During Wells Fargo CEO John Stumpf’s drubbing by Senator Elizabeth Warren and other Democratic senators and even some Republicans, Warren accused Stumpf of having gutless leadership because he spent most of his time blaming junior employees for fraudulently opening multiple bank and credit card accounts for customers who did not want them instead of taking the blame himself. Maybe if he weren’t the chairman of the board as well as the CEO there would be more oversight and a balance of authority that would require acceptance of some of the blame.
A new resolution from the Needmor Fund calls, again, for the bank to appoint an independent chairman. Similar resolutions have not received majority support in the past though they have been filed every year since 2005. Last year’s received 17 per cent support and the resolution claims an average 33 per cent support in 2015 for such resolutions. That aggregate figure could potentially be higher this year, since ISS changed many of its recommendations on the issue, such as at Goldman Sachs. In its response to the resolution filed this year, the board’s objections were based on the fact that it believes the current CEO/chair and lead director structure “already provides effective independent oversight of management and Board accountability”. That claim seems somewhat laughable in the wake of the current scandal.
The Corporate Responsibility Committee, for example, which is responsible for: “the Company’s reputation generally, including with its customers; and receives reports and updates on customer service and complaints, including related to the Company’s culture and its team members’ focus on serving customers, and other matters relating to the Company’s brand and reputation” met only three times last year, despite knowledge that the scandal had been ongoing since 2010.
The split CEO/chair resolution notes that it “is one important step in providing increased oversight and responsibility at the Board level”. Tim Smith of Walden Asset Management – one of whose clients is Needmor – said that: “This resolution is but one of an expected series of resolutions by a range of investors challenging the company in light of the years of fraud that was practiced by bank employees.”
And, indeed, Bart Naylor, financial policy advocate for Public Citizen’s Congress Watch division, has also just filed a resolution asking for a report and enquiry into “whether the divestiture of all non-core banking business segments would enhance shareholder value”. There will be more.
A letter accompanying the independent chair resolution admits that the bank has “taken steps to set up new checks and balances” but calls into question the implementation of the bank’s clawback policy over incentive compensation paid to executives with full knowledge of the fraud, as well as asking how far up the organization knowledge of the fraud existed.Since the bank has been firing employees for years because of this misconduct, it’s safe to say the knowledge was widespread.
A letter the bank in reply to an inquiry from Warren and other senators about whether Carrie Tolstedt, the senior executive in charge of community banking, was going to have some of her compensation recouped admits that high level knowledge. But it also claims that Tolstedt did not receive a $120 million dollar severance package that has been widely reported.
An independent chair is part of the solution
This figure was based on her earnings of around $9 million in each of the last three years and around $28 million in unvested stock recorded in the last proxy. In fact, the letter notes a far larger amount of unvested stock – $53 million – that the “retired” Tolstedt has not received yet. The letter goes on to say that it is the board’s business what it does about that.
But allowing board discretion over whether to implement clawbacks makes a nonsense of having a clawback policy in the first place, and the bank has many of them, including many that are simply triggered if an executive causes reputational harm.
During the committee hearing, Stumpf appeared to admit that some of Tolstedt’s compensation might be recouped. But numerous other executives benefited from the fraud, failed to stop it, knew about it, and did nothing about it, so it is hoped that this clawback would extend much farther than Tolstedt, and would include Stumpf himself. To disclose all of this publicly would do something to mitigate the reputational harm caused by the misconduct; but it would also mean that the bank was admitting blame, so I am not confident that what should happen actually will.
Other things should happen as well as the recoupment of large amounts of compensation from executives – the board should do its job properly, especially the Corporate Responsibility Committee, and Stumpf should relinquish his chairmanship. Unfortunately, the resolution, in an attempt at compromise, only calls for this to happen when a new CEO is appointed. Stumpf’s inability to accept full and ultimate responsibility and his continuing lack of candour have, however, made him unfit to hold the office of chairman.
There are some that would say that an independent chairman might have helped prevent the fraud or at least terminate it sooner. Well, it didn’t stop any of the British banks mis-selling insurance and manipulating exchange rates, but at least some had the grace to resign. It’s not the solution, but it is part of one.