In an unprecedented move, according to staff, the Board of the Federal Reserve has placed an asset cap on Wells Fargo, restricting the growth of the firm until it “sufficiently improves its governance and controls”. At the same time, Wells Fargo has agreed to replace three current board members by April and a fourth board member by the end of the year. The Fed has the authority to require board members to be removed – though it uses it rarely – but did not exercise this power. Rather, it seems as if Wells Fargo was willing to sacrifice some directors, potentially to lessen the effects of the cease and desist order. Neither Wells Fargo nor the Fed identified which board members will have to leave, but in a later, more in depth look at the case [to be published next week – Ed.], I will consider which are the most likely to be removed.
The consent cease and desist order with Wells Fargo “requires the firm to improve its governance and risk management processes, including strengthening the effectiveness of oversight by its board of directors”. Fed Chair Janet Yellen said: “We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again.”
As additional attachments to the press release, as well as the cease and desist order itself, the Fed also sent a strongly-worded letter to each board member requiring them to sign the order, and two even more strongly-worded letters to Stephen Sanger, the former Lead Independent Director, and Former Chairman and CEO John Stumpf.“In the past year and a half,” said the letter to Sanger, “it has emerged that there were many pervasive and serious compliance and conduct failures ongoing during your tenure as lead independent director.” You did not do your job, is the gist of the message. Stumpf is criticised with, frankly, the most convincing argument not to combine the CEO and chair roles I’ve yet seen. His letter contains a great deal of censure for his role as “chairman”, including: “you resisted attempts by other directors to hold executives accountable even when the other directors had become aware of the seriousness of the compliance and conduct issues.”
“We cannot tolerate pervasive and persistent misconduct”
In a statement released concurrently, Wells Fargo’s current CEO Tim Sloan stressed that these were all old troubles at the bank that it is already well on its way to remedying. These plans for improved oversight and governance and compliance and risk management will be reviewed by a third party and then compliance with them will also be reviewed by a third party. The statement also lists the governance and risk management actions the company has already undertaken, such as the separation of the chair and CEO positions and a board assessment by former SEC chair Mary Jo White.