Source: Erik M./Pacific/Barcroft Images ‘Bad Apple’ Behavior or a Spoiled Barrel: An Analysis of Wells Fargo’s Crisis Response to Alleged Culture Flaws Submitted to the 2017 Arthur W. Page Society and Institute for Public Relations Case Study Competition Abstract Who’s held accountable when deceptive practices are revealed in a company’s operations – those conducting the unethical behavior or company leadership? Wells Fargo continues to publicly grapple with this question as it mitigates damages from a fraudulent account scandal. Initial leadership response seemingly laid blame on a few ‘bad apples,’ but former employees pointed to a cross-sell-driven culture breeding bad behavior. The disparity between these viewpoints resulted in a controversy that gained intense stakeholder attention. This case study examines Wells Fargo’s crisis response to the scandal, as well as impacts to its financials, reputation and character. 1 Table of Contents Overview………………………………………………………………………………………..... 3 Company Background………………………………………………………………………... 3-6 1. Wells Fargo History……………………………………………….………………….... 3-5 2. Corporate Reputation…………………………………………………………………….. 5 3. Corporate Culture……………………………………………………………………… 5-6 Fraudulent Account Activity Timeline (2011 to 2016)…........................................................ 6-7 Wells Fargo’s Actions and Response……………………………………………………….. 7-10 Cultural Disconnect………………………………………………………………………… 10-14 1. Employee Response in the Media…………………………..………………………. 10-12 2. Corporate Values and Character…………………………………………………...... 13-14 Public Response…………………………………………………………………………….. 14-15 1. Media Response…………………………………………………………………...… 14-15 2. Policymaker Response………………………………………………………………….. 15 Shareholder Response…………………………………………………………………………. 15 Impact on Financials and Reputation…………………………………………………...… 16-17 Wells Fargo’s Challenges………………………………………………………………...… 18-19 References…………………………………………………………………………………… 20-22 Appendix A…………………………………………………………………………………...… 23 Appendix B………………………………………………………………………………...…… 24 2 Overview “If any of these things transpired, it's distressing and it's not who Wells Fargo is...” - Wells Fargo statement to NPR, October 2016 On May 5, 2015, the Los Angeles City Attorney filed a lawsuit against Wells Fargo for allegedly opening accounts without customer authorization. Sixteen months later, Wells Fargo announced it would pay $185 million in fines and $5 million in customer remediation for fraudulent account activities occurring between 2011 and 2015. The news media, customers and policymakers immediately sought answers for how Wells Fargo, America’s ‘Main Street bank,’ allowed this to happen. Early comments from company leadership, including the CEO and CFO, seemed to blame the activities on a few ‘bad apples’ who did not reflect the company’s broader culture. Former employees countered the ‘bad apple’ claims with vivid accounts of a high pressure, cross-sell-driven work environment breeding unethical behavior (Arnold, 2016, para. 1). The stark contrast between Wells Fargo’s preached “culture of caring” and the deceptive actions of 5,300 employees left stakeholders wondering whether company leadership recognized the potential cultural challenges and knew what actions were needed in order to right the ship. While reading this case study, remember that the challenges discussed do not solely apply to Wells Fargo and the highly scrutinized banking industry. A broad range of organizations, from car manufacturers to government departments (Picoult, 2016, para. 6), have and will continue to be confronted by empowered stakeholder groups for alleged deceptive business practices. To best manage growing stakeholder demands for corporate authenticity, company and communications leadership must be prepared to defend who a company is and how it acts. Company Background 1. Wells Fargo History Wells Fargo & Company (NYSE: WFC) is a financial services company headquartered in San Francisco, CA. American businessmen Henry Wells and William G. Fargo founded Wells, Fargo & 3 Company on March 18, 1852, in New York City. Wells and Fargo sought to capitalize on the California Gold Rush by providing banking and express services in the west (Encyclopedia Britannica, para. 1). As explained by the company, “[i]n the boom and bust economy of the 1850s, Wells Fargo earned a reputation of trust by dealing rapidly and responsibly with people’s money” (2016b, para. 3). Wells Fargo also operated and owned the largest stagecoach empire in the world from 1852 to 1918 (Wells Fargo & Company, 2016b). The company continues to be linked with the stagecoach emblem, signifying its heritage and the small-town values that built the business. Wells Fargo has since grown to become the third largest bank in the United States by assets. It was ranked no. 27 on Fortune’s 2016 list of America’s largest corporations by revenue. The company is divided into four primary business segments – wholesale banking, brokerage and retirement, community banking and consumer lending – and offers approximately 90 separate lines of business (Carlozo, 2015). According to the company’s September 2015 earnings report, the community banking division led all other divisions, producing $13.6 billion or 62 percent of total company revenues (CSI Market, 2016). Wells Fargo’s community banking division currently operates more than 8,000 retail banking locations across the United States, making the division the face of Wells Fargo. Source: CSI Market Wells Fargo’s success captured the attention of Berkshire Hathaway’s Warren Buffett and in 1990 he announced to shareholders that he would be investing $290 million in the bank (Gandel, 2014). From 1990 to 2015, Berkshire Hathaway continued to accumulate shares in Wells Fargo, which culminated in a 10% ownership stake as of March 2016. In a February 2016 interview with CNBC, Buffett called Wells Fargo ‘a terrific operation’ and said the company CEO John Stumpf had done a 4 ‘fabulous job’ (Stempel, 2016). As far back as 2009, Buffett explained to Fortune’s Adam Lashinsky that “those guys [Wells Fargo] have gone their own way. That doesn't mean that everything they've done has been right. But they've never felt compelled to do anything because other banks were doing it” (2009b, para. 1). The company’s innovative approach to business focuses on consumers and midsize businesses, in addition to cross-selling products and services. Lashinsky elucidated upon the bank’s approach, noting, “Wells relentlessly cross-sells everything, including credit cards and mortgages (to consumers) and treasury-management services and insurance (to businesses). Wells persuades each retail customer to buy an average of almost six products, roughly twice the level of a decade ago” (2009a, para. 9). 2. Corporate Reputation Wells Fargo is known as America’s ‘Main Street bank’ in contrast to its ‘Wall Street bank’ competitors. During the 2008 recession, when many banks struggled with the financial crisis, Wells Fargo emerged comparatively unscathed (The Economist, 2013). The bank’s stability amidst crisis further bolstered its image and reaffirmed the approval of major investors like Berkshire Hathaway’s Warren Buffett. Wells Fargo ranked no. 74 in reputation out of the top 100 most visible U.S. companies among the public in the 2015 Harris Poll Reputation Quotient – well ahead of its major competitors JP Morgan, Citigroup and Bank of America. The company has also consistently appeared on Fortune’s Most Admired Companies list – the “definitive report card on corporate reputations” (Fortune, 2016) – ranking 25 in 2016, 22 in 2015 and 35 in 2014. Further evidence of Wells Fargo’s broad recognition as one of the top banks in North America, Global Finance named it as the ‘Best Developed Market Bank’ on its 2016 list. 3. Corporate Culture Heralded as a business built on relationships and trust, Wells Fargo employees, directors and executive officers are expected to follow its Code of Ethics, which stresses individual accountability and seeking out guidance in situations of doubt. Actions are also to be guided by the company’s vision to satisfy customer’s financial needs and help them succeed financially. Wells Fargo’s “culture of caring” 5 asserts that “success depends on how much we care for each other, our customers, our communities, and our stockholders” (Wells Fargo & Company, 2016a, para. 4). The company’s focus on people is further reflected in its brand and slogan, “Together we’ll go far,” which emphasizes strong relationships. Wells Fargo also promotes a “One Wells Fargo” mindset, meaning “we [Wells Fargo] show our customers we know them at every moment of the relationship by making it easy for them to do business, providing guidance to them, and ensuring they feel valued” (Wells Fargo & Company, 2016a, para. 9). Source: The Vision and Values of Wells Fargo Fraudulent Account Activity Timeline (2011 to 2016) Between 2011 and 2015, Wells Fargo employees reportedly opened two million fraudulent debit and credit card accounts without customer knowledge. Roughly 5,300 Wells Fargo staff members were terminated over this same span of time for “sales-related misconduct” (Stumpf, 2016b, p. 3). In comparing those terminated to Wells Fargo’s total retail bank branch workforce, the company fired approximately one percent of employees each year for performing unethical banking practices. Dec. 21, 2013 The Los Angeles Times publishes a report on Wells Fargo’s alleged pressure-cooker work environment and unethical employee behavior. May 5, 2015 The