In push for profits, cutting corners and workers

This being an election year, a small set of our multimillion- dollar-salaried corporate CEOs last week went to Washington to spend a few hours in front of senators - makeup, camera lights - and swallow a bit of bitter medicine.

Just a bit. Shares of Wells Fargo & Co. rose Tuesday, after CEO John Stumpf was pummeled, by Republicans and Democrats, for the bank's practice of encouraging low-paid workers to open phony accounts for customers so Stumpf could brag to shareholders that Wells Fargo led America in cross-selling.

DuPont and Dow Chemical bosses were also in town, to defend the companies' plan to combine their pesticide and engineered-crop shops into one big producer. The union "is pro-competitive and good for farmers," Jim Collins, who is slated to run the combined business from a skeleton headquarters in Wilmington, insisted to senators.

Wells Fargo's Stumpf caught special flak for bragging that his company fired 5,300 low-wage workers - tellers and reps earning $12 to $16.50 an hour, plus their frontline managers - over five years, for "wrongful sales tactics," setting up fake accounts to meet tough bank sales goals.

(That's 1 percent of Wells Fargo's 100,000 workers a year, well within the industry's usual 10 percent to 20 percent annual turnover. The bank won't say how many were fired for not selling enough.)

After the Los Angeles Times exposed the accounts scam, the government forced the bank to repay $2.6 million in customer fees and fined it an additional $182 million. The bank paid - and let the operation's boss, consumer banking chief Carrie Tolstedt, retire peacefully, with congratulations for boosting sales, and more than $100 million in company stock.

The workers got fired. Their boss got really rich.

"Fraud," cried Sen. Pat Toomey (R., Pa.), facing a reelection fight back home.

"Resign," urged Sen. Elizabeth Warren (D., Mass.), voice of her party's angry wing.

The big shareholders who profited most from Stumpf and Tolstedt's tactics - top Wells Fargo investors BlackRock and Vanguard Group, and their many clients, plus Warren Buffett, the Democratic billionaire - didn't testify.

(In Collingswood, First Colonial Bank chief Gerry Banmiller ran anti-Wells Fargo radio ads: "Tellers aren't sellers.")

Dow and DuPont also faced bipartisan senatorial Nerf guns. With the longtime rivals shacking up at the same time that Bayer and Monsanto, and Sygenta and ChemChina, also plan unions, Sens. Charles E. Grassley (R., Iowa) and Amy Klobuchar (D., Minn.) expressed worry that the loss of competition could boost prices and cut research (DuPont has already laid off or reassigned most of its Central R&D).

They didn't urge that the deals get killed. Much of the concern expressed at the hearing was directed at absent China pesticide investors. As the all-America player, Dow-DuPont seems assured of U.S. blessing.

Nobody in government has been saying much in public about the risks that Dow, DuPont, and their planned spin-off companies might fail to continue paying hundreds of thousands of retiree pensions, or to clean up years of pollution at former facilities.

The senators also didn't probe much at the deeper issues that drive our brightest corporate minds to such extremes.

Why would Wells Fargo rip off its own customers, or accept a sales regime that required hiring and firing so many people year after year?

For the same reason Dow and DuPont have fired research scientists, maintenance contractors, and patent lawyers: With today's costs and incentives, it's easier to boost profits by cutting people than investing in new products and processes.

"Everything we do" is to "satisfy our customers' needs and help them to succeed," Stumpf claimed in a July investor conference call.

More clearly, as a public company, everything Wells Fargo does is about making money. The bank, with a No. 1 market share in Philadelphia and many other metro areas, is highly profitable, netting more than $20 billion a year, with after-tax profit margins above 22 percent, higher than Apple's.

But as a public company, Wells Fargo has to do more than earn profits. It has to boost profits. For all its industry-leading new accounts, Wells Fargo hasn't been able to lend profitably at a time of low interest rates. Its margins have been slipping. That's why it trades at just 11 times earnings, compared with 13 times for Apple, which keeps growing.

A cheaper stock will get bought up, eventually, by activist investors who think they can extract cash by breaking the company in pieces.

That's what happened to Dow and DuPont. It got tough for a mature chemical company, even one with lots of scientists, to show ever-increasing profits, in the face of hungry competition from Asia and Europe, while facing high U.S. tax, compliance, pollution, and employment expenses.

It's easier to enrich bosses and investors by borrowing money to fund consolidation deals - extra cheap, at today's low interest rates.

JoeD@phillynews.com

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@PhillyJoeD

www.inquirer.com/phillydeals