An influential shareholder advisory firm has recommended that Wells Fargo & Co. investors vote against most of the company's incumbent board members in an upcoming election — a stinging rebuke that the bank's board called "extreme and unprecedented."
In a report issued Friday, Institutional Shareholder Services said that board members failed to properly oversee the San Francisco bank and could have done more to prevent "unsound retail banking sales practices."
The firm, which advises big investment firms on corporate governance issues and on how to vote in annual shareholder elections, recommended voting against 12 of the bank's 15 board members, including Chairman Stephen Sanger.
It recommended voting for the remaining three members, all of whom joined the board after the bank's unauthorized accounts scandal came to light in September of last year. That includes Timothy Sloan, who joined the board when he was named chief executive in October, and directors Karen Peetz and Ronald Sargent, who joined the board in February.
In a response issued Friday, Wells Fargo's board said the ISS recommendations fail to account for all the actions the bank and board have taken in the wake of the scandal, in which as many as 2.1 million checking, savings and other accounts were created without customers' permission.
Those actions include firing several senior managers, canceling pay and bonuses for some executives and scrapping the onerous sales goals that critics blamed for pushing workers to open accounts without authorization.
The board also said ISS did not take into account the results of an internal investigation into the bank's sales practices and the accounts scandal. The findings of the investigation have not been released, though Wells Fargo officials have said a report will be made available before the company's April 25 shareholder meeting.
"We strongly disagree with the unwarranted recommendation by ISS to vote against 12 of Wells Fargo's 15 directors — and urge our shareholders to disregard ISS's director voting recommendations and judge for themselves the findings of the investigation and the strong actions the board has already taken," the board's release said.
ISS noted throughout its report that the bank has taken steps to address problems, but emphasized that those steps were taken only after the bank's practices were made public in last year's $185-million settlement with regulators.
"The board's actions have been largely reactive, driven by customer complaints and triggered by the consent orders and findings of [regulators]," ISS wrote. It went on to say that the failure of various board committees arguably contributed to the hundreds of millions in costs and "untold reputational harm at the bank."
The report also referenced some of the latest developments in the scandal, including an announcement Monday by the Occupational Safety and Health Administration that Wells Fargo had fired a former manager after he reported potential fraud to the bank's ethics hotline. The agency ordered the bank to rehire the manager and pay $5.4 million in back pay, damages and legal costs.
Wells Fargo said it will challenge OSHA's decision. Nevertheless, ISS called the case "chilling" and said it raised "grave concerns over processes designed to identify and manage risk at the company."
Shareholders have not nominated new candidates to serve on Wells Fargo's board, so they only have the option to vote for or against the company's nominees, who must win a majority of the votes cast in the election.
Michael Chasalow, a law professor at USC who specializes in business and corporate governance issues, said it's unlikely that shareholders will end up booting most of the bank's directors from the board.
Still, if a significant number of shareholders vote against incumbent board members, it would send a strong message to the bank that shareholders believe that the bank must do more to answer for the accounts scandal and other corporate wrongdoing, he said.
"This is a little bit of ISS saying, 'We don't think the board has done enough in the wake of the scandal to take action within the bank,'" Chasalow said. "Maybe what you'll see is the board staying in place, but further steps being taken."
ISS has also recommended voting in favor of a proposal, submitted by a group of shareholders last month, that calls for Wells Fargo to prepare a comprehensive report "on the root causes of the fraudulent activity" within the bank. Wells Fargo's board has urged shareholders to vote against that proposal, saying such a report would be redundant given the soon-to-be-released report based on the bank's own investigation.
But ISS noted that because the board has not released that report, and with just a few weeks until Wells Fargo's shareholder meeting, it makes sense for shareholders to vote in favor of the proposal.
"The details and findings of the company's investigation are unknown and will not be publicly disclosed until shortly before this annual meeting," ISS wrote, "allowing little or no time for shareholders to compare the scope and findings of that investigation to the comprehensive report proposed by [shareholders]."
The board members ISS recommends voting against are all members of the audit, risk and human resources committees, which the advisory firm said failed to provide "sufficient timely and effective risk oversight."
The members are Sanger, John Baker II, Federico Peña, James Quigley, Susan Swenson, Suzanne Vautrinot, Lloyd H. Dean, Elizabeth Duke, Enrique Hernandez Jr., Cynthia Milligan, John Chen and Donald James.
Earlier this week, another shareholder advisory firm, Glass Lewis, recommended voting against four Wells Fargo board members — Baker, Dean, Hernandez and Milligan — who were members of the bank's corporate responsibility committee, which is charged with overseeing reputational risk and customer complaints.
Glass Lewis said shareholders should vote against those directors "based on the reputational damage inflicted on the company and this committee's failure to properly fulfill its stated duties." The firm also recommended voting against board members Chen and Swenson, saying they serve on too many other corporate boards.
Shares of the bank closed Friday at $54.84, down 53 cents or about 1%.
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3:50 p.m.: This article was updated with names of all board members, comments from Michael Chasalow and details on the Glass Lewis report.