In addition to mandating a host of governance and risk management changes, the Federal Reserve levied severe penalties on Wells Fargo while taking the rare step of publicly releasing supervisory letters sent to individual Wells Fargo Board Members admonishing them for failure to “initiate any serious investigation or inquiry” into management’s cross-selling program. The Wells Fargo penalties by the Federal Reserve will require the company to replace three board members by April and a fourth by year's end and cap firm total asset size “until it sufficiently improves its governance and controls.” The penalties' severity indicates a growing view on the part of financial regulators that the Board of Directors and the rigor of its oversight serve as a key piece in preventing scandals caused by lapses in risk mitigation by management.
The forced board turnover at Wells Fargo comes even after the company took steps to appoint a former Federal Reserve governor as the company’s independent chair, replaced several independent directors, conducted a review of its governance and risk management, and begun to implement changes. Further, the Federal Reserve gave specific orders to Wells Fargo’s Board, requiring a written plan to “improve its effectiveness,” including developing a firm-wide strategy for risk tolerance and more effectively overseeing management in carrying out the implementation of that strategy. More notable, however, was the language in the letters sent to the individual board members, which stated that the Board must “have sufficient information from firm management to understand and assess problems at the firm” and that this requires a “robust inquiry and demand for further information.” Although the Federal Reserve’s emphasis on the responsibilities of individual board members of financial services companies may demonstrate a broader approach to enforcing responsible governance in the industry, it is also a strong reminder to all company boards about their responsibility for actively overseeing and holding management accountable for effective risk management processes.