Editor’s note: This article was originally published in Compliance & Ethics Professional July 2017 edition.
Last month, the Wells Fargo board released its lengthy investigative report into its sales incentive issues. Much has been written about the recent shareholder meeting, where it appeared—for a while—that some of the board would not win reelection they did), as well as the details in the report itself. Much of it was specific to the bank, its personnel, and the environment in which the company was operating at the time, but there were a few broader themes with applicability pan-industry.
Reputational risk. The investigation team castigated Wells for failure to appropriately appreciate reputation risk, which is a hard thing to quantify, as part of their risk analysis. The Community Bank leadership team believed that there was little to no risk in the sales incentive program, which leads them to under-prioritize addressing it (as compared to other larger risks like AML/ KYC). Expect to hear more around how to appropriately quantify reputation risk.
Root cause analysis. The phrase showed up 33 times in the report, and in every case, the accusation was that the Wells Community Bank Controls team (HR, Risk Management, and Compliance) failed to do any root cause analysis on the terminations. The attitude was “assign blame, discipline, move on” with no thought given to why an employee might have engaged in certain behavior.
Decentralized structure. This was a huge theme—probably the theme—in the report. All control functions at Wells resided in the businesses, with HR, Risk, and Compliance in the Community Bank all reporting directly into the head of the Community Bank. She wrote their performance evaluations and determined their bonuses. Later in the time period at issue, they had dotted lines into Corporate, but even when those were established, they were not used in any meaningful way.
Culture/public purpose. The Community Bank thought of itself as a retail organization, referring to its branches as stores and its service lines as products. The focus was on a number of units sold, not revenue. Turnover comparisons were to retail organizations. They had a long-term mantra of “run it like you own it” for each business unit, which meant a tremendous amount of discretion for the business unit head and very little in the way of corporate insight into what might be happening in the business. Culture is mentioned 47 times over the course of the report, with a significant focus on the impact of moving managers around, which caused many of the improper practices to “pollinate” across the business.
