Gretchen Morgenson captured the issue in her opinion piece in the New York Times this week:
Ms. Morgenson begins, "Even after two big shuffles at the top, Wells Fargo is still working from the same playbook. And for the bank's stockholders, that could mean more frustration lies ahead."
The concern is laid out clearly in the article.
Timothy J. Sloan is to be the new president. Mr. Sloan has been the former chief operating officer and has been employed by Wells Fargo for almost 30 years.
The Wells Fargo board is finally creating the position of an independent board chairman. The position of board chairman will go to Stephen W. Sanger, a retired chief executive and Chairman of General Mills. Mr. Sanger has been on the Wells Fargo board since 2003.
Since 2012, Mr. Sanger has been the lead independent director at Wells Fargo, a position in which "he was supposed to ensure that Mr. Stumpf (the former Chairman and president) put his shareholders' interests first."
Elizabeth A. Duke is filling a former governor from the Board of Governors of the Federal Reserve System the position of vice chairwoman. Ms. Duke arrived on the board at Wells Fargo in early 2015.
With the exception of Ms. Duke, Mr. Sloan and Mr. Sanger have been at Wells Fargo before and then during the breakdown of the company culture. That is, they can be thought to be a part of the problem, leaving the question open about whether or not they can be part of the solution?
The basic issue: Wells Fargo needs to change the environment that exists within the bank in order to build trust among its customers, its potential customers, and to its shareholders.
How can Wells Fargo accomplish this change with people that where a part of the team that was overseeing everything that was going on?
Ms. Morgenson closes her article with the direct accusation that Mr. Sanger was "supposed to ensure that Mr. Stumpf put his shareholders' interests first…" and "that didn't happen then…."
As I have written before, I believe that the culture of a corporation is crucial to the essence of what the corporation is and lays the foundation for the overall performance of that organization.
The President and Chief Executive Officer, to me, determines the culture of the organization and must promote that culture in everything that he or she does or says. This is the ultimate responsibility of the CEO and is the foundation for the long-run performance of the institution.
That is why the situation at Wells Fargo was so disturbing because Mr. Stumpf and his executive team obviously did not fulfill their responsibilities to their organization in overseeing the corporate culture. It was particularly disturbing because Wells Fargo, in financial circles, had a good reputation and was commended for the financial performance of the company. It earned at least a 15 percent return on equity for many years and, of the largest banks in the country, came out of the Great Recession as the best performer with the best chance of returning to a ROE of 15 percent or more.
With the growing information pertaining to the situation in the retail part of the bank, especially with the information about how long customer concern had been expressed and that the information was known at the highest levels, question exist about whether or not similar situations concerning employee incentives might exist elsewhere within the organization.
And, of course, this concern expanded to the financial markets and to the Wells Fargo stock price.
But, will there be more information forthcoming in the future?
This is now the responsibility of Mr. Sanger and Mr. Sloan and Ms. Duke.
Herein lies the problem Ms. Morgenson raises. Mr. Sanger and Mr. Sloan could be seen as a part of the problem…at least in the minds of investors. How can they be a part of the solution?
This is a very difficult problem to answer and I would say that this really puts Mr. Sanger and Mr. Sloan…and Ms. Duke…on the spot.
Wells Fargo is in "turnaround" mode.
Turnaround mode is a difficult situation because a turnaround generally means that a new culture needs to be implemented within the existing situation and into the existing employee base that executed the "old" culture.
This is quite a task. I have (successfully) completed three turnarounds at financial institutions and in each case I was brought in from outside. The one reality that must be faced in a turnaround is that every employee in the turnaround only knew the old culture and in many cases was very defensive about that culture because that was all that it knew.
The new CEO in the turnaround starts out from scratch in developing and implementing the new culture. He or she does not have the baggage of the old corporation hanging around their necks. So the introduction of the new culture and the execution of the new culture must comes from a new source. And, not everyone will be able to receive and adapt to this new culture…especially some of the individuals that had been heavily invested in the old culture.
This is the thing that Mr. Sanger and Mr. Sloan have to face. The old employees worked with Mr. Sanger and Mr. Sloan in executing the old culture. They have memories of the commitment that each had to the old culture. They may have even had a substantial role in generating the old culture.
So, Ms. Morgenson has a valid concern about the ability of the new leaders to "make a clean break" with the past and build something new, something that will generate the performance, that shareholders should be demanding.
In my previous post, I made the point that Wells Fargo is now a case study of how a CEO can fail in creating and implementing a corporate culture. Now, we are working on another case study: how to restore trust within an institution that has had a break down in corporate culture and let down its customers and stockholders.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.