'The Fish Rots From the Head': Why Fixing Wells Fargo's Culture Is Taking So Long

Wells Fargo & Co. CEO Charles Scharf found himself on a conference call with analysts this month having to explain why his bank was still in trouble with regulators a decade after a massive phantom-account scandal began coming to light.

“While our risk and regulatory hasn’t always followed a straight line, and we have more work to do, we’ve made significant progress,” Scharf said on the Jan. 13 call.

Not enough progress in the eyes of Rohit Chopra, the director of the Consumer Financial Protection Bureau, who a month earlier unveiled a $3.7 billion settlement with the bank—the largest the agency had ever negotiated — over its mismanagement of auto loans, mortgages and deposit accounts.

“Over the past several years, Wells Fargo executives have taken steps to fix longstanding problems, but it is also clear that they are not making rapid progress,” Chopra said. “We are concerned that the bank’s product launches, growth initiatives, and other efforts to increase profits have delayed needed reform.”

The efforts at San Francisco-based Wells Fargo, which before the scandal had been one of the nation’s most-lauded banks, serve as a cautionary tale for legal department and corporate leaders everywhere, say professors studying culture and ethics, as well as legal department leaders at other companies.

They say it’s striking how quickly a company culture can go awry and how difficult it is to fix when it does. That’s especially true at big companies such as Wells Fargo, which employs nearly 250,000 people.

Leaders at the top of the organization are responsible for establishing that culture, said Charles Elson, founding director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

“The fish rots from the head backward, and it is the same thing in organizations,” Elson said.

The initial scandal that threw the company into the spotlight was a cross-selling sales program that drove low-level employees, including tellers, to open 3.5 million accounts in customers’ names — without their knowledge — in order to meet stratospheric sales goals.

The leaders at the top at the time are long gone. Scharf is the third CEO since the scandal broke, and General Counsel Ellen Patterson is the third legal chief.

The Office of the Comptroller two years ago slapped James Strother, the bank’s general counsel from 2004 to 2017, with a $3.5 million fine, finding that he and the legal department were “instrumental in maintaining the … business model that resulted in rampant criminal and legal violations.”

Indeed, a 2017 report from the law firm Shearman & Sterling, which conducted an internal investigation of the sham-account scandal, found that although in-house attorneys were warning as early as 2011 that aggressive sales goals were a “root cause” of frequent employee firings for “sales integrity” issues, the attorneys viewed it as an employment issue instead of a consumer issue.

Senior leaders of the legal department did not fully consider the patterns of behavior and their ultimate consequences, the report found, and instead zeroed in on discrete legal problems as they arose.

In short, according to a 2018 analysis of the report by Eversheds Sutherland, “They simply could not see the forest for the trees.”

Part of the reason the sales program went off the rails is that it relied on such low-level employees, many without business or ethics training or a college education, said O.C. Ferrell, director of the Center for Ethical Cultures at Auburn University’s Harbert College of Business.

He said they were simply trying to do as they were told in a culture based solely on performance rather than on broader values, such as treating customers with respect, said Ferrell, who has researched the bank’s troubles.

Words Versus Actions

Karen Seymour, who served as general counsel of Goldman Sachs from 2018 to 2021, said she has learned a lot about culture during her 37-year legal career, which included serving as outside counsel for numerous institutions.

“The culture typically is not what compliance is, but what the company executives respond to and what the perception is of what is valued and affirmed,” said Seymour, now a partner at Sullivan & Cromwell.

Seymour wouldn’t discuss Wells Fargo, saying she isn’t privy to its inner workings, but she said fixing a culture that’s gone awry requires relentless communication about what new values the organization now embraces.

True change takes time, she said, in part because employees initially might not believe executives’ pronouncements about an organization’s new priorities.

“A lot of companies say, ‘Well, let’s start by giving a good speech about how we’ve changed,’ but it’s not that easy,” she said.

“Culture is really, really hard because of skepticism about veracity of the intentions of those who are trying to change it, particularly when the culture is making money,” Seymour said.

Merrie Spaeth, a longtime public relations and communications consultant based in Dallas, said executives’ efforts to change culture will fail if they’re built on a rigid set of rules.

“To change culture, you can’t just tell people what not to do,” she said. “Legal departments have a history of saying, ‘Here are all the things you can’t do, you can’t say, you can’t represent.’ What you have to give people is an aspirational goal.”

‘Legacy Issues’

Wells Fargo declined to be interviewed for this article. However, on this month’s conference call and in a Dec. 20 press release commenting on the $3.7 billion CFPB settlement, Scharf cast the deal as putting to rest what were primarily “legacy issues.”

“Many of the required actions were substantially complete prior to this announcement,” he said.

The settlement resolved charges that Wells Fargo misapplied loan payments, wrongfully foreclosed on homes, illegally repossessed vehicles, incorrectly assessed fees and interest and committed other illegal activity that affected more than 16 million customer accounts.

“We have made significant progress over the last three years and are a different company today,” Scharf said in the press release. “We remain committed to doing the right thing for our customers and working closely with our regulators and others to deal appropriately with any issue that arises.”

The statement from Chopra, the CFPB director, doesn’t share Scharf’s these-are-rearview-mirror-issues tone. He noted that the bank has a massive consumer-banking arm, which means its misconduct has had a sweeping impact.

“Put simply, Wells Fargo is a corporate recidivist that puts one-third of American householders at risk of harm. Finding a permanent resolution to this bank’s pattern of unlawful behavior is a top priority,” he wrote. He said the $3.7 billion settlement was merely “an important step toward that goal.”

Paul Fadlil, a professor of management at the University of North Florida who has studied Wells Fargo’s ethical lapses, said righting the ship requires winning back the trust of both customers and employees.

Fadlil said he believes Wells Fargo has learned its lesson. But that doesn’t make the monumental challenge of transforming the bank any easier.

He noted that the phantom-account scandal was born out of the Great Recession, which left banks scrambling to find ways to bolster profits. He said that the new culture must be strong enough to withstand such temptations even when the next economic slump hits.

“You can’t patch it after you’ve had such a radical shift,” he said. “You’ve now got to tear this thing down to its studs and rebuild a new culture.”