Week 9

Week9Discussion.docx

Week 9 Discussion - The Principle-Agent Problem: Understanding Motivation to Manage Incentive

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Preparation

Review the following to prepare for the discussion:

· Fed Won't Lift Wells' Growth Cap Until Deficiencies Are Fixed: Powell .

· Letter From Senator Warren to Fed on Wells Fargo FHC Status [PDF]Links to an external site. .

Your instructor may also post additional resources to help further explain concepts related to this week's discussion.

Context

On September 13, 2021, Senator Elizabeth Warren sent FED Chair Jerome Powell a letter [PDF]Links to an external site. .

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 replyLinks to an external site. , it cites progress achieved under the new CEO, Charles Scharf, including:

1. Three business groups 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. It has created a new team design to facilitate oversight of consumer practices.

5. It has created a new enterprise-wide risk assessment with the intent to design new controls.

6. 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 continues to maintain 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?

Post a Response

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?

Finance.docx

Finance, Media, and Consumer Products

Video Transcript

Tim Stenovec: Much like cloud computing services, the US is only going to need a handful of banking clouds. On those clouds will be built an enormous number of banking apps and services that banking and people will rely on. Services from banks will become unbundled and absolutely geared toward niche markets. The types of business investors have also changed over time. We've seen angel investors enter the space plus opportunities associated with crowdfunding.

Crowdfunding and investment sites are democratizing investment and allowing chances for more people act as both investors and investees. Blockchain has also provided a unique way for companies to raise money. A company can now offer tokens to investors instead of stock.

Blockchains' one-of-a-kind technology allows it to govern itself and track the movement of tokens. It's still largely unregulated, however. There will again be new prospects coming up for entrepreneurs in the finance sector. This includes the area of consumer apps. These apps will insert themselves between consumers and big banks. There's also a lot of opportunity around taxes, which are likely to become fully automated as well.

Startups will also emerge around commercial banking services where entrepreneurs can focus on niche markets for small businesses. The final opportunities here will be around digital currencies and blockchain technology.

As Tunisia states, quote: "Beyond currencies, Blockchain allows for money, trusts, and contracts to be encoded in software and distributed across the planet to anyone that has access to the Cloud in ways that are tamper-proof," end quote.

The Impact of A.I. on Companies, Entrepreneurs, and Individuals

Video Transcript

Tim Stenovec: Hello everyone, Tim Stenovec here. Over the last few weeks, we've discussed some changes that we'll likely see that will radically shift our economy due to A.I., automation and other technological advances. Now as a result of those changes, there's gonna be a call for changes in our policies, too.

As Tunisia states, quote: "Automation driven behind A.I. and robotics consume the vast numbers of people with no way to make enough money to lead a dignified life," end quote. To address this fact, there has been an ongoing discussion around implementing a UBI or universal basic income at some point in the future. This shift has already begun and will continue to play out over the next 20 years. Genomics, robotics drone's, 3D printing and IoT will bring about a massive shift of jobs away from large corporations and manufacturers. That'll be up to the government to help people adjust to the shift.

The partnership on A.I. has been formed by Microsoft, Google, Amazon, IBM, and others. Their goal is to enact their moral duty as the shift takes place. This major change is something that we need to get ahead of now to ensure that it will all turn out well in the future.

Further exacerbating this phenomenon will be people simultaneously living longer lives due to advances in genomics and related health products. Many corporate jobs will also be automated away. Large portions of our current population will have limited options for making money. And additional tax would need to be implemented on those who are employed to cover those on UBI. This additional taxation might be between 17% and 36%.

Tunisia suggests thinking of technology as a way of unleashing human potential instead of replacing it. He suggests treating it like a brilliant partner we have to work with to maximize our performance and efficiency. There are also systematic issues related to technology to think about and the related ethical implications. These issues involve monopolistic platforms and Algorithmic Accountability.

Answer the following question(s) in a 1 page (minimum) paper:

1. Discuss crypto currency and blockchain technology and how they might impact the economy.

2. Discuss some of the ethical considerations associated with AI and Automation and the impact they may have on the economy.