Senator Elizabeth Warren took Wells Fargo CEO John Stumpf to task yesterday, and she pointed out that nothing will change on Wall Street or in the boardrooms of America's banks until we start prosecuting executives who oversee fraud.
She's right, but to avoid scandals like this one, we also need to fundamentally change the way that corporate executives get paid.
Ever since the Reagan administration, instead of actually investing in research and development or raising workers' wages, corporate executives have focused more and more on inflating a company's stock prices and dividends.
This is because, over that same time, changes in the tax code made it so that CEOs like Stumpf are better off getting most of their income from so-called "performance based pay", also known as stock options.
Between the "shareholder revolution" of the 1980s and the changes to how executives can be paid, our economy is now riddled with perverse incentives that distort the values and priorities of American businesses.
And Wells Fargo CEO John Stumpf is proof.
Earlier this month, Wells Fargo
settled with a Los Angeles prosecutor and with federal regulators who accused the bank of opening more than 2 million checking and credit accounts for customers, without the customers' knowledge!.
And while Stumpf has repeatedly claimed to be accountable for the scandal, he hasn't DONE anything to make himself, or any of the other senior executives, accountable for this massive scandal.
"Did you fire any of those people? [...] No. OK, so you haven't resigned, you haven't returned a single nickel of your personal earnings, you haven't fired a single senior executive. Instead evidently your definition of "accountable" is to push the blame to your low-level employees who don't have the money for a fancy PR firm to defend themselves. It's gutless leadership."
Warren went on to explain how Stumpf borrowed logic from Dr. Seuss to encourage Wells Fargo employees to push cross-selling.
"In your time as chairman and CEO, Wells has been famous for cross-selling, which is pushing existing customers to open more accounts. Cross-selling is one of the main reasons that Wells has become the most valuable bank in the world. Wells measures cross-selling by the number of different accounts a customers has with Wells. Other big banks average fewer than three accounts per customer. But you set the target at eight. Every customer of Wells should have eight accounts with the bank. And that's not because you ran the numbers and found that the average customer needed eight banking accounts. It is because, 'Eight rhymes with great.' "
But that logic is about as good as any, because the truth of the matter is that cross-selling isn't meant to be good for customers.
It's meant to inflate stock prices, and consequently enrich investors and executives, like Wells Fargo CEO John Stumpf himself.
