Wells Fargo CEO Tim Sloan could be hard to oust — here's why

Poaching a replacement from one of the bank's few peers would probably be costly

Feb 22, 2019 @ 11:15 am

By Bloomberg News

Wells Fargo & Co.'s top critic makes it sound so easy.

Sen. Elizabeth Warren has made her view clear — again and again — that the bank can't resolve its scandals until it names an untainted replacement for Chief Executive Officer Tim Sloan. Her fellow Democrats in the House plan to turn up the pressure with hearings in coming months.

But the board doesn't agree, and even if it did, there's a question overlooked in the many tweets and rebukes coming from Capitol Hill: Who'd replace him?

Recruiters and investors say the pool of plausible successors is shallow, the job description daunting and the price tag steep. The obvious internal contenders have, like Mr. Sloan, worked at the lender for more than a decade, a period in which various misconduct occurred.

Finding an external candidate groomed to run the fourth-largest U.S. bank probably means poaching from just a few peers. Paying enough to pry such an executive from a more stable situation risks a firestorm with the same critics who calling for Mr. Sloan's head.

"When you replace a CEO in an institution that has issues and crisis — and is in the news in a bad way — it's a very, very difficult search," said Jeanne Branthover, a managing partner at executive search firm DHR International.

Ms. Warren has led the charge against Mr. Sloan since he was promoted to CEO in 2016, arguing it didn't make sense to appoint a longtime insider to clean up a growing list of scandals. She added to her calls Friday morning in a letter to Federal Reserve chairman Jerome Powell, saying that Mr. Sloan should be fired before the regulator lifts its asset cap on the bank.

Democrats who took control of the House Financial Services Committee this year are vowing to increase scrutiny of the firm, planning hearings where Mr. Sloan may appear. Each session is a chance for him to tout his efforts — or to make gaffes in front of tough critics.

Yet seeking a fresh start by enlisting an outsider as CEO would mark a major break for the industry. Since a wave of mergers created the nation's four largest commercial banks in the decade through 2000, none has made such a hire. Bank of America Corp. came closest in 2009 when it struggled to persuade several external candidates to lead it through crisis-era probes. It ultimately promoted Brian Moynihan, a lawyer already running its consumer business.

Hiring from competitors

There are two big reasons why banks usually groom their own executives to take the helm: It ensures a smooth transition. And it's less expensive.

The trouble with poaching from competitors is they can withhold tens of millions of dollars in compensation from defectors. After the financial crisis, banks subjected more pay to lockups, retaining the right to keep the money if an executive jumps to a rival. Banco Santander recently hit that obstacle when hiring UBS Group executive Andrea Orcel as CEO. It rescinded the offer rather than tell shareholders that the new boss needed as much as $60 million up front.

This analysis of challenges Wells Fargo would face enlisting an outsider is based on more than a dozen interviews with senior industry veterans, recruiters, investors and analysts. Many spoke on the condition they not be named because they weren't authorized to discuss the bank publicly.

As the nation's largest lender, JPMorgan Chase & Co. is widely seen as having the most executives capable of running Wells Fargo. Observers' lists often feature Gordon Smith, the company's co-president and co-chief operating officer, who also heads consumer banking. The catch: He's awaiting more than $50 million of unvested equity awards, according to data compiled by Bloomberg. Other standouts at JPMorgan include asset and wealth management head Mary Callahan Erdoes, commercial banking chief Doug Petno and CFO Marianne Lake.

Recruiters also point to Citigroup Inc. executives including Stephen Bird, the head of its global consumer division. He, too, is awaiting millions in unvested stock, albeit less than his counterparts at JPMorgan. Similarly, at Bank of America, there's Dean Athanasia, president of consumer and small-business banking.

Executives from other industries

Looking to other industries might not help. Comcast Corp. CFO Michael Cavanagh, once a rising star at JPMorgan, makes some lists. But Comcast grants him larger pay packages than Wells Fargo does Mr. Sloan — about 16% more for 2017. And many of Mr. Cavanagh's awards remain unvested.

Poaching from smaller banks raises a different issue: Would a regional bank CEO spend years building a business that competes with national titans, only to switch sides to undo that legacy? Observers suggest PNC Financial Services Group Inc. CEO William Demchak, recently retired U.S. Bancorp CEO Richard Davis and his successor, Andy Cecere may be capable of running Wells Fargo. Whether they'd make the jump is a big question.

Executives who've spent time in other niches of the financial industry, such as the evolving payments business, could also make sense for Wells Fargo. Candidates there include former Visa Inc. CEO Charlie Scharf, who now runs Bank of New York Mellon Corp., PayPal Holdings Inc. CEO Dan Schulman and current Visa President Ryan McInerney. But recruiters give them low odds.

Alternatively, Wells Fargo could seek cheaper relief from critics by hiring a former regulator, but, again, observers think that won't happen. The bank already has a chair, Elizabeth Duke, who previously served as a Federal Reserve Board governor.

Board support

To be clear, people close to Wells Fargo predict the board will resist pressure from Democrats to oust Mr. Sloan. The panel's unanimous support for him "has never wavered," Ms. Duke said in September. The CEO is in the midst of what the bank calls a sweeping overhaul, fixing past problems, working to prevent new lapses and streamlining operations to improve earnings.

"Over the past two years, CEO Tim Sloan, with the full support of the Wells Fargo board of directors, has made fundamental changes at Wells Fargo, including changes in leadership, organizational structure, risk and compliance, customer experience and culture," the bank said this week in a statement to Bloomberg. Earnings per share set a record last year, and payouts to shareholders surged, the bank noted.

Spokesmen for the other banks, Visa and PayPal declined to comment. A spokeswoman for Ms. Warren declined to say whether the lawmaker has any candidate in mind to succeed Mr. Sloan.

‘Too dirty'

The Wells Fargo insiders best positioned to replace Mr. Sloan in an emergency are probably Mary Mack, who runs its retail bank, or Jon Weiss, who heads wealth and investment management, according to one person close to the company. Both of them have worked at Wells Fargo and its predecessors for well over a decade. Another person said directors shouldn't even hint they have a potential successor on hand, because it could undermine Mr. Sloan, hasten his exit and disrupt business.

That might change if Mr. Sloan botches his House testimony, the bank lands in another scandal, regulators ratchet up pressure for leadership changes or Ms. Warren pulls ahead in the 2020 presidential race. Meanwhile, she's making her views of Wells Fargo known.

In late January, she blasted Mr. Sloan in a series of Twitter posts, concluding: "It's clear that Tim Sloan isn't the right person to try to clean up @WellsFargo. His hands are too dirty from overseeing years of scams and scandals. That's not just an 'informed' opinion. That's a fact."

If Ms. Warren wins the presidency, her views will become "top of the agenda" for Wells Fargo's board, said Jonathan Macey, a professor at Yale Law School. "It becomes a subject of deep concern."

(More: Wells Fargo says it's cleaning up its mess. Regulators demand more)

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