Wells Fargo — facing lawsuits about preying on minorities — just won a diversity award

Earlier this week the U.S. Supreme Court ruled that a case brought by the city of Miami, suing Wells Fargo and Bank of America for discriminatory lending during the housing bubble, could proceed. In court documents revealed last week, shareholders had brought a lawsuit against Wells Fargo alleging that Latinos, and even undocumented workers, were targeted in the sales scandal that has roiled the bank since last year.

But on Tuesday night in New York City, something interesting occurred: Wells Fargo received an honor for diversity, making the annual DiversityInc list of the 50 most diverse companies in the world. It even cracked the top 10 for the first time this year.

Wells Fargo hasn't had much good news to crow about amid the fraudulent accounts scandal — on Tuesday the city of Philadelphia fired Wells Fargo as manager of its $2 billion payroll account. "Time and time again their actions have revealed them to be the antithesis of corporate social responsibility," Philadelphia Councilwoman Cindy Bass said in a statement.

One of the reasons the bank was honored for diversity: the Wells Fargo board. The same board that many shareholders and grassroots organizations contend was negligent in its oversight of the sales culture. But it gets high marks for its diverse composition, including women and minorities. It's fair to ask whether there's a diversity bubble at work here — board diversity that makes a corporation look to be on the right side of history isn't honestly reflecting the bank's impact in the real world and on communities, where allegations of discriminatory lending and minority-targeting of customers persist.

These are just allegations — the Supreme Court was not ruling on the merits of the case, and justices indicated they think Miami will have a hard time proving it. But it's an issue that I thought would make for an interesting interview with Wells Fargo CEO Tim Sloan, who agreed to give me 45 minutes over the phone this week to discuss the diversity honor. But there were a few strings attached — the sales accounts scandal couldn't be discussed, and my questions had to be sent ahead of time (I didn't do that). I did give Wells Fargo PR a brief rundown over the phone of the issues I would like to discuss (and, I admit, I even tried to be nice). A day later the 45 minutes allotted was reduced to 20 minutes.

An 'extensive and pervasive pattern'

Then I realized there was even more that had to be weighed in an article about diversity, including the decision in March by the Office of the Comptroller of the Currency to give Wells Fargo a "needs to improve" rating under terms of the Community Reinvestment Act, a 1977 law intended to promote lending in low-income neighborhoods. The OCC stated it had uncovered "an extensive and pervasive pattern and practice of discriminatory and illegal credit practices across multiple lines of business within the bank, resulting in significant harm to large numbers of consumers."

If "needs to improve" sounds OK — who shouldn't strive to do better? — consider the way community activists describe the rating downgrade.

"We don't think any bank of this size has ever gone from 'outstanding' straight to 'needs to improve.' That is, in the least, extremely rare — a double downgrade. They are the ones who tend to get the 'outstandings' and care. There is no comparison to the double downgrade I know of," said Kevin Stein, deputy director of the California Reinvestment Coalition.

So I ambushed the CEO of DiversityInc, Luke Visconti. I'm usually a mild-mannered guy, but I got a little testy in asking him how Wells Fargo not only made the DiversityInc list but moved up this year. He struggled to answer. John Stumpf, the former CEO, was "fair-minded and passionate about providing opportunities." The scandal does not take into account the "entirety of the business situation." The acquisition of Wachovia Securities forced on the bank by the government was partially to blame (which sounded sort of like what conservative editorial pages said after the housing bust — government forced banks to make mortgage offers to bad credit risks). "Bad behavior is everywhere," Visconti said.

I've always known Visconti to encourage provocative questions — he's even set me up in the past with officials who are skeptical of his ranking. So his struggle to answer wasn't BS — it was a struggle because there isn't a clear-cut answer. And he added that none of this "absolves them for what went wrong and hurting people." But he does think Wells Fargo will respond in an "ethical and moral way." Visconti also noted that corporate diversity often follows scandal rather than being proactive. Novartis and Sodexo are companies that first made the DiversityInc list after issues involving gender discrimination. "Part of diversity is, you screw up and you get equal blame," he said.

The DiversityInc list also takes into account many more factors than just board composition.

Julie Goodridge, founder and CEO of NorthStar Asset Management, a socially responsible investing firm, said that her company hasn't owned Wells Fargo in a long time — and only when it inherited holdings that new clients brought with them. But when it did back in 2002, it promoted a shareholder resolution linking executive compensation to putting an end to predatory lending practices. "I think there is a lot of Wells Fargo bad behavior that has been happening for almost two decades," Goodridge said. "Diversity is incredibly important, but there are so many additional factors that need to be part of the question about companies behaving properly in the world," she said.

Mark Molumphy, a principal at Cotchett, Pitre & McCarthy representing shareholders in the lawsuit filed last week alleging minority-targeting within the broader sales accounts scandal, put it this way: "Governance breakdown has real-life impacts; decisions made or not made at the board level had real-life impacts for customers and for its rank-and-file employees."

Tellers serve customers at the Wells Fargo bank in downtown Denver.
Rick Wilking | Reuters
Tellers serve customers at the Wells Fargo bank in downtown Denver.
"Governance breakdown has real-life impacts; decisions made or not made at the board level had real-life impacts for customers and for its rank-and-file employees." -Mark Molumphy, lawyer representing Wells Fargo shareholders in a lawsuit

Molumphy said his firm didn't know about the targeting of minorities when it first filed — and still does not know the full extent of it — but it has collected a handful of declarations related to the targeting of undocumented workers, and he added, "Ever since we filed the case, we've been contacted by dozens and dozens of employees as well as former customers. ... People are especially upset about those types of practices," especially salespeople desperate to meet aggressive sales tactics going out to solicit accounts from day laborers or at bottling plants, he said. "It's just one more piece, one more red flag from our perspective about an active, vigilant management and board. They should have asked questions about this targeting," Molumphy said.

Wells Fargo has called the allegations "offensive."

In situations requiring equal measures moral compass and compassion, I can't see a better perspective to seek than that of a spiritual person, so I asked Sister Nora Nash, the director of corporate responsibility for the Sisters of St. Francis of Philadelphia, and a Wells Fargo shareholder activist.

"The board has historically been very conscious of diversity," Sister Nora told me. "[The board] includes women and people of color and has been a leader in the board diversity area. But we don't appreciate the other side, where there's possibly discriminatory practices, especially in the mortgage industry, and that's a little bit of a conflict there, and we know there have been quite a few problems."

Sister Nora has met with Tim Sloan and said she is "cautiously optimistic." But she was quick to add that she "won't be going away."

The shareholder resolution she supported to get a full accounting of the root causes of fraudulent activity received support from 22 percent of shareholders at the bank's recent annual meeting.

She noted the 110-page report from the Wells Fargo board on the sales scandal was "very transparent and well done, except it blamed basically one person." A woman, too — the former head of the community bank division, Carrie Tolstedt. Sister Nora noted that several years ago the Interfaith Center on Corporate Responsibility did a survey of banks asking for a comprehensive review of business standards. Goldman Sachs, JPMorgan Chase and Bank of America completed it. Citigroup completed it, in a slightly different fashion that the ICCR asked for. Wells Fargo's response was the least satisfactory, and it received the lowest score.

"Like I told them, this is emergency work that needed to be done. ... Now they have to resolve problems — lots of them. ... This is about more than retribution, it's restorative justice," Sister Nora said.

A disconnect at Wells

And then Sister Nora told me something interesting. As a shareholder, she's not that interested in board diversity anymore and has a much greater focus on environmental, social and broader governance issues (ESG). She said the ICCR, of which she is a member, considered lack of women and people of color on boards as one of its biggest issues years ago. But it's moved away from that in recent years, since it seems to her that it's the outlier corporations that lag on that issue now.

"Diversity is independently a good thing, and to the extent they are on this list, it is to their credit," said Stein of the California Reinvestment Coalition. "But I think we need to step back and say a diverse board, and a diverse company, that's good, but it's also important that a corporation is a force for good and all communities. ... All too often, too much harm is disproportionately concentrated in neighborhoods of color. And the good doesn't reach these same neighborhoods. That's where there's a disconnect at Wells."

NorthStar Asset Management officials worry about any softening in corporate diversity activism — they still believe a focus on board diversity is critical. "The issue of women and minorities on boards has gained traction, but it's absolutely still an issue we feel we need to be addressing. It's still a top issue," said Mari Schwartzer, NorthStar's assistant director of shareholder activism, engagement and social research.

Northstar CEO Goodridge said I should ask Sloan the following questions:

  • How has your board changed in terms of its diversity since 2000?
  • How has the board changed in terms of diversity since 2008?
  • To what extent do you feel like the current board is better able to, because of diversity, protect the company from the kinds of errors and legal problems that we've seen in the past regarding predatory lending and other issues?
  • What additional changes need to be made regarding diversity to help avoid legal scandals?

I had at least a few more to add:

Sister Nora said that investors have been successful getting grassroots environmental activists onto boards where environmental concerns are an issue. Should there be grassroots community activists, those whom work directly with low- and moderate-income citizens, represented on a bank's board?

We've been told for years that one of the benefits of board diversity is improved risk management because diverse backgrounds help avoid the type of group-think that has become synonymous with "The Best and the Brightest" and the all-white male, Ivy-educated entry into the Vietnam War. Does the Wells Fargo scandal damage that belief?

Can a board member who was raised in a low-income family even lose touch? Consider Lloyd Dean, a director at Wells Fargo. Though not on the risk committee, specifically, he is on the corporate responsibility committee. The African-American CEO of Dignity Health, a faith-based, predominantly Catholic nonprofit hospital network, was raised in a family "on and off welfare" and without health insurance.

Dean is now reported to be the highest-paid hospital CEO in California, earning a total compensation of $5.1 million. In a rare move, influential proxy voting firm Institutional Shareholder Services had advised Wells Fargo shareholders to vote against all 12 of the existing directors at the bank's late April annual meeting, a recommendation Wells Fargo called extreme — Sloan called it "crazy." The entire board was re-elected by slim margins.

My interview with Sloan was scheduled for Tuesday morning. On the previous Friday, I had let Wells Fargo PR know that I could not in good faith do the interview without asking about the OCC downgrade, among the other issues, including the lawsuits alleging discriminatory practices. Late Sunday, I received an email from Wells Fargo PR saying Sloan's schedule had changed and he was no longer available for the interview.

"I hope it is not too much of an inconvenience but it cannot be helped. Sincerest apologies," the Wells Fargo spokeswoman wrote.


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