by Gael O’Brien
Why has it been so difficult for a values-driven shareholder investor group with over $200 billion in invested capital to persuade a bank now dealing with a very public ethics crisis to do some structured self-examination? The bank ranked lowest in responsible lending and risk management in the shareholder group’s 2013 survey of seven largest banks. Nevertheless, it has repeatedly resisted the request to do a business standards review. These shareholders believe the bank can do a better job aligning business practices with its stated ethics principles.
So, for the third time, the Financial Services Working Group of the Interfaith Center for Corporate Responsibility (ICCR) has submitted to Wells Fargo a shareholder resolution asking for a business standards review report; the resolution is intended to be voted on at the bank’s April 2017 shareholder meeting. However, this time the resolution has been updated to address the bank’s massive consumer fraud that became public in September 2016. The bank’s position is the review isn’t needed as they’ve relied for more than 20 years on their extensive Vision and Values document.
I talked with two members of the ICCR about why their resolution is important and Wells Fargo’s resistance. But first, some background.
Shareholder activism regarding environmental, social and governance issues has been increasing. While many activists pressure companies to make changes to improve financial returns, others (including ICCR) focus on socially responsible investing – aligning values with investing. They influence companies to pursue profit and integrate social and environmental responsibilities into corporate behavior and decision making. (It’s also sometime called the triple bottom line.) Expecting companies to show corporate responsibility – and align their values with their actions – also encourages greater risk management. If discussions break down around what a company is willing to do, shareholders can file a resolution for a vote at the company’s annual meeting to apply additional pressure for behavior changes.
ICCR isn’t Wells Fargo’s largest shareholder by any means (Berkshire Hathaway is). However, ICCR is one of Wells Fargo’s most values-driven investors; the organization’s members include religious leaders of all faiths as well as churches, universities, asset management companies and others committed to corporate responsibility. As Wells Fargo uses its values statement to distinguish itself, the bank’s refusal to do a business standards review is more puzzling. Persistence, though, can pay off: ICCR filed shareholder resolutions in 2012 and 2013 regarding concerns about predatory lending practices involving Wells Fargo’s Direct Deposit Advance service; the bank discontinued those services in 2014.
Practices vs. Principles
When it comes to losing trust and reputation, Wells Fargo — which until early September 2016 enjoyed most valuable bank status — has had a bruising third quarter of ongoing harsh criticism with no signs of letting up. The bank’s testimony before the U.S. Senate Banking Committee to explain two million unauthorized accounts lacked transparency, reinforcing the bank’s commitment to its Vision and Values. The fraud was described not as a culture failing, but the fault of “a few bad apples.”
The question regarding ethics isn’t only whether Wells Fargo’s aggressive sales practice pressured or tempted employees to open fraudulent accounts (complaints may actually go back at least to 2005). The ethical meltdown is also about how the treatment of customers falls so far short of aligning with Wells Fargo’s ethics principle: “We strive to be recognized by our stakeholders as setting the standard among the world’s greatest companies for integrity and principled performance.” The integrity disconnect also shows up in issues involving three Wells Fargo settlements this year: $1.2 billion for dishonest mortgage practices (2001 – 2008); $4.1 million for illegally repossessing cars of Armed Forces servicemen and women (2008 – 2015); and $4.1 million for illegal student loan practices (which the company says it stopped by 2013).
Rankings & Analysis
ICCR’s idea to request a Business Standards Review grew out of the results of the 2013 Ranking the Banks survey report. The results “clearly uncovered the need for better business standards,” said Sr. Nora Nash, Director of Corporate Responsibility for the Sisters of St Francis of Philadelphia and a member of ICCR’s Financial Services Group that produced the report with Sustainalytics. The survey rated Wells Fargo and six other banks on risk management, responsible lending, executive compensation and political spending. Wells Fargo had the lowest final score but ICCR asked all seven banks to do Business Standards Reviews.
The review, said Rev. Séamus Finn, ICCR Board Chair, “was a reflective way for the banks to look at their own internal failures, draw a line under the financial crisis of 2007 and 2008 and say this is what we’ve learned; this is the way we’ve decided to go forward to address these things we’ve learned and the mistakes we’ve made.” By 2015, three banks had agreed to work with ICCR on the review and, in the spirit of transparency, posted their completed reports online: Goldman Sachs (their report); JPMorgan Chase & Co. (their report); and Bank of America (their report).
Credo in Theory or Action
Wells Fargo’s response to the review has always been that they had this vision and values statement, a kind of credo which defined the bank and culture, said Rev. Finn, that the bank has been updating. “We weren’t as convinced as they were about how solid a document it was,” Rev. Finn added, “in terms of providing the kinds of analysis and critique and plan for the future that we thought doing the report would.” The review “isn’t a huge ask,” he continued. “We believe it will help the bank, the board and make for a better institution.”
Sr. Nora indicated Wells Fargo used to be in the top 10 of their sustainability portfolio, but clients became concerned about trust and reputation issues. “We don’t see the meshing of business standards in their vision and values,” she added, or the metrics to uphold the standards. The Financial Services Working Group has provided reports and roadmaps on assessing culture and other topics (including Banking Conduct and Culture: A Call for Sustained Reform) to bank representative to encourage action, she said. After another meeting with the company last December, she felt there was a shift that would lead to their taking action, but it didn’t materialize, she said. “I thought we had given them enough time, two years of opportunities, to show us that they were looking at their business standards, their framework to put something in place.”
When she learned of the bank’s consumer fraud in September, she said she felt a sense of betrayal. “The sisters of St. Francis of Philadelphia use Wells Fargo as our local bank,” she said, as well as it being a national account. “We have stood by them, encouraged them, begged them, written resolutions,” said Sr. Nora, “and they come back to us and tell us they are living by their vision and values….We are betrayed because they haven’t been living by that.”
The Financial Services Working Group has asked to meet in February 2017 with board officers and Wells Fargo’s newly promoted CEO and President Timothy Sloan. The board began an independent review of the consumer fraud in October. CEO Sloan promised employees restoring trust was his primary objective. Time will tell whether that entails restoring trust with shareholder groups like ICCR as well.