Wednesday, September 21, 2016

Stumpf stumped

John Stumpf, CEO and Chairman of Wells Fargo, was earlier a non-controversial bank executive. He was recently questioned by the U S Senate wherein Sen Elizabeth Warren found him to be a 'gutless leader'.

Wells Fargo was comparatively untainted by the banking excesses which characterised the 2008 crisis. It is now revealed that since 2009 the bank has been opening sham accounts and issuing fictitious credit cards. In effect, persons who had not requested opening of accounts were charged some fees unauthorisedly.

This fraud has been attributed to the pressure created to meet targets of individual employees. How could such an obviously egregious malpractice go on for seven years before getting outed?

Carrie Tolstedt was in charge of banking operations. She was aware of the problem. Stumpf admitted that no action was taken against her because her performance was otherwise spectacular. A similar treatment was meted out to Nick Leeson by Barings Bank because he was instrumental in generating huge profits. There is a lesson here. If supervision of performers by management becomes lax, they tend to degenerate into 'rogue' performers.

Management by targets suffers from two main weaknesses. Employees limit their performance to targets even if more is achievable. Secondly, the pressure to achieve targets may result in employees cutting corners and committing frauds.

John Stumpf is both CEO and Chairman of the board. It is moot whether combination of these two positions makes frauds more likely.

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