Warren Buffett is sending the wrong message on Wells Fargo

David Nelson
David Nelson
FILE PHOTO: A Wells Fargo branch is seen in the Chicago suburb of Evanston, Illinois, U.S. February 10, 2015. To match Special Report BITCOIN-EXCHANGES/RISKS REUTERS/Jim Young/File Photo

David Nelson, CFA, is the chief strategist of Belpointe Asset Management.

On Tuesday during Congressional testimony looking into Wells Fargo’s ( WFC) fraudulent sales practices, Senator Elizabeth Warren (D-Mass)  blasted current CEO Tim Sloan saying,  “At best you were incompetent. At worst you were complicit.”

I’m not often on the same page as the Senator from Massachusetts but as it concerns Wells Fargo there’s a pretty big disconnect between the board, the CEO and consumer rights.

It’s hard for me to get on board with Sloan’s comments saying he’s the best one to right the ship because he’s been there so long. Former CEO John Stumpf was forced to leave and Sloan was certainly in a position of leadership, so he should be gone, too. Frankly, anyone on the board at that time should take a hike or at the very least have a substantial portion of pay clawed back.

What was Warren Buffett thinking?

Even longtime shareholder Warren Buffett, who often takes a hands-off approach when dealing with boards, refers to this as a stain. What I can’t square with Buffett is just what was he was thinking when he voted for all of them earlier this year. His rhetoric is often not matched with action.

In 2014 he expressed his unhappiness concerning executive pay at Coca Cola ( KO) but only abstained from voting. For me that’s kind of like complaining about your government but not going to the polls to vote. Not only did Buffett abstain from the vote but in a CNBC  interview that year he told host Becky Quick, “It’s kind of un-American to vote no at a Coke meeting.”

Really, not only do I think it’s the right thing to do but I believe corporate governance is one of the defining issues of our time. A lot of negative press followed including an op-ed from The  New York Times. Eventually he pressured the directors, but given recent actions surrounding the WFC board, it’s clear he supports management regardless of the rhetoric.

Buffett doesn’t ‘walk the walk’

When it comes to corporate governance, Buffett seems to talk the talk but doesn’t walk the walk.

Negligent management, outrageous executive pay and complicit directors are nothing new on Wall Street. It’s been with us since the dawn of public markets. The final arbiter of corporate behavior is of course the shareholder or at least it should be. Unfortunately, all too of often those in a position to make a difference shirk their responsibility.

Wells Fargo Chief Executive Officer and President Timothy Sloan looks down as Sen. Elizabeth Warren, D-Mass., questions him as he testifies during a hearing before the Senate Committee on Banking, Housing and Urban Affairs on Capitol Hill in Washington, Tuesday, Oct. 3, 2017. (AP Photo/Susan Walsh)

The recent congressional testimony of Wells Fargo’s Tim Sloan and former CEO Russell Smith of Equifax are an all-too-familiar scene. The public bloodletting makes great theater but usually ends with little more than a public apology. CEOs like Smith fall on their swords but are allowed to retire with millions in generous pension packages and stock.

As the largest institutional shareholder of Wells Fargo, Buffett’s vote for the full board sent exactly the wrong signal to corporate America. Even if working behind the scenes, it appears as if he is succumbing to public opinion.

The Wells Fargo scandal of employee fraud based on an aggressive sales culture goes all the way back to 2013 when the Los Angeles Times broke the story. All in, it looks like Wells will pay $185 million in fines and another $242 million in a class action suit. Even if there are more fines down the road this is chump change for a company with a $273 billion market cap.

Look, make no mistake — Buffett is a legend and a hero to investors everywhere but in my humble opinion has a responsibility to make his voice heard sooner, especially when the evidence is clear. To his credit, he seems to be taking a tougher stance as evidenced in recent interviews. Unfortunately, the voting record doesn’t match the words and sends the wrong message to corporate America and, even more importantly, to his fans.

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