Ethical Failures at Wells Fargo in Its Account Opening Scandal

Business Ethics and Positive Social Change at Wells Fargo

In early 2016, Wells Fargo was formally implicated in a corporate scandal which reflected the failure of its officers and directors to fulfill their duties and responsibilities. The purpose of this paper is to provide an analysis of a case study concerning this ethical scandal involving Wells Fargo to evaluate its business ethics within the context of positive social change. To this end, the paper presents the essential details of the event, its proximate causes and its negative impact on society. In addition, an examination of the causes of the crisis and a discussion concerning what steps might have prevented this scandal are followed by a description concerning what this writer would have done differently to effect positive social change instead of bilking innocent clients. Finally, the paper provides a summary of the research and important findings concerning these issues in the conclusion.

Review and Discussion

Brief overview of Wells Fargo today

Founded in in March 1852 by Henry Wells and William G. Fargo and currently headquartered in San Francisco, Wells Fargo (hereinafter alternatively “the company”) competes in the financial services sector providing a wide range of banking and other consumer finance services (About Wells Fargo, 2021). At present, the company operates the following business segments:

· Community Banking: This business segment provides an array of financial services and products, including credit and debit cards, checking and savings accounts, as well as loans for automobiles, students, and small businesses;

· Wholesale Banking: This business unit offers expert guidance concerning potential financial solutions for businesses in the U.S. and abroad;

· Wealth & Investment Management: This business unit provides individualized wealth management and investment services as well as various retirement services and products to clients in the United States; and,

· Other: Finally, this business unit also offers wealth, investment and management services but provides them through community banking distribution channels (Wells Fargo profile, 2021).

The company’s hard-won reputation for responsible business practices and stewardship of its clients’ financial resources, though, took a major hit in early 2016 when Wells Fargo was implicated in a major financial scandal that continues to adversely affect its operations today and these issues are discussed below.

What are the essential details of the event, and what do you see as the causes of the crisis and/or negative impact to society?

After more than a century and a half of providing high quality financial products and services to a global clientele and successfully surviving the subprime mortgage crisis of 2007 to 2009, Wells Fargo was the third-largest bank in the U.S. and its reputation was solid by year-end 2015 (Witman, 2018). In this regard, a case study concerning the company reports that, “By the end of 2015, Wells Fargo was the most trusted bank in the world, and the bank’s reputation for strategic discipline led pundits to list Wells Fargo as a bank that would stand the test of time” (Corporate governance and ethics, p. 233). The event that led to this precipitous decline in the company’s reputation involved Wells Fargo employees created approximately one-and-a-half million fake bank accounts as well as issuing more than a half-million consumer credit cards to clients that did not order them (Restrepo, 2017). One Wells Fargo executive conceded that the company simply told its clients that “they would be getting a credit card” (as cited in Restrepo, 2017, p.1690).

Not surprisingly, the company’s admission of such widespread wrongdoing had severe implications, including a fine of $185 million by the federal government as well as another $142 million which was used to settle a nationwide class action suit by clients affected by the company’s illegal financial activities. Although the precise internal costs that were incurred by the company to set up and administer these fraudulent accounts remains unknown, the class action suit revealed that Wells Fargo had exacted more than $2.5 million charging its clients fees and fines for these unauthorized accounts and credit cards (Restrepo, 2017).

While regulators, clients and banking sector analysts were left scratching their collective heads concerning how this ethical fiasco could occur in the first place, the facts that emerged made it clear that a major failure in corporate governance was primarily responsible for this outcome. Although $2.5 million may seem like so much corporate chump-change for a global financial services company, the negative impact extended to the entire American society and beyond. For instance, as Restrepo (2019) notes, “Conscious disregard of their duties by directors and officers affects not only the company itself, but also its consumers and potentially the larger economy” (p. 1692). The adverse impact of the Wells Fargo scandal are well documented as well as the underlying failures in corporate governance that allowed it to occur and these issues are discussed below.

Where do you see failures in corporate governance?

During period from 2011 and 2015, an incentive program was implemented at the company that lacked the requisite corporate governance oversight to ensure that the program was administered appropriately and legally. More troubling still, some industry analysts believe that this lack of corporate governance actually started long before the incentive program resulted in the above-described scandal. For instance, according to Restrepo (2017) during the 5-year period from 2011 to 2015, “Wells Fargo’s demanding corporate culture and sales practices pushed employees to open these fake accounts without customer authorization in order to meet high sales quotas. In fact, there is evidence that these practices reached as far back as 2002, and possibly even earlier” (p. 1599). While there was plenty of blame to go around, there is a general consensus that this profound failure in the ethical culture and climate of the company was directly attributable to the top leadership team at Wells Fargo as discussed below.

What caused the failures in the ethical culture and climate of the company?

Although it is impossible to accurately discern the thought processes of the company’s executives and board of directors in promoting an incentive program for its employees without first ensuring that it was administered properly and ethically, most authorities agree that the primary cause of the failure was pure and simple greed. Indeed, the top leadership team at Wells Fargo was informed time and again by whistleblowers and others who recognized the widespread wrongdoing taking place at the company but nothing was done in response. For example, Restrepo (2017) points out that, “The Wells Fargo Board of Directors received consistent warning signs, or ‘red flags,’ of such practices as early as 2005, but failed to act, allowing the fraud to escalate” (p. 1601). One of the more unsettling findings that emerged from the analysis of this major scandal was the harsh reality that there is little or nothing that can be done when these types of unethical business practices are not only ignored by a company’s top leadership but tacitly encouraged as well as discussed below.

What ethical policy might prevent this scenario from occurring in the future?

Although the above-described unethical business practices by Wells Fargo resulted in a significant blow to the company’s reputation and bottom line, it was just one among a series of similar scandals in the financial services sector that went on to have adverse effects at the global level. The historical record confirms that many people will try to get away with whatever they can for as long as they can, even if it is illegal, and this was certainly the case at Wells Fargo. Unfortunately, no ethical policy could have prevented this scenario and some question whether any such policy can prevent a recurrence in the future (Restrepo, 2017).

Indeed, the company had a 37-page mission statement in place at the time of the above-described scandal that went to great lengths to assure clients and potential clients just how darn ethical and trustworthy they were, but this hyperbolic boilerplate did absolutely nothing to stop the unethical business practices for occurring and even worsening over time. A major part of the problem in this type of scenario is just how insulated corporate executives are by statutes and the courts from being held personally accountable for even blatantly criminal wrongdoing, and these legal shields have kept the vast majority of these felons out of prison to date. In this regard, Restrepo (2017) emphasizes that, “Presently, directors are rarely held personally liable for failing to fulfill their fiduciary duties” (p. 1601).

This assertion is supported by the fact that virtually none of the major actors in the subprime mortgage crisis from 2007 to 2008 were held personally liable (some even received enormous monetary bonuses for their role), and little or nothing was done in the interim to address the type of criminal shenanigans that were taking place at Wells Fargo. Ethical policies only work when they are observed and enforced, and the research is consistent in showing that this was not the case at Wells Fargo from 2011 to 2015, and perhaps even longer. This failure suggests that even the most well-crafted ethical policies are essential toothless when it comes to ensuring ethical conduct by a company (Haugh, 2018). Based on his analysis of the Wells Fargo scandal and similar events in the recent past, Restrepo (2017) concludes that, “The magnitude and reoccurrence of these types of scandals brings into question the effectiveness of judicial approaches to corporate governance, suggesting that there is no good mechanism to effectively police director misconduct” (emphasis added) (p. 1692).

If you were a leader within this company, what choices would you have made differently to effect positive social change?