Refreshing Wells Fargo: The Fed didn’t fire any Wells Fargo directors but who should go?

I have long maintained that decisions about CEO compensation provide a window into the board’s soul. This has been proven yet again by Wells Fargo. A board that could make the decisions about CEO pay that this one did would have had no problems overlooking – rather than overseeing – the kind of fraud routinely practiced on bank customers for years, the fraud which brought down such unprecedented action from the Federal Reserve.
Back in August 2009, I wrote a blog entitled “Trust banks! And, no, I don’t mean that nicely.” It meant trust them to find a way around the pay caps then in place under the Troubled Asset Relief Program (TARP). The first bank to do so? Wells Fargo.
The now disgraced CEO John Stumpf received a 520% salary rise from $900,000 to $5,600,000. Much of it was paid in stock so that he could take full advantage of the recovery of the bank’s stock from around the $20s back up to where it was pre-financial crisis in the $40s; effectively doubling his money for riding President Obama’s recovery plan. And since the stock is around $65 now, clawing back $41m in pay from him for his responsibility for the bank’s disgrace won’t have hurt that much.
Who was on the compensation committee at the time? And who was on the board?
You can probably see where I’m going with this.
Former lead independent director Stephen Sanger – he who has now received a rude letter from the Fed – was its chairman. He’s gone now anyway. But directors John Chen and Donald James were on the compensation committee then and are still on it now. It could be argued they could be the first to go.
And on the board?
John Baker, Lloyd Dean and Enrique Fernandez have been on the board since January 2009, June 2005 and January 2003 respectively. And current CEO Tim Sloan has been in senior management at the bank for the last 30 years. Now, Wells Fargo has announced that four directors are to leave: three by the annual meeting and one by the end of the year. To my mind, six should be going. Anyone who was on the board in 2009 or employed by the bank then and on the board now.
Not that 2009 was the only questionable CEO compensation decision.
In February 2010 I wrote another blog called “More Wells Fargo salary nonsense”. In it I spoke about the board’s decision to “reduce” base salaries. In the case of Stumpf, it went down from $5.6 million to $2.8 million. As I said at the time: “Do they think we can’t remember? Do they really think we’re that stupid?” Remember, Stumpf’s salary was $900,000 less than a year before. Still, it was an increase of only 211% now.

As I mused at the time, why weren’t the salaries reduced to where they were before the TARP caps were put in place? In fact, why weren’t the salaries cut?

It’s not as if presiding over a financial crisis deserved some kind of performance-based increase.Yet, despite the presence of a Pay Czar, no one seemed to bother and they weren’t all summoned back to Washington in their corporate jets like last time.
Then, a few years later, it was discovered that not only was Wells Fargo opening unwanted bank account and credit card accounts without customers’ knowledge but also that it had charged auto-loan customers for car insurance they did not need and improper fees to some mortgage borrowers.
I could have told you, and I did tell you, that something like this was going to happen based just on that one 8-K filing; then another came along.
And Wells Fargo’s response is to “refresh” four directors? The Fed assured me that it had not and was not going to request directors to leave. Though it could. The legal standard for the Fed to “prohibit a director” requires that it must prove that:
• “The director engaged in a violation of law, breach of fiduciary duty, or unsafe or unsound practice;
• The director’s conduct caused financial loss or other damage to the institution; and
• The director acted with a culpable mental state.”
The last case requires some demonstration of a knowledge of wrongdoing on the part of the individual director. But, frankly, those six current directors surely qualify under the first two and the Fed has done only half its job.
It’s not as if Wells Fargo has not been getting rid of directors. It’s been like the night of the long knives there for a while. It just hasn’t got rid of enough. It elected six new independent directors in 2017 as five directors “retired”, bringing to eight the total number of directors elected since 2015.
Cynthia Milligan, who had been on the board since 1992, Stephen Sanger, on the board since 2003, Susan Swenson, on the board since 1998, Elain Chao, director since 2011, was appointed as Secretary of Transportation by Trump and she is married, incidentally, to Mitch McConnell, the senate majority leader, and Susan Engel, director since 1998, who did actually retire, make up the five who left. The six new directors are Juan Pujadas, Celeste Clark, Theodore Craver, Maria Morris, Ronald Sargent and Susan Peetz.
Executives have also been fired or penalised, not just Stumpf, but also Carrie Tolstedt, former head of the Community Bank and four current or former senior managers in the Community Bank were terminated for cause, thus losing a few incentives. Finally, eight members of the operating committee saw their bonuses eliminated or reduced.
But for this level of misconduct, bad governance, lack of oversight, poor risk management, compliance breakdowns and customer abuse, it does not seem enough.
And the conclusion? Keep an eye on those 8-Ks; they tell a story that needs to be listened to.