Question

Wells Fargo was the darling of the banking industry, with some of the highest returns on equity in the sector and a soaring stock price. Top management touted the company’s lead in “cross-selling”: the sale of additional products to existing customers. “Eight is great,” as in eight Wells Fargo products for every customer, was CEO John Stumpf’s mantra.

In September 2016, Wells Fargo announced that it was paying $185 million in fines for the creation of over 2 million unauthorized customer accounts. It soon came to light that the pressure on employees to hit sales quotas was immense: hourly tracking, pressure from supervisors to engage in unethical behavior, and a compensation system based heavily on bonuses.

Wells Fargo also confirmed that it had fired over 5,300 employees over the past few years related to shady sales practices. CEO John Stumpf claimed that the scandal was the result of a few bad apples who did not honor the company’s values and that there were no incentives to commit unethical behavior. The board initially stood behind the CEO but soon after received his resignation and “clawed back” millions of dollars in his compensation.

Further reporting found more troubling information. Many employees had quit under the immense pressure to engage in unethical sales practices, and some were even fired for reporting misconduct through the company’s ethics hotline. Senior leadership was aware of these aggressive sales practices as far back as 2004, with incidents as far back as 2002 identified.

The Board of Directors commissioned an independent investigation that identified cultural, structural, and leadership issues as root causes of the improper sales practices. The report cites: the wayward sales culture and performance management system; the decentralized corporate structure that gave too much autonomy to the division’s leaders; and the unwillingness of leadership to evaluate the sales model, given its longtime success for the company.

General Discussion Questions

1. What should business leaders take away from this scandal?
2. What could Wells Fargo have done differently to avert this cultural meltdown?

Practice of Ethical Leadership Questions

1. Modeling Character and Values: What values did Stumpf model to Wells Fargo employees? What impact might that have on the culture of Wells Fargo?
2. Encouraging Ethical Conduct: What behaviors can leaders model in order to encourage ethical behavior in their organization?
3. Designing Ethical Systems: Wells Fargo did have some systems in place, like the ethics hotline, to report unethical behavior, but it didn’t work. Why do you think that is? What steps can leaders take to design systems that encourage ethical behavior rather than unethical behavior

Answer 1

Answers to General Discussion Questions

Answer-1

From this scandal, the business leaders should take away the following lessons: -

            (a) Do not encourage unethical practices directly or indirectly among employees.

(b) Do not set unrealistic targets for employees to achieve within an unrealistic time-frame.

            (c) Institute measures to prevent unethical practices.

            (d) Encourage honest employees to grow in the company.

            (e) Honor adherence to regulatory framework as applicable to the company.

Answer-2

Wells Fargo could have done differently to avert this cultural meltdown, in the following manner: -

(a) When the first incident of aggressive sales practice was reported in year 2004 with identified incidents from year 2002, they could have instituted measures to prevent recurrence of such incidents. Some of the practical and workable measures are enumerated in succeeding paragraphs.

(b) Convene a meeting of senior managers to provide them with appropriate guidelines so as not to repeat such incidents.

(c) Instruct senior managers to advise their juniors to refrain from any such aggressive sales practices.

(d) Investigate to determine the extent of impact of aggressive sales practices as on 2004 and take remedial actions against those who are engaged in such activities.

(e) Promote the whistle-blower method of instantaneous reporting of an incident by anyone who has witnessed such an incident.

            (f) Reward employees having honesty, integrity and moral values.

Answers - Practice of Ethical Leadership Questions

Answer-1

CEO John Stumpf’s model was to aggressively cross-sell products by any means. While leading the bank in doing so, he had compromised on the minimum value system that any financial institution or any company must adhere to. The cultural impact that had on Wells Fargo is listed below: -

            (a) Employees were pressurized for resorting to unethical practices.

            (b) Employees reporting matters on unethical practices were punished.

(c) The performance management/ measurement system, in effect, encouraged dishonesty in employees.

            (d) The compensation system was skewed in favor of bonus.

(e) Since, the supervisors pressurized employees, the structural dishonesty within the organization was evident.

Answer-2

Leaders can encourage ethical behavior in their organization in the following manner: -

            (a) Demonstrate personal ethics in their words and actions.

            (b) Instruct senior managers to strictly adhere to the ethical norms to be followed.

(c) Instruct senior managers to communicate company’s ethical agenda to the supervisors/ other junior employees within their departments/ sections.

            (d) Monitor adherence to / violation of ethical practices on a regular basis.

(e) Institute immediate remedial measures to prevent recurrence of any unethical practice.

            (f) Encourage employees to report incidents of unethical practices.

            (g) Reward honest and hardworking employees.

Answer-3

Well Fargo’s system of ensuring Ethical System within the bank, such as ethics hotline to report unethical behavior did not work because, the top management, led by the CEO did not pay any importance to prevention of unethical practices. Rather, they steered in an organized and structured manner to promote unethical practices.

Leaders can take the following steps to design systems that encourage ethical behavior: -

(a) The top leaders must “think ethics”, “speak ethics” and “act ethics”. This is the top most fundamental step in the direction of designing systems to encourage ethical behavior.

(b) Matters on “what is ethical and what is not ethical” must be circulated across the organization.

(c) Periodic briefing must take place from the top management to the junior most employees in a structured and organized manner.

(d) Encouragement on reporting (whistle-blowing) incidents of unethical practices must be given.

(e) System of rewarding honest and hardworking employees must be put in place.