Activist union-backed adviser to pension funds CtW Investment Group on Friday launched a campaign to have Wells Fargo (WFC) - Get Report shake up its board and clawback some of the pay received by Carrie Tolstedt, an executive who oversaw a division that created unauthorized customer accounts. 

Responding to uproar over revelations that Wells Fargo employees opened unauthorized accounts in customers' names, CtW Investment Fund, an organization that advises pensions for unions belonging to the Change to Win labor group, launched a campaign urging the embattled bank to add two directors to its board who understand human capital management. The fund advises funds representing roughly 12 million Wells Fargo shares.

A failure by Wells Fargo to respond to the campaign could result in a "just vote no" campaign at the embattled mega-bank or even an effort by institutional investors to install their own dissident director candidates employing a new process recently set up at the institution.

Wells Fargo, one of the largest six U.S. banks and one that came away from the 2008 financial crisis relatively untarnished, earlier this month was fined $185 million by the nation's consumer protection agency for fraudulently opening over two million unauthorized consumer credit card and savings accounts.

The Consumer Financial Protection Bureau, which issued the penalty, said in a statement that the problems at Wells Fargo were spurred by sales targets and compensation incentives that motivated employees to open the unauthorized accounts. Critics contend that bank employees set up the accounts to boost their bonuses and help drive the perception that each customer had numerous accounts with the institution, a situation they contend ultimately benefited Wells Fargo by encouraging positive analyst reports that drove up the bank's stock price.

Rich Clayton, research director at CtW, tells The Deal that Wells Fargo should seek out director candidates by reviewing a pool of executives who have worked at corporations that receive a high level of positive comments from employees, such as Trader Joe's, Costco

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or Southwest Airlines

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"Someone who has worked in human capital management at employers who get positive reports from their workforce and produce a higher level of positive comments from employees would be a great candidate," Clayton said.

He added that academics who have studied the issue extensively would also be good candidates. "There are academics who get at this idea that the way in which the workforce is managed and incentivized has a large effect on the success of the organization," Clayton said.

A key point of contention for CtW is the over-tenured nature of some of Wells Fargo's directors. Relationship mapping service BoardEx, an affiliate of The Deal, notes that directors Cynthia Milligan and Susan Engel have served 24.7 and 17.8 years respectively on the board. Critics of over-tenured boards argue that long-serving directors may be overly chummy with executives, especially if they have known them for a long time. "Our concern is that with two very long-tenured directors and others who have served for over ten years that it would make sense for two directors to be transitioned off and new directors be brought on," Clayton said. 

In addition, CtW believes a provision in Wells Fargo's clawback policy could be employed to require Tolstedt, the executive who oversaw the unit responsible for opening up millions of fake accounts, to return a large chunk of her pay. Specifically, Clayton notes that a provision in Wells Fargo's clawback policy suggests that pay could be required to be returned when a "a senior executive has engaged in misconduct, including in a supervisory capacity, that results in significant financial or reputational harm" to the company. "Our view is that Ms. Tolstedt would qualify under the damaging the reputation provision in the clawback policy," Clayton said.

So far, CtW has not heard back from Wells Fargo. However, the CtW suggested it could launch a withhold vote campaign against corporate directors if no reasonable response is forthcoming. In addition, Clayton notes that Wells Fargo in 2015 installed a so-called "proxy access" mechanism that allows long-term investors to nominate one or two of their own director candidates to corporate boards using a companies' proxy card. The Wells Fargo mechanism allows a group of up to 20 stockholders who own 3% of Wells Fargo's stock for three years to nominate up to two directors to the board.

Clayton notes that the window for a group of institutional investors to nominate its slate of dissident directors to Wells Fargo's board at its 2017 annual meeting is between Oct. 17 and Nov. 16. It's unclear whether CtW and other funds would form a group to employ proxy access, a mechanism that has never been employed by investors. However, Clayton notes that CtW employees will start to have discussions with other institutional investors about Wells Fargo "next week."

The campaign comes after a gadfly investor said Sept. 14, he expects to relaunch a campaign in the coming weeks to push Wells Fargo into splitting the role of chairman and CEO at its 2017 annual meeting. Specifically, Gerald Armstrong, an individual investor who often submits shareholder proposals at both large and small banks, told The Deal that he plans to resubmit the proposal because he was frustrated with recent revelations around its sale practice of opening deposit and credit card accounts without customer knowledge.