Question

We are looking at the principle-agent problem and what went wrong at Wells Fargo.

What about the incentive system resulted in massive creation of fake accounts by the retail operation and why did it only get worse from there?

As you dig into this remember Froeb's rule "Avoid the temptation to think about the problem from the employee's point of view...{and ask} how does the organization give employees enough information to make good decisions and the incentives to do so?"

Be sure to cite all source used. PLEASE DO NOT RELY ON WIKIPEDIA, INVESTOPEDIA OR ANY OTHER PEDIA AS A REFERENCE AT ANYTIME.

Answer 1

Principal agent problem occurs when principal (shareholders)creates an environment in which an agents(managers) incentive don't align with those of principle.

Well Fargo is the example typically quoted for principle agent problems.

They came up with fake account scandal in which thousands of employees opened millions of fake accounts in customers name. These accounts were opened because to have higher sales revenue.

It affected badly on the organization's reputation.

When hundreds of employees are appointed these problems are inevitable but analyzing the concept of principal agent in well fargo's case it is the duty of principal to be more proactive and vigilant while Deploying agents, these agents works on incentives and when agents goals are not fulfilled then they will lacks alignement with the principal(owner). They may indulge in the Fradulent activities since operational activities are into their hands.

On the other hand principal need to give a good incentives, by sharing good amount of profit as well principal need to be proactive on the agents action.