Wells Fargo & Co. (WFC, Financial) once enjoyed an enviable reputation among America’s biggest banks. Its brand was a watchword for prudence, honesty and quality customer service. That perception was shattered in 2016 with the revelation of a widespread fake accounts fraud scheme. Unsurprisingly, the bank’s reputation has been severely tarnished by that revelation, as well as by the series of further scandals that followed. Despite its best efforts to turn the corner, Wells Fargo’s problems continue to fester.
Evidently, the pressures of dealing with the extensive internal reform program while under intense government scrutiny have proven too much for Tim Sloan, Wells Fargo’s embattled CEO. He resigned abruptly last month, triggering an unexpected hunt for a replacement.
The board wants an outsider
Sloan had been a career Wells Fargo man, but it appears likely that his successor will be an outsider. That is certainly the case at present, according to Chair Betsy Duke:
“The Board has a continuous succession planning process through which we identify potential successors within the Company. Although we have many talented executives within the Company, the Board has concluded that seeking someone from the outside is the most effective way to complete the transformation at Wells Fargo.”
Wells Fargo has a long tradition of promoting from within. Sloan himself was a 29-year veteran of the company and had risen to be chief operating officer before getting the nod for the top job in 2016. Clearly, the decision to put responsibility for root-and-branch reform in the hands of an insider has failed to pay off thus far. Hence, the decision to expand their search beyond the company’s internal talent pool makes considerable sense.
Buffett calls for something new
This choice has won plaudits from major shareholders. Warren Buffett (Trades, Portfolio), whose Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is Wells Fargo’s largest shareholder, has expressed support for the move. Moreover, Buffett has urged the board to look beyond the usual big bank candidates. Indeed, he recommends the beleaguered bank tap someone from outside of Wall Street altogether:
“They just have to come from someplace [outside Wells] and they shouldn’t come from Wall Street...They probably shouldn’t come from JPMorgan or Goldman Sachs...There are plenty of good people to run it [from the Wall Street banks], but they are automatically going to draw the ire of a significant percentage of the Senate and the U.S. House of Representatives, and that’s just not smart.”
Buffett’s concerns are understandable in light of Wells Fargo’s current position. Every move it makes is under the federal microscope. Making a change at the top that could allay the worries of Congress and regulators could allow the bank to focus on growth again, rather than merely damage control.
Politicos want real change
Buffett’s concerns have already been proven right, with numerous political heavy-hitters calling for a major shakeup at Wells Fargo. Senator Sherrod Brown was uncharacteristically pointed in his criticism in the wake of Sloan’s resignation:
“Tim Sloan needed to go, and he should not take a huge payout with him. But Wells Fargo’s mismanagement is about more than one CEO – this bank needs a complete culture shift.”
Senator Brown was far from the only voice. Representative Katie Porter offered an equally withering take on the bank’s governance:
“The bank has a lot of work to do to fix its problems, and Congress and our bank watchdogs need to continue pressing for change.”
Buffett’s advice to look beyond Wall Street appears wise indeed in light of these criticisms. Opting for a veteran banker will likely only fuel the fire of political criticism, which would only serve to further damage Wells Fargo’s reputation - and its share price.
Verdict
In May 2018, Buffett reiterated his long-standing support for Wells Fargo, declaring it to be the best big bank stock around:
"I see no reason why Wells Fargo as a company — from both an investor standpoint and a moral standpoint going forward — is in any way inferior to the other big banks with which it competes.”
Buffett has not shied away from the scandals, however. Indeed, even while defending the company last May, he called out the internal incentive program that drove the fake account scheme as Wells Fargo’s “cardinal sin.”
We are not so sure that Wells Fargo is quite so wonderful compared to its peers as Buffett seems to think, but we do agree the pressure on the stock has put it into - or at least near - bargain territory. For a long-term investor willing to ride out the present storm, Wells Fargo presents quite a compelling looking opportunity.
Disclosure: No positions.
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