Wells Fargo and Volkswagen Scandals Reveal Importance of Ethics Oversight by Board

May 15, 2017

Wells Fargo and Volkswagen scandals haunted this proxy season, highlighting the importance of ethics oversight at the board level. At Wells Fargo, the root of the problem was “the distortion of the Community Bank’s sales culture and performance management system…combined with aggressive sales management,” as stated in the Sales Practices Investigations Report of the bank’s independent directors, published April 10, 2017. That report found that, while management misled the board, the directors could have acted more decisively. All Wells Fargo directors were re-elected at the April 25, 2017, annual meeting, but several directors almost ran afoul of the bank’s majority voting policy. “Wells Fargo stockholders today have sent the entire Board a clear message of dissatisfaction. Let me assure you that the Board has heard that message,” Chairman Stephen Sanger stated in the company’s press release.

At Volkswagen, the supervisory and management boards are still addressing the “diesel issue” —repercussions from the discovery that the automaker equipped its diesel engines with software that enabled the company to cheat on emissions tests. While the holders of 92.53% of Volkswagen’s ordinary shares approved management’s actions for fiscal year 2016 at the company’s annual meeting on May 10, 2017, this is likely a reflection of the tight control held by the company’s founding families and home state in Germany. At the meeting, several outside investors expressed a lack of confidence in management and called for improved corporate governance, according to this Reuters article.

For more on the importance of ethics oversight at the board level, see John Stout’s reflections on “The Board’s Responsibility for Corporate Integrity.”

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