This article, originally published at 1:13 p.m. on Wednesday, Sept. 21, 2016, has been updated with market data and commentary from analysts.
Wells Fargo (WFC) CEO John Stumpf had a single response to Senate Banking Committee members pressuring him to discipline senior executives after the discovery of as many as 2 million unauthorized accounts opened by front-line workers trying to meet sales quotas.
He invoked the company's board, over and over.
The tactic earned him the ire of several committee members during a hearing this week in Washington and drew a stinging rebuke from Senator Elizabeth Warren. "You keep saying the board, the board, as though these are strangers that you met in a dark alley," the Massachusetts Democrat observed. "You're the chairman of the board."
Even without Stumpf's emphasis of the board's role, however, his position as both chairman and CEO would have drawn increased scrutiny amid a scandal that has already led to a $185 million fine and the firing of 5,300 workers. Together, the events will only increase pressure on the San Francisco-based bank and others to split the top jobs just as Bank of America (BAC) did after costly acquisitions during the financial crisis forced it to accept a government bailout.
Activists have previously filed shareholder resolutions supporting such a move at Wells Fargo, and proxy advisers and institutional investors have long argued that boards with independent chairs provide stronger and more effective oversight.
The fallout for the board may not end there: Stockholders and regulators are likely to focus on the 15-member panel's composition.
While the directors boast a wealth of corporate and government experience -- with Blackberry CEO John Chen, Novatel CEO Susan Swenson, a former Federal Reserve governor and two ex-Cabinet secretaries -- they also have an average tenure of 10 years, the longest of the boards of any of the six biggest U.S. banks, according to data analyzed by TheStreet.
That compares with an average tenure of nine years at JPMorgan Chase (JPM) , six years at Goldman Sachs, five years at both Bank of America and Morgan Stanley (MS) , and four years at Citigroup (C) . Six of Wells Fargo's board members have served 11 years or longer, and one, former Nebraska banking and finance director Cynthia Milligan has been a director for 24 years, one of the longest stints at any major bank, according to data from FactSet and BoardEx, a subsidiary of TheStreet.
"When you have directors who have been on for several terms, no matter what, there's an element of complacency that's fast to set in," said Mark Rogers, founder and chief executive of BoardProspects, an organization that works to build better boards for private, public, and nonprofit organizations. "There's something to be said about new blood in the boardroom."
That's unlikely to happen right away at Wells Fargo, however, and what the existing board does next will be pivotal for the bank's reputation.
Federal prosecutors are now reviewing the bogus accounts, according to the New York Times and the Wall Street Journal, and senators suggested during Tuesday's hearing that the Securities and Exchange Commission should examine whether Wells Fargo was obligated to make a disclosure to investors about the matter sooner than it did.
Additionally, the Federal Reserve, which regulates the nation's largest banks, will sharpen its examination of board oversight and compliance risk at those companies -- including safeguards against incentives that might encourage improper behavior by bank employees, Chair Janet Yellen said in a news conference Wednesday.
"What we'd really want to see is robust procedures that ensure employees are always acting in a legal and ethical manner," she said.
The agency believes board members should be "monitoring, supervising and holding senior management accountable for things that happen throughout the organization," Yellen said. "I don't think these are impossible standards to meet."
Wells Fargo's board, whose members are elected to one-year terms, has "at least three committees, maybe more, that would or should have had jurisdiction over this issue," said Boston University banking law Professor Cornelius Hurley. "You have a risk committee, you have an audit committee, you have a human resources committee and yet it appears, because we are dealing with incomplete information at this point, that none of those three committees had this issue before them."
Stumpf said Tuesday that he and the board knew about the scandal in 2013, though he didn't go into detail about what actions were taken.
The bank said this month that it would end retail banking sales targets, which had included selling as many as eight different products to each customer. Stumpf also told the banking committee that his company would examine whether phony accounts were opened as early as 2009 and 2010 and expand its confirmation of deposit accounts with customers from California, where the problems were first reported, to every state in the country.
The CEO declined repeatedly, however, to say whether the board should take back pay from senior executives who were ultimately responsible for the company's operations, including himself and retail banking chief Carrie Tolstedt, whose retirement was announced in June. He did confirm that her departure was linked at least partly to the unauthorized accounts.
According to regulatory filings, Tolstedt has been paid at least $53 million since Wells Fargo started disclosing her annual compensation in 2010, while Stumpf made $19.3 million last year.
The Dodd-Frank reform law, passed in the wake of the 2008 financial crisis, provides for clawing back from executives under certain circumstances, as does the Sarbanes Oxley Act, which followed the Enron accounting scandal in the early 2000s.
"I'm not on the human resources committee of the board; they have their own governance and structure," Stumpf said. "I'm not going to, in any way, try to influence or prejudice the board as they will do their deliberations."
Still, the company will have to undertake some kind of executive-pay clawback "in order to be able to deal with the Senate," said TheStreet's Jim Cramer, whose Action Alerts PLUS charitable trust holds Wells Fargo.
Wells Fargo's board would benefit from examining what JPMorgan CEO Jamie Dimon and his board did following the 2012 "London Whale" scandal that racked up nearly $6.2 billion in losses, said BoardProspects' Rogers.
The New York bank paid more than $900 million in fines and admitted it violated federal securities laws. Dimon took a salary cut for one year, the board's lead independent director undertook an independent review and pay was clawed back from senior executives.
"The goal in the aftermath of that was to try and get the reputation of JPMorgan back, and the way to do that is through this investigation but make it very transparent," Rogers said.
For now, it's apparent that Wells Fargo has "serious corporate governance issues" in areas including human resources and internal controls, said Rafferty Capital Markets analyst Dick Bove, who has a sell rating on the stock. "It may take two years to adjust," he said.
Once the largest bank in the U.S. by market value because of the premium its shares commanded, Wells Fargo has now dropped below JPMorgan, which was already larger in terms of revenue and assets. The bank's stock has fallen 9% this month to $45.88, while the broader S&P 500 gained 0.3%.
"What the problem is, is complexity," Georgetown Law Professor Donald Langevoort said in a phone interview, "that what is going on is so widespread and involves so many kinds of behaviors that it becomes difficult to dig into the compliance issues with respect to everything that might be amiss."
That poses particular challenges for the 63-year-old Stumpf, who joined the board in 2006, became CEO in 2007 and chairman in 2010. He still must answer outstanding questions from the Senate Banking Committee, and House Financial Services Committee Chairman Jeb Hensarling, a Texas Republican, has said his panel will undertake a separate probe.
"This is a fine example of why you need an independent chairman," said Boston University's Hurley. "If you are a large organization, you need a chairman, not a lead director, but an actual chairman who is different from the CEO."
Langevoort doesn't totally agree: If corporate governance is strong, the separation of the roles doesn't matter very much, he said.
"On the other hand, if there are material weaknesses in the control environment, then the fact that the CEO also claims that chairmanship role probably compromised governance further," he said.
There's already speculation about who might replace Stumpf if he doesn't survive the crisis, Bove wrote in a note to clients, and in that case, the roles of chairman and CEO would probably be separated.
Even if some executives are forced out, "the company has a deep bench of management talent and established succession plans in place" so its valuation wouldn't suffer, said RBC Capital Markets' analysts who have an "outperform" rating on the stock.