Schafer: Wells Fargo CEO didn't take 'run it like you own it' mantra to heart

Just about any great management practice can lead to terrible results if the implementation gets thoroughly bungled. Wells Fargo & Co. just proved that.

A lot of attention since the scandal at Wells about fake accounts has focused on the downside of cross-selling, the idea that selling more products to existing customers is the quickest path to more revenue. While that practice was mentioned in the independent directors' sweeping report on the scandal this week, that report also concluded that just trying to sell more wasn't the real management problem.

Rather, it was an excessively decentralized management, or as they call it at Wells Fargo, the "run it like you own it" model. The directors have said that this is likely their last word on the scandal, but once again Wells doesn't have it quite right. There's nothing wrong with decentralized management that a more effective CEO couldn't have fixed.

This part of the report was more of an excuse than an explanation.

There's nothing particularly new about decentralization, including at Wells Fargo. This model was inherited in the 1998 merger of Wells Fargo and Minneapolis-based Norwest that created the modern Wells.

The simple phrase "run it like you own it" became a mantra, and it was all about business-unit boss accountability. It meant that managers up and down the organizational chart were going to have to answer for their own business results, and therefore they should have the latitude to run their business units without senior managers in their hair.

Johnson & Johnson and other big companies are also known for broadly spreading out decisionmaking, and it's a proven management idea. It can be a great way to meet the challenges of running a really big company with tens of thousands of employees and millions of customers. It's one way Wells could be both a giant with nearly $2 trillion in assets and still be nimble enough to compete, customer by customer, in markets across the country.

"Run it like you own it" became closely associated with Wells Fargo. Author Jim Collins was impressed enough to include it when Wells Fargo made a shortlist of companies that managed to go from "Good to Great," as the title of his 2001 Fast Company article put it.

Months after news first broke that Wells created up to 2 million customer accounts without customers even knowing about them, it's easy to download a "Run It Like You Own It" case study on Wells Fargo's managerial excellence.

The independent directors on Wells Fargo's board are no longer impressed. Their stunning, 113-page report on the fake accounts scandal repeatedly comes back to the limitations of the company's management structure.

Much of the blame since the scandal first broke last September has fallen on Carrie Tolstedt, a Norwest banker from Nebraska who had run the community banking division from 2007 until last summer. That's where the problems caused by what had become an unreasonably high-pressure sales process arose, and she clearly had wholeheartedly adopted the principle of running the Community Bank operation as if she owned it.

"Tolstedt reinforced a culture of tight control over information about the Community Bank, including sales practice issues," the report concluded. "This hampered the ability of control functions outside the Community Bank and the Board to accurately assess the problem and work toward a solution. Numerous witnesses referred to, and documents confirmed, the difficulties in getting information from her senior leadership team."

This problem was made worse by how the company was organized. The business unit managers, to run their businesses as they saw fit, had their own managers leading the kind of staff functions that you would normally see at the corporate level. That included risk management.

The report described how, instead of bringing sales cheating to the attention of the company's board and the top risk management committee, the senior risk officer in the Community Bank was "running interference" for her boss.

While clearly not good, so far this probably doesn't sound that far out of the norm to those who have some work experience at big and decentralized companies. The fix, of course, is having another executive up the organizational chart also repeating the mantra to "run it like you own it." What was needed here was a boss to step in when reports of cheating made their way up to the C suite.

That wasn't what former CEO John Stumpf did. "Because it was the responsibility of Community Bank leadership to run the business 'like they owned it,' " the report concluded, "Stumpf did not engage in investigation and critical analysis to fully understand the problem."

He's described as never wanting to hear bad news or have to deal with any conflict. In his decentralized management model, executives were taught to be deferential, encouraged not to challenge each other or comment on problems in anybody else's line of business. It's no surprise that the weekly operating committee meetings were described as having nothing approaching a lively discussion.

Even with functions like risk management split with the operating units like the Community Bank, Stumpf still heard plenty about the gaming of the sales process. He learned by late 2013 that 1,000 Community Bank employees were being terminated every year for some form of cheating, or about 1 percent of the staff. He concluded from this that 99 percent sure seemed to be doing it right.

Stumpf was hesitant to criticize Tolstedt and resisted the lead independent director's suggestion to remove her from her job in December 2015.

So what happened to the concept of run it like you own it? Why didn't that apply to the CEO?

Carrie Tolstedt did not really "own" the Wells Fargo Community Bank and its sales process. John Stumpf did. He just didn't act like he did.

lee.schafer@startribune.com 612-673-4302