Please ensure Javascript is enabled for purposes of website accessibility

Can Warren Buffett Save Wells Fargo's Board of Directors?

By John Maxfield - Updated Apr 24, 2017 at 5:17PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors and proxy advisory firms are intent on throwing out Wells Fargo's board of directors.

It isn't often that a bank's entire board of directors comes within the line of fire, so to speak, but that's the situation at Wells Fargo (WFC -1.28%) right now, with shareholder advisory firms urging investors to vote against most of the board at the bank's upcoming annual meeting. One silver lining for the board is that it has the support of the bank's biggest shareholder, Warren Buffett's Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.04%).

This story traces back to the Consumer Financial Protection Bureau's revelation last September that thousands of Wells Fargo employees had opened millions of fake accounts for customers in order to meet strict sales quotas and drive up the bank's coveted cross-sell ratio -- the number of its financial products used by its average customer.

Berkshire Hathaway Chairman and CEO Warren Buffett.

Berkshire Hathaway Chairman and CEO Warren Buffett. Image source: The Motley Fool.

The bank initially responded by minimizing the extent of the scandal, saying it wasn't material and placing the blame on rogue employees in its branches. As the details of the scandal were revealed, however, it became clear that the bank's top executives had known about the illicit practices for years but swept the problem under the rug.

To add insult to injury, when employees started blowing the whistle about the creation of fake accounts as early as 2004, sometimes emailing former-CEO John Stumpf directly, they risked demotion and termination. Managers at the bank would even insert defamatory information in whistleblowers' regulatory paperwork to ensure they could never work in the financial services industry again.

After an amateurish attempt to explain away the scandal to the media and Congress, Stumpf resigned as chairman and CEO. He turned the corner office over to new CEO Tim Sloan and the chairmanship to Stephen Sanger, the former CEO of General Mills who joined the bank's board in 2003. A subsequent investigation commissioned by the independent directors found that Stumpf and former retail banking head Carrie Tolstedt had misled the board for years about the extent of illicit cross-selling. All told, $136 million in compensation was clawed back from the two executives with once-sterling reputations.

Former Chairman and CEO of Wells Fargo John Stumpf.

Former Chairman and CEO of Wells Fargo John Stumpf. Image source: Wells Fargo.

But these changes haven't been enough to appease all shareholders. Proxy advisory firm Institutional Shareholder Services, which advises institutional investors on how to vote in corporate referendums, is urging shareholders to vote for only three of Wells Fargo's current slate of 15 directors -- two who joined this year and new CEO Sloan. New York City's Office of the Comptroller, which oversees pension funds with sizable stakes in the bank, will vote against 10 of the current directors. And proxy advisory firm Glass Lewis & Co. recommends against voting for six members.

The saving grace for Wells Fargo's board may be the 86-year-old billionaire from Omaha, Nebraska, Warren Buffett, whose Berkshire Hathaway is the bank's biggest shareholder. According to CNBC's Berkshire Hathaway portfolio tracker, the conglomerate owns $25 billion worth of Wells Fargo stock, equating to a little under 10% of the bank's shares outstanding.

It was reported last week that Berkshire Hathaway will vote all of its shares in favor of reelecting the current board, and Buffett intends to do the same with his personal stake in the bank. Whether this is enough to overcome proponents of change remains to be seen, but given Buffett's deep understanding and appreciation for well-run banks, his perspective is good food for thought.

Investors will know either way this week, following Wells Fargo's annual meeting on Tuesday.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$40.24 (-1.28%) $0.52
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$417,700.00 (0.07%) $298.56
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$278.40 (0.04%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.