The Principle-Agent Problem: Understanding Motivation to Manage Incentive

Review the following to prepare for the discussion:
(all of the following readings are uploaded or links provided below)
Fed Won't Lift Wells' Growth Cap Until Deficiencies Are Fixed: Powell.
Letter From Senator Warren to Fed on Wells Fargo FHC StatusLinks to an external site. [PDF].
Insights From Your Professor
When I think I will have to find another case to replace Wells Fargo, they give me a gift to continue the story:
Wells Fargo Gamed System in Investor Arbitration, Judge Says
Wells Fargo to pay $7 million Over Alleged Anti-Money-Laundering Glitches
Wells Fargo to Pay Record CFPB Fine to Settle Allegations It Harmed Customers
Is Goldman Sachs the next Wells Fargo?
Federal Reserve Probes Goldman Consumer Business
The Humbling of Goldman Sachs- Being Good in a Bad Industry is Not Enough, The Economist Magazine, January 28-February 3rd
And will Earnst and Young join the dysfunctional governance group?
Upon learning that the management leading the auditing for EY was helping new employees cheat on the auditing tests, the firm will be split, with auditing an independent business and Tax consulting another business.; Can the auditing business survive with its tainted reputation? Auditing is slow growing, and the tax consulting division is fast growing. The separation will provide challenges to each of the newly independent companies.
EY (Ernst and Young) Faces Knotty Split of Its Lucrative Tax Business" WSJ 9/21/22
The article Brian Tayan Wells Fargo Cross-Selling Scandal Download Brian Tayan Wells Fargo Cross-Selling Scandal[PDF] is an in-depth review of what happened at Wells Fargo in the Cross-selling scandal. He provides insights that every organization will find valuable is an in-depth review of what happened at Wells Fargo in the Cross-selling scandal. He provides insights that every organization will find valuable.
https://web-p-ebscohost-com.libdatab.strayer.edu/ehost/delivery?sid=190be95a-7227-43f0-858f3e907a2e77c1%40redis&vid=1&ReturnUrl=https%3a%2f%2fweb.p.ebscohost.com%2fehost%2fdetail%2fdetail%3fvid%3d0%26sid%3d190be95a-7227-43f0-
858f-3e907a2e77c1%2540redis%26bdata%3dJnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl
https://www.warren.senate.gov/imo/media/doc/Letter%20from%20Senator%20Warren%20to%20Fed%20on%20Wells%20Fargo%20FHC%20Status%2009.13
https://www.wsj.com/articles/wells-fargo-gamed-system-in-investor-arbitration-judge-says-11643903122?
st=13b6sc02zgslwlq&reflink=desktopwebshare_permalink
https://www.wsj.com/articles/wells-fargo-to-pay-7-million-over-alleged-anti-money-laundering-glitches-11653082531?
st=ibvhs20eref7seq&reflink=desktopwebshare_permalink
https://www.wsj.com/articles/wells-fargo-reaches-3-7-billion-deal-with-regulators-over-consumer-banking-11671546132?
st=bu4fejvfknna66q&reflink=desktopwebshare_permalink
https://www.wsj.com/articles/federal-reserve-probes-goldman-consumer-business-11674232252?st=z3zds3otp8psjvr&reflink=desktopwebshare_permalink
https://eds-p-ebscohost-com.libdatab.strayer.edu/eds/detail/detail?vid=0&sid=deceb01f-c391-4224-b07b5ac534dbc1d5%40redis&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#AN=161629608&db=a9h
https://www.wsj.com/articles/ey-faces-knotty-split-of-its-lucrative-tax-business-11663673562?st=vgpzrmp6qywiu34&reflink=desktopwebshare_permalink
Context:
On September 13, 2021, Senator Elizabeth Warren sent FED Chair Jerome Powell a letter [PDF]
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 more than three years since then, numerous additional revelations have surfaced 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 current 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 consumer bank subsidiary from its other financial
activities.
Wells Fargo is an enormous financial services company with $1.9 trillion in assets. It serves 1 in 3 U.S. households and 10% of U.S. small businesses.
In Wells Fargo's reply, it cites progress achieved under the new CEO, Charles Scharf, including:
https://newsroom.wf.com/English/news-releases/news-release-details/2021/Wells-Fargo-Affirms-Focus-on-Building-Strong-Risk-and-ControlFoundation/default.aspx
Three business groups have been split into five.
It has created four new functions to provide greater oversight and transparency.
It has brought on board 10 new operating committee members out of the total committee of 17.
It has created a new team design to facilitate oversight of consumer practices.
It has created new enterprise-wide risk assessments with the intent to design new controls.
It has "implemented a new incentive plan for bank branches that is governed by stronger oversight and controls, and focused on customer relationships."
Instructions
The Fed maintains that Wells Fargo has not done enough to rein in the incentive failures that revealed the frailty of its corporate governance. We have seen
that several of the largest conglomerates in the United States have decided that it is time to divide their agglomerated groups into smaller units for focus and
function. Johnson & Johnson will separate its consumer products division and its pharmaceutical division. GE will divide into three units: aviation, energy,
and healthcare. Is it time for Wells Fargo to separate its consumer banking business from its other enterprises?
Address the following in your discussion post:

1. What is the principal-agent problem?
2. What is the role of corporate governance?
3. How is corporate culture different than governance?
4. Can incentive systems align culture with governance?
   Please do not use more than three sources. Textbook must be one if the three. Textbook source is provided.

Sample Solution