Wells Fargo’s terrible, horrible, no-good, very bad week

John Stumpf, chairman and chief executive officer of Wells Fargo & Co., speaks during the 2015 Fortune Global Forum in San Francisco, California, on Nov. 2, 2015. CREDIT: Bloomberg photo by David Paul Morris)

Wells Fargo CEO John Stumpf started the year off on something of a throne. In January, the investment research firm Morningstar named him “CEO of the Year” for 2015, noting that he “guided the bank through a difficult period in the industry and shunned activities that put profits ahead of customers.”

Fast forward nine months, and Stumpf is on the hot seat instead. Last week, his bank was fined $185 million in penalties after employees, in effect, put money before customers. Subject to aggressive sales goals, some two million accounts opened by Wells Fargo workers may have been unauthorized, created without customers’ knowledge and “often racking up fees or other charges,” according to the Consumer Financial Protection Bureau.

Federal prosecutors have reportedly launched an investigation into the company’s sales tactics. The bank’s stock has dropped 9 percent since the news hit. And Stumpf has been called to Capitol Hill to testify before the Senate Banking Committee, which is surely eager to hear him explain how Wells Fargo had fired 5,300 employees over a period of five years while the executive who ran the community banking unit has amassed compensation in vested stock, options and retirement benefits that, according to an analysis from Bloomberg, was valued at $90 million this past week.

The past week of devastating headlines for the nation’s now second largest bank by market value — in more bad news, it lost that crown to J.P. Morgan this week — could deal a major blow to Wells Fargo’s reputation, say communications advisers and management professors. In the Wells Fargo scandal, they see a case study that illustrates the perils of aggressive sales goals – risky enough, in Wells Fargo’s case, that the bank said it would eliminate them altogether starting Jan. 1. They point to the damage in trust that could be done to a brand that has sought to distinguish itself for its not-like-Wall-Street ways. And they question executives’ initial comments about the company’s culture, which seemed to isolate bad actors from the corporate whole and shift the blame to low-level employees.

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“There are not 5,000 bad apples,” said Maurice Schweitzer, a professor at the University of Pennsylvania’s Wharton School who studies ethical decision-making. “It was as if whole-scale divisions of people were put under unrealistic expectations, [and] told to turn in numbers.”

Since news of the penalties erupted last week, Wells Fargo has taken out full-page ads in major newspapers including The Washington Post expressing its regret and taking “full responsibility.” It said it has refunded customers’ fees for unauthorized accounts. And it said it has improved its communication, training and compliance, adding steps to confirm account openings, and eliminating the product sales goals in retail banking.

Yet experts in corporate reputation management questioned comments made by the bank’s executives since news of the scandal hit. At a financial services conference in New York Tuesday, Wells Fargo CFO John Shrewsberry appeared to blame employees for the unauthorized accounts, saying “it was really more at the lower end of the performance scale, where people apparently were making bad choices to hang on to their job,” according to CNBC. A Wall Street Journal article on Tuesday included a headline that said Stumpf “lays blame with bad employees,” quoting him as saying “there was no incentive to do bad things” and that the bad behavior “in no way reflects our culture.” Stumpf, the Journal explained, “initially wouldn’t comment on who was ultimately responsible for the practices and sales-driven culture.”

The report noted that Stumpf later said, through a spokesperson, that “I feel accountable and our leadership team feels accountable,” remarks he echoed in an interview with The Washington Post and with CNBC’s Jim Cramer. In the CNBC interview, Stumpf again said the unauthorized accounts were not representative of the company’s culture, but started out the interview by apologizing.

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“To the extent that we don’t get it right 100 percent of the time,” Stumpf said, ” ’cause that’s our goal — if we don’t make that plan, I’m responsible. I’m accountable.”

Melissa Arnoff, who leads the corporate reputation practice at the communications firm Levick, graded Wells Fargo’s response as “starting off poorly, but getting better. The fact that [the CEO] waited so long to say anything at all — and then the first thing [Stumpf] said is ‘it’s the employees fault?’ Obviously, yes, it is the employees who created the accounts. But there’s something wrong with the internal system if this went on for five years and involved at least 5,300 employees.”

Others pointed out the problems of trying to distance the company’s overall culture from those who created the phony accounts. Irving Schenkler, a professor of management communication at New York University, said that if the finger is pointed too sharply at lower-level workers, it “could cause unintended consequences or backlash,” sparking disgruntled employees to come forward or current workers to lose trust in leadership. “It could breed cynicism,” he said.

Richele Messick, a spokesperson for Wells Fargo, said in an email that the company has made “substantial investments in additional monitoring and controls” and said that “we have made fundamental changes to help ensure team members are not being pressured to sell products, customers are receiving the right solutions for their financial needs, our customer-focused culture is upheld at all times and that customer satisfaction is high.” In a follow-up phone call, she said “we have shared that we have been making changes to our processes, our controls, our training, our incentives for several years.”

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Meanwhile, Anthony Johndrow, CEO of a reputation management advisory firm in New York, said that for banks like Wells Fargo, a reputation hit like the current scandal could be particularly damaging. The so-called “reputation gap” between how customers of a bank view the company and how non-customers view it is much wider than in other industries. Since the financial crisis, customers have gone from disliking banks in general but liking their own bank to hating the banks and being just okay with their own banker, he says. That makes the risk of losing the faith and trust of their own customers that much more serious.

“When you have a massive scandal like this, which basically puts Wells Fargo in the role of villain of their customers,” he said, “you’ve really threatened that strength they have with their customers.”

One part of Wells Fargo’s response that got better reviews was its decision to do away with its product-based sales goals. “Wow,” said Lisa Ordóñez, a professor of management at the University of Arizona who studies goal-setting. At Wells Fargo, bank employees were pushed to “cross-sell” different types of accounts to customers, with goals of reaching as many as eight accounts per account holder, according to a complaint filed by the Los Angeles City Attorney. The complaint also said daily sales for each branch and each sales employee were “reported and discussed by Wells Fargo’s district managers four times a day.”

An investigation by the Los Angeles Times into the sales practices back in 2013 reported that branch managers had to commit to 120 percent of daily numbers and tellers had to come up with at least 100 sales of financial services per quarter. Aggressive sales goals are frequently cited in anonymous employee reviews on Glassdoor.com, a career web site.

One question, of course, is what will replace it. Decades of research have shown that it’s effective to set specific, challenging goals for employees. But the potential downsides — unethical behavior, distorted appetites for risk — get far less attention, Ordóñez says, pointing to several recent scandals at organizations where audacious goals were set. From Volkswagen (where the “diesel-gate” scandal came amid a push to become the world’s largest automaker) to the Veterans Administration (where a 14-day scheduling goal was said to lead to widespread cheating) to Wells Fargo, Ordóñez said, “there’s just example after example after example. If you set tough goals, and you don’t monitor them, frankly, you’re asking for this kind of behavior.”

Ordóñez has researched how multiple goals can wear people down over time, leading to greater unethical behavior. And she wrote a paper with Wharton’s Schweitzer called “Goals Gone Wild” which argues that the “systematic harm caused by goal setting has been largely ignored.”

In any company, Schweitzer says, “when everybody to your left and right is turning in numbers you can’t possibly reach without cheating, and everybody’s getting rewarded for it, and your leadership’s basically telling you to turn in those numbers — it takes a very unusual person to blow the whistle or not fall into that pattern.”

Of course, the next round of reviews for how Wells Fargo is managing its crisis will come next week, when Stumpf heads to Capitol Hill. While there, says Johndrow, he’s likely to face the Catch-22 of responding to questions about what he knew and when.

Saying he did know about the behavior would cause its own set of problems. Yet saying the opposite to a Senate committee, particularly for banks that have dealt with the “too big to fail” image for years, isn’t much better. As Johndrow puts it: If Stumpf was “to say ‘we’re too big for me to be aware of this’ — it just doesn’t work.”