Wells Fargo ignored early signals of cultural breakdown!

Wells Fargo’s CEO, John Stumpf, defiantly told congressional investigators that, despite a multi-year scandal and $185 million fine, the bank did not have a culture problem.[i] But, when 5,300 employees are fired for a five-year pattern of stealing private records, you have more than a culture problem. You have a problem with executive leadership. You also have a problem with respecting your clients, honoring ethics, and, as we shall see, turning a blind eye to the early warning signs of cultural breakdown. If Wells Fargo had been measuring its management and workforce cultures, and had taken comprehensive corrective action several years ago, it could have prevented this unfolding scandal.

Wells Fargo began making awful headlines on September 8th, when they were fined 185 million dollars in a settlement with the Los Angeles city attorney’s office and two regulatory agencies. The fine was for a five-year pattern of branch sales employees secretly using private personal information to open bogus customer credit accounts, and create fake e-mails.[ii]  All was done in order to achieve tough sales goals and earn incentives.  Wells Fargo fired over 5,300 employees involved in the scandal, but executives kept their jobs and multi-million dollar incentives. But, after two brutal, grilling congressional hearings, the bank forfeited $41 million of CEO John Stumpf’s unvested stock awards and his 2016 bonuses.[iii]

How the unethical behavior spiraled out of control

According to The Wall Street Journal, the unethical behavior began when Wells Fargo placed emphasis on “cross selling” more products to customers. This led to the bank opening as many as two million deposit and credit card accounts without customers’ knowledge. “If you could sell, you had a job,” says Scott Trainer, who worked at Wells Fargo in several different jobs, until he quit in 2014. He told The Wall Street Journal that he was fed up with the sales pressure and unethical practices. Mr. Trainer and other employees told the paper that managers suggested to employees that they hunt for sales prospects at bus stops and retirement homes.[iv]

Missed early warnings

Wells Fargo was alerted in 2011 by its employee satisfaction surveys that some bank employees felt uncomfortable about how managers were pushing them to sell more products, but no meaningful changes were made.[v] Employees also raised verbal objections. According to Ruth Landaverde, a former Wells Fargo credit manager in Palmdale, California, if an employee said: “This doesn’t make sense. Where are you getting these sales goals?” [the response]: “No, you can do it” or “You’re negative” or “Oh, you’re not a team player.” In an interview with The Wall Street Journal, Ms. Landaverde said that she often got the same response whenever she said a customer didn’t need another credit card. The answer was: “Yes, they do.” She quit after being warned she wasn’t reaching her sales goals.[vi]

The bank eventually began to conduct investigations into these practices, but the inquiries were too limited in scope, often focusing on a branch or region.

Wells Fargo is also being investigated for failure to comply with overtime laws. Bank tellers and associates often worked long hours to meet sales quotas and salaried bank associates may have been misclassified as overtime-exempt officers.[vii]  This week, the bank has also been fined $20 million for violating rules on lending to members of the military and $4 million for improper seizure of vehicles owned by soldiers who fell behind on their loans.[viii]  The State of California has suspended its business ties with Wells Fargo.[ix] More business loss will follow.

Culture is measurable, manageable and can predict future outcomes.

Many executives believe culture is soft and squishy. No true. Empirical research by Dobni, Denison, Wang and Ahmed, and others[x] demonstrates that business culture is measurable. Based on these measures, executives can significantly improve their company’s strategy implementation, innovation, and financial performance. By measuring culture, executive can learn how aligned their workforces are to the company’s mission, values, and business strategy. Executives can learn—and manage– whether the workforce trusts management, its level of engagement, and how effective the workforce is at forming teams, being innovative, and aligning to launch new products, services and business models. Culture can be scientifically measured and managed. If Wells Fargo paid more attention to its culture and the early warning signs of misconduct and the mixed messages from management to sale at all costs over ethics, it could have prevented this deepening scandal years ago.

The first rule of setting goals and incentives

The first rule of setting sales goals and designing sales incentives is to understand the behaviors and outcome you want to incent. A company’s ethics need to come into play. I have, for years, worked with executives to set sales goals and design commission plans.  One of the first conversations we have is about the desired outcomes and behaviors, as well as what behaviors we don’t want. Ethics is as much a part of that discussion as business strategy, marketing and finance. Enlightened executives know that once you seriously violate the public’s trust, it can be catastrophic, and in some cases, unrecoverable.

Empirical evidence shows that overly aggressive goals lead to bad behavior

Overly aggressive goals can create a narrow focus, which leads to undesirable consequences,[xi] such as achieving high revenue at the sake of desirable profit levels. Or, as we have seen in Wells Fargo’s case, careless risk taking and unethical behavior, which led to violations of company polices, laws and regulations.

Setting goals is better than saying, “Just do your best.” Sales goals should stretch employee performance to achieve higher sales, but when goals are set too high, trouble begins. Sales goals need to be vetted with higher levels of management, outside experts, and feedback groups. This helps ensure that goals are challenging but achievable, aligned with top management’s strategies, and do not create unexpected and dire consequences.[xii]

Wells Fargo ignored the early warning signs of a catastrophic cultural breakdown. Now, it is paying the price.

What are your thoughts? Join the discussion.

Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting and is a Managing Partner of InnovationOne. He consults on talent management, leadership development and coaching, innovation, and other strategic initiatives. Please e-mail Victor at victorassad6@gmail.com or visitwww.victorhrconsultant.com. For innovation visit www.InnovationOne.US.

[i] Stacey Cowley (Sept. 29, 2016) “Wells Fargo’s Reaction to Scandal Fails to Satisfy Angry Lawmakers,” New York Times. Found at http://www.nytimes.com/2016/09/30/business/dealbook/wells-fargo-ceo-john-stumpf-house-hearing.html.

[ii] Emily Glazer (September 8, 2016, 7:47 PM ET) “Wells Fargo to Pay $185 Million Fine Over Account Openings,” The Wall Street Journal. Found at ww.wsj.com/articles/wells-fargo-to-pay-185-million-fine-over-account-openings-1473352548.

[iii] Stacy Cowley, (Sept. 30, 2016) “Wells Fargo Fails to Satisfy Angry Lawmakers”, The New York Times.

[iv] Emily Glazer, (Sept 16, 2016, 3:10 PM ET), “How Wells Fargo’s High-Pressure Sales Culture Spiraled Out of Control,” The Wall Street Journal. Found at http://www.wsj.com/articles/how-wells-fargos-high-pressure-sales-culture-spiraled-out-of-control-1474053044

[v] Ibid.

[vi] Ibid.

[vii] Kate Davidson, Shayndi Raice and Yuke Hayashi (Sept 22, 2016, 7:30 PM ET), “Pressure Mounts on Wells Fargo CEO John Stumpf,” The Wall Street Journal. Found at  http://www.wsj.com/articles/wells-fargo-ceo-john-stumpf-steps-down-from-federal-reserve-advisory-council-1474581283

[viii] Stacey Cowley (Sept. 29, 2016) “Wells Fargo’s Reaction to Scandal Fails to Satisfy Angry Lawmakers,” New York Times. Found at http://www.nytimes.com/2016/09/30/business/dealbook/wells-fargo-ceo-john-stumpf-house-hearing.html.

[ix] Michael Corkery and Stacy Cowley, (Sept. 28, 2016) “California Suspends Ties With Wells Fargo,” New York Times. Found at http://www.nytimes.com/2016/09/29/business/dealbook/california-wells-fargo-john-stumpf.html?action=click&contentCollection=DealBook&module=RelatedCoverage&region=EndOfArticle&pgtype=article.

[x] [x] C. Brooke Dobni (2008) “Measuring innovation culture in organizations,” Found at www.emeraldinsight.com/1460-1060.htm; and D Denison (1990). Corporate culture and organizational effectiveness. New York: John Wiley and Sons.; and Wang, CL and Ahmed PK (2004) The Development and validation of the organizational innovativeness construct using confirmatory factor analysis”, European Journal of Innovation Management, Vol 7, No.4 pp 303-13.

[xi] Lisa D. Ordonez, Maurice E. Schweitzer, Adam D. Galinsky, and Max. H, Bazerman. (2009). “Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting.”  Harvard Business School. Working Paper 09-083.  Retrieved from http://www.hbs.edu/faculty/Publications%20files/90-083.pdf.

[xii] Edwin A. Locke and Gary P. Latham, A Theory of Goal Setting and Task Performance, Prentice Hall College Division, January 1, 1990.

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