Wells Fargo & Company is facing significant additional penalties for its poor oversight related to 2016 revelations of charging millions of customers for bank accounts they did not want and for auto insurance they did not need.. “Across a range of responsibilities, we simply expect much more of boards of directors than ever before,” said Jerome H. Powell, Ms. Yellen’s successor as Chairman of the Federal Reserve Board in a speech in August. “There is no reason to expect that to change.”
Mr. Powell served as the top Federal Reserve official overseeing the negotiations with Wells Fargo regarding the penalties announced in early February. The bank, repeatedly penalized by regulators since then, heard early in January, 2018, that the central bank planned stiff new penalties. The Fed’s central demand: no further growth until it proved that its governance was substantially improved. No further asset growth above its current level of about $2 trillion, and the bank needs to submit a cleanup plan.
In addition, the Fed wanted more change to the board, on which many directors had been replaced and a new chairman installed in January. The regulators had taken notice of public anger about the government’s past practice of taking action against corporations without holding individuals also responsible. Fed officials emphasized to Wells the importance of “refreshing the board,” said people who participated in the negotiations. Bank executives responded that they already planned to replace four more directors. That would leave no more than three directors who had been around during the misconduct, which appeared to satisfy the Fed. The central bank also alerted Wells that Michael Gibson, the Fed’s top regulator, planned to write public letters to two former Wells chairmen, scolding them for their inadequate oversight.
From Mr. Gibson’s letter to former chairman John Stumpf:
“The Federal Reserve Board is issuing this letter to you with respect to your tenure as Chair of the board of directors of Wells Fargo & Company (WFC) from 2010 to 2016. As Chair, it was your responsibility to lead the WFC board in its oversight of the firm’s business and
operations. With respect to that responsibility, it was incumbent upon you as leader of the WFC board to ensure that the business strategies approved by the board were consistent with the risk management capabilities of the firm. It was also incumbent on you to ensure that the WFC board had sufficient information to carry out its responsibilities….
…In addition, according to the April 10, 2017, Sales Practices Investigation Report
(Report), you were aware of specific sales practice problems over the years in your management capacity at the firm. However, as Chair, you did not ensure that the full board received detailed and timely reporting from senior management. Moreover, you did not appear to initiate any serious investigation or inquiry into the sales practices issues (or any other compliance issues that you may have been aware of at the time) or put a proposal to do so to the WFC board.
You also continued to support the sales goals that were a major cause of the problem, and the senior executives who were most responsible for the failures, and, as detailed in the Report, you resisted attempts by other directors to hold executives accountable even when the other directors had become aware of the seriousness of the compliance and conduct issues…”
The settlement is an attempt by the Fed to impress upon banks that their boards of directors should be vigorous, independent watchdogs — and if they fail, there will be consequences. That reflects a shift from regulators’ historically hands-off approach to corporate boards. Let us hope that boards and their chairmen across the globe are taking note of these actions by regulators to reinforce the accountability of all for their sins of both omission and commission.