Update on Wells Fargo
Divest or Engage?
SAN FRANCISCO, CA, February 28, 2017
Since the negative news about Wells Fargo Company (WFC) first surfaced last fall, our
shareholders have expressed concerns about Parnassus Investments holding this company in our
portfolios. Parnassus is also very concerned about controversies at WFC. Top executives at
Parnassus, including CEO Jerome Dodson, CIO Todd Ahlsten and President Benjamin Allen, have
directly engaged WFC executive leadership on making positive change. As a significant
shareholder and a responsible investment firm, Parnassus continues to use its ownership stake to
address the controversies faced by WFC.
The controversies that landed WFC in the spotlight in 2016 initially centered around high-pressure
cross-selling programs that resulted in WFC opening over a million accounts and credit cards for
customers without their permission and firing employees who did not meet overly aggressive sales
goals. We are pleased to see that WFC replaced individual sales incentives—including eliminating
cross-selling goals—for retail bankers with a new plan focused on team performance and customer
relationships. The firm also has improved new account opening procedures to protect clients.
A total of $60 million in compensation was clawed back from two senior leaders—Carrie Tolstedt,
who headed the consumer banking division, and CEO John Stumpf. In addition, Stumpf resigned
as CEO and chairman of the board. The new CEO, Tim Sloan, did not come from the retail
banking segment. Furthermore, with the departure of Stumpf, the board chairman and CEO
positions were separated, increasing the board of directors’ independence from management,
thereby strengthening the firm’s governance checks and balances.
This month, the WFC board of directors terminated several senior managers as part of their
continuing investigation of the firm’s selling programs. While we are actively building
relationships with new WFC executives, we believe that the concrete actions Wells Fargo is taking
to stop the fraudulent selling practices indicate that the new leaders are serious about changing the
Dakota Access Pipeline Loan
Another issue that has resulted in criticism of Wells Fargo is their Dakota Access Pipeline loan
(DAPL). This controversial pipeline is environmentally risky and is being routed through sacred
tribal land and Lake Oahe, which is an important source of drinking water for the Standing Rock
Sioux tribe. Well over a dozen banks have provided loans for this pipeline, but Wells Fargo has
drawn a significant amount of the adverse publicity in the wake of the firm’s other recent
Parnassus’s Communication with Wells Fargo
As reported in letters to our shareholders over the past two quarters, Parnassus initiated dialog with
Wells Fargo about the fraudulent cross-selling practices last fall. In December, Parnassus met with
CEO Tim Sloan about remedies for its customers and employees, discriminatory practices toward
minority and low-income customers, and financing of the Dakota Access Pipeline. At that meeting,
Parnassus also raised the fact that Wells Fargo is the last remaining major US bank whose “living
will” (plan outlining how the bank would protect the economy in the event of a collapse) has not
passed regulatory testing.
Most recently, Parnassus met with the heads of Government and Community Relations,
Environmental Affairs and Corporate Banking at WFC. We discussed a wide range of topics
including the Dakota Access Pipeline and retail banking issues. Parnassus has also cosigned an
investor statement addressed to the 17 banks that financed the pipeline.
Why Parnassus Invested in Wells Fargo
Some of the reasons that Parnassus purchased WFC include the bank’s nationwide scale and retail
focus, which put it in a sweet spot amongst banks. Its national branch network provides it with a
widely diversified customer base and the scale to invest in innovative new products. Meanwhile,
its focus on retail banking instead of investment banking leads to greater earnings predictability,
less volatility and higher ROEs (returns on equity) than the Wall Street banks. WFC’s credit risk
management is best in class, as evidenced by its avoidance of the worst of the sub-prime mortgage
debacle, and its loan losses remain below peers, although it should be noted that all of Parnassus’s
current and future holdings are subject to risks.
In addition to these fundamental attributes of WFC, the bank is the third largest corporate donor to
charitable causes. Minorities and women are well-represented in its leadership. Wells Fargo also
supports affordable housing initiatives that service low- and moderate-income households,
including senior, veterans and families, as well as access to capital for diverse-owned small
businesses. The company has also committed to purchasing renewable energy for 100% of its
operations by the end of this year.
Parnassus believes we can make the greatest impact on a company’s progress by voicing our
concerns as shareholders. If Parnassus were to sell our stake in WFC, we would relinquish the
opportunity to engage in dialog with senior leaders at Wells Fargo. For this reason, as long as the
management team continues to communicate with us—and our exclusionary ESG screens have
not been triggered—we will continue to pursue the discussion.
More information about Parnassus’s approach to company engagement is available in our recent
email on the topic.
Parnassus Investments is the investment advisor to the Parnassus Funds.
Mutual fund investing involves risk, and loss of principal is possible.