March 9, 2020; Washington Post
“Strong boards are essential to strong governance,” noted Rep. Maxine Waters (D-CA), chair of the US House Financial Services Committee last Friday. At NPQ, we often write about failures of nonprofit governance, but here Rep. Waters was talking about failed board governance at Wells Fargo, the nation’s fourth-largest bank, with an estimated $1.9 trillion in assets.
Last Friday, Rep. Waters also called for two Wells Fargo board members, chairwoman Elizabeth Duke and fellow board member James Quigley, to be “shown the door.” On Monday, Wells Fargo responded, announcing that both Duke and Quigley had resigned. “Duke and Quigley were scheduled to appear before Waters’s committee Wednesday. Their resignations were effective Sunday,” reports Renae Merle for the Washington Post.
What spurred these resignations? Last week, the House Financial Services Committee released a 113-page report, titled The Real Wells Fargo: Board and Management Failures, Consumer Abuses and Ineffective Regulatory Oversight, that found that the bank had been too slow to reform itself in the wake of a series of scandals that documented widespread fraud in consumer banking business, including the opening of 3.5 million false accounts.
So extreme was Wells Fargo’s fraud that in early 2018 the Federal Reserve took the unprecedented action of freezing asset growth at the bank. Some felt Wells Fargo should have suffered more. Erik Gordon, a professor at the University of Michigan’s Ross School of Business, remarked at the time that, “The bank is lucky it is too big to shut down. A smaller bank might have lost its banking licenses.”
Under the circumstances, one might have expected the Wells Fargo board to be accommodating of regulators, to help clear the company’s name. Apparently not. “The committee’s report threatens to deepen the bank’s problems,” writes Merle. “The report found the bank repeatedly failed to live up to regulators’ demands that it repay consumers and weren’t aggressive about addressing its cultural problems, despite public promises.”
Adding to Wells Fargo’s woes, Merle notes, “Last month, the bank reached a $3 billion settlement with the Justice Department and the Securities and Exchange Commission, acknowledging that for more than a decade, thousands of employees falsified records, forged signatures and misused customers’ personal information to meet unrealistic sales goals, opening millions of accounts consumers didn’t want in the process.”
Among the committee report’s findings were the following:
(A) financial regulators knew about serious, enterprise-wide deficiencies at Wells Fargo for years without taking public enforcement action;
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(B) Wells Fargo’s board of directors failed to ensure management could competently address the Company’s risk management deficiencies;
(C) Wells Fargo and CFPB [Consumer Financial Protection Bureau] political appointees had backchannel communications regarding the CFPB’s Compliance Risk Management Consent Order;
(D) Wells Fargo’s board of directors allowed management to repeatedly submit materially deficient plans to regulators in response to the consent orders;
(E) both Wells Fargo’s board and management prioritized financial and other considerations above fixing the issues identified by regulators;
(F) Wells Fargo’s board did not hold senior management accountable for repeatedly failing to meet regulators’ expectations;
(G) former Wells Fargo CEO Timothy J. Sloan gave inaccurate and misleading testimony to Congress during a March 2019 Committee hearing; and,
(H) the potential for widespread consumer abuse still remains at Wells Fargo.
As for those board members who resigned, the report indicates, “Committee staff’s review of these documents revealed that Duke was not fulfilling her obligation to oversee management’s compliance with the 2016 Sales Practices consent orders.” James Quigley, who had served as chair of Wells Fargo’s audit committee, “exhibited a similar lack of urgency in his engagement with the Bank’s regulators and a reluctance to oversee the Bank’s efforts to meet its obligations under the 2016 Sales Practices Consent Orders.”
The bank’s new CEO, Charles Scharf, is scheduled to appear before the Financial Services Committee this week and will seek to begin to repair Wells Fargo’s relationship with congressional representatives and regulators. Clearly, he will have his work cut out for him.—Steve Dubb