We pick our joys and sorrows long before we experience them—Omar Khayam
When the recent Wells Fargo (WFC) scam exploded in the public consciousness during the past week or so what struck me most about the whole fiasco and its ugly fallout was when its CEO John Stumpf appeared before the Senate Banking Committee to answer some tough questions. To say that Stumpf faced some embarrassing questions would be an understatement. The most gripping, relentless, and withering questions came from Sen. Elizabeth Warren and her session in that hearing is worth watching. I found its hypnotic grip on me exceptional and I watched it 2-3 times just to extract some perverse joy from it!
For one, when what you preach to your flock does not align with your own behaviors and that is topped by a complete and total lack of preparedness for public scrutiny it speaks volumes about what kind of leader you are. As you watch the video of Sen. Warren grilling Stumpf you are made very aware of how incompetent, irresponsible, and spineless leadership can destroy the lives of not only a company’s employees (the thousands of low-wage workers, who were fired for “ethical violations.”), but can wreak havoc in the very community it serves and with whom Stumpf tried to deepen his bank’s relationships through the myopic and toxic practices that backfired (see the quote at the top of this blog).
Not only did WFC paid penalties in hundreds of millions of dollars for this scam, but its millions of customers suffered unexpected setbacks in their credit ratings, got penalized for bad credit, and spent countless hours fixing things they did not need to. This public humiliation was further compounded yesterday when there was a shareholder class-action suit filed in the Federal Court in San Francisco asking for all the C-level executives and some Board members for returning the gains from their ill-gotten scheme. I’m not sure it will end there! Yesterday Stumpf also resigned from the Fed Board seat.
So, what are the lessons from this ugly episode? Here is my take:
1. You cannot be your own boss: John Stumpf was both the CEO and the Chairman of WFC. This creates an inherent conflict in how a CEO is held accountable. They should be accountable to the Chairman and the Board and that is possible only if they are two separate entities in those roles. As the Chairman he also gets to boss around to the Board that will often kowtow to him. Besides, most the Board members are spread thin with their memberships on many other Boards outside WFC, to boot.
2. Be clear about your purpose: Throughout the Senate testimony Stumpf kept repeating the refrain: We did this to deepen our relationship with our customers! Duh!! If you want to deepen your relationship with your customers don’t scam them with fake accounts that they get charged for without their knowledge and benefit. If they really wanted to serve their customers through deeper relationships they should have invested their time in a face-to-face interaction with each customer at some point and served their needs by offering them the right products and services if they REALLY needed them. It was clear that WFC wanted to serve themselves by creating over two million new accounts and bragging to the Wall Street that they had reached 6.5 accounts for each customer of the bank (most banks have three on average).
3. Stay true to what you say: In his town halls and emails Stumpf often bragged about creating clear accountabilities throughout WFC and often repeating “ we believe in values and not in phrases memorized.” In the same breath he goes on to insist that each bank customer must have eight accounts in the bank (the norm is three) by promoting the slogan that Eight rhymes with Great! Then he went on for the next three years personally reporting to the Street the uptick on how many accounts each customer, on average, ended up having at WFC as a result of his Eight is Great mantra: From 3 to 4 to 5 and culminating in more than 6.5 at the peak of this scam. Yet, when the scam of its employees creating fake customer accounts was exposed he promptly fired thousands of front-line workers making $12/Hr. This is what Sen. Warren called “gutless leadership.”
4. Be wary of abnormal growth: Despite all its competitors having about three accounts per customer (checking, saving, and a credit card) WFC’s customers started having a rapid increase in their accounts over a period of a few quarters and Stumpf himself took great pride in reporting this explosive growth to Wall Street. This directly helped boost WFC’s stock, which nearly doubled during the period this was happening, with many analysts giving a “Buy” guidance on its stock to their clients. The same scenario had happened when George W. Bush reported in his 2006 State of the Union address that there was a record home ownership with an unprecedented rate of ownership growth. In that scenario all the growth had come from the fraudulent mortgages that resulted in millions of people losing their homes after the crash of 2008. In the case of WFC’s growth the action was deliberate and Stumpf had turned his blind eye to the scam, keeping his focus only on the stock price and his selfish motivation of enriching himself and his flock from it.
5. Come prepared to avoid further shame: The embedded video of the hypnotic exchange between Sen. Warren and ill-prepared Stumpf is worth even a second watch. I wish all Committee members were this prepared and this committed to protecting their constituents, as is Sen. Warren!
6. Show and not tell: Despite the withering attack on him and his leadership he failed to demonstrate that anything is really going to change at WFC. Fully expecting such exchange (Sen. Warren is famous for such grueling questions to Wall Street crooks and she had gone on Fox News the week before telling what and how she was going to do it), and because of her public warning Stumpf should have at least done some head chopping at the executive levels and then told the Committee that he had already fired the top three executives and is restructuring the entire retail operation to avoid this from happening in the future. He completely failed to acknowledge how his leadership mantra, Eight is Great, had percolated down his chain of command and how toxic and stressful the front-line environment was to work there.
7. Demonstrate personal pain: Stumpf should also have returned some of the financial gains from this scam before facing the Committee. He could have as easily mentioned that he was going to remove himself as the Chairman and appointing another Board member to replace him as Chairman. He could have then continued as the CEO with perhaps less shame.
8. Customers again: Throughout the hearing he failed to show any contrition and to repair the pain his millions of customers endured through this scam. He kept insisting that their objective was to deepen their customer relationships with this “cross-selling” strategy, but utterly failed to show, after the scam was exposed and customers were deeply harmed, how he was going to repair it to at least protect those relationships, if not deepen them.
9. Own the system: Stumpf failed the Management 101 test, which states that senior executives create the system in which front-line employees work and their behavior is governed by the systems they (executives) create. Firing the front-line employees can be good optics, but does not address the root-cause of the problem. Remember: Managers work on the system and workers work in the system.
10. Face the questions: Stumpf was more like a politician pretending not to understand the simple (but damning) questions Sen. Warren was lobbing at him. Despite her repeatedly interrupting him on giving the wrong response to her original question, Stumpf continued to dodge the question with his own filibuster. He knew she had limited time allotted to conduct her inquiry. Yet, Sen. Warren stopped him cold each time, brought him back on track, and shamed him by answering the question herself. With this recalcitrant attitude he made a further fool of himself.
In complete contrast, one of the most brave examples of facing the truth and falling on your sword by owning one’s mistake wholeheartedly was by the Captain of the Japan Airlines (JAL Flight #2) when its plane landed by mistake in the San Francisco Bay on November 23, 1968. A major inquiry was organized to get to the bottom of what went wrong on that flight and yet it was over in just seconds, just as Committee members were settling down for a long week of inquiry. As the proceedings were underway, some had gone out looking for coffee and missed the climax. The NTSB Chairman gaveled the session and when asked Capt. Kohel Asoh (with 10,000 flight hours to his credit) what happened that caused the mishap, he calmly responded: “Asoh F/U.” That was it. This has now famously become known as the Asoh defense. I wish more (Wall Street) executives would know what it is and embrace it when they F#&@up as Strumpf did.
Throughout my career I have watched these showdowns and fiascos in major companies or even countries (the 2008 economic collapse). They all have the same underlying causes: untrammeled greed, linear thinking (not systems thinking), living under the illusion that they are too big to suffer consequences, ethical lapses, blaming the powerless, and going forward as if nothing matters. There is nothing novel and unique about this Wells Fargo scam and how it got exposed. A very similar or the same scam is happening somewhere right now for Sen. Warren-like maverick to shame its perpetrators yet again!
So, brace yourself, Mr. Stumpf and his ilk!