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Wells Fargo's Stewardship Takes a Hit

We’ve also raised our fair value uncertainty rating to high.


We have downgraded our stewardship rating for Wells Fargo (WFC) to Poor after more details emerged from two reports published by the U.S. House Committee on Financial Services, and Elizabeth Duke (the former chair of Wells Fargo’s board of directors) and James Quigley (another former board member) resigned. In the past, we readily admitted that pre-2016 stewardship at the company was lacking, but we kept our rating at Standard after the sales scandals became public because of all the changes occurring in management and on the board of directors. Part of our thesis on wide-moat Wells Fargo has been that the bank’s board and management would improve as the old members and executives were replaced. We believed that this would, over a reasonable period, lead to a rebuilding and a re-emergence of Wells Fargo as a better bank.

Given the information made public in the House reports, we can now see that our thesis was not correct. Board members like Duke, who came in after the sales scandals broke, were apparently just as bad as outgoing directors. It also appears that former CEO Tim Sloan was not even remotely up to the task, with very little progress made on his watch. We’ve had a difficult time explaining to investors why it was taking so long for Wells Fargo to satisfy certain consent orders; we now have a much clearer picture of what was holding things up. With part of our thesis about the bank seeing improvements in board oversight and management acuity (following the departure of such key characters as Carrie Tolstedt and John Stumpf) shown to be wrong, which throws into doubt the stewardship of the bank in general, we decided a downgrade of our stewardship rating to Poor was warranted. Additionally, given the uncertainty surrounding how long it will take for Wells Fargo to finally turn things around, we are increasing our fair value uncertainty rating to high from medium.

Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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