Art of The Apology: Deconstructing Wells Fargo

SMITH BRAIN TRUST — It was the latest revelation in the Wells Fargo scandal: The surprise departure of CEO John Stumpf. Well, maybe not too much of a surprise. Stumpf had been in a downward spiral since revelations that bank employees, driven by bank incentives, had opened as many as 2 million accounts without their customers' knowledge. The bank was fined $185 million. Stumpf was forced to give up some tens of millions of dollars in stock awards and was berated on Capitol Hill by Sen. Elizabeth Warren, D-Mass., who accused him of “gutless leadership.” 

The scandal could have been handled better from the start, says management professor Susan Taylor at the University of Maryland’s Robert H. Smith School of Business. She views the Wells Fargo story through the prism of a four-stage framework she laid out in "After the Fall: Reintegrating the Corrupt Organization," a paper published in 2008 by Academy of Management Review and co-authored by  Smith School professor emeritus Ken G. Smith, Michael Pfarrer (then at the University of Denver and now at the University of Georgia) and Katy Decelles (then at Harvard and now at the University of Toronto).

The paper advises firms to: 1. discover the transgression, 2. explain the wrongdoing, 3. serve penance by accepting punishment, and 4. internally and externally rehabilitating the organization’s processes and legitimacy. Stumpf's departure appears to begin to address that fourth stage. He is taking heat for blaming lower-level employees, rather than placing responsibility on himself and on higher-level personnel. Early on in the scandal, he fell short in answering to Wells Fargo stakeholders, including customers, shareholders, regulators and politicians. Taylor shares her insights below, based on her research: 

How Wells Fargo Could Have Recovered in Four Stages 

By Susan Taylor

During the U.S. Senate Banking Committee hearing on Sept. 20, 2016, John Stumpf, then Wells Fargo chairman and CEO, introduced a chain of new activities to strengthen the organization’s culture and rebuild the trust of its customers and team members. But Stumpf’s effort came too late and was plagued by a failure that one can process through four stages laid out in "After the Fall: Reintegrating the Corrupt Organization."  

Stage 1: Discovery

Discovery, here, refers to the stakeholders collecting information to understand “What happened?” If they initially cannot concur on the facts of the transgression and the suitability of fact-finding, they provide feedback to the firm’s leaders and continue discussions at least until a “threshold of agreement” is reached. In this case, Wells Fargo should have voluntarily disclosed its transgressions, held internal investigations and cooperated swiftly and transparently with regulatory officials and salient stakeholders. Instead, the company seems to have played down the transgression to avoid embarrassment, and communicated different accounts to positively influence stakeholders’ perceptions. In this case to date, stakeholder discussions and demands do not appear to have been met — imperiling Wells Fargo’s chances of survival in the long term and delaying a move to the next stage.

Stage 2: Explanation 

There are two types of explanation that are applicable here: appropriate (adequate and sincere, honest, forthcoming and free of guile) and inappropriate (neither adequate nor sincere, while decreasing the level of cooperation among stakeholders and simultaneously increasing their retaliation and withdrawal, angst and agitation). Wells Fargo seems to have taken too few actions to explain and acknowledge its wrongdoing in order to adequately demonstrate accepting responsibility and remorse. Instead, it has provided inadequate, insincere explanations. Slow movement in the explanation stage can reduce the likelihood of reintegration.

Stage 3: Penance

How should Wells Fargo be punished? Ideally, the company accepts an equitable punishment for its transgression and in the process demonstrates a willingness to cooperate in rebuilding damaging relationships, leading prominent stakeholders to believe that the company has learned from its mistakes, has good intentions and intends to change its ways.

If the company refuses to accept punishment, it leaves its relationships with stakeholders unbalanced and in danger of exploding. In this case, if Wells Fargo stakeholders — customers, employees, politicians, journalists and analysts — deem the punishment ($185 million fine and Stumpf’s stock forfeiture) inequitable, they will tend to find their own form of unofficial punishment that could offset the perceived imbalance between the egregiousness of the transgression and the strictness of the official punishment. Wells Fargo might be wise to take a close look at high-level executives to determine whether they played a role in the transgression. We might see a development in this regard after the presidential election, when Berkshire Hathaway Chairman Warren Buffett is expected to comment on Wells Fargo’s situation. (Wells Fargo is Berkshire's second-largest stock investment, currently valued at about $20 billion.) 

Stage 4: Rehabilitation

The rehabilitation stage begins when stakeholders move away from the question, “How should the organization be punished?” and begin to demand that Wells Fargo ensure that another transgression does not occur. Stage 4 yields an approach that is closely consistent with internal and external actions. Internal actions concerned with rebuilding the technical, human, infrastructural and social aspects of the organization previously having led to the initial transgression and may incorporate changes in management, the way rewards are structured and the codes of conduct.  These elements of renovation point to internal stakeholders. However, Wells Fargo may instead rely on its past culture and banish some positive influences along the way, sending a  strong signal to stakeholders that there is energy for renewal while almost automatically leaning toward the former way of working at all levels of the organization.

Such a finding would wreak a great havoc once discovered and would seemingly push back any changes of upcoming renewal. Although external actions may prove to be very strong and sound, this too raises a conflict as inconsistent internal and external actions are likely to distort the renewal message and yield a lack of stakeholder trust.

It seems likely that Wells Fargo might well pass through one or two of the first stages. By the third stage, stakeholders should have much more insight regarding Wells Fargo's (low) intentions in running the organization ethically. Thus the prediction of Wells Fargo credibly moving through the last two stages and reaching renewal seems quite low due to the likelihood of significant change in leader transition and employees, and as well as the monitoring by prominent stakeholders.

Susan Taylor is the Smith Chair of Human Resource Management and Organizational Change and co-director of the Center For Leadership, Innovation, & Technology at the University of Maryland’s Robert H. Smith School of Business.