Wells Fargo Claws Back Additional $72 Million From John Stumpf, Former Retail Banking Head

It's been a bad start to the week for bank CEOs and ex-CEOs.

Hours after Barclays chief executive Jes Staley was slammed with a regulatory probe and learned he would see substantial cuts to his compensation after he tried to "unmask" a whistleblower, the board of Wells Fargo said it has clawed back an additional $72 million of pay from the two former execs it holds responsible for last year's biggest banking scandal, namely the bank's unprecedented cross-selling practices which went on for years, and which, too, resulted in numerous whistleblowers being silenced.

According to a 113-page board committee report released on Monday, directors of the bank decided to hold back more pay than disclosed last year from ex-CEO John Stumpf and former retail bank leader Carrie Tolstedt, who departed the bank shortly before the scandal brke out. Among the reasons, as summarized by the WSJ, "the board felt misled about the extent of sales abuses that went back to 2002 and resulted in a $185 million fine and two congressional inquiries."

In its report, the board said as of last Friday, it decided to claw back from Mr. Stumpf an additional $28 million of incentive compensation paid in March 2016 under an equity grant made in 2013. In September it announced $41 million in clawbacks from Mr. Stumpf.

The board is also clawing back Ms. Tolstedt’s outstanding stock options worth about $47.3 million, following $19 million in earlier clawback activity. That brings total clawbacks to $183 million, according to the board report. That is one of the largest company clawbacks in recent history.

The report described Ms. Tolstedt’s work on tackling sales practices problems—including allegations of fake accounts being opened for unsuspecting customers—as “insufficient.” She and some of her top managers ran the division as “insular and defensive,” not liking “to be challenged or hear negative information.”

The Wells board alleged that it didn’t know that 5,300 employees had been fired over five years related to sales practices at the bank until federal regulators and a city official announced the penalty last September. The board’s results cap a six-month independent investigation that has not only rocked the country’s third largest bank by assets but also the broader banking industry, with dozens of firms examining their own sales practices at the behest of regulators.

The scandal fallout is far from contained however as many directors on the San Francisco bank’s board now face their own scrutiny. Last week, proxy advisory firm Institutional Shareholder Services Inc. suggested Wells Fargo investors vote against 12 of the bank’s 15 directors at the firm’s annual meeting April 25. The bank also continues to face federal and state investigations about its sales practices.

Some further details from the report, per the WSJ:

  • At one board meeting in October 2015, Ms. Tolstedt gave a presentation that directors later felt “minimized and understated problems” at her unit. At a May 2015 meeting, she told some board members 230 people had been terminated over sales-practice issues, a number far short of the aggregate total.
  • As early as 2012, some top Wells Fargo retail banking and risk executives knew the firm had a problem with its strategy of “cross selling” multiple products to the same customer. The issue grew with a Los Angeles Times story on the topic and a 2015 lawsuit by the Los Angeles City Attorney.

The bank’s board wrestled with how widespread the problem was. “Stumpf was by nature an optimistic executive who refused to believe that the sales model was seriously impaired,” according to the report. “He was too late and too slow to call for inspection of or critical challenge to the basic business model.”

Ah yes, the "too optimistic" excuse.

* * *

While Stumpf has been thrown under the bus again, his successor as CEO, Timothy Sloan, has been largely clearly of any wrongdoing: he was among eight other executives who didn’t receive 2016 cash bonuses, and who received certain equity clawbacks. He hasn’t had other pay clawed back, in part because he wasn’t closely involved in overseeing the retail unit until recently.

Both Stumpf and Sloan participated in the board’s investigation, a person familiar with the process said. Ms. Tolstedt didn’t participate on advice of her lawyer, according to the report.

The bank’s directors also faulted the lender’s decentralized organization and the autonomy it gave business heads who were encouraged to “run the business like they own it.” Functions including risk and human resources reported into the unit heads without enough companywide attention, the report added.

While Sloan is safe, Tolstedt was repeatedly singled out: the executive, whose rise once paralleled Wells Fargo’s own success, was singled out 142 times in the report. At one point, it said she was “scared to death” of taking a step that could hurt her unit’s sales figures. At another, it said there was “no evidence that Tolstedt showed serious concern about the effects of improper sales practices on Wells Fargo’s customers.” It explained the $47 million clawback by saying “that cause existed for terminating Tolstedt’s employment.”

In late 2015, key board members including lead independent director Stephen Sanger pushed Mr. Stumpf to remove Ms. Tolstedt from her role. But Mr. Stumpf declined, saying that Ms. Tolstedt, while at times controlling, was “the best banker in America.”

 

Ms. Tolstedt stayed for another six months before being moved out of her role. The board “should have been more forceful in pushing Stumpf to change leadership,” the committee concluded.

 

The report, which was approved by all the board’s independent directors, didn’t call for any other top-level clawbacks or terminations. In February, the bank announced the firing of four retail banking executives related to the scandal.

As reported previously, umproper sales practices began to escalate as far back as 2002, years earlier than the bank has agreed to check for consumer harm, the report noted. The bank has said it is going back an additional two years beyond what regulators called for in last year’s consent orders. By 2004, a Wells Fargo’s internal investigations employee wrote to management in the group about sales issues, but the board report found “no evidence” that the memo or its recommendations “were further escalated.”

In the end, Stumpf's "optimism" turns out to have been unjustified.