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Scenario
Wells Fargo was the darling of the banking industry, with some of the highest returns on
equity in the sector and a soaring stock price. Top management touted the company’s
lead in “cross-selling”: the sale of additional products to existing customers. “Eight is
great,” as in eight Wells Fargo products for every customer, was CEO John Stumpf’s
mantra.
In September 2016, Wells Fargo announced that it was paying $185 million in fines for
the creation of over 2 million unauthorized customer accounts. It soon came to light that
the pressure on employees to hit sales quotas was immense: hourly tracking, pressure
from supervisors to engage in unethical behavior, and a compensation system based
heavily on bonuses.
Wells Fargo also confirmed that it had fired over 5,300 employees over the past few
years related to shady sales practices. CEO John Stumpf claimed that the scandal was
the result of a few bad apples who did not honor the company’s values and that there
were no incentives to commit unethical behavior. The board initially stood behind the
CEO, but soon after received his resignation and “clawed back” millions of dollars in his
compensation.
Further reporting found more troubling information. Many employees had quit under the
immense pressure to engage in unethical sales practices, and some were even fired for
reporting misconduct through the company’s ethics hotline. Senior leadership was aware
of these aggressive sales practices as far back as 2004, with incidents as far back as
2002 identified.
The Board of Directors commissioned an independent investigation that identified
cultural, structural, and leadership issues as root causes of the improper sales practices.
The report cites the wayward sales culture and performance management system; the
decentralized corporate structure that gave too much autonomy to the division’s leaders;
and the unwillingness of leadership to evaluate the sales model, given its longtime
success for the company. +400 words, include references, citation format is APA
The Wells Fargo scandal of 2016 was one that rocked the banking industry and brought to light unethical practices that had been in place for years. The root cause of this scandal lies in the aggressive cross-selling strategies employed by the organization, which emphasized sales quotas and bonuses based off those quotas. Employees were observed engaging in unethical behavior such as opening unauthorized accounts on existing customers’ behalf without their knowledge, due to an immense pressure from supervisors to meet these sales targets (U.S. Consumer Financial Protection Bureau, 2016). This troubling misconduct is further understood when considering how long senior leadership was aware of these practices; reports suggest they had known since at least 2004, with some incidents dating back as far as 2002 (Luhby, 2017).
The Board of Directors commissioned an independent investigation led by former Los Angeles Mayor Antonio Villaraigosa to identify cultural, structural and leadership issues within the company which contributed to these improper practices (Ramirez & Rapoport, 2017). The investigation found that a sales culture created by management incentivized employees to act unethically or else face negative consequences such as firing or demotion. A decentralized corporate structure allowing too much autonomy for division leaders enabled questionable actions to go unchecked while simultaneously creating a lack of accountability among leaders (Ramirez & Rapoport, 2017). Additionally, there was an unwillingness within corporate leadership to evaluate their longstanding successful sales model despite warnings over time indicating its potential riskiness.
As a result of this scandal Wells Fargo has lost billions in market value and faced scrutiny from regulators across multiple states including New York and California (Kapur et al., 2016). CEO John Stumpf initially claimed responsibility but insisted that it was only due to a few bad apples rather than systemic problems throughout the organization; however he soon stepped down after significant public backlash against him along with other board members who initially stood behind him (Rosenthal & Kirchgaessner ,2017) . Furthermore millions have been “clawed back” from Stumpf along with former head of community banking Carrie Tolstedt who unexpectedly retired prior to this incident coming into light (CNBC News Desk Staff Writer ,2016).
References:
CNBC News Desk Staff Writer .(2016) Bank execs get clawback over fake account scandal .Retrieved from https://www.cnbc.com/2016/12/20/bank-executives-get-clawbacks-over-fake-accounts-scandal-.html?__source=twitter%7Cmain
Kapur P.,A., Todras M.,H., Montanaro D.(2016 ). Wells Fargo fined $185 millionfor widespread illegal practice.. Retrieved from http://money.cnn.com/2016/09/08/investing/wells-fargo-settlement/?iid=EL
Luhby T.(2017 ).When did Wells Fargo know about fake accounts? Maybe 2002..Retrievedfrom https://edition.cnn.com/2017/05//01 /us /wells – fargo – investigations – timeline /index .html
Ramirez R.,&Rapoport N.(2017 ) Final report on findings relatedto wells fargo customer accountsand retail Sales Practices ..Received from https://files .consumerfinance .gov /fc ucfiles2webmna_prod /attachments /171024 _Wellsfargofindingsreportfinal pdf Rosenthall S ,& Kirchgaessner G.(2017)Ousted Wells Fargo chairman forced outafter damaging inquiry .Retrievedfromhttps : //www guardian com us business – ousterforceoutStumpfafterdamaginginquiry U S Consumer Financial Protection Bureau(2016 ). CFPB penalizes wells farga$100millionforwidespreadillegalpracticeo creating sham Accounts ..Retrievedfrom https://www consumer finance gov news cfpbpenalizes wells farga 100 millionwidespread illegalpracticescreating sham Accounts