“I accept full responsibility.” That’s how Wells Fargo head honcho John Stumpf began his Tuesday morning testimony before the Senate over the bank’s opening of up to 2 million fraudulent retail accounts in the past five years. He then took it a step further and noted that the bank’s board - which he chairs - “has the tools to hold senior management accountable.”
That is, if his fellow board members recommend that any executive bonuses be returned, he’d accept.
He may have intended the admission as an olive branch to his congressional inquisitors, but they were unfortunately way more interested in his blood. Sen. Elizabeth Warren seemed particularly eager to flay the executive, asking pointedly whether his claim of responsibility would involve resigning or handing back any bonus cash. His answer ("No") prompted some unsolicited friendly advice from the Senator.
“You should resign,” Warren said. For good measure, she added that Stumpf ought to be “criminally investigated” for touting the bank’s cross-selling system even as he failed to inform investors of the mounting claims of fraud arising from that very program.
But a rare second round of interrogation provided a more interesting line of questioning, when Warren pried further into Stumpf’s attitude toward clawbacks of bonuses for the executives overseeing divisions where oversight lapses occurred. When pressed, Stumpf refused to say whether any bonuses should be rescinded.
“I don’t want to prejudice the board,” Stumpf said, explaining that the Human Resources Committee decides compensation decisions. That includes whether the board will consider holding back some of the $125 million in stock-based pay owed to Carrie Tolstedt, the former head of community banking who has borne the brunt of the blame for the scandal.
But what the exchange really did was highlight the impotence of clawback policies intended to keep executives honest. Since the financial crisis, lawmakers have proposed these measures as essential items in the prudential toolkit, helping ensure that when something truly egregious happens at a big bank, executives will feel it in their pocketbooks.
Yet the Wells Fargo crisis proven to be an object lesson in the ineptitude of these policies, at least as they are enacted at a massive bank like Wells Fargo.
Part of the Dodd-Frank suite of regulatory cudgels, clawbacks rules are still being hammered out by the SEC. Still, the major national banks all have clawback policies of one sort or another, giving their boards the option to hold back bonuses in the event of serious misbehavior.
In the case of Wells Fargo, the compensation committee can choose to claw back pay for various reasons, including for misconduct that does “reputational harm” to the company and “materially inaccurate performance metrics, whether or not the executive was responsible for the inaccuracy.”
Wells Fargo’s scandal has easily met both those conditions. And even though Stumpf told the Senate Banking Committee that the misconduct was “not a material event” for the purposes of securities law, it's hard to see any scenario in which cross-selling performance metrics were not affected.
But the timeline of the ordeal suggests that the board thought differently. Stumpf said that board members learned of the epidemic of fake accounts in late 2013 or 2014. Yet Stumpf, Tolstedt and the rest of the executive team continued receiving their bonuses in those and subsequent years. According to Warren’s estimates, Stumpf’s effective income from stock awards and price gains was around $200 million during that time.
Even if the board decides that it would be prudent to withhold some of the executive’s pay, the damage has been done. The crisis bubbled under the surface, largely unbeknownst to clients and investors, for at least five years, without any meaningful action from the compensation group at Wells Fargo. Should they act now, it would be more of a public relations move than an actual incentive measure.
Interestingly, Stumpf’s own bonus pay didn’t seem to hinge on matters related to the scandal during its early years. His incentive compensation had more to do with broader profitability measures than internal operations or performance metrics, such as the “record cross-sell and deposit levels” that helped Tolstedt earn her lucre.
But in 2014 and 2015, the executive committee began noting specific corporate agenda items Stumpf had undertaken. In 2014 that included Stumpf’s role in “continuing to enhance our approaches to risk management and operational excellence.” In 2015 his bonus relied in part on “reinforcing our risk culture and promoting proactive risk management.”
Those also happened to be the years when, according to Stumpf’s testimony, Wells Fargo was actively remediating the huge oversight lapses that ended up claiming the jobs for some 5,300 employees.
That timing could be mere happenstance, but it underlines the problem with bonus incentives and clawbacks. When it might have mattered, Stumpf wasn’t being graded on risk management. Once he could brag about righting the ship, he was being rewarded handsomely for it. And whatever the board decides to do, it’s unlikely that the punishment will amount to anything near the $200 million Stumpf earned in the past five years.
Whatever remediations the incentive system at Wells Fargo needs to keep executives in line, it’s probably not Stumpf who will take the lead in proposing them. As the CEO and board chairman said during his testimony: “I'm not an expert in compensation.”