How Wells Fargo Became a Champion for Boardroom Diversity

Former Wells Fargo Chairman and Chief Executive Richard Kovacevich was thinking about boardroom diversity long before it became fashionable

When he ran Norwest back in the 1980s and 1990s, the conventional wisdom was that public-company boards should be made up largely of former or current CEOs or other C-suite types. Norwest had its share of those, but Kovacevich wanted women on his board too.

Since there were few female CEOs or chief financial officers around in those days, Norwest had to look elsewhere for qualified candidates. One of his recruits was Reatha Clark King, an African-American woman who ran General Mills' charitable foundation. Another was Cynthia Mulligan, a banking law professor and former bank regulator.

"I'm a huge proponent that you need active CEOs on a board," Kovacevich, who is now retired, says in an August interview. "But if you're a small board, and you say you want active CEOs and you want gender and ethnic diversity, the numbers just don't add up."

He brought that mindset to Wells when Norwest acquired the San Francisco company and took its name, and it's a big reason why Wells outperforms its peers today, at least when it comes to boardroom diversity.

The $1.7 trillion-asset Wells has seven women on its 16-member board, a 44% ratio that makes it the leader among large U.S. commercial banks. It has twice the number of female directors as the average top 25 bank, where the ratio is 22%, according to Ernst & Young's Center for Board Matters.

Kovacevich pushed for more diversity in the boardroom because he fundamentally believes that directors and management teams should be representative of a bank's customers and employees. Most banking executives would not argue with that, but when the time comes to recruit new directors, many still don't look beyond their internal networks — which are overwhelmingly white and male, observers say.

Kovacevich's successor, John Stumpf, says that if banks focus on finding the most qualified candidates, then diversity will happen. "We didn't go about it saying that we had to have so-and-so number of females," Stumpf says in explaining why Wells pursued former Federal Reserve Gov. Elizabeth "Betsy" Duke for its board. Wells wanted someone with deep regulatory experience, and she was the best choice, he says.

"It's always about getting the best people we can find. When you open your aperture to the entire population of who would be great directors, you get better people," Stumpf says.

Still, if it were that easy, everybody's board would better resemble a cross section of America.

Wells officials went further and made a couple of simple policy decisions — actively seeking non-CEOs, and boosting the number of directors — that have had a major impact on the makeup of its board.

LOOKING BEYOND THE C-SUITE

To get more female directors, Wells executives say, they had to eliminate an embedded corporate bias: the preference for hiring only CEOs or C-suite executives as directors. If banks only put CEOs on their boards, they narrow the playing field of potential director candidates because of the lack of diversity in the executive ranks of U.S. businesses.

Some companies limit their directors to current or retired CEOs, CFOs or chief operating officers for a reason. C-suite executives typically have experience in the trenches so they can better understand and act on corporate problems. Investors also are increasingly seeking confirmation that boards have the expertise to provide strategic counsel.

Still, when Wells added two directors to its board last year, it wasn't afraid to hire non-CEOs. One was Duke, a former regulator and bank CEO. But the other was Suzanne Vautrinot, a retired major general of the U.S. Air Force, who is the president of her own cybersecurity firm, Kilovolt Consulting in San Antonio.

Pat Callahan, a Wells senior vice president and chief administrative officer who oversaw the director searches, says there is an inherent bias if a board is limited to just CEOs.

"If you want a board full of sitting CEOs from Fortune 500 companies, you won't have a lot of women," says Callahan, who retired in August. "But if you are willing to branch out a little bit to private companies, tech companies, academia, and are creative in thinking about where your members come from, there are lots of impressive women out there."

Some female directors echoed the arguments of Callahan and Kovacevich.

Lizabeth Zlatkus, a former CFO at Hartford Financial, who is on two boards, Boston Private Financial and the U.K.'s Legal and General Group, says limiting board choices to only the C-suite is counterproductive.

"It's extremely important to have diversity of thought," Zlatkus says. "What will solve this problem is to recognize you want qualified women on a board and define it as someone who is really skilled in a particular field relevant to your business, say in securities law or risk management."

Wells has 16 members overall, so it has the flexibility to carry plenty of C-suite veterans and also recruit directors from outside the mainstream. Four of the five Wells directors that are nontraditional — that is, they are not former or retired CEOs or chairmen — are women.

BIG BOARD DEBATE

The average board size of S&P 1500 companies last year was nine, according to Ernst & Young. But bank boards tend to be larger, with the top 25 banks averaging 12 directors, based on 2015 annual meetings, E&Y found. Some studies have shown that companies with smaller boards are more effective and produce better shareholder returns. Larger boards can offer certain benefits, particularly in heavily regulated industries like banking.

Consider how Wells went about selecting Suzanne Vautrinot.

The company was not even looking for another director. But Stumpf received an email from a retired executive who sang Vautrinot's praises. Her expertise in cybersecurity took on more urgency after several high-profile data breaches last year at Target and Home Depot. There was also the possibility that Vautrinot might get snapped up by another board or would not be available when an existing member retired. So Wells simply increased the size of its board to make room for her.

"When somebody exceptional comes along, it's worth being bigger for a while," says Callahan.

Increasing a board's size to make room for female directors is a common practice these days in corporate America. But some experts suggest it is not always a good idea.

"We would want to hear from the board why it was important to have that many directors," says Jamie Carroll Smith, the assistant director of Ernst & Young's Center for Board Matters. "We don't want to say what size of a board is appropriate. [But] if boards are always adding directors and none are leaving, are they thinking about the tough side of refreshing the board, which includes asking people to leave when appropriate?"

Many companies consider downsizing their boards when a number of directors are on the brink of retirement. The pace of director retirements is expected to accelerate over the next decade, but at least some companies may opt to shrink the size of their boards, thus choking off opportunities for women and minorities.

"There are a lot of people who believe small boards are more effective, that there are fewer people around the table and that bigger is harder to manage," Kovacevich says. "For people who say [Wells' board is] too large, I'd ask, 'What are you going to cut out?' Yes, it takes a little more time, and it's a little more difficult to manage, but you get so much more."

LEGACY FACTORS

The big surge in female directors at Wells came 17 years ago when it merged with Norwest, which had grown dramatically in the previous decade under Kovacevich. He was responsible for some of the major trends in banking, including cross-selling existing customers more products and expanding Norwest into 70 lines of business compared to Wells' 10.

Because Norwest was based in Minnesota, a fairly progressive state with a large number of Fortune 500 companies, it came to the merger with three female board members. Wells had two. So the combined company ended up with five female directors, out of 24 board members, a whopping 21% at the time. One of them, King, retired shortly after the merger, but four of those original five female directors are still on Wells' board.

"Everything about us, whether it's diversity of product lines, or of people or geographics, is about diversity," Kovacevich says. "We think we gain better ideas, we reduce our risk, we serve our markets better, the more diverse we are, and that word applies to so many things we do."

The original Wells Fargo had a bent toward gender equality too, perhaps because it opened for business in 1852 at the height of the Gold Rush. As the West grew dramatically, women were hired in greater numbers as bank tellers and clerks. In 1934, Wells named its first female director, Clara Hellman Heller, who was the daughter of the bank's president.

TOLL OF THE FINANCIAL CRISIS

Duke, the former Fed governor who joined Wells' board as a director last year, is a woman who broke through the glass ceiling. She served five years at the Fed, during the height of the financial crisis, when three of the five Fed governors were women.

Yet even Duke is concerned with the slow pace of change.

"I don't know that there's been a big breakthrough in corporate boardrooms," Duke says. "It does stress me that the number of female directors is about 20% now and that seems low to me."

Last year, just 16% of board seats at S&P 1500 companies were held by women, less than the percentage held by directors named John, Robert, James and William, E&Y found.

By comparison, of the top 25 banks, 22% of board seats are held by women, E&Y found. Banks are ahead of a slew of other industries, including retail, consumer products, and technology firms, in the percentage of female directors on their boards.

Duke has a theory as to why too few women have become directors.

Many bankers, both men and women, got purged during the financial crisis, she says.

In 2004, when Duke became the first female chairman of the American Bankers Association, there were about 200 female bank presidents, almost all at community banks. There also were women in senior management positions at most of the large banks who seemed to be on the CEO track. So, for Duke, it seemed reasonable to expect that more women would become CEOs.

"At the time it looked like all these women were teed up and they were going to become the CEOs of major banks," Duke says. "But then there were mergers and acquisitions and the financial crisis came, and whole management teams were toppled. The crisis wiped out a whole generation of bank management. The bankers who made it through were tired and the group of women that had seemed ready to go didn't. It was a vicious time to be in banking."

DIVERSITY DASHBOARD

Stumpf emphasizes that the way to ensure more women are coming up through the ranks is to measure their progress. When Stumpf sits down with the 10 top managers who report directly to him (three of whom are women), he conducts reviews and the talk includes diversity and inclusiveness.

"We know our checking sales numbers, we know our credit numbers, we know our return-on-asset numbers, why wouldn't we know our inclusiveness numbers?" Stumpf asks, rhetorically. "We keep score. How many people, what's our percentage of women and persons of difference in this level of management and that level, and so forth. It's measurable."