While press releases from the CFPB and the OCC tie the agencies’ action only to mortgage fees and auto loan problems, the political context suggests that the penalty’s severity stems in part from public outrage over the original fake-accounts scandal. This was followed in April by a joint $1 billion fine from the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC), which led Wells Fargo to increase its litigation accrual by $800 million. In February 2018 the Federal Reserve prohibited Wells Fargo from growing its assets any further until it strengthened its governance and risk management. In the fourth quarter the bank had to set aside a $3.25 billion accrual for future litigation expenses. Meanwhile, more revelations about unauthorized mortgage modifications and fees, improper auto loan practices, and other missteps surfaced throughout 2017. In April 2017, it reported that first-quarter credit card applications were down 42% year over year, with new checking-account openings down 35%. In addition to paying initial fines ($185 million), reimbursing customers for fees ($6.1 million), and eventually settling a class-action lawsuit to cover damages as far back as 2002 ($142 million), Wells Fargo has faced strong headwinds in attracting new retail customers.
The costs from that debacle were enormous, and the bank has yet to see the end of the financial carnage. For an extreme example of this problem, look to Wells Fargo, where employees opened 3.5 million deposit and credit card accounts without customers’ consent in an effort to implement its now-infamous “cross-selling” strategy. If strategy is the blueprint for building an organization, metrics are the concrete, wood, drywall, and bricks.īut there’s a hidden trap in this organizational architecture: A company can easily lose sight of its strategy and instead focus strictly on the metrics that are meant to represent it. Apple’s “Think different” and Samsung’s “Create the future” could be linked to the amount of sales from new products.
With metrics, Ford Motor Company’s onetime strategy “Quality is job one” could be translated into Six Sigma performance standards. Strategy is abstract by definition, but metrics give strategy form, allowing our minds to grasp it more readily. Tying performance metrics to strategy has become an accepted best practice over the past few decades. Using multiple yardsticks is very helpful, however that highlights the fact that no single metric captures the strategy and makes people less apt to surrogate. Tying financial incentives to a metric is usually a mistake: It only increases the focus on the numbers. For instance, they can involve the people who’ll implement a strategy in its formulation, so they’ll be more likely to grasp it and less likely to replace it with a metric. Though it’s easy to fall into the surrogation snare, firms can take steps to avoid it.
The focus on cross-selling goals led employees to open 3.5 million accounts without customer consent, which, with brutal irony, severely damaged the long-term relationships the bank sought. Executives there decided to track cross-sales to customers to measure performance on the bank’s strategy of building long-term customer relationships. This tendency is called surrogation, and it destroys a lot of value. Because strategy is abstract, employees often mentally replace it with the hard metrics meant to assess whether the organization is succeeding at it. Every day, at almost every company, strategy is being hijacked by numbers.
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