Former Wells Fargo CEO John Stumpf spent years cultivating an image as a wholesome bank head who always put the interests of Main Street and the little guy first.
The bank dodged most of the problems of the financial crisis, recovering rapidly and growing to become the world’s largest bank by market capitalization in 2015. Then came the disclosure earlier this year that at least 5,300 low-level Wells Fargo workers had been systematically committing fraud by setting up dummy accounts for customers. The workers had set up the accounts as a way of meeting quotas set by upper management, including Stumpf, who had been warned about the fraud as early 2007. The bank was ultimately hit with $185 million in fines, and Stumpf, after a grilling by Massachusetts Senator Elizabeth Warren, resigned.
This was massive fraud, over the course of years, involving thousands of employees, many of them within the same branches. Whistleblowers have spoken of a deep-seated cultural malaise, with middle managers harassing front-line employees to boost their numbers at any cost while upper management remained indifferent to the warning signs, even punishing whistleblowers rather than offending employees.
Many of these workers further explicitly blamed Wells Fargo’s corporate culture for encouraging fraud. But Wells Fargo is hardly alone in being undone by a deficient culture.
“Virtually every company that you go to has stuff pasted on the wall, usually in gold lettering saying something like, ‘take care of our customers.’ These are the so-called values. But how we actually live these values out is super important, and more often than not, there’s a disconnect,” explains Shivaram Rajgopal, a professor of accounting at Columbia Business School.
“In banking, the obvious point is given the option between doing something right and doing something profitable, the worry is that the bankers would opt for the latter and not the former,” says Rajgopal, who coauthored a recent paper “Corporate Culture: The Interview Evidence,” which argues that firm value and profitability are profoundly affected by the effectiveness of corporate culture.
One of the causes of the Wells Fargo fraud was that employees were rewarded for opening more accounts per customer and risked getting in trouble if they opened too few. “One of the most important things about culture is that how you pay people is fairly important,” Rajgopal says. “If you’re paying them on metrics, do the metrics reflect the values?” In the case of Wells Fargo, the metric was for more accounts per customer, rather than customer satisfaction, for instance.
Culture, Rajgopal asserts, is set by executives at the highest levels of the company and filters down to the frontline. Indeed, Stumpf famously quipped in the bank’s 2010 annual report that, “I’m often asked why we set a cross-sell goal of eight. The answer is, it rhymed with ‘great.’ Perhaps our new cheer should be: ‘Let’s go again, for 10.’”
This sort of flippant attitude likely filtered down to the lowest levels in the bank and created the expectations that employees focus on setting up accounts simply to meet arbitrary quotas, rather than to fulfill customer needs.
Those pressures can wear particularly hard on middle managers, according to Columbia Business School professor Andrea Prat, eroding performance across the organization. In a new paper, “Corporate Purpose and Financial Performance,” Prat argues that the way espoused corporate values are practiced is more dependent on middle management than on executives.
“The top and bottom are motivated by different objectives,” Prat explains. Typically, the top faces very high financial incentives. Those on the bottom often have simpler tasks that can easily be monitored and rewarded. It’s the middle that’s difficult to motivate because they’re not offered these huge financial incentives, yet their tasks are very complicated. Their morale matters a lot.” Prat argues that if purpose and clarity exist within middle management, morale is boosted and the work of the entire organization is improved.
While Prat would not comment specifically on Wells Fargo, he did say that in general company culture goes sour when one set of values is espoused but incentives encourage a different practice. “You find top management sending conflicting messages. On the one hand, they say ‘we are pursuing these greater goods.’ On the other hand, they may provide incentives that send employees in different directions.” The importance of clarity and purpose in a corporate culture should be not underestimated. The correlation of high levels of clarity and a strong sense of purpose “predicts how the company will do in the future,” Prat asserts.
That should light a fire under not only Stumpf’s replacement, Tim Sloan, but also the other 84 percent of executives who, Rajgopal finds, don’t believe their culture in practice is where it should be. “It always starts at the top. It’s always the leadership—tone on the top is super important,” Rajgopal says. Even if you don’t’ have any kind of formal set of values, employees look around a see what kind of values are celebrated. Who’s getting promoted, who’s getting the big bonuses. Employees are very quickly going to try to mimic that behavior.”
About the researcher
Andrea Prat is the Richard Paul Richman Professor of Business at Columbia Business School and Professor of Economics at the Department of Economics, Columbia...Read more.
About the researcher
Shiva Rajgopal is the Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School. He has also been a faculty member...Read more.