Kudos to the Wells Fargo Board
The Wells Fargo Board of Directors has taken unexpected action quickly in the wake of congressional criticism of its CEO, John Stumpf, for his inaction as fraudulent practices grew in the bank’s consumer division.
Mr. Stumpf has resigned with no exit bonus or special payment.
The board has adopted a widely recommended best practice of appointing an independent director, Stephen Sanger, as its chairman.
This is common practice in U.K. corporations, but rare in the U.S., where the same person is both CEO, responsible to the board and chairman of the board, setting its agenda. One person serving both as CEO and chairman can easily control the flow of information to members of the board and shape its decisions.
I have suggested in a previous comment published in our newsletter, Pegasus, that American CEO centric corporate governance, contrary to long stated law which empowers only the board to manage and direct the affairs of the corporation, arose by historic accident. The first large private corporations arose here after the Civil War, especially to build railroads. In the main, they were organized and managed by former officers in the Union Army, men trained in and comfortable with the command and control practices of large land army formations, practices taught to many of them at West Point in the 1850s, looking back to the command methods of Napoleon.
This remarkable innovation in U.S. corporate governance practices by the Wells Fargo board is both surprising and important. It is a precedent of substantial visibility for all American corporations. Its visibility will enhance its persuasive effect on other boards, as its notoriety will now ripple through our business elites, corporate lawyers and investors.
If checks and balances — separation of executive and supervisory responsibilities — are deemed necessary for good public governance, it would seem hard to argue against them in settings of private power. Lord Acton’s famous admonition that “power corrupts and absolute power corrupts absolutely” would seem, on its face, to have been proposed as a universal norm of human frailty.
Separating the offices of CEO and board chairman is also advised to promote better stewardship across a corporation’s leadership in that power comes to be constrained by considerations of higher purpose aligned with a more common good than personal prerogative.
It is no surprise to me that Wells Fargo’s action resonates with Minnesota traditions, as much of the bank’s current culture comes from the old Northwest Bank here, which bought the San Francisco Bank, Wells Fargo, some years ago. The new chairman, Stephen Sanger, for example, is the former CEO of General Mills, a Minnesota company. Minnesotans took the lead as part of the Caux Round Table in proposing our ethical Principles for Business 24 years ago.
Wells Fargo has acted differently from the New York financial institutions responsible for the negligence which cumulated in the 2008 collapse of credit markets. In the surviving institutions, few boards imposed accountability on those who had been so slack in their responsibilities to both shareholders and society.