Column: Scandal-racked Wells Fargo is docking its CEO $41 million. That’s not nearly enough

The Wells Fargo Board of Directors is evidently hoping that we’ll be very impressed with the punishment it has meted out to Chairman and Chief Executive John Stumpf in the wake of the bank’s cross-selling scandal.

Certainly the numbers are eye-catching: Stumpf will forfeit all his unvested incentive stock awards, won’t get a bonus for 2016 and won’t collect his $2.8-million annual salary for as long as an outside investigation continues. Put it all together, and he will be docked at least $45 million (assuming he would have received the same $4-million bonus the board had been shoveling his way, as though by autopilot, every year).

What the forfeiture — or clawback, as one might term it — really demonstrates, however, is how lax the standards have become for executive compensation in corporate America, and how lightly executives and directors have taken their own responsibilities of management and oversight.

Just for a start, consider that the forfeiture amounts to only about 40% of the $100 million in cash and stock compensation Stumpf collected in 2011-2015, the minimum period during which Wells Fargo’s abuse of its retail clients is known to have taken place. That’s not even counting the $200-million increase in market value Stumpf experienced in his Wells Fargo stockholdings during that time span, as calculated by Sen. Elizabeth Warren (D-Mass).

The Wells board has come under intense pressure to show it is addressing the scandal, in which millions of bogus customer accounts were opened by its bankers in the names of existing customers and outsiders, all to meet relentless sales quotas imposed from above.

First exposed by The Times in 2013, the activity resulted in penalties and fines of $185 million imposed by federal regulators and the Los Angeles city attorney’s office earlier this month. It also blew Wells Fargo’s reputation for integrity into smithereens, which may be costlier in the long run.

Stumpf and the bank were roundly pilloried by Democrats and Republicans on the Senate Banking Committee last week. The board imposed its punishment of Stumpf and of Carrie Tolstedt, the executive who oversaw retail banking, at an emergency meeting Tuesday, obviously anticipating another bloodletting when Stumpf appears Thursday at a hearing of the House Financial Services Committee. (Tolstedt, who hastily retired, will give up an estimated $19 million in unvested stock awards, a 2016 bonus and severance pay.)

Is this punishment enough? Some banking industry analysts, who have long admired Stumpf, seem to hope so. “The monetary loss should be enough to quell the outrage of interested parties (senators, etc.) and should buy the CEO more time to deal with the ongoing scandal,” wrote Brian Kleinhanzl and Michael Brown of Keefe, Bruyette & Woods, which specializes in bank stock analyses, in a flash note Tuesday.

But that may be hoping against hope. “It’s not a slap on the wrist,” Erik Gordon, an expert in corporate governance at the University of Michigan business school, told me, “but it’s probably not enough.”

Stumpf “is CEO, he’s responsible for the culture at the bank,” Gordon says. “This was so widespread, that either Stumpf knew about it and failed to take appropriate action, or he didn’t know. In either case, shareholders will want to know if Stumpf should remain as CEO.”

Almost as important is the performance of the board. As we observed recently, these well-paid time servers were entirely missing in action as the misbehavior proliferated.

“We are committed to ensuring that all aspects of the Company’s business are conducted with integrity, transparency, and oversight,” lead independent director Stephen Sanger said in a statement Tuesday announcing the clawbacks. Sanger has been a Wells Fargo director for 13 years and has collected an $338,000 in average annual pay over the last five; where has he been all that time?

The other directors, almost all of whom collect an average of more than $300,000 a year, include two former bank regulators, one of whom is the former dean of a business school; two former Cabinet secretaries; and nine corporate chief executives. Sanger is the former chairman and chief executive of General Mills.

Gordon considers their compensation not overly large for directors of a company the size of Wells Fargo, “but it’s enough money to expect them to do their job.” As he observes, that job, according to the company’s proxy statement, includes overseeing “the Company’s reputation generally, including … oversight of customer service and complaint matters [and] matters relating to the Company’s culture and its team members’ focus on serving customers.” That’s exactly where the scandal erupted, while the board snoozed.

One remarkable aspect of the clawbacks of pay from Stumpf and Tolstedt is that they’re almost unprecedented in corporate America. That’s true even though Congress has pressured public companies at least to publish clawback standards applicable to top executives.

In 2002, Congress gave the Securities and Exchange Commission the authority to seek clawbacks on its own, Gordon observes. But that’s only in cases where financial statements have to be restated as the result of misconduct. The Dodd-Frank Act required public companies to implement policies recovering pay when misconduct leads to financial restatements. But the restatement must be “material,” which could be a high bar, and applies only to incentive compensation such as stock options.

It’s doubtful that these rules would apply to Stumpf. As a result, further action to bring him to accountability remains in the board’s hands. Sanger’s statement leaves open the possibility that “additional steps” may be taken against Stumpf or other executives, but indicates that those will depend on the outside investigation.

The bottom line is that the Wells Fargo board, like almost every other board, has shown itself to be reluctant to bring the hammer down on its executives, or to live up to its own responsibilities. If the actions it’s taken so far are enough to quell the outrage over the bank’s misdeeds, that will be a relief in the corporate suite but a heavy burden for shareholders and customers. If that’s the case, why would anyone invest in Wells Fargo or open an account there?

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