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Wells Fargo: A cautionary tale

Wells Fargo executives were scrambling.

The bank in September 2016 was preparing to disclose that more than two million checking, savings and credit card accounts had been opened without explicit consent from customers. Fines and penalties in the regulatory settlement totaled $185 million, rounding error for a company capable of generating more than $20 billion annual net income. Restitution had been paid to customers, even though actual damages averaged less than $2 each. All in, the settlement equaled less than a week’s worth of earnings, nowhere close to a materiality threshold for disclosing financial news to shareholders.

While finalizing a press release about what seemed to be a routine regulatory settlement, though, Wells Fargo attorneys kept running into a sticking point with regulators. The company had already agreed to disclose details about their investigation into the fraudulent accounts, the amount of the settlement, and refunded fees. Still, the Consumer Financial Protection Bureau, a consumer watchdog agency created in the wake of the financial crisis, was pressuring Wells Fargo to disclose one more nagging detail.

Thousands of employees – mainly tellers and branch managers – had been fired for opening the bogus accounts.

Why disclose that? The bank was not being accused of any workplace violations, and turnover among its more than 100,000 branch workers was typically 20% or more a year. Internally, the dismissals were considered so inconsequential that human resources was not effectively tracking them, and the bank’s senior executives had not even bothered to mention them to the board of directors.

Meanwhile, as the legal team hashed out the final press release with regulators, Wells Fargo PR was taking its direction from those same senior executives. “You know how this works. The business will tell us what to say, and we will say it,” one senior Wells Fargo PR executive told me as the press release was being finalized.

Wells Fargo was flying blind.

Heading into what would become one of the most severe reputational events in corporate history, regulators seemingly understood why firing thousands of bank tellers mattered. The press certainly did. And so would Wells Fargo customers.

Banks that had been bailed out during the financial crisis had entered into an implicit contract. After triggering a financial crisis, receiving billions of dollars in TARP bailouts and causing the Great Recession, banks were simply expected to behave better. Bottom line, behaving better included holding highly paid executives -- and not minimum-wage tellers -- accountable.

By settlement day, Wells Fargo had been successful to some extent in spinning the story that would be released to the press. The number of fired employees was referred to in the corporate press release as “terminations of managers and team members who acted counter to our values.”

The breaking news headlines mirrored the press release, initially. But “Wells Fargo Fined $185 Million for Fraudulently Opening Accounts” quickly shifted to “5,300 Wells Fargo Employees Fired Over 2 Million Phony Accounts” after the Los Angeles City Attorney confirmed the number of employees pressured into gaming that ill-conceived bonus scheme.

When the updated headlines hit, the reaction was immediate. And explosive. And it quickly became clear exactly what consumers were angry about. The day the news broke, several hundred people posted comments against the Washington Post coverage alone. In the comment strings, the amount of the settlement was mentioned in passing. About one in ten comments focused on the victims. Nearly half of the comments, though, were directed at Wells Fargo executives.

“Fired employees??? Are we ever going to see top executives in jail for incentivizing criminal activity for which every big bank has now been found guilty of. These people destroy lives and the shareholders get to pay fines while they walk free. This is just outrageous!!!!!”

“You gonna tell me that there weren't executives that gave tacit approval for this caper? There should be hard time for the crooked banksters, they are nothing but home grown terrorists. Just another slap on the wrist means it's OK to keep pulling this stuff, and they will.”

And the news cycle was not over. “’You Should Resign,’ Senator Warren Blasts Wells Fargo CEO” became a rare instance in which a direct quote was crafted into a headline. Days later, former Chief Executive Officer John Stumpf did just that. But the damage was done. The company's misread on the firings had triggered a crisis, and the lead-up to Congressional hearings prolonged a devastating news cycle for several more weeks.

On a typical day, barely one in ten people would say they heard or saw something negative about Wells Fargo, not unusual for a bank. By the time this initial news cycle had run its course in late 2016, negative headlines about the settlement had reached more than half of U.S. adults – about 135 million customers and potential customers -- according to YouGov daily tracking polls.

“No question. The most damaging thing was the firings. Followed by the fact we were opening phony accounts, of course. But mostly it was the firings,” one senior Wells Fargo communication executive told me a year later, citing marketing research conducted in the wake of the crisis. That research was compiled months after the settlement was announced, well after the damage had been done. Too late to help the company navigate the sales impacts. Too late to avoid piling on by legislators and regulators. Too late to alter a post-settlement communications strategy that prolonged the crisis for months.

While marketing struggled to quantify the reputational damage, bank executives knew almost immediately how bad it would be for the business. Days after the headlines broke, Wells Fargo purchase consideration declined by more than 50%, according to YouGov’s online polling. The survey was spot on. During investor calls monitored by the financial press, the company confirmed the corresponding sales impacts. Applications for new credit cards in September plunged 50%. Consumer bank account openings declined 44%.

Comeback story?

What started out as a financially immaterial settlement to a virtually victimless fraud had mushroomed into a full-on strategic business crisis. Ironically, Wells Fargo executives were trying to pull the bank out of the crisis in much the same way that a “share of wallet” culture had pulled the bank in. By focusing communications on shareholders. Not the media that would amplify the shareholder messages to customers. Not the customers who were now being reminded of executive behaviors on a monthly basis. Not even the legislators and regulators launching their own investigations into the bank’s conduct.

Investor relations -- not corporate communications -- was calling the shots now. Although Wells Fargo, not unlike most companies, declared an unwavering commitment to Main Street, “putting our customers’ interests first 100 percent of the time,” the communications plan during the crisis was aimed squarely at Wall Street. And even though the 2016 Trump election was about to take all the air out of the room, Wells Fargo pledged to deliver monthly updates and publicize a board investigation. The media relations tactics effectively ensured Wells Fargo would stay in the headlines for years to come.

By April 2017, barely eight months into the crisis, Oscar Suris, then the bank’s chief communications officer, was already anticipating the next chapter of the story. “I have faith that all Americans love a great comeback story,” Suris would say in a home-town presentation to Charlotte’s Public Relations Society of America chapter. Suris and his team had spent months weathering the glare of the national media. A month earlier, Wells Fargo marketing colleagues had launched another ad offensive, promising the bank was “Building Better Every Day.” According to the bank’s marketing executives, the worst of the crisis was behind them.

“Our research clearly shows our customers are ready to hear a different message from us,” a Wells Fargo marketing executive proclaimed, according to employees who attended town hall meetings held across the bank’s footprint. “We have successfully rebranded the bank.” But bank employees did not share her optimism, peppering new CEO Timothy Sloan with persistent questions about the effectiveness of the “brand refresh,” which did not appear to be doing much to reverse sales declines.

Barely a year later, in May 2018, marketing seemingly validated those concerns, launching yet another brand repositioning campaign. “Established 1852. Re-established 2018” also was met with a measure of skepticism. “Wells Fargo launches ad campaign to leave accounts scandal behind. Not everyone is buying it,” the Los Angeles Times reported. Ultimately, none of the ad campaigns moved the brand needle significantly. Full-page ads taken out the day after the settlement was announced actually seem to have made things marginally worse.

Faulty compass

In banking, regulators have created a supervisory framework comprised of financial and non-financial risks that could threaten the safety and soundness of banks. The risks mainly are financial -- liquidity, credit, market, rates -- or focus on bank operations, compliance or strategy. The final risk -- reputation -- is not as well defined, but poses significant risks in the event of a true crisis.

In business terms, reputation risk is a low-probability, high-impact event -- a tail risk. In economic terms, a news-driven shift in consumer perceptions and sales would be triggered by narratives that catalyze a shock. In virtually every major company, though, reputation is managed not as a business or economic construct, but as a marketing construct.

Wells Fargo is no exception. At Wells Fargo, reputation risk management was rooted in a marketing assumption that taking responsible environmental stances and making philanthropic donations shaped the bank's reputation -- and, by extension, would effectively mitigate reputational damage.

But there is a case to be made that reputation is based more on personal experiences with a brand than the brand's marketing and promotions. By extension, reputation risk is pegged to events that are meaningful to customers, and experienced directly through interactions with the company, or indirectly through the media. Taking responsible environmental stands and making million-dollar philanthropic donations make for good press releases. Neither has been shown to shift reputation in any material or lasting way -- and certainly not in the wake of a shock.

Throughout its crisis -- now in its seventh year -- the Wells Fargo reputation risk team has been navigating with something of a faulty compass.

Third rails and long tails

O.K., so what should Wells Fargo have done? Could the company have predicted that firing 5,300 tellers and not a single executive would be the catalyst for one of the most severe reputational crisis events in corporate history? Once the news broke, could the company have predicted that consumer sales would be cut in half? And once the company hit bottom, was there any way for Wells Fargo to plot an eventual recovery?

These are all rhetorical questions. Here's how crisis events play out.

News is virtually always the catalyst that triggers a shock. And we're not talking about a single story that breaks today and is gone tomorrow. Just like an earthquake, a business shock starts with a tectonic shift -- in this case, a protracted news cycle. When we look at a company's news stream, the catalyst for a shock looks something like the chart below. The exclamation point marks the day Wells Fargo announced the settlement, and the first news cycle did not end until CEO Stumpf's resignation. This is what a news catalyst looks like:

As we know, the volume and tonality of published news tell us about what was published in the media. We need a separate metric to gauge what people heard or saw. That's consumer Buzz. The chart below tracks both the News Stream and consumer Buzz scores. Note the correlations -- r = 0.04. That's a very weak to non-existent correlation. What we are measuring are two separate and distinct variables -- qualities of news published in the media, and qualities of news people heard or saw. This is what a significant shift in consumer buzz looks like:

Now we've measured the news, and people's reaction to the news. But has that news corresponded to a shift in perceptions about the company? People hear or see news every day that is perceived as negative. But does that change opinions about the company? In Wells Fargo's case, unfortunately, the answer was yes. Check out this chart, below. Again, more than half of U.S. consumers had a negative impression of Wells Fargo following the news coverage. And the consumer Buzz and company Reputation are highly correlated -- r = 0.93. That's an incredibly strong relationship. This is what a significant reputational shift looks like:

And now we have a way to predict the depth and duration of a storm. Why? Because they all play out the same way. See that first big plunge in consumer Buzz when the news broke. That negative spike bottomed when the news cycle ended. Then our Buzz score rebounded, and the company's reputation recovered slightly. Then Buzz and Reputation started what has proven to be a long, gradual recovery.

Remember our functional, tactical, strategic framework? Functional is being able to tell our client about the news stream, what was published. Tactical is plotting shifts in consumer Buzz, what people heard or saw. Strategic is forecasting the depth and duration of the erosion and gradual recovery of the organization's reputation. But at the very start of a crisis, when nothing has changed but the impacts from the news, we also can add one more strategic insight.

One final chart, below. Remember we mentioned that Wells Fargo investor relations was managing the communications tactics during the crisis? As a result, they wanted to help investors track a key metric, which they called sales suppression. Some might call it sales declines, or lost sales. Whatever.

New bank account openings declined by about 40% at the peak of the crisis. And once sales bottomed out, they began to recover -- gradually. Six months after the news first broke, sales were down 23% from the same month the prior year. Just like Buzz and Reputation, the sales suppression bottomed out, rebounded, and then gradually recovered. Check it out. This is what a true business shock looks like:

Based on this pattern, we can not only predict the depth and duration of reputational shocks. Now we also can classify the severity, in much the same way we categorize the power of an earthquake or the strength of a hurricane or tornado. Here are the severity levels of a long-tail business shock:

  1. Media: A protracted cycle of negative news that people read or heard about

  2. Consumer: A significant shift in perceptions about news people read or heard about

  3. Reputation: A significant shift in perceptions about a company or its products

  4. Top line: Sales impacts

  5. Bottom-line: Earnings impacts

A footnote. In PR, virtually any cycle of negative news is categorized as a crisis. For companies, causes and campaigns, a crisis should denote lasting strategic impacts on customer sales, or support from donors and voters. News that moves the needle on perceptions, sales and earnings can be categorized as a shock. Anything less than that is just a negative news cycle. Not a shock. Certainly not a crisis.

End in sight?

As you read this blog, Wells Fargo is in the midst of Year Seven of its crisis. U.S. regulators and legislators seem to be losing their patience. The bank has been the target of numerous additional enforcement actions in recent years, and U.S. Sen. Elizabeth Warren continues to urge regulators to break up the bank, citing a new finding that the bank could not fix "significant deficiencies" in its home mortgage business.

More recently, Consumer Financial Protection Bureau Director Rohit Chopra said dealing with "too big to fail" repeat offenders ranked as one of his top supervisory priorities. Wells Fargo would sit at the top of a very short list of large recidivist banks meeting his criteria. Wells Fargo's business impacts cannot be resolved fully, though, until punitive sanctions imposed by now-U.S. Treasury Secretary Janet Yellen have been lifted.

Still, consumer recall of news about Wells Fargo -- the negative buzz -- has faded gradually. Is an end in sight? If the trajectory of the current trend line holds, the bank’s reputation had been on track to return to a net-neutral level sometime in mid-2025 -- assuming Wells Fargo could stay out of the news until then.

It couldn't. The bank continues to draw the ire of U.S. Sen. Elizabeth Warren and CFPB Director Chopra, who have targeted the bank as a "recidivist offender."

At this point, the Wells Fargo recovery has stalled.

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