Despite Consumer Scandals and Bank Mismanagement, Wells Fargo Continues to Spend Billions Rewarding Shareholders
March 9, 2020
By Katy Milani
Following a year-long congressional investigation into Wells Fargo’s egregious consumer abuses, lax corporate management, and toxic corporate culture, CEO Charles Scharf and Well Fargo’s board members will testify before the House Financial Service Committee this week.
This hearing comes in the wake of a detailed report, written by the Financial Services Committee staff, exposing the ways in which Wells Fargo’s board and management failed to oversee an adequate regulatory response to multiple consumer scandals since 2016. What this report does not question is why the CEO and the board authorized billions of dollars in stock buyback and dividend spending—enriching shareholders and the highest paid executives—rather than making consumers whole. The committee should interrogate CEO Scharf and the corporate board on these activities.
Through an analysis of Wells Fargo’s recent 10-K filings, we found that the bank’s spending on shareholders (in buybacks and dividends combined) increased from $12.5 billion in 2016 to $30.2 billion in 2019. Instead of following through with “building a better bank,” Wells Fargo’s board of directors and CEO chose to direct corporate resources toward shareholder wealth, deciding to increase buyback and dividend spending two and a half times (142 percent) since the consumer abuses came to light.
Corporate spending on stock buybacks has exploded in recent years across many companies and industries—including at Wells Fargo as this analysis shows—illuminating a key symptom of today’s extractive shareholder-first economy. But what does this illuminate about today’s economy? Known as “open-market share repurchases,” buybacks occur when a company buys back its own shares on the open market. This reduces the number of shares available, thus resulting in an increase in the price per share. In essence, stock buybacks raise share prices artificially. In other words, the value of a stock goes up as a result of a buyback, but without companies making the kinds of changes that would improve the actual value of the company—through more efficient production, new products, higher compensation for workers, or better customer experience. In short, when corporations or banks spend more resources toward enriching shareholders, this comes at the expense of productive investments.
Wells Fargo’s board not only agreed to reward shareholders at the expense of its workers and consumers, but the annual CEO compensation at Wells Fargo rose dramatically at the same time, from $13 million in 2016 to $18.4 million in 2018—despite the ongoing scandals and failure to address the bank’s mismanagement. Though Wells Fargo has failed to root out bad management practices, its CEO pay rose over 40 percent from 2016 to 2018—making 300 times the pay of Wells Fargo’s median worker.
These statistics are jarring on their own but especially so given the fact that Wells Fargo has changed its CEO three times in the three years since the scandals broke. John Stumpf resigned in 2016 and is now barred from the industry. Timothy Sloan then took the job but abruptly resigned in 2019—leaving Charles Scharf to take the reins of the scandal-ridden company just last year. One of the major problems with stock buybacks is that corporate executives often hold large amounts of stock themselves, and their compensation is often tied to an increase in the company’s earnings-per-share metric. This gives executives a personal incentive to time buybacks so that they can profit off of a rising share price, especially because the decision of whether and when to execute a buyback can affect a CEO’s compensation by millions of dollars. In fact, SEC Commissioner Robert Jackson found that corporate executives use buybacks to exploit their insider status and grossly inflate returns on their own stock holdings. Over the last few years, the majority of Wells Fargo CEO compensation—upwards of 80 percent—was paid in the form of stock awards or other annual incentive awards.
To build better banks, a better financial sector, and a better economy, we need better rules that encourage productive—not extractive—corporate behavior. Reshaping decision-making (and power) within corporate America, including at Wells Fargo, will help us foster the shared prosperity that US companies can clearly afford to provide.