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April 23, 2019

OP-ED: Wells Fargo Needs a Retail Banker at the Helm

(this op-ed originally appeared in American Banker)

Before it became a customer predator, Wells Fargo was America’s bank, focused on lending to and serving Main Street families and businesses for more than 160 years. That was in stark contrast to Wall Street’s bailed-out, too-big-to-fail banks, which remain too focused on high-risk, bonus-boosting trading and capital markets activities.

Those two distinct business models have very different cultures and ethos that impact everything from management style and executive compensation to risk-taking and business focus. One has a long-term view of customers and success while the other too often has a short-term view of counterparties as profit centers to be maximized.

That’s why it’s so important that Wells Fargo’s board of directors choose a leader deeply experienced in retail and commercial banking who is obsessively customer focused. It is also why the board should reject CEO candidates with primarily capital markets, investment banking and trading experience. That culture will infect and destroy the core of what had made Wells Fargo distinct, successful and trusted among U.S. banks.

This culture conflict should be an overriding concern for the board, yet a Wall Street pedigree may get overvalued given that Wells Fargo remains a crisis management turnaround project.

But, it’s not all bad news. The good news is that recently resigned CEO Tim Sloan did some of the hardest work and turned the bank halfway around. Unfortunately, he also made the turn longer and crisis management more difficult.

That wasn’t entirely his fault. The then-directors share blame. Picking Sloan was a mistake from the start. He was not only a 30-plus-year Wells veteran with all the groupthink, blind spots and baggage that entailed; he was also tainted by his connections to the phony-accounts scandal.

More fundamentally, Sloan was groomed over the years to be a peacetime commander, ready to run the business in the ordinary course. He was utterly unprepared for the battlefield promotion he got and less prepared to command in a crisis. A totally different skill set is required, which would have equipped him to see and seize opportunities as well as to take quick, difficult and unpopular but necessary actions.

Nevertheless, while he should have done a lot more, Sloan has made the job of the next CEO easier.

First, in an unprecedented move, he didn’t just investigate the scandal that was discovered; he ordered a bottom-up review of the entire bank, which unearthed lots of other misconduct and customer abuses. Second, he committed to making all injured customers whole and resolved the vast majority of legal actions, while structurally changing the bank’s entire risk and compliance systems as well as its culture. Third, Sloan attracted top talent to key positions, like General Counsel C. Allen Parker, who was the former managing partner at one of the country’s top law firms, Cravath, and is now the acting CEO.

Whether he did any or all of this well, far or fast enough isn’t as important as the fact he started it and the next CEO will get to build on it.

Under Sloan’s leadership, the bank also adopted some significant customer protections like “overdraft rewind” and “real-time balance alerts” that enable customers to avoid overdraft fees. This has been estimated to have cost the bank almost $400 million in lost revenue. Yes, this and lots more should have been done earlier and better (and without needlessly antagonizing members of Congress), but it’s a start.

Why is it important to the country that Wells Fargo finishes the work Sloan started? Because the bank serves one in three U.S. households. It is literally everywhere, with 7,800 locations, more than 13,000 ATMs and 95% of its 259,000 employees based in the U.S. It has $2 trillion in assets and more than $1 trillion in deposits. It’s the No. 1 provider of mortgage funding in the country and it originated $2.5 billion in small-business loans in 2018, making it the nation’s No. 1 Small Business Administration lender by dollars. It’s also not solely a coastal bank, as evidenced by being the nation’s number one commercial agricultural lender for the last 20 years.

On top of all those banking activities, Wells Fargo is a well-known presence in towns and cities across the country, contributing $444 million to thousands of nonprofits and schools in 2018. Additionally, Sloan committed the bank to contributing 2% of its annual after-tax profits to philanthropy in the years to come.

There’s no denying that Wells Fargo is deeply embedded into the fabric of the country, its families, communities, businesses and economy. That’s why it’s so important that the bank be fixed, get back to treating its customers right, and support the country’s retail and commercial banking needs.

The board has to understand that the road map to a successful future for Wells lies in its past: superior retail customer focus and service. That’s what put Wells into one out of every three American homes. That was based on trust, which was due in part to Wells’ not being a Wall Street bank — or, more accurately, being the opposite of a Wall Street bank. That’s likely also a big reason why, as Warren Buffett recently noted, so many customers have stuck with Wells since 2016.

To pick someone from Wall Street would break that key distinction, undermine that trust and, ultimately, erode customer loyalty. Years of polling and focus groups show that Wall Street is distrusted, if not despised, and the 2008 crash and all the ongoing illegal activity proves that those views are well deserved. Moreover, a Wall Street CEO with the Wall Street-centric view of the world will inevitably prioritize short-term profit maximization that will lead, once again, to customer exploitation. Some may think that is unfair, but the historic facts speak for themselves.

Therefore, Wells simply must pick someone from commercial/retail banking who really knows that business and is manically committed to prioritizing customer satisfaction. Only that will position Wells to rebuild the trust of its customers, reward their loyalty and restore the business.

Finding the right person to be CEO isn’t going to be easy, but the key is not repeating the self-inflicted wound of picking Sloan last time by picking Wall Street this time. The bank’s Main Street customers deserve better.



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