Wells Fargo faces costly overhaul of
bankrupt sales culture
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[October 12, 2016]
By Dan Freed and E. Scott Reckard
(Reuters) - Embroiled in a scandal over
unauthorized customer accounts, Wells Fargo & Co <WFC.N> faces a steep
challenge in overhauling its hard-charging sales culture without gutting
profits.
Until recently, Wells staffers labored under ambitious quotas while
executives boasted to Wall Street about “cross-selling” each customer
multiple accounts.
That system collapsed with revelations that thousands of employees
opened as many as 2 million accounts without customer permission,
leading to a $185 million fine in September. But the problems ahead
extend far beyond regulatory penalties, investigations and lawsuits.
Executives will have to dismantle and rebuild systems of sales
incentives and performance management that date back two decades, said
retail banking experts, including two consultants who have worked for
Wells Fargo. That will require heavy spending on hiring, training and
installing safeguards against abuses.
"They have to retrain their entire sales culture going back years," said
Paul Miller, an analyst at FBR Capital markets. "It's a huge job."
Wells Fargo spokesman Oscar Suris declined to comment for this story.
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On Monday, bank CEO John Stumpf and President Tim Sloan led a conference
call with 500 executives to lay out responses to the scandal, including
the addition of 2,000 risk management employees and a series of branch
tours by the new head of retail banking, according to the Wall Street
Journal.
Management said the bank had lost some retail banking business and could
lose more.
“It’s going to be harder for awhile, and we get that," Sloan said,
according to the Journal.
Dan Kleinman - a San Francisco-based consultant who has worked with
Wells Fargo on and off since the 1970s - predicted it would take the
bank 3-5 years to rebuild its sales and management structures, which he
called a "Herculean task.”
Retraining could involve as many as 100,000 staffers at more than 6,000
locations. Some other potential costs are less obvious, such as
recruiting and retaining the necessary talent.
"The question is whether the type of folks you want as employees will
even work for the bank," Kleinman said. "Its reputation is soiled.”
SLASHED PROFIT FORECASTS
Most stock analysts covering Wells Fargo have cut profit forecasts,
citing fallout from the scandal. Fitch Ratings also cut the bank's
credit rating outlook to "negative," citing potential profit erosion.
The bank ditched its sales quotas on Oct. 1, amid political pressure.
Stumpf has said he still "loves" cross-selling, but he used the word
sparingly while fielding withering questions from the Senate Banking
Committee. Stumpf explained that it was “shorthand for deepening
relationships."
Some industry experts agree that the bank’s failures stem more from poor
management than from the mere idea of selling customers multiple
accounts, which isn’t unique to Wells.
Citigroup Inc <C.N> predecessor Citicorp was one of the first companies
to encourage cross-selling in banking in the late 1970s under former CEO
Walter Wriston, according to financial journalist and author Philip
Zweig, whose biography of Wriston was published in 1996.
"There's nothing inherently wrong with cross-selling," Zweig said. "The
Wells Fargo scandal is the result of greed, perverse incentives, lack of
controls ... and just plain bad management."
SHORT-SIGHTED STRATEGY
Wells Fargo embraced cross-selling about two decades ago, as
“supermarket” banking gained popularity as a business model. By 1999,
Wells Fargo's annual report referred to "stores" rather than "branches."
Kleinman, a sales compensation expert who worked at Wells Fargo in the
1970s and 1980s, saw the shift in corporate culture taking hold by 2003,
when he returned as a consultant.
Retail operations were headed at the time by Stumpf, then executive vice
president of community banking, and Carrie Tolstedt, then regional
banking executive vice president. Kleinman recalled being summoned to a
big meeting with large audio-visual displays on sales strategy.
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Protestors gather
outside the Wells Fargo & Co corporate campus in Manhattan, New York
City, U.S., October 6, 2016. REUTERS/Brendan McDermid/File Photo
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“I walked into basically a corporate sales event, pumping people up,
very different than the culture I had seen before,” he said.
Now Stumpf is battling to survive as CEO. Tolstedt retired as head
of community banking in July amid investigations into the bank’s
high-pressure sale culture. Her $125 million severance package has
since sparked widespread criticism. The two executives forfeited $41
million and $19 million in unvested stock, respectively, in response
to the blowback.
Michael Moebs - a Wells Fargo executive in the 1970s and later a
consultant to the bank for two decades - said the bank’s quota
system would have been more appropriate for selling cars than car
loans.
Because retail banks sell ongoing services, measuring long-term
customer service and satisfaction is far more important than
short-term sales figures, said Moebs, now a banking consultant based
in Lake Bluff, Ill.
“You're not just selling a product, but establishing a
relationship," he said.
A CRUCIAL ‘PIVOT’
Since Wells agreed to a regulatory settlement with the Consumer
Financial Protection Bureau on Sept. 8, executives have denied that
the bank's sales quotas and culture caused the widespread abuses.
Chief Financial Officer John Shrewsberry has said Wells Fargo's
customers were still happy and its employees were productive.
"I think we can make this pivot in a way that protects our business
model," he said at an investor conference last month.
Wells has tried before to curtail gaming of sales quotas. In 2014,
the bank monitored certain statistics as indicators of unauthorized
account openings, one former Los Angeles-area branch manager told
Reuters.
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In a “quality sales report card,” the bank set limits on the number
of accounts that went unused - but the limits were so high as to
undercut any serious reform, said the former manager, who declined
to be identified because he now works for a Wells competitor.
The bank directed managers, for instance, to ensure that no more
than 45 percent of debit cards went without activation, and no more
than 27.5 percent of new accounts went unfunded, the former manager
said. The "report cards" were also cited in a 2015 federal lawsuit
filed in San Francisco by employees alleging unauthorized account
openings.
Suris, the Wells Fargo spokesman, declined to comment on the bank's
efforts to track unused accounts.
Moebs, the consultant, said any effective reform effort would
include more sophisticated employee incentives, such as bonuses that
vest over several years with sustained growth in sales and customer
satisfaction.
The cost of such efforts would cut into short-term profits, he said,
but with the ultimate payoff of customer and employee loyalty.
"Like the rebuilding of any sports team,” Moebs said, “it takes
time, money and talent."
(Reporting by Dan Freed in New York and E. Scott Reckard in Laguna
Beach, California; additional reporting by Patrick Rucker; Editing
by Lauren Tara LaCapra and Brian Thevenot)
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