Ethical Issues in Wells Fargo

Business Ethics

UNIVERSITY BUSINESS SCHOOL

PANJAB UNIVERSITY, CHANDIGARH

Submitted To: Submitted By:

Prof. Deepak Kapur Ramneet Singh

MBA Gen Sec-B

Contents
1.0 About the Company .......................................................................................................................... 3
1.1 Community Banking ..................................................................................................................... 3
1.2 Wholesale Banking ....................................................................................................................... 3
1.3 Wealth and Investment Management ............................................................................................ 3
2.0 Values of the Company ..................................................................................................................... 4
3.0 Ethical Issues in Wells Fargo ............................................................................................................. 4
3.1 They feel pressured ....................................................................................................................... 5
3.2 They think meh, its just business. ........................................................................................ 5
3.3 They separate their lives at work from their lives at home. .......................................................... 5
3.4 Safeguards: is it time to bring in the behavioural aspect in Quality and Error control? ............... 6
3.5 A blind spot among senior leaders ................................................................................................ 7
3.6 Deterrents to speaking up.............................................................................................................. 8
3.7 Time to bring in the Behavioural analysis perspective ............................................................... 10
4.0 Summary of the ethical issues ........................................................................................................ 10
5.0 References ...................................................................................................................................... 12
1.0 About the Company

Wells Fargo & Company, incorporated on January 24, 1929, is a bank holding company. The
Company is a diversified financial services company. The Company has three operating
segments: Community Banking, Wholesale Banking, and Wealth and Investment
Management. The Company provides banking, insurance, trust and investments, mortgage
banking, investment banking, retail banking, brokerage, and consumer and commercial
finance through banking stores, the Internet and other distribution channels to consumers,
businesses and institutions in approximately 50 states, the District of Columbia, and in
foreign countries. The Company operates through over 8,700 locations and approximately
13,000 automated teller machines (ATMs). The Company's net loans include approximately
$905,014 million. Its total deposits include approximately $1.2 billion. The Company's total
investment securities include approximately $347.56 million.

1.1 Community Banking

The Company's Community Banking segment offers financial products and services for
consumers and small businesses, including checking and savings accounts, credit and debit
cards, and auto, student and small business lending. Its products also include investment,
insurance and trust services in approximately 40 states and District of Columbia, and
mortgage and home equity loans in all 50 states and District of Columbia through its
Regional Banking and Wells Fargo Home Lending business units. The Community Banking
segment also includes the results of its Corporate Treasury activities net of allocations in
support of the other operating segments and results of investments in its affiliated venture
capital partnerships.

1.2 Wholesale Banking

The Company's Wholesale Banking segment provides financial solutions to businesses across
the United States and around the word. Its products and businesses include Business Banking,
Middle Market Commercial Banking, Government and Institutional Banking, Corporate
Banking, Commercial Real Estate, Treasury Management, Wells Fargo Capital Finance,
Insurance, International, Real Estate Capital Markets, Commercial Mortgage Servicing,
Corporate Trust, Equipment Finance, Wells Fargo Securities, Principal Investments, and
Asset Backed Finance.

1.3 Wealth and Investment Management

The Company's Wealth and Investment Management segment provides a range of

personalized wealth management, investment, and retirement products and services to clients
across the United States-based businesses, including Wells Fargo Advisors, The Private
Bank, Abbot Downing, Wells Fargo Institutional Retirement and Trust, and Wells Fargo
Asset Management. The Company delivers financial planning, private banking, credit,
investment management and fiduciary services to high-net worth and ultra-high-net worth
individuals and families. It also serves clients' brokerage needs, supply retirement and trust
services to institutional clients and provides investment management capabilities to global
institutional clients through separate accounts and the Wells Fargo Funds.

2.0 Values of the Company

Our values should guide every conversation, decision, and interaction. Our values should
anchor every product and service we provide and every channel we operate. If we cant link
what we do to one of our values, we should ask ourselves why were doing it. Its that simple.

We have five primary values that are based on our vision and provide the foundation for
everything we do:

People as a competitive advantage

Ethics
Whats right for customers
Diversity and inclusion
Leadership
Ethics

We strive to be recognized by our stakeholders as setting the standard among the worlds
great companies for integrity and principled performance. This is more than just doing the
right thing. We also have to do it in the right way.

Honesty, trust, and integrity are essential for meeting the highest standards of corporate
governance.

Our ethics are the sum of all the decisions each of us makes every day. Everything we do is
built on trust. It doesnt happen with one transaction, in one day on the job, or in one quarter.
Its earned relationship by relationship.

We want our customers to trust us as their financial resource whether its giving them
sound guidance, helping them reach their financial goals, completing transactions accurately
and promptly, or providing them with products and services to meet their needs.

We want our customers to trust all of us to act as risk managers to ask the right questions,
protect their assets, and help them reach their goals. 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. That's more
important now than ever.

3.0 Ethical Issues in Wells Fargo

The Wells Fargo scandal that broke last year involving fake accounts with real customer
money was a corporate scandal unlike others, and the case offers important lessons for how
companies can avoid creating a culture vulnerable to corruption.
The Wells Fargo scandal was far different. Instead of a select few doing bad things, the
unethical behaviour was widespread at the bank, with thousands of employees engaged in
secretly creating new bank and credit-card accounts for customers without their knowledge,
resulting in overdraft and other fees.
The first impulse is to read the incident as an act of greed and dishonesty plain common
sense isnt it? The fact is not all dishonest people commit fraud. Similarly there are many
who are avaricious but are usually law abiding. The answer lies in the intent or motivation
behind these acts; which is largely formed based on ones personality and the situation where
one is placed. To quote Lawrence E. Cohen and Marcus Felson: Most criminal acts require
convergence in space and time of likely offenders, suitable targets and the absence of capable
guardians against crime. (American Sociological Review, Vol. 44, No. 4 (Aug., 1979), pp.
588-608)
So far, 5,300 Wells Fargo employees have been fired over the issue. And whereas most
headline-making unethical behaviour is aimed at driving financial gain for the organization or
individual, that was less clearly the case here; it seemed more related to employees trying to
meet aggressive sales goals, such as the banks Gr-eight initiative a push to increase the
average number of financial products customers held from six to eight.
The question now is what makes an employee more likely to lock up their moral compass,
even if temporarily? Understanding how such unethical behaviour arose in the first place can
point to practical steps to avoid it and the reputational damage that goes along with it. So here
are four explanations that may have left employees at the bank susceptible to unethical
behaviour:

3.1 They feel pressured

One morality-diminishing factor that was likely at play at Wells Fargo was the presence
of overly aggressive goals and performance pressure. In the face of hard-to-reach objectives
like Wells Fargos Gr-eight campaign, people are more likely to become morally
disengaged, and to consider cheating to make the grade. As a researcher focused the
psychological mechanisms of immoral behavior, including those related to everyday
behaviours, my colleagues and I have found that anxiety at work impacts employees ethics.
Humans opt for self-protection as a survival mechanism in the face of pressure, and become
less concerned about ethics.

3.2 They think meh, its just business.

Another factor can be an 'Its just business' mentality, which can eliminate personal feelings,
values, and ethics from professional situations. Our research has shown that a business
mindset leads to dishonesty and lack of consideration for other things like moral issues. Wells
Fargo employees may have seen their behaviours as justified by simple cost-benefit analyses,
where each new account opened benefited them, with presumably negligible harm to clients.

3.3 They separate their lives at work from their lives at home.
Another factor in unethical behaviour has to do with how we see our identities. My research
shows that when people segment their identities into different rolesparent, professional,
coachrather than integrating these into a more unified whole, it can lead to feelings of in
authenticity and, in turn, unethical behavior. In the Wells Fargo case, that might mean an
employee could have separated their professional role from their personal life to avoid feeling
bad about anything they do at work. Also, they may have justified acting badly with more
ethical behavior outside of work.

Morality matters deeply to us, so we tread very carefully in these matters and go to great
lengths to preserve our positive moral self-image, to an extent that our memory of our
transgressions gets obfuscated over time, which helps explain repeated dishonesty. But
whatever the sources of the scandalous Wells Fargo behaviour, the news raises the issue
of moral muteness, or peoples reluctance to communicate their moral concerns and speak
up about unethical behaviors in the workplace. My experiments in progress show that most
people remain quiet in such situations, especially when it does not harm them personally.
And importantly, peers are less likely than bosses to speak up.
Leaders can promote a see something, say something environment by communicating that
any reports will be followed up on (and how), with steps taken to ensure the safety of those
who speak up. Some of my research in progress shows that encouraging authenticity, or
acting in accord with ones true self, increases speaking up and reduces silence.
By understanding the factors at play, leaders can take steps to prevent unethical behavior and
its high costs.

The bank has recently come under scrutiny for such quotas after it was revealed that for
years, thousands of its employees had been opening unauthorized accounts in order to meet
them. More than 2m such accounts were opened without customers permission and more
than 5,300 Wells Fargo employees have been fired with about 1,000 being dismissed each
year over the past five years.

The bank has apologized for the unauthorized accounts and recently announced a $185m
settlement with US regulators. In addition to Polonskys lawsuit on behalf of employees fired
for not meeting quotas, other lawsuits by shareholders, investors and customers were filed in
September. The Department of Labor is investigating the bank for possible retaliation against
whistleblowers employees who called an ethics line regarding the unauthorized accounts
and were later fired.

3.4 Safeguards: is it time to bring in the behavioural aspect in Quality and Error
control?

The magnitude of this situation warrants thorough and comprehensive review. Specifically,
the committee should thoroughly examine this issue, including: How it is possible that more
than 5,000 employees could bilk customers over the course of five years; the timing, extent
and disposition of customer complaints; whether Wells Fargos sales and compensation
structure incentivized employees to engage in deceptive and abusive practices; and what
additional safeguards may be needed to prevent this type of behaviour.(Senator Robert
Menendez - New Jersey, in his letter to the Chairman of Senate Banking Committee
members)
Another aspect that has come out during the investigations is that the Sales targets were un-
realistic. Wells Fargo encouraged employees to sell eight Wells Fargo products to each
customer; this proved burdensome for them as they struggled to meet exceedingly high
challenging sales quotas and satisfy even more demanding managers.

The Employees angle in most frauds or scams investigationindicates how most of them feel
that they are subject to unfair treatment (both real and perceived) from their employer. This
includes but is not limited to things like not getting that promotion, inadequate remuneration
in a high inflation economy, partiality, lack of recognition, unrealistic goals etc. Getting back
at the employer by engaging in scams/ embezzlements therefore assures them that they are
doing the right thing. In the long haul, ego motives and a sense of superiority over others also
gets into the picture.

Theoretically the incentives are supposed to be based on the objective measures of

performance. Without built-In safeguards, an organisations incentive programme is most
likely to lead the workforce to achieve maximum output at the price of ethical violations
which is what exactly happened in the case of Well Fargo.

The discussion on safe-guards should go hand in hand during the design of the incentive
programmes. Safe-guards in itself should not be limited to Quality Control alone. Specific
behavioural aspects of the individual (this is irrespective of their position in the organisation)
should be observed and noted with the help of Behavioural Science especially when
individuals start to score high in exceeding expectations in anticipation of rewards.But the
fallout is far from over. Hearings last month before the Senates banking committee and
the Houses Financial Services Committee point to further dangerous cultural dynamics
inside Wells Fargo. The grueling testimonies from CEO John Stumpf, coupled with insights
from my industry-wide research into the culture and mindsets of bankers, suggest there is a
blind spot among senior leaders at Wells Fargo, as well as deterrents to speaking up among
the rank and file. Along with fixing the sales culture, the bank will have to address these
critical management issues to prevent the next scandal.

3.5 A blind spot among senior leaders

Despite five years of explicit and repeated warnings, the executive team and the board of
directors were remarkably slow to see the breadth and gravity of this fraud, and to address it
effectively.

According to Stumpfs testimony, a board committee became aware of the fraud at a high
level back in 2011. They had a fuller discussion in 20132014 around the time
when media reports of the illicit behavior first surfaced. Although roughly 1,000 employees
had been fired each year since 2011 for these practices, the board only became very active
on the issue in 2015.

Stumpf testified that he personally became aware in 2013 when, after two years of ineffective
solutions within the business unit, the volume of fake accounts was still increasing. It was yet
another two years before Stumpf brought in consultants in 2015 to investigate the full scope
of impact on consumers.

In examining what took them so long to react, Stumpfs comments portray a leadership team
that refused to believe the sales fraud could be systemic in a culture such as theirs. Founded
in 1852, Wells Fargo and its trademark red stagecoach aim to evoke the values of
plainspoken pioneers and a simpler time. The bank proudly held itself apart from its New
Yorkbased peers after the financial crisis and regularly touted its culture of caring. The
public believed it, rating the brand far more trustworthy than any of its peers of a similar size.

Executive team members, most who have spent decades at the company, concluded this fraud
had to be minor isolated incidents. During both Congressional hearings, Stumpf kept
repeating that the firings totaled only 1% of headcount per year, and that only 1.9% of deposit
accounts could be fraudulent. He also said, Ive always knownthat not everybody will do
it right every day, trying to rationalize this as the work of rogue bad actors and a predictable
part of doing business, as opposed to a systemic failure.

Wells Fargo leaders also seem to be blind to the significance of this crisis both for
consumers and for its own culture. Stumpf noted that initially, the bank didnt realize
customers could be charged fees for these fake accounts, but said, when we finally
connected the dots on customer harm in 2015, the board was very active on this.

3.6 Deterrents to speaking up

This leadership blind spot is the result of misguided reverence for their culture and its ability
to inoculate the bank from systemic problems. It represents a governance breakdown of the
highest order for executives and board members. But it appears that some red flags never
even reached them: Investigations revealed the bank has ignored, discouraged, and even fired
employees who tried to voice concerns about the intimidating culture and unethical practices.

In the worst cases, whistleblowers claim they were fired after reporting violations to the
banks ethics hotline or trying to alert supervisors to illegal behavior. Concerns raised by
other employees were reportedly ignored, including an alleged email sent to Stumpf directly,
and a petition, signed by 5,000 colleagues, that sought to lower sales quotas and combat
unethical conduct. Stumpf called the firings regrettable and assured Congress that the bank
has a policy of non-retaliation against whistleblowers.

But the damage goes beyond the employees who were terminated it sends a signal to
everyone else that they should keep quiet. At best, problem-raisers will be ignored; at worst,
they will lose their jobs. Why risk it? If the bank doesnt care, why should they?

This is one of the most dangerous dynamics to afflict a financial institution. Following the
2008 crisis, regulators have prioritized a healthy banking culture, anchored by effective
challenge, meaning when people question ideas or escalate problems, they are heard and
welcomed, without fear of reprisal. In a large organization, successful risk management
requires all hands on deck. Employees should feel not only comfortable but also accountable
for speaking up.

Wells Fargo is creating the opposite environment where employees are discouraged from
caring or challenging anything.
In addition, a more implicit deterrent to speaking up may be permeating the organization.
During his testimony, Stumpf interrupted a detailed exchange saying, I care about outcomes,
not process. If this mentality pervades the bank, it could exacerbate an existing industry
bias.

For the bank, any obstacles to speaking up whether deliberate or inadvertent must be
eradicated. That starts with listening to and protecting the employees who raise concerns.
And managers at all levels must take explicit steps to encourage questions and collaborative
problem-solving. Its important to care about how things are done, not just the end results.

The problems from blind spots at the top and stifled voices within the ranks will not
disappear when sales goals do. Without doubt, there are many great people working at Wells
Fargo, and they deserve better. Senior leaders need to see the truth about the banks culture
and engage all employees in the effort to repair it.

Just when you thought that big banker greed had surely bottomed out with the 2008 Wall
Street crash and bailout, along comes Wells Fargo, burrowing even deeper into the ethical
slime to reach a previously unimaginable level of corporate depravity.

Its one thing for the giants of finance to cook the books or defraud investors, but top
executives of Wells Fargo have been profiteering for years by literally forcing their
employees to rob the banks customers. Rather than promoting a culture of service,
executives have pushed a high-pressure sales culture since at least 2009, demanding that
frontline employees meet extreme quotas of selling myriad unnecessary bank products to
common depositors who just wanted a simple checking account. Employees were expected to
load each customer with at least eight accounts, and staffers were monitored constantly on
meeting their quotas fail and theyd be fired.

Thats why the bosses sales culture turned employees into a syndicate of bank robbers. The
thievery was systemic and not subtle: Half a million customers were secretly issued credit
cards that they hadnt requested. Fake email accounts for online services were set up without
customers knowledge. Debit cards were issued and activated without telling customers.
Depositors money was moved from one account to another. Signatures were forged and,
of course, Wells Fargo collected fees for all these bogus transactions, boosting its profits.
This is not a case of a few bankers gone rogue, but of a whole institution gone rogue, rotting
from the head down. Some stories of corporate villainy make me throw up my hands in
astonishment. But this one is so putrid, it makes me literally throw up.

The sorry, still-evolving saga of Wells Fargo systematically stealing from its small depositors
is a gag-inducing story of executive-suite greed. Start at the very top, with CEO John Stumpf,
who claimed at a recent Senate hearing on the scandal to be shocked and deeply sorry that
thousands of his employees had been opening bogus accounts in the names of non-English-
speaking and elderly customers.
The silver-haired bank chief assured senators that he and other top bosses knew nothing about
this massive breach of the banks code of ethics, blaming low-level employees and firing
5,300 of them.

But the chief is not the only one who should be held accountable at Wells Fargo. Where were
its board members, who are empowered and duty bound to set, monitor and assure ethnical
corporate behavior from the top down? For seven years, this 15-member board of governance
sat idle, apparently incurious about the corporations flagrant, widespread thievery, even after
the report by the Los Angeles Times exposed it. Far from investigating and clamping down,
the board kept shoving multimillion-dollar bonuses at Stumpf and other top executives. This
is a powerhouse board, made up of top executives from other corporations, former
government financial officials and big-time academics. And they are extremely well paid to
be diligent, receiving as much as $400,000 a year to keep Wells Fargo honest.

Whats at work here is the ethical rot that now consumes Americas entire corporate system
a system that steals from the many to further enrich the few, buying off the integrity and
vigilance of those who run it. Excuse me, but I have to go throw up now

3.7 Time to bring in the Behavioural analysis perspective

An Individuals propensity to commit fraud could wary even if he is under similar

environmental pressures. In the event there is a change in environment, the probability of the
fraudulent behaviour would also change. It is noted that while there could be situational
conditions that would normally discourage most people (even here there are exceptions no
doubt) from committing fraud; there are situations that encourage fraud so much so that even
the average person may be lured into participating in it.

There is an urgent need of more research into the behaviour that brings about the act; so that
it at the slightest hint of a red flag; necessary action can be initiated. Most importantly, its
time that Organisations bring in behavioural analysis in all fields of governance, compliance
and risk management; that which is applicable to all employees within the same.

4.0 Summary of the ethical issues

Mr. John Stumpf failed. He failed to oversee and control the culture of the
organization he was responsible for, even if it was not a major part of bank.
Of course, we don't know what else in the organization might be affected by the
mildew and mold from the retail area, Mr. Timothy Sloan now has that responsibility.
The situation has ramifications for the idea of banks that are "too big to fail" and for
banks deal in instruments that are too sophisticated and complex to control risk.

As mentioned before, it is my belief that the CEO of an organization defines the culture of his
or her organization and everything he or she does should be to promote and back up that
culture. When the culture goes awry, it is the CEO's responsibility, especially if the culture
that results lasts for a decade or more. Wells Fargo has just presented the world with a prime
example of how this principle works. The bank has released reports over the past few days
indicating that the leadership of the bank had been restructured with Mr. Sloan moving into a
position to become the next CEO. I can't stress enough how important it is to have someone
in an organization held responsible for the culture of the organization.

A real leader, in my mind, whether in business, the military, or in politics, the religious
community or whatever, must be in charge of the culture. And, when the culture breaks
apartand, breaks apart for an extended period of timethere must be a change in
leadership. Otherwise confidence is lost in the organization and business cannot go on as
usual.

What happened within Wells Fargo may seem to many to be a minor thing. But, it seemed to
represent the cultureat least as it was forthcoming in one sector of the bank. How this
imploded into other areas is not really known at this time.
5.0 References
[1] https://www.linkedin.com/pulse/case-study-behaviour-wells-fargo-scam-anil-r-nair

[2] http://seekingalpha.com/article/4011907-wells-fargo-case-study-failure-ceo-leading-
organizational-culture

[3] https://www.wellsfargo.com/

[4] http://fortune.com/2016/09/15/wells-fargo-scandal/

[5] https://www.theguardian.com/business/2016/oct/01/wells-fargo-investigations-lawsuits-john-
stumpf

[6] https://www.wsj.com/articles/wells-fargo-found-issues-with-its-ethics-line-1478811903

[7] https://www.nytimes.com/2016/10/12/business/dealbook/at-wells-fargo-complaints-about-
fraudulent-accounts-since-2005.html?_r=0