ACY6118 Case Report (Final Assessment)

Posted: July 7th, 2022

2022-2023 Semester 2 Case Report (Final Assessment)
Module Code : ACY6118
Module Title : Corporate Governance and Compliance
Date and Time: 3:00PM, 22-25 April 2023
Time Allowed : 3 days
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1. This is an open-book take-home Case Report (Final Assessment). You are required to
complete the Case Report by yourself. No collaboration or discussion with others is
allowed. Any evidence of collaboration in the completion of the Case Report may result in
severe mark deduction and referral to university committees for disciplinary actions.
2. There are FOUR questions in this Case Report. Answer ALL questions in NOT more
than 2,500 words using the Answer Book provided. Marks allocated to parts of questions
are indicated in brackets.
3. The Case Report will be marked out of 100.
4. Submission: Upon filling in your answers in the “Answer Book” provided, the soft
copy of your answers in Word format should be uploaded to the folder under the
activity of “Case Report” in Moodle by 3:00PM, 25 April 2023 (Tuesday). The time
allowed is 3 days. The file name in Word format should be saved as “Module
Code_Name”, e.g. ACY6118_Chan Tai Man.
5. You should submit your file in Word format to Moodle ONCE only. Any re-submission
of file will NOT be allowed. Hence, please double check the correctness of your
answers before submission.
6. It is highly encouraged that you should NOT upload the file in the last minute before the
submission deadline. In case of technical issues such as a system failure of Moodle, you
can email your answer to your module teacher as a last resort.
7. Late Submission: 20% of the marks awarded to the Case Report will be deducted for
each calendar day overdue until the soft copy of it is submitted.
8. Non-Submission: No marks will be given to any students who fail to submit the Case
Report.
1
Read the cases given and answer ALL questions. Total marks are 100 marks.
You are required to answer the relevant questions in the “Answer Book” provided.
The following article is abstracted from Corporate Governance Case Studies Volume 5,
October 2017:
“Wells Fargo: Forgone Reputation?” by Mak Yuen Teen (Editor)
Case Overview
NYSE-listed Wells Fargo is one of the world’s largest financial institutions, serving 70 million
customers and boasting total assets amounting to US$1.9 trillion. Its market capitalisation of
around US$240 billion in early September 2016 made it one of the most valuable banks in the
US. It also received accolades such as ‘Best Bank in North America (2016)’ by the Global
Finance Magazine.
On 8 September 2016, it was revealed that Wells Fargo’s employees had opened about two
million unauthorised deposit and credit card accounts since 2011 to satisfy sales goals and earn
financial rewards under the bank’s incentive-compensation programme. Sales figures were
inflated by moving funds from existing accounts into unconsented new ones, and by creating
unconsented applications for credit card accounts. This also increased earnings from
unwarranted charges such as overdraft fees on original accounts. The fraudulent misconduct
was attributed to the obsessive sales-driven culture at Wells Fargo and may have gone back
more than 10 years. Wells Fargo announced that it had agreed to pay fines amounting to
US$185 million to the Consumer Financial Protection Bureau, regarding allegations of Wells
Fargo’s sales practices. Fines totalling US$185 million levied by regulators represented a
minor setback for a bank bringing in annual profits of over US$20 billion. However, Wells
Fargo’s stock price plunged to a two-and-a-half year low and its reputation was damaged, as
reflected in a survey done by consultancy firm cg42, which showed negative perceptions of the
bank rising to 52% from 15% during the period prior to the scandal.
Corporate Culture
John Stumpf worked his way up the corporate ladder in the loan department of Norwest Corp
and joined Wells Fargo when the two firms merged in 1998. He was appointed Chief Executive
Officer (CEO) in 2007 and Chairman in 2010, and was subsequently awarded ‘Banker of the
Year’ by American Banker in 2013 and ‘CEO of the Year’ by Morningstar in 2015. In 2015, his
remuneration amounted to US$19.3 million.
After the scandal broke, fingers were pointed at Stumpf for allowing a sales-driven culture to
perpetuate in the company. Contrary to the prudent approach to managing risk described in
Wells Fargo’s annual report, one of Stumpf’s mantras was “eight is great”; employees were
pushed to sell at least eight financial products per household in what was known internally as
the “Gr-eight initiative”. This cross-selling – pushing different products to the same customer –
was a key strategy at Wells Fargo. In 2016, the average retail banking household reportedly
used 6.27 Wells Fargo products.
To be continued on the next page
2
Former employees alleged that they were trained to “push customers to open multiple
accounts” and were even coached on how to “inflate sales numbers”. Branch managers were
assigned quotas that were carried forward if targets were not met during the period. This
resulted in a ‘pressure-cooker’ environment where employees sold products that arguably did
not serve the best interests of customers. However, when rumours of the aggressive sales
culture first circulated in 2013, executives like then-Chief Financial Officer (CFO) Tim Sloan
denied any form of overbearing sales culture in Wells Fargo, adding that there were “multiple
controls in place to prevent abuse” such as an ethics program for employees and a
whistleblower hotline to notify senior management of potential violations. Wells Fargo
eventually announced a revamped employee compensation and incentive plan effected in
January 2017, which would not include any sales goals, and where performance evaluations
would be based on customer service, usage and growth, instead of simply the number of new
accounts opened. The new head of community banking, Mary Mack, described this as a
milestone for Wells Fargo to restore trust both within and outside the organization.
Dual Roles
The dual roles held by Stumpf since 2010 was another point of contention. CtW Investments
suggested that splitting the roles with an independent board Chairman “could help repair the
bank’s broken compliance systems”. Although there was a board meeting and the board could
have clawed back the pay of the executives involved, no statement was issued on potential
clawbacks. Rafferty Capital’s analyst stated that this represented “the strongest argument” for
removing Stumpf as Chairman.
After repeated calls, Stumpf resigned as CEO and Chairman of Wells Fargo on 12 October
2016. Tim Sloan, who served as Chief Operating Officer (COO) from November 2015 to
October 2016, was promoted to CEO, while lead independent director Stephen Sanger became
the non-executive Chairman of the board.
Executive Remuneration and Accountability
After the 2008 financial crisis, large banks promised to recover large payouts from top bankers
that were obtained through unlawful conduct, underpinned by the Sarbanes-Oxley Act and
Dodd-Frank Act. However, Stumpf was walking away with US$133.1 million upon his
resignation, including 2.4 million shares he accumulated, despite a clawback of US$41 million
worth of unvested options. Stumpf’s bonus scheme was designed to be directly tied to Wells
Fargo’s account growth. He received US$4 million in awards in 2015 linked to factors such as
growing “primary consumer, small business and banking checking customers”.
Another executive under fire was the head of the community banking division since 2008,
Carrie Tolstedt, who led retail operations and cross-selling efforts to customers. Tolstedt had
resigned prior to the September revelation, and walked with a US$125 million payout. In 2014,
Wells Fargo specifically disclosed cross-selling as a factor behind her multi-million dollar pay.
Having confirmed that Tolstedt’s departure was partially linked to the unauthorised accounts,
Stumpf and the board were criticised for allowing the huge payout instead of firing her for the
misdeed. Eventually, Wells Fargo recovered US$19 million but Tolstedt still left with US$43
million in stock.
To be continued on the next page
3
Board of Directors
Wells Fargo’s board faced scrutiny, with proxy advisory firms Institutional Shareholder
Services and Glass Lewis calling for shareholders to vote against some or almost all of the
incumbent directors. Glass Lewis also advised against the re-election of two directors who
were on too many other boards to effectively govern Wells Fargo.
However, the board was seen to be largely inactive. For instance, the Corporate Responsibility
Committee met only thrice in 2015, the minimum number set by board rules. The board also
remained mainly passive even when early warnings about the company’s business practices
surfaced in 2013. It took no action in early September to fire Stumpf or clawback his
remuneration. Several reasons were cited for the board’s inactivity. For example, directors
often nominate themselves for re-election in the US, allowing them to remain on the board
without difficulty.
Another issue was the closeness of the board with the CEO, which was accentuated by the fact
that the CEO himself was the Chairman of the board. This was partially attributed to the
directors’ long tenures, with Wells Fargo’s directors’ average tenure of 9.7 years exceeding
those of other S&P 500 companies and banks like J.P. Morgan and Citigroup, leading to an
insular board and familiarity concerns.
Various suggestions to improve board effectiveness were made. CtW Investment Group
suggested the inclusion of new directors with experience linking employees’ remuneration to
corporate goals, while shareholders such as New York City’s pension funds, who found trouble
understanding the responsibilities of board committees, called for fewer directors and greater
clarity about their duties.
Moving Forward: Will All Be Well?
Half a year on from the revelation on 8 September 2016, Wells Fargo has instituted various
changes, ranging from new executives to improved company policies. These have placated
some observers, but others remain sceptical of the bank’s inherent profit-seeking nature.
Looking ahead, the bank can be comforted by the fact that other equally sizeable companies
have recovered from similar incidents. Yet, trust is something easily broken but not easily
earned. How Wells Fargo will do in the years to come remains to be seen.
To be continued on the next page
4
Required:
(1) Before John Stumpf’s resignation on 12 October 2016, discuss what type of corporate
governance model that Wells Fargo might belong to? Explain the characteristics of this
specific type of corporate governance model. (10 marks)
(2) Explain each of the following corporate governance problems then faced by Wells Fargo.
If Wells Fargo is a Hong Kong incorporated company listed on the Main Board of The
Stock Exchange of Hong Kong Limited, discuss your recommended measures to tackle the
said corporate governance problems with reference to the relevant Code Provisions of the
Hong Kong Corporate Governance Code (Appendix 14 to the Main Board Listing Rules)
(“CGC”) in order to achieve good corporate governance.
(a) John Stumpf’s dual role; (12 marks)
(b) Long tenures of directors; and (16 marks)
(c) Inactive board. (16 marks)
(3) John Stumpf was walking away with US$133.1 million upon his resignation, including 2.4
million shares he accumulated while Carrie Tolstedt resigned and walked with a US$125
million payout. If a similar case occurs in Hong Kong, discuss:
(a) the terms of reference; and (12 marks)
(b) recommended measures (12 marks)
that you would recommend Well Fargo’s Board to form a Remuneration Committee for
improvement of its excessive remuneration problem with reference to the relevant Code
Provisions of the CGC.
(4) Although a whistleblower hotline had functioned to notify Well Fargo’s senior
management of potential violations, the ‘pressure-cooker’ environment of the bank had
still maintained.
(a) Identify the alleged misconducts involved in the then banking business of Wells Fargo.
(6 marks)
(b) If a similar case occurs in Hong Kong, explain how a company secretary could assist
the Board on the policy of whistleblowing. (16 marks)
-END OF QUESTION PAPER-

The case study revolves around Wells Fargo, which is a financial institution with a market capitalization of $240 billion and serving 70 million customers. The company was charged with opening around two million unauthorized deposit and credit card accounts since 2011 to meet sales goals and earn incentives under the bank’s incentive-compensation program. The fraudulent practices may have existed for more than a decade, resulting in a $185 million fine from the Consumer Financial Protection Bureau. John Stumpf, the CEO and Chairman of Wells Fargo, was held responsible for allowing a sales-driven culture in the company. As a result of the scandal, Wells Fargo’s reputation was damaged, with a negative perception of the bank rising to 52% from 15% during the period prior to the scandal. This case report consists of four questions related to corporate governance and compliance, and the students are required to answer all questions within 2,500 words.