Friday, October 6, 2017

The Wells Fargo banking scandal. Cheats at Work and Corporate Myths

Wells Fargo is fined

On September 8, 2016, the Wells Fargo bank paid a $100 million dollar fine to the Consumer Financial Protection Bureau, $50 million to the City of Los Angeles and $35 million to the comptroller of the currency. These fines were incurred after Wells Fargo acknowledged that between 2011 and 2016 its branch-bank employees had opened up roughly 1.5 million bank accounts for customers and sent them 565,000 credit cards without their knowledge and permission. Some customers noticed these infractions when, for example, they received credit cards in the mail they did not request, or in more egregious cases, debt collectors approached them about accounts they did not recognize. Yet it seems as if the overall impact on the bank’s customers was limited. For example, many sham bank accounts went unnoticed because bank employees would close them shortly after opening them. Strikingly, the bank did not profit greatly from these infractions. Assessing the damages its customers incurred, the bank refunded about $2.6 million to aggrieved customers, a rounding error for a company with about $20 billion in net income. This is also why the total fine incurred, $185 million, was relatively small. For example, Citigroup payed $7 billion in fines for misleading investors about the toxic mortgage products it sold them in the run-up to the financial crisis of 2007. Indeed, Wells Fargo had emerged relatively unscathed from that crisis having avoided selling such mortgages.

Yet there was something unseemly about the fraud. The bank had betrayed the trust of everyday customers who depended on a bank to be the steward of their money. For example, some customers were told that they needed separate banks accounts for different needs, such as grocery shopping, or traveling. As one employee noted, “They would deposit their money and get hit with fees like crazy, because they got confused about what account they were using.” They would use the wrong debit card and overdraw their travel account, and then when they came back three months later, they would lose hundreds of dollars from their next check paying off those fees.” If the bank in aggregate did not steal much money from its customers, the average refund was about $25, it nonetheless did steal from them through everyday encounters. These actions communicate a disregard or even contempt for customers, particularly since these actions of petty theft or misdirection appeared institutionalized. In a sense, a single large theft, like the sale of a toxic mortgage, is egregious. But small petty thefts are corrosive.

Yet when confronted with the evidence of such infractions from at least 2008 onwards, the bank’s senior officials did not see this as evidence of any systematic flaw in the company's culture. Instead, they believed it was due to rogue employees’ misconduct. This framing was shaped party by the relatively small number of employees, one percent in any given year, who were fired for misbehaving.  As one senior executive commented, “(this number) is mind- boggling so low – I think it shows (that) our [employees] are significantly more ethical than the general population.” When in 2016 the Wells Fargo Board of Directors examined the scandal, its final report noted that, “The senior leaders did not consider that the 1% represented only employees who were caught engaging in sales practice misconduct. Moreover, even accounting for the Community Bank’s high turnover rate, firing 1% of the workforce each year meant over time that more than 1% were engaging in terminable misconduct.” The bank in fact fired 5,300 employees from 2011 to 2016.

Testifying before a senate subcommittee investigating the Wells Fargo scandal in September, 2016, John Stumpf, the bank’s CEO from 2007 to 2016, “Disagreed with senators when they described the illicit sales as part of a deliberate scheme to increase the bank’s bottom line. He said the 5,300 employees who had been terminated over the issue — many of them earning $12 an hour — deserved to lose their jobs. ‘The 5,300 were dishonest, and that is not part of our culture.’”

Cross-selling in a retail environment

Senior management’s framing of the situation - rogue employees, not our culture, was to blame- was rooted partly in their conception of the bank’s branches as retail outlets. Their primary task was selling products rather than serving customers. As the board of directors’ report notes, “The Community Bank identified itself as a sales organization, like department or retail stores, rather than a service-oriented financial institution.” What difference did this conceptualization make and how did it make a difference?  Consider the following argument. 

Beginning with the merger of Wells Fargo with the bank Norwest in 1998, the merged company under the direction of its CEO Richard Kovacevich, by all accounts a charismatic leader, developed a strategy for growing revenue and profits by “cross-selling” products to customers.  This meant persuading customers who for example only had a checking account, to take on additional products such as a credit card, a market savings account, a home equity loan, and auto insurance. The underlying conception was simple though not easy to execute. It was more profitable and less costly to sell more products to the customers you have than to acquire new ones. As one observer notes, “Kovacevich, credited with developing the bank' s obsession with cross-selling products to its customers, viewed banking as a commodity business and preferred to compare Wells Fargo to merchants like Wal-Mart or Lowe' s rather than to Goldman Sachs.”

The strategy was successful. In 2012, Wells Fargo had the largest market capitalization of any American bank ($161 billion), including JPMorgan Chase, which had twice Wells Fargo’s assets. It averaged 6 products per customer in its retail banking business; better than any rival and more than twice the industry’s average. As one observer wrote, “Wells Fargo has about seventy million customers. In the past thirteen years, during its cross-selling mania, Wells has increased the average number of products, per customer, from about four to more than six. That means it has sold a hundred and forty million more products than it would have otherwise, transferring more of its accounts from that $41 low-end toward the $1000 high-end. Wells Fargo has surely made tens of billions of dollars, and likely hundreds of billions, by employing its aggressive cross-selling approach.”

As this last observation suggests, to achieve these results, Carrie Tolstedt, the head of the community bank--the division that oversaw the branches—along with her executives and managers, put great pressure on bank-branch employees to sell products to its customers aggressively. To give an example, the Wells Fargo board’s report notes that senior management developed 50/50 sales goals for the bank’s different regions. This meant, as the report notes, “That there was an expectation that only half the regions would be able to meet them.” The report goes on to note, “Once set, the sales goals were pushed down to the regions, and ultimately to Wells Fargo retail bank branches, and at each level in the hierarchy, employees were measured on how they performed relative to these goals. They were ranked against one another on their performance relative to goals, and their incentive compensation and promotional opportunities were determined relative to those goals. That system created intense pressure to perform and, in certain areas, local or regional managers imposed excessive pressure on their subordinates.”
Similarly, bank managers used “Motivator” reports which contained monthly, quarterly and year-to-date sales goals, and highlighted sales rankings down to the retail bank district level. “Circulation of the reports — and their focus on sales-based rankings — ramped up pressure on managers, such that some ‘lived and died by’ the Motivator results. Witnesses also described that in some areas there was an extremely competitive environment, driven in significant part by regular rankings.”
Finally, the Community bank had a program called “Jump to January” which focused on branches selling products strongly in January as a prelude to meeting annual sales goals. But over time employees responded to the pressure through bad sales practices for example, by listing friends and family as targets, funding accounts customers opened with small amounts of their own money, opening accounts for customers without their knowledge but then closing them shortly afterwards, providing false phone numbers linked to new accounts so that bank managers could not check them, or withholding likely sales that could have been made in December to reach the ambitious January targets, a process called “sandbagging.”
Slippage and cheats at work.  

Senior executives were aware of such tactics as early as 2002. In that year, a “sales integrity task force” introduced a training program for branch employees, in 2005 an employee wrote to HR about the opening of sham accounts, in 2008, responding to other reports, the bank  began investigating sham accounts, in 2009 two employees complained to a Wells Fargo hotline about such practices, in 2010 management added sales quality measures in assessing branch productivity, (for example 85% of new checking accounts had to be “funded,” i.e., money was deposited in the accounts), in 2011 the bank began firing employees suspected of misconduct, and in that same year the community bank formed a “sales quality project group.”

This record of response suggests that the bank saw the problem not as an ethical one in which the bank and its employees had crossed a red line, but as a management problem which required judicious intervention to minimize misconduct rather than to eliminate it. As one senior manager phrased it, the problem was akin to “jaywalking,” an infraction one could never eliminate but one could contain.

One clue to management’s conception of the issue is their supposition that employee misconduct represented “slippage.” Those familiar with retail environments will hear the resemblance of this term to the notion of “shrinkage,” the belief that a certain percent of goods on the shelves or floor will disappear due to breakage and employee theft. As we have argued, senior managers saw the bank branches as retail outlets. This suggests that employees, by “gaming the system” a phrase senior executives used to describe employee misconduct, were not so much cheating customers as they were ripping off the bank, for example by opening accounts for family members and friends in order to meet sales objectives and win the appropriate incentive pay. This shifted management’s attention from possible customer harm to employee cheating.  

Indeed, there is a longstanding tradition in the anthropological study of work to describe and theorize criminal conduct at work. In a famous book, Cheats at Work, Gerald Mars outlines all the way people rip-off their employers, for example, cashiers not ringing sales and taking the money, or ringing up false refunds and pocketing the money, with the results showing up as inventory shrinkage.

One hypothesis is that in formulating their emotional response to the evidence of employee misconduct, Wells Fargo executives imagined that they were thinking realistically about a work-world where relationships between employers and employees are contested, and some people, when given a chance, are dishonest, particularly when they earn low wages, and feel no loyalty to their employer. Cheating in this sense is one expression of the texture of industrial relations, within which employees and employers fight over pay and working conditions. In 2012, branch employees could earn as little as $11.75 per hour.  Moreover, as the board report notes, “Community Bank leadership regularly likened the retail bank to non-bank retailers, a view that created a tolerance for high employee turnover. The community Bank-wide rolling 12-month average turnover reached at least 30% in every period from January 2011 to December 2015, and as high as 41% for the 12-month period ending in October 2012. Some Community Bank leaders did not view reducing turnover as a priority because they saw high turnover as a normal aspect of a retail business.” The board report goes on to note that Carrie Tolstedt, the community bank’s head had offered, “That there were always people willing to work in Wells Fargo branches.”

Worker stress

This veiled contempt for the “run-of-the-mill” retail worker and the realistic view that employers and their workers are at odds, probably helped senior executives turn away from the evident stresses that at least some branch employees were experiencing. Workers described these stresses to journalists. Consider these two reports.

“Managers kept a board right by the teller line where we would write how many people we had talked to, how many we had referred to a banker and how many sales were closed. At the end of the day, the manager would call out each teller in front of everybody and share their results. It was a frightening experience. If tellers did not have any sales on the board, you did not want to be that person. The last three months were hell. Even though I was reaching my sales goals, it was not enough for them. Every morning I had to sit with my boss and go over the previous day and every single customer’s relationship. I had to tell them why I didn’t force them into opening that third, fourth, fifth checking account that they could have used for Christmas, their son’s birthday, school, a pet and so on. I had to explain why I did not feel comfortable with pushing people into paying for something they did not need. I was so stressed out, I developed shingles. The last straw was when the district manager laughed at me in front of my manager because I explained that I did not feel comfortable with the sales culture and the robotic paragraphs they had us memorize.”

"We would have conference calls with regional presidents and managers coaching us on how to word our selling points so the customer can’t say no. I felt like a cheat. I started losing sleep and got nauseous every Sunday night over the start of the next workweek. 
This year, I reported a customer incident to the corporate office and the ethics line. Soon after, my district manager showed up. Not his usual friendly self, either — he just grabbed my manager and sat in the back office with the door closed. I started to feel sick.  After an hour or so, he walked out. My manager then called me into the back office to give me a performance improvement plan. Retaliation at its finest. I never had any conversation with anyone regarding my performance, or my interactions with customers, lack of sales or my attitude. I felt cornered and just low. For the first time in my career with the company, I did the right thing — and I was reprimanded for it. I almost left without having a backup plan, but then I was offered a job at a dealership. It was a pay cut at first, but is very rewarding compared to what I endured.”

Moreover, the board report notes that there was a direct correlation between sales pressure and the number of terminations and resignations. “Trends in the data show, perhaps not surprisingly, that as sales goals became harder to achieve, the number of allegations and terminations increased and the quality of accounts declined. Thus, the number of sales integrity-related allegations and associated terminations and resignations increased relatively steadily from the second quarter of 2007 and both peaked in the fourth quarter of 2013, when a newspaper article brought to light improper sales practices in Los Angeles.”

It is well known that job stress triggers turnover. This is probably why turnover reached a high of 41% in the year ending in October 2012, a period in which sales pressure was intensifying and was close to its peak.

Persuasion or deception?

There is an additional feature of the selling environment which I suggest shaped management’s response. There is a fine line between persuasion and deception when businesses offer goods or services that are not essential. Consider for example offering a bank customer separate accounts for different purposes, such as home improvement, insurance and travel. Such an offer can complicate a person's task of keeping each account balanced so as not to incur penalties for writing checks against accounts with insufficient funds. But this offer is not all that different from credit unions that offer vacation club or Christmas club accounts in which a person deposits funds but withdraws them only in specified periods.

Indeed, one finding of behavioral economics is that people engage in “mental accounting,” defined as, “the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account.”  The practice is irrational in the sense that I should not save dollars for a vacation if at the same time, I have unpaid credit card debt because I financed home repairs. Better to pay down my credit card debt to save on interest payments incurred, rather than to separately save for my vacation. Yet mental accounting persists partly because people use them to control their impulse to spend money in trivial or wasteful ways that can deprive them of meeting longer term objectives or desires, for example paying tuition or going on a family vacation.

What then are the ethics of persuading people to open multiple checking accounts?  On the one hand, it fits with customers’ innate and preferred mental accounting methods, on the other, it exposes them to the risk of not funding accounts and incurring unwanted bank fees. Most likely, some Wells Fargo customers, those who could keep tabs on their checkbooks, benefited from having several checking accounts, just as others were hurt when they wrote checks against accounts with insufficient funds. 

The same fine line characterizes the sale of many banking products to a single customer; the heart of any cross-selling program.  On the one hand, it offers customers the comfort and simplicity of dealing with just one bank. On the other, it means that customers do not take advantage of better offers that competing banks or other financial service companies proffer, for example, better terms on an auto-instance policy. The classic term “buyer beware” means that it is in the legitimate interests of sellers to mask these costs and instead emphasize the benefits of their products and services. The extreme case clarifies the average ones. Pharmaceutical firms in the U.S. must reveal all the dangerous side effects of the drugs on offer, though in television ads the latter are often verbalized in a more hurried tone than the initial pitch for the drug’s benefits. But Coke and Pepsi and the purveyor of children’s cereal are not required to highlight the long-term debilitating effects of excessive sugar intake on health.

More broadly, it is standard issue advertising to persuade potential buyers by linking products or services to other represented, but not explicitly articulated, needs or wishes. A recent and deliciously witty television ad for the automobile maker Volkswagen (VW) evokes the movie King Kong, by showing the gigantic ape floating through the sky over New York City in order to follow a VW car moving along the streets below; only the car is driven by a lovely blonde woman whose puzzled and then bemused face we glimpse a few times. The reference to King Kong evokes the story of the giant ape falling in love with Ann Darrow, played by Fay Wray, in the original 1933 movie. The ad provokes the simple association that the Ape is in fact following the woman, not the car, in this way linking car buyers to the prospect of either capturing a beautiful blonde (for men) or of being pursued as one (for women). We accept this misdirection, understanding that in an economy when most purchases are discretionary, our desires for goods and services are multisided and are shaped by an underlining plasticity.

The dark side of business

Let me propose the following hypothesis. The backdrop to customer harm, employee cheating with its evident stress and resulting turnover, and the bank’s selling programs, evoked in Wells Fargo’s executives the dark side of business dealings, a side that managers in many companies, I suggest, see as realistic, if unattractive. It underlines for them the exigencies and tradeoffs of doing business, and makes the concept of ethical red lines problematic for them. Confronting what Robert Jackall calls in his seminal work, managers’ “moral mazes,” managers resort to everyday pragmatism and incrementalism, making adjustments on the margin to delimit the destructive consequences of their programs and systems while advancing their interests. As Jackall writes, “a principal managerial virtue and, in fact, managers’ most striking actual characteristic is an essential, pervasive, and thoroughgoing pragmatism.”

This explanation accounts in part for the bank’s incremental approach to addressing the issue of employees gaming the system, a process that on occasion led to customer exploitation. It also sheds some light on the banks’ treatment of whistleblowers. The pattern is clear. In 2009 six employees in Montana sued Wells Fargo, arguing that they had been fired after they complained about unethical practices and sales “gaming.” The case was settled in 2011. In 2010 two fired employees sued the bank alleging that the bank had retaliated against them for complaining about fraudulent and illegal activities. Their case was dismissed in in 2012. In 2011, a manager in Pomona California, “Notified her district manager that bankers in her branch were falsifying bank documents and fraudulently opening accounts. Soon after, she was fired for ‘inappropriate conduct,’ and filed a Department of Labor complaint alleging that she was fired for whistle-blowing. The complaint is still pending.”

This conduct, firing whistle blowers, looks egregious, but it is not without its rationale. The managerial ethic values team players, and in the context of managerial pragmatism this means valuing those who understand the exigencies and tradeoffs that managers arrive at as they bob and weave between their own and their company’s self-interest and the abstract ethical principles which they may very well treasure in their outside lives. In a sense, managers arrive at a compact to support one another in the sometimes necessary but dirty work of doing business.

This dirty work is often evident in the internal political life of a company, in the way in which managers treat each other. Consider the following. A qualified manager is unlucky enough to be associated with the leader of a failed project. He is found “guilty by association,” without anyone explicitly telling him. He soon finds that he is no longer included in certain important meetings, his peers no longer seek his counsel and advice, nor is he selected to participate in a training program for “high potentials” along with his peers. In effect, he experiences a kind of “social death” in which the signals of his demise are all indirect, partly because political coalitions that shape the competition for opportunities and advancement are sub-rosa. His peers can’t befriend him because he was on the “losing side.” A bureaucracy as Jackall notes, is in this sense less an organization for rationally linking means and ends and more a setting for the competition between clans and patrimonial alliances.

Seen in this light, the whistle blower signals that he or she is not a team player, who indicts not only a practice, but the managerial ethic of adjustment which after all imposes a certain psychological cost on those who embody it. Complying with a colleague’s social death is psychologically taxing. Tolerating harm to customers and employees, is psychologically taxing. Whistle blowers threaten to upend the compromise between managers’ attunement to their social survival, and their responsiveness to their own personal ethics. Whistle blowers are therefore isolated, if not punished, even if their charges are later considered seriously and are used to revamp bad practices, particularly those that may sully the company's reputation. I have no direct evidence that the whistle blowers’ charges triggered some of the incremental changes the bank made to deal with the problems of cross-selling products. But I suspect that they did. They killed the messenger but accepted the message.

Corporate Myths as protective defenses
Anthropology, as Abraham Zaleznik notes, “has taught us that myths are used to confront a problem and provide one or more solutions that allay anxiety, put fears and uncertainty to rest, and above all, link the individual to society.” The 19th century novelist Horatio Alger, created the durable American myth of the plucky and honest young boy who by dint of his character and choices can rise from “rags to riches.” It was a myth in the sense that it provided hope to the poor who dreamt of succeeding, and comfort to the wealthy made anxious when viewing the gap between rich and poor. Its message of inclusion helped paper over the extremes of wealth and poverty in America’s “gilded age.” Let me propose that the myth of teams played such a role at Wells Fargo, at least for senior executives. Its salience was one measure of the psychological tax that the bank’s unethical practices imposed on managers’ consciousness, and was a signal of the discrepancy between underlying reality and conscious belief. It protected particularly senior managers who worked at some distance from the trenches, from those truths, that if confronted, could provoke discomfort, anxiety and the experience of cognitive dissonance.
Consider the following. Beginning with Kovacevich, the creator of the bank’s cross-selling strategy, the bank’s senior management has produced, refined and published a vision and values document meant to inspire and guide employee behavior. The statement emphasizes that the bank’s members are not employees but are team members, “Because our people are resources to be invested in, not expenses to be managed — and because teamwork is essential to our success in helping customers.” Describing the banks desired relationships to its customers, the document notes; “We have to earn that trust every day by behaving ethically; rewarding open, honest, two-way communication; and holding ourselves accountable for the decisions we make and the actions we take.” Linking customer relations to employee relations, the document highlights in bold, “We’re a relationship company, but our relationship with our customers are only as strong as our relationships with each other.”
We might dismiss this as simple propaganda, a discourse that is consciously understood by those who propagate it to be a lie. After all it stretches the imagination to consider employees a team when, as we have seen, close to a 1/3 of the community bank’s employees quit every year. But consider the observations of an astute Forbes reporter who visited John Stumpf the bank's CEO before he is was fired by the board in 2016. Reflecting on the banks positioning as “family friendly,” the reporter observes that Stumpf's informality, frugality and family history reflects his genial openness to employees and customers. It is worth quoting his report at some length.
“Wells (Fargo) down-to-earth approach isn't just for public show. You don’t see John Stumpf at the World Economic Forum in Davos and that’s good says Mike Mayo, an analyst at Credit Lyonnais Securities Asia. In contrast to John Thain’s (CEO of Merrill Lynch) $35,000-toilet-adorned office, Wells’ executive suite seems trapped in the 1970s, down to the orange-brown carpeting and tired-looking upholstered chairs in Stumpf’s office. During Forbes ’interview pipes clanged as the heat came up. The CEO’s credenza is cluttered with banking tchotchkes and family pictures, including one of his ­father and mother surrounded by 30-plus grandchildren. But despite his trophy-driven industry, his office is noticeably devoid of plaques or Lucite deal toys. It’s also devoid of something else you’d expect: a door. ‘Around here if you have something to say, you say it, nobody is going to be offended,’ says Stumpf of his policy of no doors on the executive floor. ‘We’ve learned how to disagree without being disagreeable. There’s no tolerance for being passive-aggressive or for having sharp elbows around here.’”   

The reporter goes on to note, “Stumpf’s father was a dairy farmer in the German Catholic enclave of Pierz, Minn., and his 10 children (Stumpf shared a bedroom with his brothers until he got married) were expected to pitch in. From age 10, when his dad added a chicken barn for 10,000 laying hens, Stumpf would rise at 4:30 a.m. to pick eggs; after school, he milked cows. ‘Even though we were very poor financially we learned the value of plural pronouns, we and ours,’ says Stumpf, who has kept his flat prairie accent. There wasn’t a lot of time for I, me and my.’”

“During the harsh winters, the family drank beer (each member had his or her own stein, says a college friend). They also played bridge. (Stumpf still plays, mostly online, sometimes partnering with Buffett’s sister Bertie against her brother or Bill Gates.) But card smarts did not translate at high school; Stumpf graduated in the bottom half of his class, and those bad grades and limited family finances netted him job as a bread maker in a Pierz bakery.”

The picture here is one of modesty, openness, frugality, and the “common touch.” Stumpf does not put on airs, is secure in his sense of self, does not dominate others, and welcomes influence and feedback. As CEO, he appears to embody the features consonant with the bank’s self-concept, as represented in its vision and values statement, that it thrives on team-work. In other words, he can represent what I am calling the myth of teams honestly, an exemplify it to his subordinates. 

To be sure my skeptical reader may counter that it is all for show. But consider the observations of another reporter. “Wells Fargo even has its own version of George Bailey/Jimmy Stewart (from the famous movie “It's a Wonderful Life,” shown on TV in the U.S. every Christmas); CEO John Stumpf, who spins out the kind of corny, homespun sayings you might find embroidered and framed on the wall of Aunt Tilly s lake cabin. ‘When we hire somebody around here, we want to know how much you care, before we care how much you know,’ he says, without the slightest hint of irony as we sit with him at his San Francisco office.”

My own instinct is to agree with this last reporter; that Stumpf held to these beliefs without irony. For example, when Carrie Tolstedt retired as head of the community bank well after the Los Angeles Times first exposed the cross-selling scandal, but before the scandal became headline news, Stumpf gave her a glowing farewell, calling her “a role model for responsible leadership” and “a standard-bearer of our culture.” Unless this statement is cynical it suggests that he saw the scandal as an aberration, the action of only 1% of the employees, and believed as he later told the senate committee investigating the scandal, that Tolstedt had in fact improved customer loyalty which was “top of class among large banks.” Moreover, as we have already noted, “Mr. Stumpf disagreed with senators when they described the illicit sales as part of a deliberate scheme to increase the bank’s bottom line. He said the 5,300 employees who had been terminated over the issue — many of them earning $12 an hour — deserved to lose their jobs. ‘The 5,300 were dishonest, and that is not part of our culture.’”

Stumpf as team coach, not leader

Consider finally the following. When pressed by the senate committee about why he was not now recommending that the board rescind some of the compensation Tolstedt had received upon her retirement (though she later had to forfeit $47.3 million), he responded “I am not part of that process. I want to make sure nothing I say will prejudice their process.” He said this even though he had been board chair since 2010.

This last statement is open to several interpretations, for example, he felt very loyal to Tolstedt which is very likely true. He regarded her as a brilliant community banker who had made good on the banks’ cross-selling strategy. Or, alternatively he was simply evading responsibility. I want to propose a third possibility linked to his idea of the bank as a team; a central plank in the bank’s vision and values statement, the locus of its myth, and the motivating idea behind Stumpf’s presentation of his roots. (“There wasn’t a lot of time (in my family) for I, me and my.”)

Stumpf inherited the cross-selling strategy from Kovacevich. The latter developed the idea while he was the CEO of Norwest and brought it over to Wells Fargo when the two banks merged. He was in essence the father of the bank’s success. Tolstedt in turn executed this strategy, and according to Stumpf, she did so brilliantly. This suggests that Stumpf saw himself more as a steward of a strategy. In team terms, he was the good coach, protecting the framework for the banks governance so that everyone else, particularly those close to the customer, could succeed.

Indeed, the bank itself was quite decentralized and the presidents of the different divisions, such as the community bank, were encouraged to run their pieces of the business as if they owned them. This was one reason why staff members of the corporate (central) legal, risk and HR divisions ultimately had little impact on the community bank, even as they suspected that its cross-selling strategy might have deleterious effects on the bank’s reputation. As the board report notes, “Corporate control functions were constrained by the decentralized organizational structure and a culture of substantial deference to the business units.”

I think the term “deference” is suggestive. As the steward of the successful cross-selling strategy he deferred in spirit to Kovacevich’s legacy as the founding father, and as Tolstedt’s supporter and cheerleader he deferred to her program of executing the strategy. This placed him at many steps removed from the ongoing and visceral experience of the strategy in the trenches and enabled him to represent with great honesty the mythological structure of the bank’s culture, as embodied in its vision and values statement. This is why he could say without embarrassment that the 5,300 employees who were fired were simply dishonest. Moreover, as the CEO, his stance provided emotional cover for other senior managers who identified with him. By internalizing his conviction, they too could take up the bank’s myths about itself as a team system, and so discount the likelihood that they too were engaged in some of the bank’s dirty business.

Myths for elites

What this suggests is that the myth was for the elites, while the “commoners” absorbed the stresses and anxieties of everyday practice. It is striking in this regard that when branch managers on the West Coast complained about punishing sales targets, senior executives saw this “as simply a cover-up for poor management; to them, sales quality and integrity issues had to be resolved through better management, not decreased goals.” In other words, the core tension at the heart of the business model, selling customers products they did not ask for was to be held and managed near and at the bottom rather than at the top of the organization. This can be one consequence of a hierarchical system. The dirty work migrates to the bottom where it creates undue stress, while the organization’s myth, suffusing consciousness at the top, protects the elite from the discomfort and anxiety that the dirty work triggers.

In sum

There is little doubt that Wells Faro exercised undue pressure on its employees to cross sell its products, a central feature of its strategy for success. The impact on particular customers was harmful, though the scale of the exploitation was not great. Individual employees experienced significant stress, many others quit while whistle blowers were fired. Yet senior executives framed the issue as a problem of rogue employees, insisting that its systems, procedures and culture promoted honest work. This happened in part because, looking at the bank as a retail operation they saw employee misconduct as the common and familiar feature of settings in which low wage employees cheat employers by gaming the system to their benefit. “Slippage in the bank was the analogue of “shrinkage” in a retail outlet.

In addition, employees and managers were exposed to the dark side of selling where there is a fine line between persuasion and deception, particularly when customers are buying discretionary goods and services. Confronting the dark side of the business-- cheating, deception, and stressed employees -- which to managers and executives appears as a realistic as against an idealized version of their experience, managers responded pragmatically to contain difficulties rather than confront them. They did not create in their minds or in practice ethical red lines which if fully implemented would have overturned the bank’s business model. Instead, they sought to manage tradeoffs for example, developing training programs, adding sales quality measures and firing rogue employees. This incremental response was consonant with a more general managerial ethic which is to juggle their personal ethical beliefs with the politics of corporate life where, often enough, colleagues are treated poorly and truth is temporized.

Yet this all took place against the backdrop of a “visions and values” statement, that has been in force for decades. The statement lauds team work, the value of every employee and ethical conduct with customers. This statement was part and parcel of a myth-making process in which senior executives believed that the bank was one big team, executives were modest, the company was frugal and its practices and purposes were down to earth. John Stumpf exemplified this myth in his personal being, but did so in part by removing himself from the company’s dirty work. He succeeded the creator of the cross-selling program, Dick Kovacevich and helped sustain its execution by supporting the brilliant community banker Carrie Tolstedt. In this sense, he was the ideal coach to the team rather than its key player. He functioned at an emotional remove from the bank and its work, and this distance enabled him to embody, with full sincerity, the myth of the bank as honest and team centered. Executives who could identify with him could gain succor from this myth’s meaning, which protected them in turn from the anxieties associated with the company's dirty work. This only served to further institutionalize the work itself by facilitating the scapegoating of the “rogue” employee and the whistleblower.


  1. Did the company's stock value increase as a result of cross-retailing? And then also the holdings of any employee stock owning plan?

    I do hope you compile all your posts into a book. It would make fascinating reading.


    1. Yes to the stock value- I don't know about employees My hunch is that since there was such a high degree of turnover most employees had no opportunity to buy the stock at a discount.

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  2. Wonderful. Makes me wonder - are myths so divergent from practice?

  3. Jim- provocative question. I suppose it would not be a myth if it accorded with practice. Did you have something else in mind?

  4. Larry, good read. I have a family member working for Wells. In response to Norbert's question, the employees that were fired earned on average about $15.00 per hour and were not in the position to buy stock. These employees were subjected to great pressure by their supervisors who were at the lower end of the management scale and reported up to middle management etc. A lot of good people were let go because of these practices.

  5. Several months after this story broke (the most recent time in 2016), my husband and I refinanced our mortgage away from Wells Fargo. We had to go into a branch to sign some paperwork and told the branch manager why we were taking this action--because of our outrage about the scandal. The branch manager looked at us with a puzzled look on his face and said that he didn't understand the connection. I wonder if this branch manager also bought into the myth.

  6. A very good read, easy but honest truth-telling, Larry. Like others, I have encouraged the case studies from your blog be compiled into book form. I also hope your followers on LinkedIn take the time to read your fuller works. Few, as you, make the complicated connections of covert motivations in leadership to the business cultures they foster as easy to grasp.

    Having just returned form the US giving reading/lectures from “Broken Places,” Grove/Atlantic (the world breaks everyone, and afterward, many heal stronger in the broken places), I was struck by the reality of a “myth” of good fortune, which interfaced with deepest concern –among parents –that their children and grandchildren had turned their back on America’s “God-given” blessings. Of greatest concern to them was the opiod epidemic, in which many saw the ugliest of profit motives, apparent in your drawing at once distinctions and similarities between “egregious vs corrosive” usury.

    I do have a question about your use of the term “myth.” How are you using it, Larry?

    The quick definition: myth=lie. Makes sense with Wells Fargo. But others have described it as: Myth=at once an external reality which reflects our internal vicissitudes. At a time when corporations and banks have taken hard hits for ruthlessness, yet the interdependence of staff is clear –be this a small branch office, larger inter group, cross agency or even trans national –I hope you may point to case studies of some “happy stories,” where there is safety and vitality impacting profit positively. This will add to the success of your book, am sure.

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