Wells Fargo may have weathered the banking crisis of 2008 rather well, but that doesn't mean it hasn't had its share of failures and scandals. The biggest scandal to date broke in September 2016, when the Consumer Financial Protection Bureau revealed it was fining Wells Fargo $185 million for unethical, illegal practices. Investigators had discovered that over the course of several years, bank employees had been opening fake accounts and credit cards, using millions of customers' names without their authorization. The suit brought to light a problem that the bank had been aware of internally but failed to address.

Wells Fargo began in San Francisco in 1852 as a service to the many gold miners flocking to Northern California during the Gold Rush. It remained a largely regional bank for decades, but eventually began to grow through acquisitions. Its takeover of Norwest in 1998 expanded its reach throughout the Midwest, and its buyout of the East's major banking chain, Wachovia, in 2008 made it the most extensive coast-to-coast banking chain in the United States. Although Wells Fargo primarily serves individuals and small businesses through commercial banking, it also has practices in wholesale banking, investment banking, wealth management, insurance brokering, loan servicing, and more.

In this largely commoditized industry, one of the few growth strategies available to Wells Fargo's commercial banking division was a practice known as "cross-selling." Under direction from CEO John Stumpf, COO Timothy Sloan, and community banking head Carrie Tolstedt, bankers and tellers were directed to sell new products to existing customers as much as possible. For example, a customer with a checking account was encouraged to open a savings account, a credit card, and so on. Externally, competitors were astonished at Wells Fargo's ability to cross-sell, but internally employees described the pursuit of cross-selling as "relentless." Their efforts were checked four times a day, and employees with lower-than-average numbers were shamed in front of co-workers. Employees began to open fictitious accounts, just to make their performance quotas.

Years before the issue became public, Wells Fargo's leadership became aware of the problem. The firm fired more than 5,000 employees suspected of engaging in this illegal practice, loosened performance standards to ease the pressure, and made ethical conduct the hot topic for the remaining employees. At the same time, whistleblowers were fired, and the practice continued. Investigators estimate that all told, Wells Fargo customers paid approximately $2.6 million in fees related to accounts they had never authorized.

After news of the Consumer Financial Protection Bureau's fines became public knowledge in September 2016, Wells Fargo began a massive campaign to win back customers' trust. The CEO was forced to resign, policies were changed dramatically, and the firm issued an apology to its customers and employees. The scandal continued for months as top-level managers were called before Congress to explain their actions.

Strategic Issues and Suggested Discussion

How did the three internal corporate governance mechanisms workor fail to workat Wells Fargo?

Describe the organizational structure used by Wells Fargo. Do you think this structure could have contributed to the employees' illegal behavior in any way?