10/28/2016 05:03 pm ET Updated Oct 29, 2017

Tone At The Top: Culture Counts -- The Wells Fargo Saga

"Tone at the Top" has become an often-quoted mantra in business circles but it appears to have shed a rather dim light when evidenced by the continuing saga at Wells Fargo. In a nutshell - in case you haven't followed the recent news reports - the San Francisco-based bank recently fired over five thousand employees (roughly one percent of its workforce) for signing up customers for credit cards and checking accounts without their permission. In all, authorities estimate that as far back as 2011, two million bogus accounts were opened - complete with forged signatures, phony email addresses, and fake PIN numbers. Pressures by banking supervisors pushed employees to create these bogus accounts in order to meet daily (and sometimes hourly) account quotas. This lead to an estimated $1.5 million in fees charged back to customers for these bogus accounts.

Gary Roboff and Bob Jones, senior advisors with The Santa Fe Group, an executive risk management consulting firm based in Santa Fe, New Mexico, who each have decades of financial and banking experience in payments fraud and operation risk, recently analyzed and blogged the situation at Wells Fargo and provided some very thought-provoking analysis.

They noted four key points that we haven't seen in previous analysis into Wells Fargo:
• The sales culture at Wells Fargo was more than two decades in the making, and as early as 1995 they were already achieving cross-sell ratios twice the industry average;
• The specific targets used in Wells incentives were wrong;
• Under the right circumstances and done correctly branch sales incentives can be useful tools in banking; and
• Communication channels from the Board of Directors on down (and back up again) were lacking.

Wells Fargo predecessor, Minneapolis-based Norwest Bank, was renown in the banking industry for its "unusual success" in cross-selling retail banking products. The organization was already measuring cross-sell performance daily at the branch and salesperson level and was already achieving industry-leading cross-sell performance. They believe that cross-sell, in and of itself, is not an unethical practice; that a good cross-sell typically results from understanding customer needs and suggesting other products the company offers to meet those needs. However, they note "when the incentives to cross-sell go astray and inconsistent messages about corporate priorities come from a board and C-Suite, sales cultures may go off the tracks".

Additional analysis evidences cross-sell ratios at Wells Fargo climbed to astronomical levels over the years, and the bank's profitability climbed with it. "By 2006 cross-sell ratios at Wells were well over four accounts per household, reached five accounts per household in 2007, and six per household in 2012. Cross-sell ratios have exceeded six in every year since 2012" they noted,a year that the American Banker Association (ABA) reported the industry average was 2.3 accounts per household.

In a different internal culture, the steps Wells took might have been enough to quickly halt unethical business practices. "Their internal sales culture had evolved to such an extreme that perhaps the only way to straighten it was by blowing it up, which - in effect - has happened as a result of the extreme legal, regulatory and legislative push-back we've seen in the last few weeks" noted Roboff and Jones.

What happens at the board and C-suite and within the retail bank will be apparent in the months ahead. Per Roboff and Jones, "consistent, focused, and regularly reinforced behavioral expectation messages from the board and C-suite are essential to developing appropriate risk cultures." Additionally, they noted that retail employees sadly received two contrasting messages from executives; one set appropriate behavioral and policy expectations, while the other "directly encouraged a sales culture of 'the sky's the limit'".

Roboff and Jones have identified a key concern though; that the regulatory community and the financial services industry might draw the wrong conclusions from the recent events at Wells Fargo. "Stigmatizing the practice of cross-selling and completely eliminating branch-based sales goals does not strike at the real source of the problem" adding that "(there) was an imbalance between management's often expressed desire to reach ever improving levels of cross-sell performance and a textbook set of risk culture and ethical values that were clearly on the books at Wells Fargo but were under-communicated and under-enforced within the retail bank."