The other shoe keeps dropping at Wells Fargo.

One year after the San Francisco megabank paid $190 million in fines and restitution to settle charges that thousands of employees opened millions of unauthorized checking and credit card accounts for customers, Wells remains mired in scandal and struggling to repair its once-pristine reputation.

CEO Tim Sloan apologized yet again last week after the $1.9 trillion-asset bank boosted its estimates of how many customers were affected to 3.5 million, a nearly 70% jump from its original estimate. Wells Fargo also faces new accusations of wrongdoing — allegedly charging customers for unnecessary auto insurance, signing up depositors for online bill pay without permission, and forcing mortgage borrowers to pay improper fees, among other issues. The bank recently agreed to a $142 million settlement related to the fake accounts.

"It's stunning the revelations that keep tripping Wells up," said Richard Parsons, a retired Bank of America executive and the author of two books about banking.

Wells Fargo sign
“What you find is there’s never just one cockroach in the kitchen when you start looking around,” Warren Buffett, the CEO of Berkshire Hathaway, the bank’s largest shareholder, said in a recent interview about the continuing scandals at Wells Fargo. Bloomberg News

Wells' stumbles have provided ammunition to Democrats fighting to preserve the Consumer Financial Protection Bureau and its recent rulemaking banning mandatory arbitration clauses in financial contracts. The bank has become the poster child for why the Dodd-Frank Act needs to remain intact.

“Wells Fargo has made a routine practice of ripping off and preying on their customers, in a seemingly never-ending avalanche of scandals in which service members, minorities, homeowners, small-business owners and many other consumers have been targeted and abused by the bank," said Rep. Maxine Waters, D-Calif., who has called for legislation to break up the bank.

The drip-drip-drip of scandal is also weighing on the company’s stock price. On Thursday, Wells Fargo shares were trading at $49.30, down 1% from a year earlier. During the same period, a broad index of bank stocks has risen by 24%.

“What you find is there’s never just one cockroach in the kitchen when you start looking around,” Warren Buffett, the CEO of Berkshire Hathaway, the bank’s largest shareholder, said in a recent interview.

Wells' travails are arguably the most remarkable change of fortune for any bank in the past decade. The question is: Why hasn't the company been able to recover?

There are no simple answers to that question. But clues can be found several factors tie the numerous scandals together: an internal culture that prized sales over everything else, a failed corporate governance system, and an increase in regulatory scrutiny.

Overly aggressive sales culture

Wells Fargo’s hard-charging sales culture dates back to the firm’s 1998 merger with Minneapolis-based Norwest Corp., when Norwest CEO Richard Kovacevich, who was nicknamed “King of the Cross-Sell,” took the reins of the combined company.

For many years, Wells was singularly focused on sales of additional products to existing customers — a priority reflected in the bank’s heavily touted cross-sell ratio, which rose steadily until 2013, as well as its bonus pay scheme and sales quotas.

The revelation that thousands of rank-and-file employees opened 3.5 million potentially fake accounts laid bare a massive cultural problem at the bank, where workers felt pressure to meet sales quotas and avoid termination.

The more recent spate of scandals — from auto insurance to mortgages and online bill pay services — also ties back to the firm’s sales culture.

“The cultural identity of the company wasn’t shaped overnight. And that cultural identity was what laid the foundation for these practices to be accepted,” said Stephen Beck, managing partner of the consulting firm cg42. “It may be in the process of changing, but it certainly hasn’t shifted.”

Over the last year, Wells has overhauled its incentive compensation plan, jettisoned sales quotas and stopped reporting its cross-sell ratio. Some observers say the bank’s expanded review of potentially unauthorized accounts, which was recently completed, indicates that it is taking steps to regain its footing.

But disgruntled shareholders remain unconvinced that Wells is moving fast enough.

“At the annual meeting, you said: ‘We will fix everything that was broken,’ ” Sister Nora Nash, who has led shareholder efforts to bring about change at Wells Fargo, wrote in a recent letter to Sloan. “But there has not been real evidence to substantiate that.”

For its part, Wells Fargo said it has "taken many actions over the past year, including changes in senior leadership, executive accountability actions and numerous steps to ensure we make things right with any customer affected by unacceptable sales practices," a spokesperson said.

"We have made fundamental changes to our business model, organizational structure, and compensation and performance management programs to ensure our focus is on our customers and their financial needs," the spokesperson said. "We continue to seek out areas across our operations that can be improved, and we are keeping our stakeholders informed. We are making strong progress in our work to rebuild trust and build a better Wells Fargo for the future.”

Governance failures

An investigation by a committee of Wells Fargo’s board of directors, released in April, pinned much of the blame for the cross-selling scandal on the firm’s decentralized organizational structure and a culture of showing deference to business units.

In recent months, Wells has begun centralizing many of its operations, with the idea being that employee misconduct can be prevented if business units have a more arm's-length relationship with other parts of the company.

But Wells Fargo’s critics say that more fundamental changes are needed.

“I think the root cause is it’s too big. It’s too big to manage,” said Bartlett Naylor, an expert on corporate governance at the progressive group Public Citizen.

Others argue that compliance became an exercise in box-checking at the scandal-plagued bank.

"Companies are relying on regulations to address problems that they didn't rely on in the past," said Samuel Gregg, director of research at the Acton Institute, a nonprofit focused on the relationship between ethics and the market economy. "In the past, it would have been unthinkable to allow such behavior to go on. Regulation is not a long-term substitute for integrity and honesty."

The scandal claimed the job of former Wells CEO John Stumpf, who resigned last year after a drubbing in Congress. Chairman Stephen Sanger also plans to step down Jan. 1. He will be succeeded by Vice Chairman Elizabeth Duke, a former Federal Reserve Board governor.

Though Wells fired a handful of senior managers, the company’s board largely blamed former retail banking head Carrie Tolstedt for fostering the aggressive sales culture. She was allowed to resign before Wells reached a settlement with regulators.

Some employees say the bank has not cleaned house and is still run by longtime insiders, including Sloan and Mary Mack, who replaced Tolstedt as head of the bank’s retail banking unit. Board change, too, has been slow in coming.

Enrique Hernandez Jr., who has been on Wells' board for 15 years, was recently replaced as chair of the board's risk committee. But Hernandez, who is the CEO of Inter-Con Security Systems, a security company in Pasadena, Calif., and is also a director of the oil and gas giant Chevron and is chairman of the board at McDonald's, remains on Wells Fargo’s board.

"I'd like to see five to seven directors at Wells Fargo who are truly independent, own a lot of shares and are directors full time and don't serve on other boards," Parsons said.

Nell Minow, a prominent activist investor, said that the most recent revelations about misconduct at Wells Fargo illustrate the deficiencies in the board’s investigation. The board’s 113-page report failed to expose abuses in the company’s auto-lending business, for example.

“Obviously it wasn’t thorough enough. We’re still getting bad news,” she said.

Increased regulatory scrutiny

Earlier this decade, when Wall Street banks came under a microscope for their role in the mortgage crisis, Wells Fargo benefited from its comparatively unblemished public image.

By late 2015, Wells was the nation’s third-largest bank by assets, but it did not have an enormous investment banking operation, and it did not get blamed for fueling the subprime mortgage bubble. In other words, Wells did not have a target on its back in Washington.

That all changed last September.

The list of federal and state agencies that have opened probes of Wells Fargo in the past year includes the Department of Justice, the Securities and Exchange Commission, the Federal Reserve Bank of San Francisco, the California attorney general’s office, and the insurance regulators in New York and California.

Sen. Elizabeth Warren, D-Mass., and other politicians have been stoking the fire. But the multiple investigations and a gusher of civil lawsuits alleging wrongdoing at Wells have also fed on each other. Each new revelation seems to beget another.

“Everyone’s going to have issues. And if your regulator switches to a zero-tolerance policy with you, then you just going to be constantly getting hit,” said a former financial regulator who now represents banks.

This lawyer expressed sympathy for Wells Fargo’s current predicament but also said: “The facts are the facts. And to the extent that violations of the law occurred, they need to be investigated.”

Kevin Wack

Kevin Wack

Kevin Wack is a California-based reporter for American Banker who covers the U.S. consumer finance industry.