In February of this year, in response to widespread consumer abuses and breakdowns in compliance, the Board of Governors of the Federal Reserve System issued an unprecedented enforcement order against Wells Fargo & Co. that, among other things, requires Wells to submit to the Federal Reserve a written plan to enhance the effectiveness of its board of directors in carrying out its oversight and governance responsibilities, and further restricts Wells’ growth—an action that is typically only imposed on troubled institutions.
In the consent order, Wells agreed to fully cooperate with the Fed in further investigations as to whether separate enforcement actions should be taken against individuals involved in the conduct cited in the order. In connection with entering into the consent order, Wells agreed to replace four directors, three by April and the other by the end of 2018. In addition, on the same date, the Fed publicly released letters of reprimand that it issued to the board of directors of Wells as well as to the company’s past lead director and chairman. These types of supervisory letters usually remain confidential.
While the Federal Reserve’s action was clearly intended to address an egregious situation that involved a breakdown of Wells’ risk management system and resulted in widespread consumer abuses, bank board members and executive management should take note of its statements in the letters of reprimand as they relate to the responsibilities of a board and its leadership, particularly when they become aware of serious matters at the bank, whether related to misconduct, compliance, operations or other areas.
Here are the key governance and oversight considerations noted by the Federal Reserve.
Responsibility of the Board
In its letter of reprimand to the Wells board, the Fed noted that it was incumbent upon the board to “carefully evaluate” the company’s risk management capacity and “to oversee” the implementation by management of an adequate risk management framework for the entire company. The Federal Reserve found that the Wells board failed to take sufficient steps to ensure that the bank’s executive management team had established and was maintaining an effective risk management structure. It also found that reporting by management to the board lacked sufficient detail and failed to include concrete plans to address the serious consumer compliance issues Wells was facing.
The Federal Reserve also emphasized that it was the board’s responsibility to ensure that the company’s performance management and compensation programs were consistent with sound risk management objectives and complied with laws and regulations. The letter stated that the lack of effective oversight and control of compliance and operational risks were material factors in the substantial harm suffered by Wells customers.
Responsibility of the Board Chair
The letter of reprimand to former Chairman and CEO John Stumpf stated that it was the responsibility of the chairman “to ensure that business strategies approved by the board were consistent with the risk management capabilities” of Wells. It further noted that it was incumbent on the chairman to ensure that the full board had sufficient information to fulfill its responsibilities. The Federal Reserve found that Stumpf failed to take appropriate and timely action to address the compliance issues and improper conduct by Wells employees. Also noted were his actions in continuing to support those senior executives most responsible for the failures and in resisting attempts by other directors to hold the executives accountable.
Responsibility of the Lead Director
For financial institutions that have lead directors, the Fed’s letter of reprimand is insightful as to its view of the lead director’s role. The letter stated that former lead director Stephen Sanger “had a responsibility to lead other non-executive directors in forming and providing an independent view of the state of the firm and its management.” The letter noted the failure of the lead director to initiate any serious, robust investigation into the widespread consumer compliance issues that were raised as well as the failure to press management for more information or action after being made aware of the seriousness of the issues. The Fed also noted that Sanger did not perform in a manner consistent with the duties and responsibilities of the lead director that were set forth in Wells’ corporate governance guidelines.