The Federal Reserve Board came down hard on the Wells Fargo board of directors last week, punishing the bank for consumer abuses by restricting its growth until it shores up compliance issues and paving the way for the replacement of four directors this year.
The move clearly illustrates that regulators are paying closer attention to how management and boards run their organizations—and holding them accountable when things go wrong.
The Fed’s consent cease and desist order with Wells Fargo (signed by all current directors) requires the bank to improve its governance and risk management processes—including the effectiveness of oversight by the board of directors. Until then, Wells Fargo will be restricted from growing any larger than its total asset size as of the end of 2017, and three board members must be replaced by April and another by year’s end.
“I view this as quite a shot across the bow that says management and board leadership matters.” – TK Kerstetter
“Usually these kinds of regulatory steps are saved for banks that are failing or in real capital deficiency trouble, so I view this as quite a shot across the bow that says management and board leadership matters,” says TK Kerstetter, CEO of Board Resources LLC, and editor at large of Corporate Board Member.
“The fact that they’ve done that and limited [Wells Fargo’s] growth is the statement that says that board leadership matters, and the culture from which management and the board set really matters.”
Details on which board members will be replaced and whether specific individuals on the board will be targeted for regulatory follow-up bears watching in the coming weeks and months, as this level of regulation is far from the norm.
“We hardly saw any of that even in the debacle of 2008 and 2009, where individuals were pointed out,” Kerstetter says. “It remains to be seen, but that could be another shot across the bow—if they start looking at individual people and feeling that they have somehow violated the public’s and regulators’ trust.”
One thing the Fed’s actions show is that boards (and individual board members) are being held responsible for corporate culture when that culture goes south.
“If you ever thought that culture was a soft issue, this changes it from a soft issue to a hard issue,” Kerstetter says.