INCENTIVES

Warren Buffett tries to explain the Wells Fargo scandal that undermined one of his biggest investments

Warren Buffett blames the fraud scandal at Wells Fargo on a case of misplaced incentives, compounded by the “huge, huge error” of ignoring whistleblowers.

Wells Fargo is one of the largest investments of Buffett’s conglomerate, Berkshire Hathaway. At the Berkshire annual meeting this weekend, Buffett laid out a list of blunders that led to the scandal at Wells, where more than 5,000 salespeople set up about 2 million fake accounts for the bank’s customers in order to meet high-pressure internal goals, including a monthly report called the “Motivator.”

The scandal resulted in $185 million in fines and the resignation of Wells Fargo CEO John Stumpf. The bank’s stock has lagged about 30% behind peers such as JPMorgan Chase and Bank of America.

“You have to be very careful what you incentivize,” Buffett said at the annual shareholder meeting of his Berkshire Hathaway conglomerate, which owns about 10% of Wells Fargo shares, worth about $26 billion.

Among the bank’s many mistakes, “there was one that dwarfs all the others,” Buffett said. “At some point if there’s a major problem, the CEO gets wind of it. And the CEO has to act.”

The bank dismissed warnings from hundreds of employees about the fraudulent accounts, and retaliated against 885 employees who called its ethics hotline between 2011 and 2016.

The company also had data about ethical breaches among its employees that it ignored or misinterpreted. According to an internal review, executives knew that 1% of employees had been terminated for “sales integrity” violations, but in fact that grossly understated the problem due to high staff turnover.

A senior executive named Matthew Raphaelson wrote in an email that it was “mind boggling to me it’s so low–I think it shows our [employees] are significantly more ethical than the general population (no data whatsoever to back that up, just impressionistic comment!).”

Buffett also said that Wells Fargo’s leaders may have been bamboozled by the billions of dollars in fines incurred by Wall Street since the financial crisis, so that the relatively smaller fine that was initially levied did not raise alarm bells.

“They totally underestimated the impact,” Buffett said. “People get fined billions in the industry, so they measured the seriousness of the problem by the dimension of the fine and they thought $185 million [was small]. They were totally wrong on that.”

Update: Wells Fargo has issued a statement in response to Buffett’s critique, saying: “We agree with Mr. Buffett’s comments and value Berkshire Hathaway as a long-term shareholder and customer.”

home our picks popular latest obsessions search