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Wells Fargo CEO John Stumpf’s Fatal Flaw

October 13, 2016, 3:07 PM UTC

John Stumpf’s sudden retirement yesterday was no surprise. As Wells Fargo’s fake-accounts scandal continued to grow, it became clear that the bank couldn’t move on until Stump left the building. What makes the news interesting is that it fits a larger recent pattern, along with the Samsung Galaxy Note 7 disaster and the never-ending VW mess. All look increasingly like examples of the same leadership failing.

The failing is a common one: demanding results at all costs in the belief that pushing people to their utmost limits is the only way to make them deliver everything they’re capable of. That belief holds an element of truth, of course. That’s what makes it seductive and insidious, a trap for leaders who don’t fully understand what they’re doing.

The trouble started with each of those three companies’ leaders facing monster strategic goals that simply had to be achieved.

-For Samsung mobile chief D.J. Koh it was beating Apple’s iPhone 7 to market with a knockout competitive product. Product development and testing got rushed, and the result will cost the company some $4 billion in direct costs and lost sales, plus incalculable damage to the brand.

-For Wells Fargo’s Stumpf it was doubling down on cross-selling, the key to its excellent performance over many years, which would be its salvation in a low-growth, low-interest-rate environment. Now the company will undoubtedly face massive class-action lawsuits and likely punishment by federal regulators.

-For former VW CEO Martin Winterkorn and former chairman Ferdinand Piëch, it was making the company’s diesel engines compliant with U.S. emissions rules so it could increase U.S. sales, as it desperately needed to do in order to meet its audacious goal of becoming the world’s largest automaker. Ultimate costs of the defeat-device scandal are unknowable but certainly in the tens of billions of dollars, not counting reputational harm.

In each case the company’s future was at stake, or so the leaders believed. Failure was not an option. Except, of course, that in demanding success at all costs, each leader has now damaged his company in profound ways that will hurt employees, investors, suppliers, and communities for years.

In the Wells Fargo and Samsung cases we don’t yet know to what extent each leader cracked the whip over subordinates, creating an unbearable atmosphere in which employees did what they surely knew was wrong. Investigations into the VW case over the past 13 months have revealed that Winterkorn and Piëch were quite explicit in demanding results or else.

Another developing pattern: Winterkorn stepped down abruptly, as Stumpf has now done also. Is Samsung next? Its unique conglomerate structure makes that a tough call, but it’s hard to see how the company recovers until some top-level executive pays a heavy price.

The leaders in these cases already knew that the art of leadership lies largely in striking the right balance between risks and rewards. What they didn’t fully appreciate is the staggering cost of getting it wrong. And perhaps they never imagined that they actually might get it wrong.

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The Wells Fargo Saga

Wells Fargo CEO steps down
After weeks of pressure to resign, John Stumpf has decided to retire. He will not receive severance pay and has already relinquished $41 million in unvested equity awards. It's a rapid fall for Stumpf, long considered one of America's best CEOs. His slow response to the fake-accounts scandal and grudging acceptance of responsibility made his departure inevitable. WSJ

The new CEO faces immediate test
COO Tim Sloan will succeed Stumpf as CEO. Previously the clear heir apparent, he will quickly have to respond to Wall Street when he presents third-quarter results on Friday. Investors want to hear how Wells will grow with one of its top revenue generators, cross-selling, under fire after the fake-accounts scandal. Reuters

Sloan didn't see a problem with Wells's culture
Just three months ago,  Sloan didn't think that the bank's cross-selling practices had created cultural problems, and he has defended the culture against numerous reports dating to 2013 that aggressive sales goals led to illegal behavior. Some analysts argue that an outside CEO would have been a better choice to fix the bank's problems. Fortune

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