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.

Wells Fargo & Co.'s directors better watch their backs. For that matter, so should CEO Tim Sloan.

It's been a while coming, but on Tuesday -- for the first time since the bank's sales-practices scandal emerged -- Warren Buffett took those responsible to task, speaking extensively about Wells Fargo's handling of its missteps in an interview with CNBC. His comments came just as Sloan was set to appear before the Senate Banking Committee to talk about the bank's progress in cleaning up the mess. 

Buffett, whose Berkshire Hathaway Inc. is Wells Fargo's biggest shareholder with a 9.92 percent stake, said the San Francisco-based bank had yet to completely "remove the stain," referring to the people that performed or condoned the acts that led to an estimated 3.5 million in potentially fake accounts. 

Unwell
Since its sales-practice scandal escalated, shareholders have suffered. Wells Fargo ceded its position as the most valuable U.S. bank and is now wrestling for second place.
Source: Bloomberg

The billionaire's attention, for now, is on the bank's board, which is ironic considering he reelected them in their entirety earlier this year. As I wrote at the time, if Berkshire had pushed for a level of accountability, at least four existing board members including chairman Stephen Sanger -- who will now retire at the end of this year -- would have already been shown the door.

Notably, the Oracle of Omaha's change of heart led him to a suggestion that he described as "more extreme" than that of Senator Elizabeth Warren, who has been calling for the Federal Reserve to remove Wells Fargo's directors who were present during its scandal. 

Leading By Example
Berkshire Hathaway pays its directors a nominal amount to facilitate a spirit of independence. This compares to hauls of well over $300,000 for Wells Fargo's directors.
Source: Company filings

"As much as possible you want the people responsible to pay," said Buffett. Specifically, he resurfaced a suggestion he'd made in 2011 that directors should have five years of their pay clawed back. While that won't make shareholders whole, it would at least show there are consequences for lapses in oversight. In case you are curious, here are Buffett's 2011 comments in full, from Berkshire's annual meeting:

The CEO and spouse should be put at risk of going broke. This is especially true of the CEO, but the board should suffer huge penalties as well. Perhaps they should have to repay the last five years of director’s fees. If you run a firm that needs to be saved, then the person running that institution should be aware that it is very painful to fail.

Pocketful
Shareholders including Warren Buffett may posture for the 2016 payments to Wells Fargo's directors -- as well as those from preceding years -- to be clawed back
Source: Company filing
Note: Enrique Hernandez, the director who garnered the least shareholder approval, is chair of two committees and entitled to $65,000 in additional compensation above base.

For now, Sloan, who succeeded John Stumpf almost a year ago, still has Buffett's confidence. But his three-decade-long tenure at Wells Fargo may soon -- if it hasn't already -- turn him into tainted goods in the eyes of other shareholders, as well as the bank's board. In his testimony Tuesday, Sloan repeatedly admitted that the actions taken to fix the lender's sales practices issues when they first arose in 2013 were insufficient and not aggressive enough, a time when he was chief financial officer and had a say in its actions.  This too, may haunt him. 

Senator Warren didn't mince her words at Tuesday's hearing: She told Sloan he was at best "incompetent" and at worst, "complicit", and added that "Wells Fargo is not going to change while you are in charge." While there may be truth to this statement, I'd expect the lender to let Sloan sweat in the hot seat until the heat subsides rather than sacrifice another longtime executive to navigate the bank through a lingering tough patch. That includes the risk of additional sanctions from bank regulators relating to sales abuses related to auto insurance and mortgages.

When the dust settles, that's another matter. Rather than replacing him with another Wells Fargo lifer, odds should be on an outsider to take the helm.

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

  1. He was also president and chief operating officer while the fraudulent accounts scandal escalated. 

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