Wells Fargo Directors Exiting After Federal Reserve Slams Governance

Wells Fargo's board, accused of failing to prevent executives' overly aggressive sales practices, will undergo another round of "refreshment." And that doesn't mean directors will get breath mints.

Don't let the door hit you on the way out.

Wells Fargo & Co. (WFC) , the embattled U.S. bank, said Friday in a statement that four board members will retire, less than a month after the Federal Reserve barred the bank from future asset growth beyond the current $2 trillion balance sheet until it improves corporate governance and addresses other failings.   

The board shakeup represents the latest fallout from allegations by regulators, customers and employees that Wells Fargo over the past decade set overly aggressive sales targets that resulted in abusive practices towards consumers, including opening unauthorized accounts and charging for unneeded auto insurance. The fallout from the scandal, disclosed by the bank in 2016, led to the departure of former CEO John Stumpf as well as hundreds of millions of dollars in fines, legal costs and lost revenue.   

Shareholders are likely to cheer the departure of the directors -- Enrique Hernandez Jr., owner of a private-security company; John Chen, CEO of Blackberry Ltd.; Lloyd Dean, CEO of a hospital chain; and Federico Peña, a former U.S. Transportation Secretary. The directors had been accused by corporate-governance experts as well as lawmakers and state-government officials for failing to detect or stop the abusive practices before they exploded into the biggest scandal in the 166-year-old bank's recent history. Their exit will come at the bank's next annual meeting. 

At last year's annual meeting, the directors barely won reelection, with some of them garnering just over 50% of votes even though they ran unopposed. Yet at the time, Wells Fargo CEO Tim Sloan told Bloomberg News that it would be a "shame" if any directors were voted out, and they were allowed to remain - as the bank's share price languished.

U.S. Senator Elizabeth Warren, a Massachusetts Democrat, had called for the entire Wells Fargo board to resign, given the depth of the failures. And California State Treasurer John Chiang had likewise called for some directors, including Hernandez, to resign.

Then last month, former Federal Reserve Chair Janet Yellen, just as she was leaving office, ordered Wells Fargo to halt future asset growth -- seen as a draconian and unprecedented sanction -- until the board's oversight and governance improved.

In a press release, Wells Fargo described the director retirements as part of a "refreshment" process.

"We respect their decisions to retire and know our board benefited greatly from their expertise and perspectives during their many years of service," Chair Betsy Duke said in the statement. Duke, a former Federal Reserve governor, was named chair of the Wells Fargo board last year after the bank announced that former Chair Stephen Sanger would step down.

Investors may beg to differ on how much value the board members added: Over the past 12 months, Wells Fargo shares are down 3.5%, even as rival banks JPMorgan Chase & Co. (JPM) , Bank of America Corp. (BAC) and Citigroup Inc. (C) have seen their stock prices rally 20% or more.

The directors also each took home roughly $300,000 to $400,000 in pay for attending roughly a meeting a month.

And for at least one director, Hernandez, owner of a private-security company, there was a lot more in remuneration. An examination of regulatory filings by TheStreet last year found that Hernandez's private-security company extracted some $24.4 million in payments under contracts to guard branches over the past decade. Corporate-governance experts say such lucrative arrangements can compromise a director's ability to provide tough, independent oversight of management. 

Wells Fargo has said the arrangements were approved by the board. 

In the years leading up to the sales-practices scandal, Hernandez had headed the Wells Fargo board's risk committee -- with responsibility for ethics, oversight and integrity. 

And at Wells Fargo's annual meeting in April, he received just 53% of shareholder votes, the lowest among the 15 board nominees. Such a result was seen as a harsh rebuke; it's rare in such corporate elections to receive approval ratings below 90%.

The upcoming retirements may now spare Hernandez, Chen, Dean and Peña from having to face irate shareholders at this year's annual meeting, the bank's first since the Fed imposed the cap on asset growth.

They'll be off getting refreshed.