Case Study: The Stagecoach Scandal

Henry Wells and William G. Fargo structured a joint-stock company, Wells, Fargo & Company, on March 18, 1852, to provide express banking services to California during the California Gold Rush. They offered banking and express delivery of gold and anything else valuable. In 1858, the company expanded its services into overland mail and was awarded a government contract to carry mail from the southeast to California for the U.S. Post Office in their famous six-horse stagecoach. Over time, Wells Fargo developed new banking concepts and changed the way people banked. In the 1980s Wells Fargo became the seventh-largest bank in the nation and launched its online service.

Wells Fargo began cross-selling all services including credit cards, mortgages, and treasury management. They persuaded each retail customer to buy an average of six products, roughly twice the level of the previous decade. It was an aggressive sales culture with daily mandatory quotas, and employees began reporting that sales goals were unrealistic and unobtainable. A former New Jersey employee called an ethics hotline and sent an email to human resources in 2013, flagging unethical sales activities he was being instructed to do, and was subsequently terminated. There were deficiencies with a decentralized organization resulting in constrained corporate control. The local business units would address any issues only locally. For instance, if something was wrong, the chief risk officer in the retail bank would report it to the head of the retail bank only and they would handle the issue. It would never reach the corporate level.

In 2016, the Wells Fargo account fraud scandal came to light, and they announced that a $185 million fine would be paid to federal regulators and the city of Los Angeles to settle allegations that their employees had created millions of fake financial accounts for customers in order to get bonuses. Over five thousand employees were dismissed due to their conduct over a span of five years that lead to the $185 million payout. The conduct dated back to at least 2011 and involved more than 1.5 million checking and savings accounts and about 500,000 credit card accounts, with many customers getting hit with unexpected fees, according to federal officials. The year before the scandal came to light, the company made $20 billion.

Wells Fargo reconfigured incentives at the branch level to emphasize customer service instead of cross-selling metrics, and product sales goals were eliminated. The company also developed new procedures for verifying account openings and introduced additional training and control mechanisms to prevent violations. They also now spend more money on compliance. A third party helped them design a short survey for employees to determine needs and address issues. Senior leadership now visits local branches to interact with team members and address any needs. Now, if something happens at the local branch level, the chief risk officer reports to the corporate chief risk officer as well.

Appropriate training of relevant individuals can help them to identify what is causing lower sales and then recommend a solution. Wells Fargo bred a culture of unethical behavior, setting unrealistic sales goals for its employees and encouraging them to game the system in order to keep their jobs. That is why training, compensation management, and career development are all important in preventing these types of situations.