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A Changing of the Guard at Wells Fargo—But What Has Changed?

In the wake of its consumer abuses, including the creation of millions of unauthorized accounts, Wells Fargo is desperately attempting to clean up its image and instate a series of protocols to avoid such issues in the future.1 Recently, the Federal Reserve (“Fed”) ordered the San Francisco-based bank to cap its growth and improve its corporate governance before it will be allowed to continue business as usual. Wells Fargo must provide a plan to the Fed that details increased board oversight and risk management, while the bank cannot increase its total assets beyond $1.95 trillion (capped where it stood at the end of 2017).2 One of the bank’s most vocal critics, Senator Elizabeth Warren (D-Mass.), even asked former Fed chairman Janet Yellen to remove all of the bank’s board members. Senator Warren cited a report by the New York law firm Shearman & Sterling that conducted an independent investigation of the scandal and ultimately found that the board did not take an “active enough role in monitoring the bank’s practices.”3 Some critics felt that this was not a harsh enough portrayal because it made the directors look aloof or out of the loop instead of negligent.4

On April 10, 2017, Wells Fargo published the internal report cited by Senator Warren entitled “Sales Practices Investigation Report” by the “Independent Directors of the board of Wells Fargo and Company” that aimed to assess the fraudulent accounts and practices previously employed by the bank.5 The directors intended the report to ultimately restore confidence in the institution while outlining solutions and ways forward, and avoiding the devastating failures in the future. However, most critics saw right through the publication and portrayed it merely as a poor attempt to downplay the board’s inability to spot and stop the problems before they spiraled out of control. Some critics even viewed the report as a way to distance the board from a few “rogue” employees.6 The board announced that it was going to claw back as much as $75 million in bonuses awarded to two former senior executives, but again, this did not help to stem the outpouring of public and government anger toward the embattled bank. The two executives were John Stumpf, the former CEO, and Carrie Tolstedt, the former head of Community Banking.7 Customers attempted to sue the bank for wrongdoing, but Wells Fargo pointed to arbitration clauses in the contracts with those customers that were signed when they opened accounts—even fake accounts opened in their name. Arbitration forces much of the conversation and details into the shadows, seemingly protecting the bank and its executives from prying litigation.8

The New York Times editorial board not only called Wells Fargo out for not taking drastic enough steps to begin to correct issues, but the newspaper also called on the Justice Department and Securities and Exchange Commission to change their approach in the wake of the financial crisis. The Times echoed a sentiment largely proffered by critics across the Street that these agencies should pursue individuals who were responsible for such oversights and frauds, civilly or criminally, when necessary. Boards like those at Wells Fargo can publish reports and discuss strategies for future conduct, but it remains unknown how much of a deterrent the plans will be without individual accountability from board members or senior executives.9

In addition to sanctioning the payouts of Stumpf and Tolstedt, the Board outlined other “corrective” steps in the report. Without taking any responsibility for missing the scandal occurring under their supervision, the board explained that they completed an internal investigation that was supposedly independent. Many people found the idea of an “independent” investigation led by bank board members as inappropriate and ineffectual after the scandal had already cost the jobs of more than 5,000 employees.10 Having Wells Fargo’s own board of directors set up an “independent” investigation with so much wrongdoing does not seem to make much sense given the inherent conflicts of interest at stake. Although the board retained the assistance of outside counsel from Shearman & Sterling, the committee was comprised of four current Wells Fargo board members. Even more appalling, a partner from the same law firm was defending those same four directors in a suit brought by some of the bank’s shareholders for a breach of fiduciary duties.11

The report maintained a position that the board of directors had no idea what was happening regarding the creation of millions of fraudulent accounts—rarely mentioning higher-level employees in the overall scheme. The report only detailed the abuses of very low-level staff that most likely were not acting alone.12 By mounting an attack on the CEO and the head of Community Banking, the board attempted to distract from the general abuses within the institution across many levels. The report lambasted Tolstedt’s nearly impossible-to-reach sales quotas that allegedly led employees to open accounts on behalf of fake customers as well as additional accounts for existing customers without their knowledge or consent.13 Shearman & Sterling insulated the board further by claiming CEO Stumpf protected Tolstedt and continued to nurture her aggressive programming for the shockingly autonomous Community Banking division. Those people who are familiar with the relationship between the executives indicate that Tolstedt was encouraged to “run it like you own it” (Community Banking) by other top employees.14 The board was well aware of how decentralized Wells Fargo was going into the crisis, yet they were extremely slow to make any inquiries when questionable practices came to their attention. The report further blamed Tolstedt for effectively resisting scrutiny from both inside her own division as well as from others outside her immediate control.15 The report stated that Tolstedt failed to “escalate issues outside the Community Bank, but also worked to impede such escalation, including by keeping the Board information regarding the number of employees terminated for sales practice violations.”16

Through this decentralization, Stumpf allowed himself to largely ignore any of the mounting issues within the Community Bank division and he continued to put blind trust into Tolstedt’s leadership. The board even claims that it was too late for a response from the CEO when the issues became glaringly apparent to people throughout the bank. Again, the board attempted to cast the whole incident as an unforeseen, distant problem for only a few key employees. The report insisted, “Stumpf was by nature an optimistic executive who refused to believe that the sales model was seriously impaired. His reaction invariably was that a few bad employees were causing issues, but that the overwhelming majority of employees were behaving properly. He was too late and too slow to call for inspection of or critical challenge to the basic business model.”17 Beginning as early as 2012, Stumpf learned of certain unethical and unsustainable practices occurring in Community Banking. In certain instances, customers were not continuing to fund their accounts as regional managers were pleading with their bosses to lower the sales targets.18 Not taking any responsibility itself, the board used the 113-page report to tear down two executives while not offering any tangible solutions to the inherent problems with such a decentralized power structure.

Even with the report and its findings, it seems rather unbelievable that the board of such a sophisticated institution would be oblivious to these structural deficiencies. The report plainly stated, “Corporate control functions were constrained by the decentralized organizational structure and a culture of substantial deference to the business units,” yet the board wasn’t spurred to earlier action?19 Critics have noted that this serious lack of oversight could stir suits regarding breaches of fiduciary duties by the board members, but it may be challenging to show more than high incompetence. It is hard to believe that a bank—in such a heavily regulated industry—could operate in a “hands off” way from the top down. There are specific departments charged with compliance and identifying risk that are supposed to regularly inform both the executives and directors.20 With this context, the best way to push for reform may come from a litany of shareholder lawsuits that target specific board members and officers, holding them accountable for the many failures. Although the bankers will likely use the defense of ignorance, the derivative suits may call greater attention to the need for better corporate governance in the future across the industry. These suits can involve powerful institutional investors, such as large state pension funds, thereby adding to the pressure for reform from within the bank even without going to trial. It is unclear if Wells Fargo and its board felt the necessary pressure for change as they replaced Stumpf with Timothy Sloan as CEO after the scandal broke. Sloan was a 30-year veteran of the bank before ascending to the helm, and it is quite possible that he had to be aware of some of the shady business practices employed by various business units during his tenure.21 The board once again publicly noted that the decentralization of the company shuttered many people, even very high up in the rank, from the misdeeds of others. But for a company that had lost significant trust from the general population by the time the management changes slowly rolled out, it makes little sense why the board would continue to pump old blood into the C-Suite. Regulatory agency leaders and academics chastised the Wells Fargo board for not attempting to hit at the root of the problem and take a more aggressive cleansing step by bringing in people from outside the company.22

Friday, March 9, 2018—nearly a year since the publishing of the board’s report—Wells Fargo announced that four board members would soon step down in a move that follows the bank’s pledge to the Fed that it is still working quickly to implement governance changes. These four directors are joining half of the 16-member board that has already stepped down since the scandals broke.23 Pressure from regulators has encouraged Wells Fargo to make drastic changes, but it is unclear what new directors will alter in the form of internal policies. For now, the board is complying with terms negotiated with the Fed; however, it may take considerable time to fully comply with the new rules after years of abuses at all levels of the corporation.24 In a press release from the bank, Wells Fargo explained that this move was in concert with its conscious “refreshment of the board—largely a euphemism for an ongoing dismantling of the former membership.25 The Company’s press release juxtaposed with a similarly timed press release from the Federal Reserve shows a stark difference in tone. The Fed’s release stated that their earlier mentioned order “requires the firm to strengthen its governance and risk-management processes, including strengthening the oversight by its board of directors.”26 And furthermore, “The firm’s board of directors, during the period of compliance breakdowns, did not meet supervisory expectations.”27

The board member departures signal change at Wells Fargo, but also remind the public and worried stockholders alike how long and drawn out this process has been. With these four directors having “retired” at the end of April, the bank can point to its continued effort to strengthen corporate governance, yet the institution’s reputation may take much longer to heal.28 As shareholders remain involved, it is possible to see more change throughout the Wells Fargo leadership from derivative lawsuits like the one mentioned above, but also from the urging of increasingly powerful consultants that counsel institutional investors with significant company interests on corporate governance measures and shareholder voting recommendations.29 With the “refreshing” of the board and a more active and informed shareholder base, Wells Fargo has the opportunity to refresh itself and its strategy for the future—but it will take a strong effort to weed out old habits and further centralize a mostly-disjointed financial behemoth.

  1. Jim Puzzanghera, Fed Chief says Wells Fargo Needs to Make ‘Significant’ Reforms Before Growth Cap is Lifted, Los Angeles Times (Mar. 1, 2018),

  2. James Koren, Fed Caps Growth at Wells Fargo Over Sham Accounts, Other Consumer Abuses, Los Angeles Times (Feb. 2, 2018),

  3. Jack Flemming, Elizabeth Warren Calls on Fed to Remove Wells Fargo Board Members Over Accounts Scandal, Los Angeles Times (June 19, 2017),

  4. Id. 

  5. Independent Directors of the Board of Wells Fargo & Company Sales Practices Investigation Report (Apr. 10, 2017),

  6. Eleanor Bloxham, Here’s How Wells Fargo’s Board of Directors Just Failed Customers, Fortune, (Apr. 14, 2017),

  7. The Editorial Board, Plenty More Villains at Wells Fargo, The New York Times (Apr. 12, 2017),

  8. Id

  9. Id

  10. Thomas Lee, Wells Fargo Directors: Don’t Blame Us. Blame Former Execs, CEO, San Francisco Chronicle (Apr. 11, 2017),

  11. Id

  12. Id

  13. Michael Hiltzik, Wells Fargo Scandal Report Details Board of Directors’ Dereliction of Duty, But Gives Them a Pass, Los Angeles Times (Apr. 10, 2017),

  14. Bess Levin, 6 Ways Wells Fargo Made Its Employees’ Lives A Living Hell, Vanity Fair (Apr. 10, 2017),

  15. Id

  16. Wells Fargo Sales Practices Investigation Report, supra note 5. 

  17. Id

  18. Stacy Cowley & Jennifer A. Kingson, Wells Fargo to Claw Back $75 Million From 2 Former Executives, The New York Times (Apr. 10, 2017),

  19. Lee, Don’t Blame Us, supra note 10. 

  20. Id

  21. Thomas Lee, Shareholder Suit May Offer Best Chance to Fix Wells Fargo, San Francisco Chronicle (Apr. 8, 2017),

  22. Id

  23. Stacy Cowley, Four Directors Will Leave Wells Fargo’s Board, The New York Times (Mar. 2, 2018),

  24. Emily Flitter, How Wells Fargo and Federal Reserve Struck Deal to Hold Bank’s Board Accountable, The New York Times (Feb. 4, 2018),

  25. Bradley Keoun & Anders Keitz, In Wells Fargo’s Board ‘Refreshment,’ There Are No Spa Treatments, The Street (Feb. 6, 2018),

  26. Id. 

  27. Id

  28. Bradley Keoun, Wells Fargo Director Hernandez to Exit After Scandal, Maintains Side Deals, The Street (Mar. 28, 2018),

  29. Id