Wells Fargo chief executive John Stumpf, fighting to keep his job amid a national political furore, will forgo more than $41 million (€36 million) of shares and salary as the bank’s board investigates how employees opened legions of bogus accounts for customers.
It’s a swift turn for one of the industry’s most exalted leaders, marking the biggest forfeiture of compensation from a major US bank chief since at least the 2008 financial crisis. But it may not be enough to spare Stumpf another lashing when he returns to Capitol Hill on Thursday. Last week, Senator Elizabeth Warren demanded he resign for “gutless leadership” after he blamed abuses on low-wage employees.
Giving up pay “is a smack on the head, but it doesn’t end the question of whether Mr. Stumpf should be allowed to head a bank,” Erik Gordon, a law professor at the University of Michigan in Ann Arbor. “He is responsible for the culture and he knew or should have known about a practice that was so wide-spread and well-known in the bank.”
Stumpf told employees in a memo that he offered to give up $41 million in unvested stock, which reflected his performance back to 2013, and the board accepted. Former community banking chief Carrie Tolstedt will forgo about $19 million in unvested stock, and agreed not to cash in outstanding options during the review, the lender said. She has left the firm, after previously planning to retire at year-end. Neither Stumpf nor Tolstedt will get a bonus for this year.
Wells Fargo is under intense pressure to show it’s holding leaders accountable before Stumpf testifies to the House Financial Services Committee, after government investigations found branch employees potentially created two million deposit and credit-card accounts without authorisation. The CEO faced withering questions from lawmakers on both sides of the aisle at a Senate hearing last week, a rare moment of bipartisanship.
“We are deeply concerned by these matters, and we are committed to ensuring that all aspects of the company’s business are conducted with integrity, transparency and oversight,” Stephen Sanger, the board’s lead independent director, said in the statement. “We will proceed with a sense of urgency but will take the time we need to conduct a thorough investigation.”
The bank already waited too long to start sanctioning top executives, said Isaac Boltansky, an analyst at Compass Point Research & Trading.
“It’s a dollar short and a day late,” he said. “Lawmakers will focus intently on this coming two days before a congressional grilling, therefore appearing to be more about optics than substance.”
A special panel of independent directors will lead the company’s review, working with the board’s human resources committee and the law firm Shearman & Sterling, according to the statement. The investigation may lead to further compensation changes or employment actions, the company said.
That could include evaluating whether top executives including Stumpf should keep their posts, according to a person with knowledge of the panel’s deliberations, who asked not to be identified because they’re confidential.
Stumpf, 63, serves as both CEO and chairman after guiding Wells Fargo through the financial crisis, expanding mortgage lending while rivals retreated and adding Wall Street operations. Under his watch, the firm generated returns that were the envy of the industry and turned it into the world’s most valuable bank – a crown it ceded to JPMorgan Chase as the scandal widened this month.
Stumpf’s forfeiture dwarfs the $19.3 million he was awarded for his work in 2015. It’s also a much stiffer price than what JPMorgan CEO Jamie Dimon paid when his board found he bore “ultimate responsibility” for botched trades in a London office that lost more than $6.2 billion. In that case, directors cut Dimon’s 2012 pay in half to $11.5 million.
But there also have been costlier deals for CEOs. In 2007, for example, former UnitedHealth chief executive William W. McGuire agreed to give up more than $600 million of benefits after investors claimed that he received improperly backdated stock options.
Wells Fargo told senators in a September 19 letter that it could recoup as much as $19 million in unvested shares from Tolstedt. Cash and stock she already owns – including about $44 million of shares amassed during her 27-year career and $34 million in previously vested stock options – weren’t eligible to be clawed back, according to the bank’s filings.
Tolstedt, 56, oversaw the retail unit during the years that authorities found the abuses. The Consumer Financial Protection Bureau, one of the regulators that investigated the bank, said thousands of Wells Fargo employees opened the accounts because they were under pressure to meet targets to sell more products and services to customers, a practice known as cross-selling.
In July, when announcing her planned retirement, Stumpf described Tolstedt as “one of our most valuable Wells Fargo leaders, a standard bearer for our culture, a champion for our customers, and a role model for responsible, principled and inclusive leadership.”
The bank settled initial government inquiries about two months later, paying $185 million in penalties without admitting or denying wrongdoing. It had already fired 5,300 workers – about 10 per cent of which were managers. And it has promised to eliminate sales goals by October 1 that regulators linked to its cross-selling strategy.
Lawmakers have called on additional US agencies, including the Department of Justice and Securities and Exchange Commission, to open probes. The Department of Labour is looking into lawmakers’ assertions that Wells Fargo put excessive pressure on employees to meet sales quotas.
Such concerns were inflamed at last week’s Senate hearing, when Stumpf said he accepts ultimate responsibility but declined to specify whether he or other senior executives would be punished, telling senators more than 15 times that such matters are handled by the board.
“The mistake Stumpf made is he didn’t offer anything up” to show managers were being held accountable, said Charles Peabody, a Compass Point analyst. “He offered an apology but that wasn’t sufficient,” extending the political uproar.
But what ultimately matters is the opinion of major shareholders led by Berkshire Hathaway’s Warren Buffett, who controls a 10 per cent stake in the bank and has said he’ll comment on the situation in November, Peabody said. “That is going to be a very important development in terms of Stumpf’s future.”
Like most US companies, Wells Fargo’s broadest options for recouping pay are reserved for situations where it must “restate all or a significant portion of its financial statements,” according to a proxy filing. The phony account practice yielded only $2.4 million in fees for Wells Fargo, and is unlikely to trigger a material restatement.
Still, Stumpf’s forfeiture “is a big number, and given what happened, it’s an appropriate number,” because it damaged the bank’s reputation, said Charles Elson, director of the University of Delaware’s John L. Weinberg Centre for Corporate Governance. “The bigger question is, should he remain chair?”