Ford’s Pinto disaster, GM’s ignition switch debacle, and Tepco’s nuclear catastrophe at Fukushima – all unintended consequences of company goals to manage costs. Lucent Technologies and Enron’s goals were all about market value growth – neither company survived. Toyota’s issue with uncontrolled vehicle acceleration was tied to goals about capturing market share. VW’s goal was to be the leader in environmental performance – and they created software to fake emission test results. And, now we have Wells Fargo’s “scandal” and its goal was to become the most valuable bank in the world.

All of these companies failed in one way or another while trying to achieve goals that seem reasonable and appropriate.

Wells Fargo is an even more special case. Among peers, it’s the only bank that was not bailed out by the Federal government during the credit market collapse in 2009. It never ventured into the sub-prime mortgage frenzy that took down most of the major US banks. Instead, it maintained a conservative posture, built on a vision and set of values tied to caring for customers and the employees who develop relationships with them. It still has, even today, the highest customer satisfaction ratings in surveys conducted by JD Power. And its market value in early 2016 exceeded $300 billion, making it the most valuable bank in the world, with profits so high that it ranked among the top five payers of corporate income taxes in the US.

Yet, we just watched alarmingly over the last month as the bank’s highly successful and revered CEO, John Stumpf, got destroyed by a handful of US senators. He and the retail banking head, Carrie Tolstedt, forfeited $60 million in unvested compensation, and the bank paid a $185 million fine. All of this attributed to fraudulent sales practices by low-level employees and a handful of regional managers that led the bank to repay, on its own volition, $2.6 million in fees to customers. At the 10000-foot level, nothing adds up here – a great CEO forced to resign and $245 million in combined penalties – all for $2.6 million in illegitimate fees that the bank repaid!

There are four clear leadership lessons to be learned from Wells Fargo’s situation: Goalodicy and Wrong Message as unintended consequences of a poorly designed performance management system, the pitfalls of Hierarchy Myopia, and the consequences of not being proactive in managing risks.

Goalodicy

Wells Fargo’s goal to be the world’s most valuable bank is entirely appropriate. The issue was a performance management system for retail bankers that was too focused on a single metric: cross-selling – which is measured by the number of accounts opened per customer household. The target was set at 8.0 and in 2016 the bank achieved 6.13.

Bankers in the company’s 6000 branches could earn bonuses of $500 to $2000 per quarter for hitting the cross-selling target. That’s a significant incentive relative to an annual base salary of roughly $30000. The system was implemented in 2007 and, overtime, it shaped the culture of the retail bank. The sales-driven culture was so heavily rooted among employees that cross-selling become more than a target – it defined the identity of a successful banker. That identity blinded bankers to the moral disengagement and illegalities of creating accounts for customers without their consent. Often the customer did not know the fake accounts existed. Approximately 1.5 million deposit accounts were fraudulent, out of 82 million accounts opened over the 5-year period ending in 2015. In addition, 565000 credit card accounts were opened without customer approval.

Had the bank created a more balanced score card for retail bankers, the bad behaviors likely would not have occurred. For example, a metric like “Account Utilization” in addition to Cross-Selling would have created a self-checking feature to the system. Fake accounts would have diminished performance incentive value if they were not used by the customer.

Wrong Message

As we discuss in Applied Leadership, Message = Content + Context. Carrie Tolstedt was called “The Watchmaker” by colleagues because of her capacity to absorb and analyze great volumes of details. Cross-selling was about deepening relationships with customers, but the message got blurred with the excessive focus on data. It’s reported that Carrie’s operational reviews with regional bank executives would dive into nitty-gritty line items at the expense of shaping context about expectations. The important context in the bank’s Visions & Values handbook about honesty and ethics, escalating concerns to management’s attention, and building connections to communities was overshadowed. Low-level employees felt pressured to meet targets in order to keep their jobs – a perception that was messaged but not intended by the senior executives of the company. These employees did not take Carrie out of context, they took her into their context – and that was “I will get fired if I do not hit the sales target”. By all reports, Carrie was the standard-bearer of the bank’s vision, a champion of their customers, and a role model for responsible, principled, and inclusive leadership. Sadly, her data orientation likely overtook the important context and a critical number of employees got the wrong messages.

Hierarchy Myopia

We define hierarchy myopia as the situation that occurs when the “official truths” held at the top of a company vary significantly from “what’s actually happening” in the company. John Stumpf learned about the sale-practice abuse in 2013, many years after it begun. Regional executives had been addressing the issues all the way back to when it was first reported in 2009. They even created a special task force in 2012 to look into suspicious patterns in sales practices, resulting in the first employees being fired for sales-related misconduct in 2013. There is some evidence that the bank’s decentralized structure may have prevented the escalation of issues to the top of the company. Typically, however, the myopia is an unconscious effect, i.e., the manifestation of a lack of diversity in the executive ranks, where senior managers perceive the same information but are blinded to other information and interpretations inconsistent with their mental models. What may have appeared as “willful blindness” on the part of executives was nothing more than the effects of hierarchy myopia.

Proactive Risk Management

In Applied Leadership we highlight the need for attention on identifying and managing risks. Moreover, we note the issue of a “perfect storm” when risk events occur more systematically rather than as one-offs. Despite the banks many efforts over several years to stop the sales abuses, clearly the mitigation actions were more incremental in nature and collectively were inadequate to address the scale of the issue. But there’s an even more important lesson – a number of seemingly random but related events converged to create the perception of a “scandal” when in fact one did not exist:

• 200 employees are fired in 2013 in the Los Angeles area for unethical sales-related misconduct.
• The Los Angeles times reports in a story that low-level employees are being scapegoated.
• The Los Angeles city attorney initiates an investigation and ultimately a lawsuit against Wells Fargo.
• Several civil litigations fully air all of the sales practice issues at the bank.
• The firings increase to 5300 employees through 2015 – a number that stirs outrage in local communities as it becomes public knowledge.
• The bank modifies and lowers the performance targets for bankers at retail branches.
• The Consumer Financial Protection Bureau, set up after the 2009 banking crisis, is upstaged by the LA city attorney’s prosecution of the bank.
• Wells Fargo management agrees to settle with the city attorney rather than go to court – and the embarrassed federal agencies jump in on the settlement and ultimately drive it up to the $185 million level.
• The settlement is announced right as congressional election campaigns are heating up.
• Politicians spin a tale of “bankers gone wild” to justify Washington’s financial bureaucracy and its failure to unearth the Wells Fargo issue.
• What appears to many as a charade of congressional hearings seemingly has little to do with investigating anything and everything to do with politicians elevating their election-year profile by re-enacting anti-banker tirades.

Had Wells Fargo stalled the settlement until after the November elections the “scandal” likely would not have occurred. Instead, John Stumpf was “scalped” and the bank’s reputation was impaired. Many observers believe that his resignation was a necessary gesture to appease the Washington political machine. As one journalist reported, “The hiring and firing of CEO’s does not operate on principles of justice but on what’s good for the business.”

One thing is clear: Wells Fargo is an extremely well-managed company. The root cause of the so-called scandal was weakness in leadership, not management, especially in the areas of performance and risk assessment. More attention to creating congruent messages through robust context sharing from the top to the bottom of the company, more diversity of observations at the executive level, and attention to connecting the dots on risk events could have averted the entire debacle.