Research Paper on Wells Fargo: A Multinational Financial Services Leader Since 1852

Introduction

Wells Fargo & Company, founded in 1852, is a multinational financial services organization based in California, United States (US). The entity provides products and services such as mortgage and investment, banking as well as commercial and consumer finance to assist customers who do businesses globally. The company ranks fourth in the largest financial institutions in the US, with an asset base of approximately 1.9 Trillion (Antonacopoulou et al., 2019). While Wells Fargo has been doing well in profitability for the past few years, lately, the company is facing setbacks as a consequence of the fake accounts scandal (Flitter, 2020). The organization's profits are falling, and the new Chief Executive Officer is under pressure to steer the firm back to normalcy. Therefore, strategies for managing risks and uncertainty, and the use of incentives to motivate the workforce, are critical to Wells Fargo's redemption.

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Latest Actions Dealing with Risks and Uncertainty

Since the exposure that Wells Fargo's employees created fake accounts to increase their sales, the bank has suffered a blow in its reputation. However, that is not the sole risk that the institution has fallen into; there are others, such as legal cases and fines (Flitter, 2020). For instance, in February, the bank agreed to pay a fine of three billion dollars. With such threats, the profitability of the company is at stake; for example, in the last quarter of 2019, the profit fell from $6.06 billion to $2.87 billion (Flitter, 2020). The scandal, which came to the limelight in 2016, was a result of the firm's failure in risk management (Antonacopoulou et al., 2019). However, the company, through the new CEO, has admitted having tough times but has promised actions to rebuild the confidence of the regulators and consumers.

Some of the ongoing remedies that Wells Fargo has taken towards clearing its tainted image include the realignment of staff. Recently, the company has reorganized the risk operations functions where four executives in the department retired to pave the way for new staff. The restructuring of the team will see an aggressive approach to risk control (Aven, 2016). Besides, Wells Fargo has introduced a department that will deal with the workers' complaints and ethics. Previously the employees were seen to be the cause of the scandal, and most of them lost jobs as a result. But later, the employees revealed that they created fake accounts due to pressure from the management for more sales (Smith & Reiners, 2017). Therefore, the section will be critical in getting the workforce back to the track.

Advice on Improving the Management of Risk

Effective risk management is crucial for any business offering financial services, and the company could practice some ideas to boost this function. For instance, upon hiring new executives, there is a need for systematic changes to avoid a repeat of the failure. First, the inception of software that aids in the engagement of low-level supervisors and experts in the subject matter. These front-line managers are closer to the eventualities and engaging them regularly in threat assessments, and incident reporting is vital for the success of any risk control program (Voorn et al., 2019). Therefore, it would be prudent if the bank deploys an ideal Enterprise Risk Management (ERM) application following the scandal. Second, the management should come up with a new strategy of offering suitable incentives and ditch the previous that could potentially guide the staff into breaking moral codes, Business managers experience the pressure of meeting unrealistic goals, and one of the ways of keeping them motivated is by providing sufficient remuneration policies (Aven, 2016)

Adverse Selection Problem

Earlier, the firm had maintained an excellent reputation, subsequently the customer's confidence. However, the issue of adverse selection emerged upon discovery that the bank had created close to 3.5 million fraudulent accounts using the information supplied by its customers. While the action is a moral hazard, they entered into a transaction with individuals who did not know that their data was subject to misuse for the sake of profit (Flitter, 2020). The adverse selection problem affects the trust built between the parties, and there are low chances that there will be further transactions in the future. In that case, the company could lose customers to competitors unless they act accordingly to restore faith in the brand (Benner & Zenger, 2016).

In mitigating the negative consequences of adverse selection, the company should undergo a paradigm shift from profit centered to a customer-oriented entity. Through this, Wells Fargo will align its goals with fulfilling the needs of the consumer who, in return, dedicate their loyalty to the business. Wells Fargo ought to make deliberate efforts to win public confidence, such as engaging in corporate social responsibility as well as offering incentives to customers (Benner & Zenger, 2016).

Moral Hazard Issue

Wells Fargo, like many other companies of its stature, has experienced problems with moral hazards, including health and safety, resources, and internal conflicts. Issues of moral hazards in financial institutions create room for the organization to fail (Benner & Zenger, 2016). The corporate culture of Wells Fargo promoted unethical practices, which led to compliance failure. It enabled the bank's employees to have their interests ahead of those of their clients. The unethical behaviors of its employees, which included the unauthorized transfer of funds, creating fake accounts, and failing to handle the customers' accounts properly, led to financial loss. The company consented to pay fines and also refund the customers for the unethical actions of its employees.

The financial institution is tackling the moral hazard by tying the managerial compensation to the overall performance of the company. Though managers can manipulate profitability measures and conceal significant losses, rewarding them based on the company's performance can minimize unethical behaviors. One of the best practices in such a financial institution to deal with the issue of moral hazard is auditing. Though the monitoring process is costly, effecting auditing alleviates the problem of moral hazard (Voorn et al., 2019). Government regulation is another best practice where financial institutions are required to comply with the rules. The use of technology is another best practice to ease the problem of moral hazard. Data analytics also exposes risks and monitor the cause of the problem.

Principal-Agent Problem

There exist principal-agent problems in the company bearing in mind both its organizational structure and worldwide span. The problems arise if an agent trusted to act on behalf of the principal performs contrary to the expectation. The agents instead pursue their self-interests while disregarding the principals' affairs. Wells Fargo has regional managers who most often make decisions that do not match with the corporate standards. For instance, they engage in unethical behaviors like creating fake accounts, failure to handle the accounts of customers properly as well as transferring funds to accounts without authority. The bitter pill is that agents have an informational advantage over the principal, making it hard to eliminate such setbacks.

Nevertheless, the major principal-agent problem in the corporation involves the management body's failure to cater for the best interests of the shareholder. The company is headed by the board of directors who oversee the performance of the CEO (chief executive officer). The CEO, on the other hand, is in charge of the regional managers. They all are agents to the shareholder who is the investor in the company. When individuals are committing their capital to companies where other people manage on their behalf, they expect to gain as much profit as possible from their investment. However, this is not always the case as most of the time; the agents use their information advantage to exploit the investor. The corporation fails the shareholders by concealing much information in their annual reports, making poor decisions that go unpunished, and using the company resources for selfish gains.

However, Wells Fargo uses some tools to solve the principle-agent problems and boost profitability. One is the use of contract design; through it, the parties create a contract framework to address the drawbacks of information asymmetry, determining monitoring procedures and stimulating the incentives of an agent to comply with the principal interests. Another way they do it is through compensation and performance evaluation. The compensation of an agent is fundamental in the alignment of principal-agent interests. Wells Fargo utilizes compensation methods such as profit-sharing, stock options, and deferred compensation to promote agency loyalty, especially among the regional managers. When managers receive payments in stock options, they are motivated to raise the stock prices, which they always do either by making the company efficient or through accounting crafts.

Organization Structure

A company's corporate organization structure is the system design and composition pertinent to the interconnections between divisions, groups, and employees of the concern. Wells Fargo's organizational structure embodies the limits and abilities of the enterprise in its operations. It emphasizes on the need to work on differences surrounding regional markets. The company has diversified its financial services with a vision to satisfy the need of its customers. Wells Fargo, as among the most significant players in the finance sector, serves as a guide on including regional disparities in business strategies. Strategic and structural alignment that reckon on these variations fortifies the company's competitive advantage, chiefly in infiltrating local markets (Voorn et al., 2019). The concern has a structure that enables regional based business strategies.

Consequently, regionalization boosts value chains that mainly fulfill the expectations of the consumers, primarily on the realm of marketing and service (Voorn et al., 2019). Wells Fargo's corporate structure is a geographical divisional one that is necessitated by the need in its regional markets and global organization. The geographic framework divides tasks in an enterprise by location (Voorn et al., 2019). The need for such a structure is dependent on product or service as well as legal environment and topology, which could factor in when deciding to organize geographically. Global corporate leadership facilitates the control of the whole firm while semi-autonomous geographic regions offer flexibility towards fulfilling the customer's financial needs.

The management can change the organizational structure by making the regional branches non-autonomous. By doing this, it can be able to carefully check the division managers, therefore, minimizing the possible unethical practices. Making the local offices non-autonomous will create an open culture of integrity, thus, improving the company's profitability. Furthermore, autonomy limits innovation since the distribution of power is uneven. Another way of improving the profitability of Wells Fargo is by keeping the organizational structure dynamic. A dynamic structure enables the company to adapt to changes that create room for survival and profitability. Although the organization's structure is well formulated and serves Wells Fargo right, some gaps require bridging in this form. The reason being, geographical boundaries in an entity can dim management's perspective of the consumer divisions in their markets. Besides, they can create barr...