Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Well, that was exciting but in the end, Wells Fargo 's board survived. Not that it's business as usual.

The bank on Tuesday held its first annual general meeting since its retail-banking scandal, setting up a showdown in which shareholders had a chance to oust the bulk of the bank's board and withhold consent for the appointment of its decades-old auditor.

Angry investors hurled plenty of invective as they voiced skepticism about the board's contention that it didn't know about the fraudulent sales practices. Take for instance Brandon Rees, the deputy director of the Office of Investment for the American Federation of Labor and Congress of Industrial Organizations, who aired his grievances by colorfully comparing directors to mushrooms that are "kept in dark and fed horse manure." Or Round Hill Asset Management's Channing Lushbough, who mused that if the entire board resigned tomorrow, the company would do just fine.

The venting may have felt good. As it turned out, all 15 directors survived the vote -- some just barely so, but they made it just the same. That's despite recommendations from influential proxy adviser Institutional Shareholder Services Inc. to support just only three directors and a fairly well-publicized decision from large investors including the California State Teachers’ Retirement System and California Public Employees’ Retirement System that they'd be voting in favor of only six of them.

Scraping By
Preliminary voting shows a level of dissatisfaction with the bank's directors. Three others, including two not present during the scandal, garnered 99 percent of votes
Source: Wells Fargo

I've previously written that a board refresh would be a good move, and the result could indeed have been different if the bank's largest shareholder, Berkshire Hathaway Inc. hadn't used its roughly 10 percent stake to back all of the nominated directors.

If the Warren Buffett-led conglomerate had instead pushed for a level of accountability, at least four existing board members would have been shown the door and each forced to farewell more than $300,000 in director fees, including Chairman Stephen Sanger.  One or all of them should even consider the selfless move of stepping down of their own accord, especially since such departures wouldn't be viewed negatively by investors.

"Your Wells Fargo is on the right track," Chief Executive Officer Tim Sloan promised shareholders amid their crisis of confidence, while Sanger assured investors that the board understands their overall dissatisfaction. Sloan, Sanger and the other 13 Wells Fargo directors must now prove their worth, in part by improving transparency and continuing to review sales practices across all its business lines. While reviewing quarterly or more regular reports, they shouldn't hesitate to ask questions about anything that looks askew -- even if it seems minor: abundant or even excessive governance is better, at this stage.

Quite a Departure
Only three of Wells Fargo's 15 directors received more than 90 percent of votes. Compare that to the average for board members elected at all S&P 500 companies.
Source: ISS Analytics, the data arm of Institutional Shareholder Services
*Data based on between 3,000 and 5,000 elections per year for S&P 500 companies. 2017 data doesn't inlcude Wells Fargo.

Board members aside, it's certainly helpful that Wells Fargo's "living will" plan, which shows that it wouldn't require a bailout in the event of bankruptcy, was finally approved on Monday, and the bank's performance has improved. Key metrics could still be better:

Proof Is in the Pudding
Shareholders will be best convinced that the company is on the right track if key profitability metrics, such as return on equity, start to improve
Source: Bloomberg

Does it all matter? The stock closed almost 2 percent higher on Tuesday afternoon, so some folks were relieved. But until the retail-sales scandal is truly behind it and the bank can string together more than a few good quarters, it'll be a while until rank-and-file investors are on the same page. The board best interpret their narrow victory as more of a narrow escape. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The others would have been Enrique Hernandez, who chairs the bank's risk and finance committees; Federico Pena, chair of the corporate responsibility committee; and Cynthia Milligan, chair of the bank's credit committee.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net