Wells Fargo Scandal: An Alternative Organisational Behaviour Analysis.

Introduction.

The Wells Fargo scandal, which was publicly disclosed in 2016, is a key corporate governance and
ethical management failure. ABC News (2016) reports that during a period of over ten years, more
than a million unauthorized bank and credit card accounts were created by employees without the
consent of the customers. These were systematic organisational forces and not individual
malpractices and led to huge financial fines, loss of image and top executives leaving.

This essay examines the scandal in two Organisational Behaviour (OB) theories, namely the Ethical
Leadership Theory and Agency Theory. These frameworks offer understanding of how the failure of
leadership and misalignment of organisational incentives played a role in unethical behaviour. The
essay ends by giving recommendations on how to avoid such incidences in the future.

Case Analysis.

1. Ethical Leadership Theory.

Ethical Leadership Theory is a theory that looks at the nature of influence by leaders over the
behaviour of employees as a result of moral conduct, decision-making and the fostering of ethical
behaviour. Ethical leaders are described as being characterised by integrity, fairness and
accountability and they promote ethical behaviour in organisations (Brown and Treviño, 2006).

Leadership has not been ethical in the Wells Fargo case. Top managers were more focused on
financial results and cross-selling goals without paying much attention to ethical issues. In as much as
leadership publicly denied any encouragement of misbehaviour, the organisational culture that they
fostered valued outcomes more than integrity.

Ethical leadership applies to being a moral individual as well as a moral manager (Treviño, Hartman
and Brown, 2000). A moral person shows ethical behaviour on a personal level whereas a moral
manager imposes ethical conduct in the organisation. At Wells Fargo, the leadership was ineffective
in both aspects. They have not laid down strong ethical standards, have not adequately supervising
unethical actions, and have been inept in disciplining misconduct.

Moreover, some studies show that ethical leadership is very essential in minimising unethical
behaviour in organisations (Mayer et al., 2012). Without a robust ethical leadership at Wells Fargo,
the employees would have more chances to indulge in unethical behaviours.

Also, organisational behaviour studies indicate that organisational context and leadership cues affect
employee behaviour (Treviño, Weaver and Reynolds, 2006). Here, the workers felt that the targets
were more important than ethical behaviour, a factor that condoned unethical behaviour within the
organisation.

2. Agency Theory.
The Agency Theory describes the interaction between principal (shareholders) and agents
(employees), and the conflict that arises when agents are motivated to act in their own self-interest,
and not in the best interests of the organisation (Jensen and Meckling, 1976).

Agency problems were present in various organisational levels at Wells Fargo. The top managers
were also motivated to maximise profits and ensure good financial results, a move that put pressure
on the organisational hierarchy. This pressure was passed to frontline workers and this led to high
emphasis on short-term performance results.

The compensation systems at Wells Fargo formed apparent conflicts of interest. Rewarding
employees on the basis of opening accounts whether they were legitimate or not encouraged
employees, managers were rewarded on the basis of team performance and the executives were
rewarded on the basis of financial results. As a result, workers focused on personal gains like bonuses
and employment stability more than on customer interests, and organisational integrity.

Eisenhardt (1989) argues that agency problems are enhanced by poor monitoring and lack of
incentives. In Wells Fargo, the control systems were inadequate and the performance measurement
was more on quantitative goals than ethical behavior. This loss of control allowed the employees to
take advantage of the system.

In addition, information asymmetry was also a significant contributor to the problem. Top managers
and regulators were not fully aware of unethical practices that were managed at lower levels in an
organisation. This was a failure to be transparent and this enabled misconduct to continue over a
long time.

Agency Problems Interaction with Ethical Leadership.

The Wells Fargo scandal exemplifies the agency problems and poor ethical leadership as they support
each other. The lack of solid ethical leadership did not provide boundaries of behaviour, and the
wrong sets of incentives promoted self-interest behaviour.

It was not necessarily that employees were acting with ill motives but were reacting to organisational
pressures, which rewarded unethical performance. This mixture resulted in a situation whereby
malpractice became prevalent and institutionalised. The absence of proper ethical supervision
enabled the agency conflict to turn into an institutional failure of the organisation.

Recommendations.

1. Strengthen Ethical Leadership.

Organisations should also make sure that leaders at every level exhibited ethical behaviours and they
should promote integrity. These involve establishing clear ethics, acting as role models, and
accountability. Ethical decision-making and responsibility should be focused in leadership
development programmes (Brown and Treviño, 2006).
2. Match Incentives to Long-run Interests.

Incentive systems must be reformulated to respond to the long term organisational objectives in
order to solve agency problems. This involves the rewarding of customer satisfaction, minimising
dependence on short-term financial measures and the inclusion of ethical performance measures
(Eisenhardt, 1989).

3. Enhance Control and Management.

Organisational controls should be enhanced with better supervisory systems, like frequent auditing,
separate risk management systems, and open reporting systems. All these curb information
asymmetry and prevent the possibility of unethical behaviour (Jensen and Meckling, 1976).

4. Enhance Accountability Mechanisms.

There should be clear accountability structures at all levels in the organisation. The actions of leaders
and employees should be accountable especially when it comes to misconduct in order to reinforce
ethics.

5. Advance Ethical Consciousness and Education.

Organisational practices should incorporate ethics training programmes where employees are
educated on how to make ethical decisions and professional responsibility (Treviño, Weaver and
Reynolds, 2006).

Critical Evaluation.

Although both Ethical Leadership Theory and Agency Theory offer a solid explanation of the Wells
Fargo scandal, both theories are also limited in some respects. Ethical Leadership Theory is suitable
in bringing to focus the influence of leaders in employee behaviour, but it can be overly simplistic in
understanding organisational dynamics because it puts too much burden on leaders as the sole
determinants of behaviour. In big institutions like Wells Fargo, the leaders are usually not the only
ones to affect unethical behaviour but also systems, structures and cultural norms which are deeply
embedded. Accordingly, the emphasis on leadership can neglect more general institutional issues
that led to the malpractice.

On the same note, Agency Theory is a great source of information on how unethical behaviour can
be instigated by poor alignment of incentives and self-interest. It describes the motivation behind the
focus of the employees on personal rewards at the expense of customer welfare. The theory
however, assumes that rational self-interest is the main driving force behind people and this may not
be the ultimate driving force of the social and psychological forces on behaviour. As an illustration,
the workers at Wells Fargo also succumbed to peer pressure, fear of losing their jobs, and
organisational demands, which are farther than the traditional premises of the Agency Theory.

Further, the two theories fail to comprehensively discuss the role of organisational culture as a
reinforcing mechanism. The fact that unethical behaviours in Wells Fargo have been normalised
indicates that incentives and leadership were not the only drivers of behaviour, but also shared
beliefs and social acceptance in the organisation.

The combination of Ethical Leadership Theory and Agency Theory still overcomes these shortcomings
to give a complete picture of the scandal. Ethical leadership depicts the ineffectiveness of moral
leadership, whereas Agency Theory notes the structural and incentive-based problems. The two of
them provide a sound model to study the way systemic organisational failures can contribute to a
high level of unethical behaviour.

Conclusion.

The Wells Fargo scandal underscores the importance of leadership and incentive structures in
influencing organisational behaviour. Through the Ethical Leadership Theory and the Agency Theory,
this essay has shown that poor leadership and lack of alignment between incentives played a major
role in unethical practices that were prevalent.

Lack of effective ethical leadership also enabled the employees to focus on effectiveness rather than
honesty and the agency issues provided an incentive to commit wrong. To avoid such cases,
organisations should enhance ethical leadership, align incentives with long term objectives, enhance
governance systems and foster accountability. Finally, ethical conduct has to be institutionalised in
every level of the organisation in order to achieve success in the long run.

References.

Brown, M.E. and Treviño, L.K. (2006) ‘Ethical leadership: A review and future directions’, The
Leadership Quarterly, 17(6), pp. 595–616.

Eisenhardt, K.M. (1989) ‘Agency theory: An assessment and review’, Academy of Management
Review, 14(1), pp. 57–74.

Jensen, M.C. and Meckling, W.H. (1976) ‘Theory of the firm: Managerial behavior, agency costs and
ownership structure’, Journal of Financial Economics, 3(4), pp. 305–360.

Mayer, D.M., Aquino, K., Greenbaum, R.L. and Kuenzi, M. (2012) ‘Who is an ethical leader and why is
it important?’, Academy of Management Journal, 55(1), pp. 151–171.

Treviño, L.K., Weaver, G.R. and Reynolds, S.J. (2006) ‘Behavioral ethics in organizations: A review’,
Journal of Management, 32(6), pp. 951–990.

Treviño, L.K., Hartman, L.P. and Brown, M. (2000) ‘Moral person and moral manager: How executives
develop a reputation for ethical leadership’, California Management