The independent directors' investigation followed regulatory settlements announced in September 2016 by the Consumer Financial Protection Bureau ("CFPB"), the Office of the Comptroller of the Currency ("OCC"), and the City and County of Los Angeles.

The settlement arose from allegations that thousands of Wells Fargo employees opened deposit accounts and issued credit cards without consumers' knowledge or consent, so that employees could satisfy sales goals and earn financial rewards.

These settlements provided for $185 million in penalties, plus consumer restitution.

Wells Fargo has taken a number of remedial actions, including discontinuing the relevant sales goals, reforming incentives, terminating five senior executives, implementing compliance and corporate governance changes, and imposing clawbacks and other executive compensation measures that now total over $180 million.

The report's findings

The Report attributes two main causes for the sales practices abuses and Wells Fargo's failure to address the problem:

  1. A culture and performance management system at the Community Bank that put pressure on employees to sell unwanted or unneeded products to customers.
  2. A decentralized organizational structure at Wells Fargo with a historical culture that gave substantial deference to the business units. The departments who would normally have exercised control functions over this type of problem were not centralized at Wells Fargo. The executives, including the chief executive officer, deferred to the head of the Community Bank to address problems within her business unit. The head of Community Bank and certain senior leaders paid insufficient regard to the substantial risk to Wells Fargo's brand and reputation. The Community Bank not only failed to escalate issues outside of Community Bank but also kept from the Board of Directors information regarding the number of employees terminated for sales practice violations.

A sales model that over-emphasized growth

With respect to the first issue, senior management at Community Bank espoused a sales model which called for significant annual growth in the number of products, such as checking accounts, and credit cards sold each year. Senior management refused to accept that the sales goals were too high and untenable. To the contrary senior management tolerated low quality accounts as a necessary by-product of a sales-driven organization. Senior management also failed to consider that low quality accounts could be indicative of unauthorized accounts.

In order to exert pressure on employees to exceed the sales goals, performance and salary reviews were primarily driven by sales goals. Incentive compensation and performance ratings were associated with sales goals. This meant that bankers, branch managers and district managers who did not meet sales goals not only could miss out on opportunities to earn incentive compensation, but were also at risk of poor performance reviews.

When problems arose, there was a disinclination among the Community Bank's senior leadership, regardless of the scope of improper behaviour or the number of terminated employees to see the problem as systemic. Instead, it was common to blame the employees who violated the rules without analyzing what caused them to do so.

A decentralized structure that under appreciated risk 

With respect to the second issue, the report finds that as a result of Wells Fargo's culture and structure the departments who would have normally exercised control functions over this type of problem were hampered in their ability to effectively analyze, size and escalate the sales practice issues. Those departments were Corporate Risk, the Law Department, Human Resources, Internal Investigations and Audit.

As a result of the decentralized organizational structure, centralized functions, such as audit and risk, had parallel units in the Community Bank. For example risk function at Wells Fargo was highly decentralized. It was only in 2011 that the Board of Directors created a Risk Committee consisting of the chairs of all of the Board's standing committees. In 2013, a multi-year plan was launched to grow Corporate Risk and to centralize risk functions. When problems arose in 2013-2015, Corporate Risk was till a work in progress and the Chief Risk Officer had limited authority with respect to the Community Bank.

With respect to Human Resources, there was no coordinate effort by HR, either within the Community Bank or in Corporate HR to track, analyze or report on sales practice issues. While HR had a great deal of information recorded in its systems on employee terminations, training, coaching, discipline and litigation, it had not developed any means to consolidate this information on sales practice issues. This prevented Community Bank and Wells Fargo from seeing this as a systemic problem. HR has now been centralized and the head of HR of the Community Bank reports to Corporate HUR rather than to the head of the Community Bank.

Similarly, the lawyers at the Law Department's Employment Section had visibility into the scope and causes of sales practice misconduct. While they made commendable attempts to address it through work on various committees, they did not discuss or appreciate the seriousness and scale of sales practice issues within the Community Bank or fully consider whether there might be a pattern of illegal conduct involved. The Law Department focused on advising on discrete legal problems as they arose and on managing Wells Fargo's exposure to specific litigation risks.

The same problem applied to Audit. While Audit reviewed relevant controls and processes, it largely found them to be effective. Audit scored most of the systems as a 4 out of 5. Audit failed to see it as their role to analyze more broadly the root cause of improper conduct. Audit was satisfied that Wells Fargo could catch the conduct if or when it occurred.

The report finds that the control functions of Wells Fargo did not appreciate the extent of the sales practice abuses. They viewed them as a problem of relatively modest significance, the equivalent of a tolerable number of minor infractions or victimless crimes. This underappreciation of the problem resulted in the incorrect belief that improper practices did not cause "customer harm". Wells Fargo mistakenly construed "customer harm" to mean only financial harm such as fees or penalties. This flawed perception prevented Wells Fargo from properly assessing the risk to its brand and reputation from the misuse of customer information and breaches of trust occasioned by improper sales practices.

Related to the decentralized structure, a culture of deference existed at Wells Fargo. In particular, even when senior executives came to recognize sales practices as a problem, they relied on the head of Community Bank, Carrie Tolstedt and her senior managers to carry out corrective actions. The Report is very critical of Tolstedt's failure to recognize the problem and manage it. The report states that Tolstedt mismanaged the Community Banks' response to the rise in sales practice issues, failing to appreciate both the negative impact on customers and the grave risk to Well's Fargo's brank and reputation. The report is also critical of Tolstedt management style. She is described as "obsessed" with control, especially of negative information about the Community Bank and extremely reluctant to make changes. In part, the report implies, it was this reluctance to make changes that prevented Tolstedt from addressing the problem. Tolstedt reportedly resisted and rejected the near-unanimous view of senior regional bank leaders that the sales goals were unreasonable and led to negative outcomes and improper behaviour.

Lessons Learned1

  • The report provides strong support for having a centralized corporate structure, in particular with regards to control functions such as risk, compliance, legal and human resources.  
  • The Board should have been more active in requiring more detailed reports and concrete action plans to address problems. Some of the sales practice problems came to the Board's attention in 2013. However, upon further review, those reports were thin and insubstantive. The Board should have exercised greater control to demand more detailed reports and to ask further questions.
  • Ethics and Culture. The Report often repeats Wells Fargo's modo "run it like you own it". While this guiding principle may have been laudable at a certain point, it led to an over-emphasis on sales over service. The Report suggests that a corporation's culture from the top down is important. In this case, the sale driven culture impeded the ability of managers and internal controls from escalate problems arising from sales practice.
  • Risk must be defined more broadly than just financial risk.

In addition to these, the Consumer Financial Protection Bureau in the United States issued guidance on steps that regulated entities should take in managing sales and other compensation incentives (the "Guidance Document").


1 The Harvard Law School Forum on Corporate Governance and Financial Regulation. For more details see:

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