Board Chair: ‘We must embrace change’
In her first annual letter to shareholders, Board Chair Betsy Duke writes, “We must continue to strengthen and enhance our oversight and risk management practices.”
Editor’s note: In a letter published in the 2017 Wells Fargo Annual Report, Board Chair Betsy Duke reviews the actions the board has taken to enhance governance and oversight of the company.
Dear fellow shareholders,
I am honored to serve as chair of the board of directors of Wells Fargo, a company with a long history of success and a unique opportunity to learn from its challenges and become better, stronger, and more customer-focused than ever before.
For that to happen, we must embrace change. Our CEO, Tim Sloan, has been relentless in making the kinds of changes that are required for us to achieve our six shared goals — namely, for Wells Fargo to be the financial services leader in customer service and advice, team member engagement, innovation, risk management, corporate citizenship, and shareholder value. Tim writes in his CEO letter about the transformation he is leading, and I would like to highlight some of the actions the board of directors has taken to enhance our governance and oversight of Wells Fargo. Many of these actions will help us satisfy the requirements of the consent order that the company entered into with the Board of Governors of the Federal Reserve System on Feb. 2, 2018.
The board recognizes that we must continue to strengthen and enhance our oversight and risk management practices. Our board is committed to meeting the expectations of our regulators and protecting and serving the interests of our shareholders, customers, team members, and communities. To support these efforts, in recent months we have made significant changes to board composition, reconstituted several board committees, amended committee charters, and worked with Wells Fargo senior management to improve the reporting and analysis provided to the board. These actions were informed by rigorous self-examination. The board’s independent directors engaged in a comprehensive, independent investigation of Wells Fargo’s retail banking sales practices and drew important conclusions. In addition, the board conducted a thoughtful and deliberate self-evaluation of its own effectiveness, facilitated by Mary Jo White, a senior partner at Debevoise & Plimpton LLP and former chair of the Securities and Exchange Commission.
Many of the changes we made also reflected the feedback we received as part of the company’s long-standing investor engagement program. Following my election as board chair, I met with many of our shareholders to discuss our progress and listen to their feedback. To help provide insights from a stakeholder perspective, including insights on current and emerging issues relevant to the company, we formed a Stakeholder Advisory Council. It includes seven members, all external, representing groups focused on consumer banking, fair lending, the environment, human rights, civil rights, and governance. Tim and I began meeting with this group in December 2017. The council's feedback has proven valuable in informing how we can be responsive to our stakeholders and assess our progress, and I look forward to continuing our engagement in the future.
Board composition and capabilities
At our 2017 annual meeting, Wells Fargo shareholders sent the entire board a clear message. The board heard that message and, as part of our response, we took a number of actions to refresh the board, including electing four new independent directors and announcing the retirement of three long-serving directors who retired at the end of 2017. In total, we elected six new independent directors — Celeste Clark, Theodore Craver, Maria Morris, Karen Peetz, Juan Pujadas, and Ronald Sargent — and five retired in 2017. As we announced in February 2018, and in furtherance of our board succession planning process, three additional directors are expected to retire by the date of our 2018 Annual Meeting of Shareholders and a fourth by the end of 2018. We are taking great care, as part of our board refreshment process, to appropriately balance new perspectives with the experience of existing directors while undergoing an orderly transition of roles and responsibilities on the board and its committees.
Our new directors bring a broad range of capabilities, including expertise in financial services, risk management, technology, human capital management, finance and accounting, corporate responsibility, and regulatory matters. Throughout the transition, the board has also maintained its focus on diversity, and I am proud that of our six new directors elected in 2017, four are women or people of color.
Understanding that effective risk management protects and benefits all stakeholders, the board has made several important changes so that risks are properly identified, evaluated, and escalated. These fall into two main categories: changes in board committee composition and oversight responsibilities, and enhancements to management reporting.
“We have made significant changes to the way management escalates risk issues and reports them to the board.”
Committee composition and oversight responsibilities
We reconstituted our Risk Committee to add new perspectives and expertise. Karen Peetz, retired president of The Bank of New York Mellon, was appointed chair of the Risk Committee; Juan Pujadas, a retired principal of PwC, joined the committee in 2017; and Maria Morris, a retired MetLife executive, joined early in 2018. Wells Fargo is classified as a Systemically Important Financial Institution (SIFI), and all three join me in bringing experience with the regulatory expectations, especially in risk management, of SIFIs. Suzanne Vautrinot, a retired major general in the U.S. Air Force responsible for its cyber command and network operations, also joined the Risk Committee, providing it with additional cyber expertise.
The charters of the Risk Committee and the Audit and Examination Committee were amended to (1) consolidate oversight of the company’s compliance, operational, technology, information security, and financial crimes risk programs under the Risk Committee and (2) maintain oversight of financial reporting, the company’s independent auditor, and other audit-related activities under the Audit and Examination Committee. We also expanded the Human Resources Committee’s oversight responsibilities to include human capital management, ethics, and culture.
Reporting practices and oversight
Applying key learnings from our investigation into sales practices, we have made significant changes to the way management escalates risk issues and reports them to the board. The company has focused on examining business practices across the company by using third-party experts to conduct independent reviews of business and risk practices. In addition, where we identify an issue, management is conducting a root cause analysis, holding individuals accountable when appropriate, changing processes (and in some cases, changing business models), and most important, assessing and remediating customer harm. The board has set clear expectations that, as issues are identified, they will be reported promptly to the board and our regulators.
At the same time, we enhanced our oversight of conduct risk, including sales practice risk, through the company’s Conduct Management Office. Created to consolidate internal investigations, EthicsLine and ethics oversight, complaints oversight, and sales practice oversight, the Conduct Management Office reports regularly to the Risk Committee on its activities and to the Human Resources Committee on matters related to team members. In addition, the full board receives updates at least twice a year from this office.
To fulfill its broader charter responsibilities, the Human Resources Committee receives reports on matters involving team members, including reports related to leadership planning, training and development, compensation and benefits, culture, ethics, and the company’s code of ethics and business conduct. The committee continues to oversee the company’s incentive compensation risk management program, and its scope was expanded in 2017 to include a broader population of team members and incentive plans.
We will continue to make changes in 2018 to further enhance the board’s effectiveness in carrying out its oversight and governance of the company, consistent with the Federal Reserve consent order.
Even as we reorganize for better risk oversight, we remain focused on the financial performance of the company. I would characterize the company’s financial performance in 2017 as solid. We ordinarily would have expected to see more earnings growth; however, taking into consideration the reputation challenges and significant legal and regulatory expenses resulting from sales practices and other matters, we consider it positive that we maintained profitability and a return on equity that ranks near the top of our peer group. Nevertheless, we all know that we can do better.
Much of the work underway to improve risk management and controls will benefit the customer experience and should lead to a reduction in overall operating expenses going forward. We also expect that investments in innovation will pay off in revenue growth and expense reduction. Finally, a disciplined process is underway to consolidate functions across the enterprise and simplify procedures and systems, resulting in significant cost savings and improved effectiveness.
Our capital levels remained strong, and we were able to return $14.5 billion to shareholders through common stock dividends and net share repurchases in 2017, up 16 percent from 2016. We continue to believe that our diversified business model, nationwide franchise, and investment in innovation — along with our commitment to the six goals I mentioned earlier — will create long-term value for our investors.
At the end of 2017, three long-serving directors — Stephen Sanger, Cynthia Milligan, and Susan Swenson — retired from the board. On behalf of the entire board of directors, I want to thank Steve for his tireless work as chairman. With a steady determination, he led us to the necessary changes I have outlined here. I would also like to recognize Cynthia and Sue for their many contributions and service to the board and company. Cynthia and Sue retired with a combined 44 years on the board, a tribute to Wells Fargo’s long-standing commitment to gender diversity on the board and an inspiration to leaders of the future.
And to you, our shareholders, thank you for your continued investment in our company. We recognize the commitment that you, as investors in Wells Fargo, have made in the company. We are confident that the optimistic leadership provided by our CEO, combined with the operational and cultural changes we have made and are making at the company and on the board, will mark 2018 as a positive inflection point on our quest to rebuild trust and become a better company. We greatly value and appreciate your investment.
Elizabeth A. Duke
Chair, Board of Directors
Wells Fargo & Company
February 15, 2018