Your instructor may also post additional resources below to help further explain concepts related to this week’s discussion.
This week we looked at the principle-agent problem and what went wrong at Wells Fargo. On March 28, 2019, Tim Sloan, the CEO of Wells Fargo, who was supposed to restore the bank’s reputation, stepped down. After a very poor showing by Sloan in testimony about the bank before Congress and with long-standing restrictions by the Federal Reserve still in place, the bank seems unable to overcome the crisis created by a whole collection of deceptive practices which rose to the level of fraud. (For more information, refer to the 2018 article “Fed Won’t Lift Wells’ Growth Cap Until Deficiencies Are Fixed: Powell” from American Banker.)
On October 21, 2019, Charles Scharf officially assumed the role of CEO. Can he succeed in restoring the reputation of Wells Fargo as “the bank that always does the right thing”? This week’s discussion will provide you with an opportunity examine the principal-agency problem and incentives.
For some history of what when wrong at Wells Fargo and why I recommend the article “Wells Fargo Cross-Selling Scandal” from the Harvard Business Review, February 2019.
On September 13, 2021, Senator Elizabeth Warren sent FED Chair Jerome Powell a letter https://www.warren.senate.gov/imo/media/doc/Letter…
In the letter she wrote “Under Janet Yellen’s leadership, the Fed placed Wells Fargo under an asset cap in 2018 due to its ‘widespread consumer abuses and other compliance breakdowns. In the three years since then, numerous additional revelations have surface about Wells Fargo’s continued unethical and anti-consumer conduct. These new revelations have once again made clear that continuing to allow this giant bank with a broken culture to conduct business in its correct form poses substantial risks to consumers and the financial system.” Senator Warren goes on to ask that the FED revoke Wells Fargo’s status as a financial holding company. The action would require Wells Fargo to separate its bank subsidiary from it other financial activities.
Wells Fargo is an enormous financial services company with $1.9 trillion in assets. It serves 1 in 3 US households and 10% of US small business. In reply to Senator Warren’s demand Well Fargo replied, https://newsroom.wf.com/English/news-releases/news…
In it’s reply it cites progress achieve under the new CEO Charles Scharf, including: 1) three business group have been split into five; 2) it has created four new functions to provide greater oversight and transparency; 3) it has brought on board 10 new Operating Committee members out of the total committee of 17; 4) created a new team design to facilitate oversight of consumer practices; 5) created new enterprise wide risk assessment with the intent to design new controls; 6) “Implemented a new incentive plan for bank branches that is governed by stronger oversight and controls, and focused on customer relationships.” Emphasis added by Dr. Isley.
Instructions
The FED continues to maintain that Wells Fargo has not done enough to rein in the incentive failures that revealed the failure of it corporate governance. We have seen that several of the largest conglomerate in the US decide that it is time to divide their agglomerate groups into smaller units for focus and function. J & J will separate it consumer products division and its pharmaceutical division. GE will divide into three units; aviation; energy, and healthcare. It is time for Wells Fargo to separate it’s banking business from it’s other enterprises? YES NO Explain
What is the principal-agent problem?
What is the role of corporate governance?
How is corporate culture different than governance?
Can incentive systems align culture with governance?
How might separating Wells Fargo’s banking business from it’s other enterprises improve depositor safety?
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