A Case Study For The Role Of Culture In Driving Ethical Outcomes In Wells Fargo Organization

Introduction

In October 2017, Wells Fargo reported its lowest quarterly return in 7 years. This comes as no surprise given that the company has been managing the fallout from its recent cross-selling revelations and enforcement actions. About a year ago, Wells Fargo announced a settlement of $185 million with federal regulators after admitting to having opened millions of unauthorized customer accounts, falsifying bank records, forging customer signatures and contact information, and even manipulating/transferring funds between accounts to charge overdraft fees, all without customer knowledge or consent. The settlement was seen by many observers as an admission to fraudulent practices, sparking a frenzy among consumers, government officials, and the media.

In an attempt to repair its reputation, the bank responded by dismissing John Stumpf, then-chairman and CEO, and promised to identify the causes of the fraudulent activities and implement reforms with full transparency to all relevant stakeholders. As part of its reforms, in April 2017 Wells Fargo released a report by board oversight Committee (hereafter Investigative Report) summarizing an investigation conducted by independent counsel Sherman & Sterling LLP analyzing the bank sales practices and causes of their ethical failures. The report was based on over 100 interviews and reviews of over 35 million documents, identifying possible causes behind the violations and recommending corrective measures.

The bank also publicly maintains on its website a page that notes steps in its reforms progress, updating the public on remedial measures taken post-scandal. After three months of the release of the Investigative Report, Wells Fargo once again found itself embroiled in crisis on auto insurance practices. In July 2017, it was noticed between 2012 and 2016, the Bank had charged 800,000 loan customers unnecessary auto insurance, pushing 274,000 customers into delinquency which led to approximately 20,000 wrongful vehicle repossessions. Some customers were also charged late fees, incurred insufficient funds charges, and credit damage in connection with unauthorized insurance policies added to their accounts. This revelation was one indication that the misconduct associated with the unauthorized accounts scandal was not just a one-off phenomenon, but perhaps more systemic.

Wells Fargo prides itself on its brand purpose, which is supported by three pillars:

• Relationships that last a lifetime;
• Expertise and guidance to help customers make confident decisions;
• Going the extra mile to do what’s right.

Despite these intentions, Wells Fargo has now become a case study for the role of culture in driving ethical outcomes in an organization.

What went wrong?

The facts from the Investigative Report and media coverage highlight an organization whose culture prized short-term rewards at the expense of customers, leaders who didn’t respond quickly enough, and whose initial crisis management approach didn’t recognize the systemic cause of the scandal. These factors contributed to the massive loss of faith and substantial reputational damage among consumers, which the company will struggle to regain. The structural, procedural and behavioral practices that led to the scandal makes Wells Fargo an apt case study from which other organizations can glean lessons to learn how to be proactive in preventing large-scale ethics lapses. Hence, I focus on the sequences of events that led to the scandal, the remedial measures they implemented, and an analysis of these factors in light of the academic research and models on ethical culture in organizations.

What went wrong: the facts, through the lens of ethical culture and leadership Models

I focus my analysis on two critical contributing factors to the ethics crisis: culture and leadership.to provide sound comprehensive recommendations I draw on established ethical leadership and culture models:

• Trevino and Nelson’s Ethical culture model(ECM)
• Brown, Trevino and Harrison’s Ethical Leadership model(ELM).

My source of data and information f this case study are the investigative report and the wells Fargo’s website, which details remedial measures. Companies often struggle to live to their own state values and an organizations ethical journey is a process in which the alignment between vision and reality is often challenged, and cannot be easily achieved by vision statements or ethical codes of conduct. It takes a tremendous collective and ongoing effort to cultivate an organizational culture that is ethical and beneficial for all stakeholders.

An organization’s ethical culture reflects its values and informs the perceptions formed by both employees and customers. As such, the culture becomes the primary driver for both individual and group ethical decision-making and behavior. However, maintaining ethics in business settings, especially in large organizations such as Wells Fargo is a complex and challenging process. Ethical behavior and decision making in organizations involves dynamic forces, making it easy for ethics to slip between the cracks, or fall into blind spots, often unnoticed until it is too late. Given its complexity, ethical breaches can only be circumvented when organizational elements align with ethical components, continually pushing individuals to do the right thing.

Trevino and Nelson’s Ethical Culture Model (ECM) accounts for such complexities, it’s composed of multifaceted systems encompassing both formal and informal systems at work in an organization. The ECM posits that the level of alignment between the formal and informal systems determines the strength or weakness of an organization’s ethical culture. If ethical integrity is prioritized by making it salient at the formal level, then the message is heard loud and clear at the informal levels, thereby influencing daily norms in the workplace.

The work to sustain an ethical climate, however, does not stop there but requires active engagement by managers and senior leaders at all times. As such individual differences at the micro-level and ethical culture and leadership at the macro-level, help determine why many employees behave the way they do within the organization. To provide a thorough assessment of wells Fargo’s organizational culture, I use the strategy recommended by Trevino and Nelson: delving into a company’s history and values to analyze the alignment between the formal and informal structures to provide an explanation for what went wrong. The Harris Poll claims some have deemed Wells Fargo’s reputation irreparable and have started to refrain from conducting new business with the bank. Wells Fargo is now increasingly viewed by many observers as morally bankrupt.

The Investigative Report attributes the leading causes driving the bank’s ethical failures as:

1. A misalignment between stated and actual organizational vision and values.
2. A high pressure and cut-throat sales culture created by aggressive sales management, and performance management systems and unattainable incentive mechanisms.
3. A decentralized corporate structure leading to reduced accountability.
4. A leadership in denial, minimizing the scale and nature of the problem.
5. A transactional approach to problem-solving.

These factors correspond with the misalignment conceived by Trevino and Nelson’s ECM. The Bank has now committed itself to regaining its reputation. Key remedial measures implemented by Wells Fargo include:

1. Replacement and reorganization of leadership.
2. Elimination of sales goals.
3. Improving incentive and performance management systems.
4. Centralizing control functions.
5. New office of Ethics, Oversight, and Integrity

Formal Systems

Performance Management Systems (PMS)

Performance management measures as the primary drivers of the ethical breaches. It specifically identified “motivator reports”, retail scorecards, sales campaigns and individuals gaming the system as crucial factors in what led to ethical misconduct. The company created a competitive atmosphere by frequently ranking performance between and among individuals, branches, and regions. Rankings were also regularly circulated bank-wide, creating significant pressure to outperform peers and shaming of those who fell short. Although goal setting has been prescribed over the years by numerous scholars as a panacea for employee motivation, some research recognizes its limitations. Goals Gone Wild, describes the downsides of goal-setting, especially its link to risky and unethical behavior. Ordonez et al (2009) draw parallels between goal-setting and prescription strength medications.

If overprescribed, it could lead to egregious side effects such as “narrow focus that neglects non-goal areas, a rise in unethical behavior, distorted risk preferences, corrosion of organizational culture, and reduced intrinsic motivation”. Further, the researchers recommend that for goal setting to be successful, the organization needs to closely monitor and supervise the rollout and implementation of the goals.

In the case of Wells Fargo, pushing unattainable goals that were linked to compensation, motivated employees to engage in risky behavior and cutting corners to benefit from financial rewards as well as job security.

Leadership

Within the ECM, leadership plays an important role in both formal and informal systems i.e. Executive leadership in the former and role models in the latter. Brown et al. (2015), state that leaders provide substantial ethical guidance for employees by shining a light on how things should be done. As such, Brown et al. define ethical leadership as “the demonstration of normatively appropriate conduct through personal actions and interpersonal relationships, and the promotion of such conduct to followers through two-way communication, reinforcement, and decision-making”.

Brown et al. (2015) proposed an Ethical Leadership Model (ELM), which builds on Albert Bandura’s Social Learning Theory. ELM posits that followers vicariously learn and emulate behavior that is expected, rewarded, and punished from role models.

ELM establishes that the emulated behavior is closely related to various factors, including (a) the leader’s honesty, (b) whether or not the leader treats his/her followers with dignity and respect, (c) interactional fairness, (d) socialized charismatic leadership and (e) abusive supervision. Furthermore, ELM provides that leadership behavior predicts outcomes that are important to the leader’s long-term management of a company: the followers’ job satisfaction and dedication, and their willingness to report problems to management. At Wells Fargo, the complicity of leadership went hand-in-hand with the high pressure, numbers-focused sales culture. The conduct, decisions, and interactions of the senior leadership provided ethical guidance to middle managers regarding behavioral expectations, which were then cascaded to lower level employees. Looking at the timeline of the scandal’s unfolding, and according to CEO John Stumpf’s congressional testimony, the fraudulent practices were first brought to their attention in 2011, but were downplayed as minor one-off incidents.it was only after the reports in 2013-2014 that leadership slowly started to take things seriously where they brought consultants in 2015 to investigate the full scope of the problem. John G. Stumpf said “on average,1 percent of the employees have not done the right and were terminated ”.Wells Fargo managers saw the events as isolated incidents that were as a result of a few apples in the company as it was opposed to a systematic and cultural issue. When a leader is not open to feedback of different views employees fear retaliation so they do not raise concerns hence allowing ethical issues to arise.

Recommendations

Wells Fargo continues to deal with new revelations of misconduct, as recently as the July 2017. The New York Times report of unauthorized auto insurance policies issued to Bank customers. This brings into question whether Wells Fargo is addressing the systemic issues at the Bank. It is critical that the Bank avoid a transactional approach to the crisis with merely a checklist of corrective actions, it should instead focus on making ethical integrity ubiquitously salient throughout the organization, top to bottom, through a cultural and leadership shift. The longer a company’s operations are misaligned with its ethos, the higher the chances of an even larger ethical breach. Hence, Wells Fargo’s remedial measures need to be integrated into the bank’s culture and viewed through a systems lens, addressing the alignment of formal and informal systems. Otherwise, any short term fix will likely lead to further long-term repercussions.