical” as well as illegal about the practices of Wells Fargo’s
officers?
4. What changes ­were recommended to get the com­pany back on track?

Sources
This case was developed from material contained in the following sources:
Downdector​.­com. (2020, December 1). Prob­lems at Wells Fargo. https://­
downdetector​.­com​/­status​/­wells​-­fargo​/­news​/­351455​-­problems​-­at​-­wells​-­fargo​/­.