Editor’s note: In a February 15, 2019, letter published in the 2018 Wells Fargo Annual Report, Board Chair Betsy Duke reviews the progress the company and the board have made to build a better Wells Fargo.
Dear Fellow Shareholders,
We are steadfast in our commitment to building and protecting the long-term value of the company.
Looking back on my first year as chair of the Wells Fargo Board of Directors, I am encouraged by the progress the company and our board have made as we build a better Wells Fargo for the future.
Before I talk about the board, I’d like to recognize the tireless efforts of our management team. Tim Sloan became CEO just over two years ago, and since then, with the full support of the board, he has been driving transformational change at the company.
As CEO, Tim’s first priority was to initiate an extensive review to identify, understand, and resolve the problems of the past; to provide appropriate remediation to customers who were harmed; and to be transparent about our progress. We discovered a variety of issues, and even though the specific causes may have been different, some common themes emerged, such as the company’s history of running businesses individually and the decentralized nature of certain control functions. I believe this review was necessary to help us serve our customers better. In the past two years, we have centralized many aspects of our organizational structure, strengthened risk management, and improved governance practices and oversight. Going forward, we believe maintaining a holistic view of the company and focusing on operational excellence will result in continued positive change.
Organizationally, Tim has pulled together a strong management team that blends Wells Fargo veterans with experienced talent from elsewhere. Three of his direct reports are from outside the company, and two more — the company’s new head of Technology and chief auditor — will join Wells Fargo in April. Most of his other direct reports are in new or expanded roles. Together, the leadership team is executing plans to streamline the company’s operating structure, better define roles and responsibilities, fill key positions, enhance the way we serve customers, strengthen risk and compliance measures, and instill our Vision, Values & Goals uniformly into the culture of Wells Fargo. In addition, the management team has redesigned the strategy, leadership, and incentive structure of the retail bank and the Wells Fargo Auto business to align with a more forward-looking consumer approach. One important early indicator of the success of these efforts is that “Customer Loyalty” and “Overall Satisfaction with Most Recent Visit” Community Bank branch survey scores reached 24-month highs in December 2018. At the same time, voluntary team member attrition in 2018 improved to its lowest level in six years.
Early in 2018, we agreed to a consent order with the Board of Governors of the Federal Reserve System and consent orders with the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau. To make sure we are meeting our commitments under the consent orders, the board and senior management are engaged in regular dialogue with our regulators. Clear communication is necessary so that the comprehensive changes we are making across the company will sufficiently strengthen our governance and oversight, as well as operational and compliance risk management. Although we are devoting a significant amount of resources to these efforts, we also have been delivering on our ongoing cost-reduction initiatives. Expense savings from simplifying and centralizing operations help fund our investments in areas such as risk management and technology.
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We continue to have constructive dialogue with the Federal Reserve on an ongoing basis to clarify expectations, receive feedback, and assess progress under the consent order, and we are now planning to operate under the asset cap through the end of 2019. Making the changes necessary to ensure we meet regulatory expectations remains a top priority, as is continuing to serve our customers and help them succeed financially.
Our board of directors
The board operates very differently today than it did a year ago. Following our independent board investigation into retail sales practices and our 2017 board self-evaluation, we identified several areas in which we could enhance board oversight. As a result, we added more directors with expertise in financial services; adjusted committee structures, charters, and membership; enhanced agenda planning; and worked with management to better focus materials provided to the board. Mary Jo White, a senior partner at the law firm of Debevoise & Plimpton LLP and former chair of the Securities and Exchange Commission, was engaged by the board to facilitate its 2017 self-evaluation and work with the board on its 2018 self-evaluation to help assess our progress. Regular self-assessment provides us a mechanism for continuous improvement.
With 13 directors, our board is smaller than in the recent past. More than half of the current directors joined the board in 2017 or later. These new directors came ready to work and began to contribute immediately. The new directors have brought important experience in several areas, including financial services, other highly regulated industries, and consumer brand management. With board turnover, we have also refreshed our board committee leadership. Since September 2017, six of seven standing board committees have new committee chairs. Today, the average tenure of our independent directors is less than four years. Even as the board and its committees have experienced much change, we remain focused on responding to stakeholders, enhancing oversight, and creating long-term value for shareholders.
In January 2019, Wayne Hewett joined our board. Throughout his career as a CEO and senior executive, Wayne has had a record of success managing strategic priorities in complex business environments. His background as an industrial engineer and experience with data-driven process improvement methodologies will be especially valuable as we focus on operational excellence.
Karen Peetz will retire from the board at our Annual Meeting of Shareholders in April 2019. Karen has been effective at framing risk management imperatives and insisting on individual accountability, especially in her role as chair of the Risk Committee. Since Karen joined the Risk Committee, we have brought on to our board and Risk Committee additional expertise in risk management of financial institutions. By announcing her retirement decision early, Karen has again demonstrated her commitment to responsible governance by ensuring a smooth transition of Risk Committee chair to Maria Morris, who will continue the work Karen started.
Our board oversight in 2018 focused heavily on identifying, understanding, and resolving issues within the company, including concerns identified by our regulators. We are also looking to the future. In his letter to shareholders, Tim details management strategies to achieve our six company goals of becoming the financial services leader in customer service and advice, team member engagement, innovation, risk management, corporate citizenship, and shareholder value. Going forward, board oversight of those goals will emphasize the following:
- Meeting regulatory expectations. We recognize the importance of fully satisfying regulatory expectations. We are specifically focused on satisfying the requirements of the company’s outstanding consent orders. But more broadly, we are enhancing our risk and reporting systems to meet the heightened regulatory expectations for systemically important financial institutions and our own goal of industry leadership in risk management. We are engaging in frequent and open communication with our regulators about our progress.
- Enhancing risk management. Wells Fargo has been and remains an industry leader in credit, market, and liquidity risk management. Over the years, the company has demonstrated an ability to manage through difficult economic conditions, including the 2008 financial crisis, but management of compliance and operational risks needed improvement. We have new leadership in the chief risk officer, chief compliance officer, head of Regulatory Relations, and chief operational risk officer roles. They have developed and are busy implementing plans to continue building our operational and compliance risk management systems to a level that matches our business, structure, and strategies. These plans include enhancing management-level governance committee structures, oversight, monitoring and controls, and escalation processes and procedures. Our objective is to build an industry-leading risk management program.
- Operational excellence. Many of our past operational risk problems stemmed from weaknesses in underlying operations. In 2018, management launched a project to inventory and map all our business processes. While identifying risk areas will improve our control testing and monitoring functions, reducing the number and complexity of our business processes also offers the potential for improving the efficiency and effectiveness of core operations. We expect this work to improve the customer and team member experience, reduce operating costs, and enhance risk management.
- Oversight of culture and human capital management. We continue to assess and shape the company’s culture, with an emphasis on such areas as ethics, training and development, and diversity and inclusion. One of the guiding values of Wells Fargo is “people as a competitive advantage.” We expect to devote a substantial amount of board attention to talent management strategies, including plans to attract, retain, reward, develop, and care for the very best people available. We recognize the importance of rewarding outstanding performance and holding team members accountable.
- Technology. New generations of customers and team members expect technology to work seamlessly and intuitively. Thoughtful use of emerging technologies can enable quantum leaps in innovation and efficiency. At the same time, cyber risk is at an all-time high. We want to make sure all our systems operate on up-to-date platforms, are able to process and protect massive amounts of data, and contribute to our vision of operational excellence and leadership in innovation.
We have already made progress in each of these areas, and we will continue to focus on them in 2019.
For the past several years, our independent directors have participated in a shareholder engagement program to help us better understand our shareholders’ views on key corporate governance and other topics. The candid feedback of our shareholders helps us define priorities, assess progress, and enhance our corporate governance practices. In 2018, I met with shareholders representing more than 35 percent of our company’s common stock to discuss our governance approach.
“The entire board remains excited and optimistic about Wells Fargo.”
— Betsy Duke
Our board is also focused on corporate citizenship, which is overseen by the board’s Corporate Responsibility Committee. The committee reviews environmental and social governance practices and policies. Following our 2018 Annual Meeting of Shareholders, Corporate Responsibility Committee members met with members of our external Stakeholder Advisory Council to seek feedback and insights on current and emerging issues important to them. Tim and I continued to meet with the council during the year to discuss such varied topics as mortgage lending, services for unbanked or underbanked consumers, our efforts to help customers avoid and reduce overdraft fees, environmental commitments, human rights, and reputational risk issues.
One of our most significant responses to shareholder feedback was the publication of a Business Standards Report on our website in early 2019. The report was the culmination of engagement with a group of stakeholders led by the Interfaith Center on Corporate Responsibility, which requested the report. The report discusses our business practices and the many fundamental changes we have made — and continue to make — as we transform our company. The report also details what we have learned and what we have changed as we work to improve the company and rebuild trust. I encourage you to read it.
Long-term shareholder value
Over the past few years, management and the board have devoted a substantial amount of time and attention to the problems we have found in our company. Finding, fixing, and atoning for those problems is necessary to build our future on a strong foundation and is required to meet the expectations of our regulators and regain the trust of our customers, team members, and the public. Through it all, we have also delivered solid financial performance. The company earned $22.4 billion in 2018, or $4.28 per diluted common share, the highest earnings per share in the company’s history. Our ability to sustain solid financial performance in the face of our recent challenges is a testament to the financial durability provided by our core franchise and diversified business model.
Our capital levels are well in excess of regulatory minimums. As part of the company’s goal of delivering long-term shareholder value, we’re committed to returning capital to shareholders when appropriate. During 2018 we returned a record $25.8 billion in capital to shareholders through common stock dividends and net share repurchases, representing a 78 percent increase from 2017. In January 2019, we increased the quarterly common stock dividend from 43 cents to 45 cents per share.
We do not take our strengths for granted. We intend to continue to strengthen risk management, streamline and simplify operations, and innovate responsibly so we can build on our strengths. The goal of all these efforts is to become even more customer-focused, innovative, and better positioned for the future — creating long-term value for our shareholders.
On behalf of the directors of your company, thank you for choosing to invest in Wells Fargo and for your continued faith in the future of our company. Even though much work remains, we believe we are on the right path and are making real progress. We are confident we have a CEO and management team with the vision and strategy to achieve our goals — and to fix the problems of the past while building a strong foundation for the future. The changes the company is making are showing positive signs, and we are confident in our success.
I encourage you to carefully review this report, our 2019 proxy statement, and the other materials the company makes available to shareholders to better understand the opportunities and challenges ahead and Wells Fargo’s work to execute its strategy. We are steadfast in our commitment to building and protecting the long-term value of the company.
The entire board remains excited and optimistic about Wells Fargo.
Elizabeth A. Duke
Chair, Board of Directors
Wells Fargo & Company
February 15, 2019