Chapter 8 Discussion 6 Review the following videos, read the "Management in Action" case included at the end of the chapter, and post your answers for the following case questions within this discussion. 1. How can a scandal like this one destroy a company's longterm revenues and prots? 2. Would you recommend this nancial institution to others? If yes, why, if no, why not? 3. Describe the culture at Wells Fargo and give examples to support your conclusion. Your post should be at least 200 words and directly address the question or questions with sufcient detail. Details should include examples and reasons. Please comment on at least two other students' posts. Your post should include specic commentary and be at least 25 words each. In addition to posting your comments to this discussion board, you must also submit your post to the Chapter Discussion check assignment. Wells Fargo whistleblower on recent scandale Management in Action Wells Fargo's Sales Culture Fails the Company How do you sell money? This is a fundamental challenge for retail banks, and Richard Kovacevich had a solution. He saw banks as stores, bankers as salespeople, and nancial instruments as consumer products. Much like a deli worker asks if you'd like to upsize that combo or add dessert to your order, a banker should encourage you to add a credit card, savings account, or loan to your portfolio. Kovacevich called it \"cross-selling,\" and he based it on the fact that customers With several accounts are much more protable to a bank than customers with a single account. How many accounts should a customer have? Eight, according to the \"Going for GrEight\" initiative he launched as CEO of Norwest in 1997. Why eight? Because, Kovacevich said. \"It rhymes with GREAT!\"167 SALES PRACTICES AT WELLS FARGO E Norwest merged with Wells Fargo in 1998; the bank retained the Wells Fargo name, and Kovacevich took the helm as president and CEO. He saw revenue growth as the bank's most important goal and cross-selling as the way to achieve it.168 Bankers could earn between $500 and $2,000 in quarterly bonuses for hitting sales targets, and district managers could increase their annual compensation by up to $20,000. According to former Wells Fargo worker Scott Trainor, "Ifyou could sell, you had ajob.\"169 The strong sales culture transformed Wells Fargo's bottom line, as evidenced by a 67% increase in the bank's stock from 2006 to 2015.170 Unfortunately, the culture had a dark side. Steven Schrodt, who worked at a Wells Fargo branch in Lincoln, Nebraska, before resigning due to severe sales pressure in 2012, remembers managers encouraging those who hadn't reached sales goals to open accounts for their family members and friends. Other former employees describe searching for potential customers at retirement homes and local bus stops,171 Bankers who grew tired of asking friends, family, and strangers for business adopted more covert tactics. One former Wells Fargo employee recalls the day he discovered a high-performing coworker's secret formula. A customer had applied for a home equity loan and somehow also ended up with a $20,000 personal line of credit. \"So then I realized how he was doing all his loans, because he was basically tagging on other loan products in the same application so they wouldn't really notice when they signed the documents?\"2 Problems started to emerge in 2009. At this point, Richard Kovacevich was gone, John Stumpf was president and CEO, and Page 356 Kovacevich's sales culture was deeply embedded. To investigate potential problems in retail sales practices (RSPS) in the bank's branches, Wells Fargo established an internal task force in 2012. The task force concluded that the unethical behavior was due to a small set of \"rogue\" individual branch workers.\"3 Wells Fargo subsequently red more than 5,000 "rogue" bankers between 2013 and 2016.174 WELLS FARGO ADMITS TO FRAUD: BLAMES PROBLEM ON WORKERS, NOT CULTURE E In September 2016, the Ofce ofthe Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), and the Los Angeles City Attorney publicly ned Wells Fargo $185 million for opening millions of bank accounts without customers\" knowledge.175 The bank openly admitted to the fraud, but executives noted that Wells Fargo had ofcial policies in place in their Sales Quality Manual requiring customers\" consent \"for each specic solution or service\" and expressly prohibiting bankers from opening multiple accounts to increase incentive compensation.\"6 In an interview with The Wall Street Journal, CEO Stumpf maintained, \"there was no incentive to do bad things,\" adding, "the 1% that did it wrong, who we red, terminated, in no way reflects our culture nor reects the great work the other vast majority of the people do."177 Former workers tell a different story. Former employees who worked at Wells Fargo between 2004 and 2011 told NPR the fraud was pervasive and that managers were heavily involved. One former banker recalled sitting at a conference table with her managers in a windowless, locked room and receiving a \"formal warning\" to sign. Her managers told her that bankers who didn't meet sales goals were not team players, and poor team members would be red and forced to carry the mark on their permanent records,178 Employees who played by the rules and reported their concerns were red from theirjobs within weeks of reporting for things like \"excessive tardiness.\"179 ANOTHER SCAN DAL Stumpf resigned from Wells Fargo in October 2016, and Timothy Sloan took over as CEO. Sloan immediately discontinued labeling branches \"stores" and overhauled the bank's incentive compensation plan, shifting the focus to customer satisfaction and drastically reducing the emphasis on sales goals. He restructured the organization to fully centralize the bank's risk and HR functions, consolidating "much of the vast risk-control bureaucracy into a new ofce of ethics, oversight, and integrity, accountable to the board's risk committee,\"180 In spite of Sloan's efforts, another scandal Was brewing. Earlier in 2016, executives at Wells Fargo had realized that hundreds of thousands of car loan customers had been charged for unnecessary auto insurance.181 An internal report revealed that the costs ofthe gratuitous insurance resulted in auto loan defaults for more than 270,000 customers and the repossession of approximately 25,000 vehicles.\"2 Federal probes into the insurance debacle shed light on yet another slew ofinternal issues with compliance, controls, and board oversight ofoperations at Wells Fargo.183 In a report released in October 2017, OCC regulators slammed managers at Wells Fargo Dealer Services (the bank's auto loan unit) for ignoring customer complaints, failing to monitor contractors, and general laziness in responding to problems that had been unfolding since at least 2015.134 In July 2017, Wells Fargo publicly admitted it became aware of the auto insurance scandal a year prior. Interestingly, when the Senate Banking Committee asked, as part of the September 2016 hearings related to RSP fraud, if executives were \"condent that this type of fraudulent activity does not exist\" in other areas, the bank insisted problems were limited to individual employees in the community 185 banking division. Senator Sherrod Brown has since alleged that Wells Fargo \"pure and simple lied to this committeeand lied to the public\" in failing to disclose the auto insurance problems during the 2016 hearings.186 Sloan has maintained there are fundamental differences between the RSP and auto insurance scandals, with only the former being fueled by sales incentives.187 AFTERMATH In February 2018 the Federal Reserve capped Wells Fargo's growth and stated that the bank would not be allowed to accumulate any more assets until the Fed believed the bank had turned itself around.188 Two months later. the CFPB handed down a record $1 billion ne related. in part, to the auto insurance scandal.189 By early 2020 Wells Fargo agreed to a settlement with the DOJ. including a $3 billion ne related to the creation ofthree million fraudulent accounts between 2002 and 2016. The DC] agreed to withhold criminal charges, provided that the bank continued to cooperate in investigations and comply with all relevant laws for three more years. As part of the settlement, Wells Fargo admitted to two criminal violationsidentity theft and creating false bank records.190 By early 2020 the OCC had also ned eight of the bank's former executives a total of $59 million. Stumpf's $17.5 million portion of the total was the largest penalty the OCC had ever imposed on an individual. In addition. Stumpf received a lifetime ban from the banking industry191 Page 357 NEW LEADERSHIP, NEW STRUCTURE The year 2019 brought a change in leadership when Sloan stepped down from his role as CEO. "It has become apparent to me that our ability to successfully move Wells Fargo forward from here will benet from a new CEO and fresh perspectives,\" he said.192 Charles Scharf, the former CEO ofVisa and Bank of New York Mellon, took over as CEO, and he quickly announced a plan to radically restructure the bank as part of his effort to implement changes. Scharf's reorganization split the bank's structure into ve lines of business, with each line overseen by its own CEO, and each CEO reporting directly to Scharf. He said, \"These changes create the right structure to build our businesses over the long term and increase our ability to successfully execute on our top priority, which is the risk, regulatory and control work. I am condent that this organizational model and our strengthened risk and control foundation will bring greater focus and accountability to the company-1\"\"3 Testifying before the House Financial Services Committee in March 2020, Scharf said, \"I want to give you my personal assurance that we will do the work necessary to put Wells Fargo on sound footing with our customers, employees, regulators, shareholders, and the communities we serve,\" adding, \"What we have done to date is not enough, and we will continue to drive prcogress.\"19'1 \\\\