Question

In several paragraphs, summarize and discuss the failure in corporate governance related to the Wells Fargo scandal's fake accounts. How did the Corporate directors fail in resolving this scandal? What consequences to the company, employees and customers?

Answer 1

Answer

Corporate Governance refers specifically to the set of rules, controls, policies, and resolutions put in place to dictate corporate behaviour. Good corporate governance helps companies build trust with investors and the community. The four Ps of Corporate Governance are People, Purpose, Process, and Performance. The Wells Fargo’s fake account opening scandal is a typical example of failure in corporate governance.

The management of Wells Fargo gave impossible sales targets to employees, this made them opening 1,534,280 unauthorized deposit accounts, submitting 565,443 unauthorized credit card applications, opening unauthorized lines of credits, and various other fraudulent actions all without the customers knowledge. News of the fraud became widely known in late 2016 after various regulatory bodies, including the Consumer Financial Protection Bureau (CFPB), fined the company USD185 million as a result of the illegal activity.

How did Corporate Directors fail in resolving scandal?

The sales culture in Wells Fargo which ignores what customers want, neglecting early warning signals, a decentralized nature of risk management an unquestioning board, favouritism of CEO, territorialism etc.

Sales integrity issues were prepared for the Audit and Examination Committee but sales integrity issues were not given much importance by the directors until first reported unethical practices in 2013.

When cross selling issue was raised at the board level, some important Directors in Board said that cross-selling is a long-term corporate strategic initiative of Wells Fargo.

Consequences

The bank experienced decreased profitability in the first quarter after the news of the scandal broke.After earnings were reported in January 2017, the bank announced it would close over 400 of its approximately 6000 branches by the end of 2018, the bank announced that they would cut costs through investment in technology while decreasing reliance on its sales force.

The CFPB fined Wells Fargo $100 million in September 8, 2016 for the "widespread illegal practice of secretly opening unauthorized accounts." The order also required Wells Fargo to pay millions of dollars as compensation to customers, government and numerous regulatory bodies.

The controversy resulted in the resignation of CEO John Stumpf and Sloan took over as CEO. The offices of the Chairman and the CEO have been separated. Betsy Duke, the new Chair of the Board of Directors, took charge effective from January 2018. The market Capitalization of the bank came down and investors lost big amount.

The bank fired approximately 5300 employees between 2011 and 2016 as a result of fraudulent sales and discontinued sales quotas at its individual branches after the announcement of the fine in September 2016. Till now Wells Fargo's reputation has never fully recovered from the sales scandal.