How the Bible Helped Me Avoid Investing in Wells Fargo
The thing that makes investing in the stock market different from owning a business is that when you invest in a publicly traded company you are an owner, but you are not a manager. You have entrusted your retirement, children's education, etc., to the hands of a team of people over whom you do not have direct control. Modern economists call this "agency risk," because there is a risk that the managers, your "agents," may not act in accordance with your interests.
But modern economists did not discover this problem: it is found originally in the pages of the Bible, particularly in the parables of Jesus.
We tend to think of Jesus as a merely "spiritual" teacher, but He was, in fact, a sophisticated and intelligent observer of all facets of human life.
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As we know, Jesus spent much of His early life in the small town of Nazareth. This has caused some commentators to view him as a something of a "country bumpkin," not sufficiently sophisticated to be the author of the financial parables attributed to Him. But extensive archeological work has shown that Nazareth was an exurb of Sepphoris, a short walk away.
Sepphoris had been destroyed by the Romans and was rebuilt during the early years of Jesus' life. It is inconceivable to assume that Joseph and Jesus, who were tektons (that is, builders, not merely carpenters) would do nothing but small projects in their home village, fixing the homes of other builders, and not be involved in one of the most massive building projects of the ancient Middle East a short walk away.
Jesus was exposed to a major financial center, where new innovations like partnerships requiring absentee owners to entrust assets to active managers were being practiced on a daily basis. He was there near the birth of such institutions in the Middle East and spotted quite early the risks involved. In fact, 33 AD, the likely year of his death, was the year of a massive empire-wide financial crisis much like the one we suffered in 2008 AD.
So, apart from what Jesus knew as the divine Second Person of the Trinity, He was, as a man, a shrewd observer of the impact of human nature on financial markets, because He was in a good position to see it all up close. This phenomenon of absentee ownership (agency risk in modern parlance) is something that Jesus referred to as a "steward" relationship.
The Parable of the Talents explains how stewards can become lazy and fail to live up to the trust which the absentee owner has put in them. Yes, of course, this parable has theological implications, but a parable depends on an analogy. It reasons using the established rabbinical form of argument "light and heavy," which is only valid if both levels of the parable are true. The form of the argument is: "such-and-such is true on the lighter physical/financial level, so it is even more true on the heavier level of spiritual reality."
Everything Jesus says is true, not just the "moral" of the story, but the story itself. And that includes finance.
To me, this is the first principle on which to understand investing in publicly traded markets, because the problem of agency risk is what makes publicly traded markets distinct. It is their beauty (lots of people can pool huge sums of money to do very large projects about which they have no expertise), and it is their curse (this far flung group of investors needs to be able to trust their stewards.)
Paul saw this, too: "Moreover it is required in stewards, that a man be found faithful." (2 Cor 4:2 KJV)
Keep in mind that this letter from Paul deals heavily with financial matters. In the Biblical view, faithfulness is of the essence of stewardship, not a peripheral matter. Yes, they should be skilled and diligent and all the rest, but all of their skills and diligence are to a bad end if they are not using them to faithfully carry out the mission.
CEOs should work for boards and boards should work for shareholders. Both should have what Warren Buffett calls "an owner orientation." Even the largest CEO with vast responsibilities and corresponding income is still, in the great scale of things, just the hired help. Imperial CEOs are not faithful stewards, and they create agency risk for the owners.
This brings us to Wells Fargo. I work for a financial services company called Vident Financial, and we decided early on that when it comes to choosing companies, we would evaluate, among other important factors, whether management has this stewardship mentality.
For example, if a CEO is also the chairman of the board of directors, he or she is in essence their own boss. They would run the board that they answer to. Most companies have figured out that these dual roles are a problem (or investors have figured it out for them), and therefore most companies do not have a combined chair/CEO.
Wells Fargo unfortunately does combine these offices. There are numerous other ways in which Wells Fargo has displayed a lack of owner orientation: making it more difficult than necessary for dissenting shareholders to elect board members, allowing over-boarding (board members serving on many boards and committees, collecting fees for each and spreading themselves too thin), and having board members who do business with the company at management's discretion, creating conflicts of interest.
Wells has serious problems in all of the above and in other areas. They were on our "naughty list" long before their recent settlement with the SEC because before we knew exactly what they had done wrong, we knew their corporate culture made them riskier for investors.
They were looking like a house built on a foundation of sand. You want to evaluate them before the storm comes, not after it has hit. Wells demonstrated a series of practices which suggested (but did not prove) a sandy foundation.
Their principle violations are far too many to spell out in this space (for a more complete list of stewardship/owner orientation failures and caution flags read this.
