The Advisors' Blog

– Broc Romanek

This column from LA Times Michael Hiltzik about the Wells Fargo scandal is quite powerful & raises some good points. This Reuters piece says that the company’s board was successful in getting a voluntary clawback from the CEO to the tune of $41 million in unvested equity. It will be interesting to see if institutional investors give the directors here a pass – or does this rise to the Enron level? Here’s an excerpt from the LA Times column:

But symbolism cuts both ways, positively and negatively. Stumpf’s management, or lack of it, gives the lie to Wells Fargo’s facile “vision and values” statement, which states (next to a photo of Stumpf that could have been taken directly from a Brooks Bros. catalog page), “Everything we do is built on trust….It’s earned relationship by relationship.” No one takes such blather seriously, but seldom is it undermined as vividly by corporate behavior as it is at Wells Fargo.

In any event, more than symbolism is at issue. Wells Fargo’s share price fell by as much as 10% after the settlement; as of Monday, it’s still down 8%. That’s a cost to shareholders. The $185-million settlement will also come out of their pockets, not senior executives’. The questions sure to be raised by regulators about whether Wells Fargo has become too big to manage will be a further threat, as will the prospect of further civil actions or even criminal prosecution.

Warren’s question about clawing back Tolstedt’s pay is apt, but it doesn’t go far enough. The clawback provision appearing in the company’s proxy statement applies to “improper or grossly negligent failure, including in a supervisory capacity, to identify, escalate, monitor or manage… risks material to the Company.” How could that not apply to the chairman and CEO on whose watch the very reputation of the company was shattered, opening it up to perhaps billions of dollars in civil judgments and redoubled scrutiny by banking regulators? Stumpf received more than $100 million in compensation in 2011-15, which would make for a good start in covering the company’s penalties.

That brings us to the other players in this tragic drama: the Wells Fargo Board of Directors. The firm’s proxy statement brims with testimonials to how the directors’ “leadership and management experience” enhances Wells’ performance. But the only skill they really seem to exhibit is the ability (to quote George Orwell) to hold onto their board seats as if with “prehensile bottoms.”

Some have served since the 1990s, and one for nearly a quarter-century. That suggests that cobwebs have been growing in the board suite for years. The board cost Wells Fargo $20.8 million in compensation during the five years of scandal, each member collecting an average of nearly $300,000 a year. What Wells Fargo’s shareholders got for this money was scandal and a $185-million bill.