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Scandals Test Global Shareholders WFC

Lou Carlozo

Picture this: You're driving to your friendly Wells Fargo branch in your thrifty diesel Volkswagen Beetle, ready to dial your handy Samsung smartphone. But just as you pull up to the bank, all heck breaks loose.

You discover you have six Wells accounts when you thought you had just one. Then your Galaxy Note 7 catches fire. Now there's a cop nearby, ready to write you a huge ticket for emissions violations, in part from those flames in your lap.

If you think that adds up to a bad day, imagine what it's been like for investors in those three companies. Within the last month, major implosions and poison press have dogged Wells Fargo & Co. (ticker: WFC), Volkswagen AG and Samsung Electronics Co. And we're not talking garden-variety, gotcha moments that involve mitts in the company kitty.

[See: 7 of the Worst Product Flops Ever, Besides the Samsung Galaxy Note 7.]

This troika now accounts for three of the biggest corporate disasters and scandals of the year. Deadly on an Enron scale? Not quite. But the multi-billion dollar consequences are enough shake investor confidence for years.

"To restore investor trust in the wake of a scandal, public companies need to act ethically and put shareholders' interest first," says Derek Peterson, CEO of Terra Tech, a publicly traded agricultural company. "This might seem overly simplistic, but there's no substitute for good business practices -- and companies that utilize them with consistency will gain trust over time."

That's how it should work, anyway. With winning back that trust -- from shareholders and investors alike -- it comes back to the nagging feeling that a company is only fixing things because they got caught in the first place.

Volkswagen's gaming of U.S. emissions tests would've likely continued had it not been for the scandal coming to light. And quite the nefarious fix it was, as the automaker installed secret software in its diesels to cheat exhaust emissions tests on a massive scale. The "clean emissions" measured at more than 40 times the toxins allowed by law. A U.S. judge last week approved one of the biggest corporate settlements on record to federal and California regulators: $14.7 billion.

Meanwhile, the Wells Fargo debacle has already cost it $30 billion in business with the state of Illinois alone and that damage just the tip of the iceberg in this Titanic-sized transgression.

Wells also remains under fire for opening millions of unauthorized customer accounts amid unrelenting sales pressure on its employees.

The San Francisco-based banking giant tripped up "when it first blamed its employees and it used a picture of its historical stagecoach in newspaper ads to try to spin its way out of the mess," says Andrew Blum, a crisis PR expert based in New York. "The stagecoach was supposed to convey the message: 'Trust us.'

"That image doesn't do it when Sen. Elizabeth Warren is calling for the CEO's head at a congressional hearing," Blum says. "You don't want this in a crisis at all."

[See: 8 Soaring Stocks That Suffered the Big Bounce.]

That CEO, John Stumpf, will forevermore be known for his cross-selling mantra "Eight is Great" -- as in a goal of eight customer products per household. And he wound up suffering the same fate as Volkswagen CEO Martin Winterkorn. Both men were forced out of their posts as the horrors came to a head. In each case, apparent greed run amok was replaced by a bigger financial imperative: saving shareholders from ruin.

That goal boils down to a plan for handling crisis management and image meltdown, experts say.

"The board of directors should proactively request that the company develop crisis management plans for different scenarios to ensure that senior managers are prepared to handle a crisis effectively," says Annalisa Barrett, clinical professor of finance in the University of San Diego School of Business.

Boards, she adds, "should also explicitly state their expectations for the CEO's role in any crisis situation. They should never assume that the company has a plan in place or knows what to do in a crisis. They should seek assurance on a regular basis that the company is ready for anything that comes its way."

"Anything" need not be limited to cheating. At this stage, no one seems to know the exact reason for battery defects in the Samsung Galaxy Note 7, not even company executives.

But here's what is certain: Samsung tried to handle the crisis by itself, quietly, at the outset. When it became clear that the problem was much more widespread than first thought -- and that the Korean company was far out of step with U.S. Consumer Product Safety Commission -- the phone wasn't the only thing to catch fire.

"The first thing they needed to do was understand both how the problem was created and what the perception problem actually was," says analyst Rob Enderle of the Enderle Group. And failing this crucial trial, "you can make things worse, which Samsung did."

Yet on Wall Street, where you can't spell "scandal" without "can," the curious twists and turns of an unmitigated disaster can sometimes lead to unexpected if short-term investor gains. VW stock is up more than 36 percent since its September 2015 crash. Wells Fargo? Up about 3 percent since July. Samsung? Up 10 percent since mid-September.

What happens to these companies in the long haul, though, remains another matter that the market may not sort out until investigators and authorities do it first.

Or, competitors smelling the blood of the wounded.

[See: 7 Global Goats That Could Bring Market Mayhem.]

"Time will show that Wells Fargo fumbled the ball," says Amy Littleton, senior vice president and head of the public relations division at KemperLesnik, a Chicago-based PR agency specializing in crisis communications. "Their policies and practices will likely be seen as too deep in its culture, and its CEO held his grip on his position for too long. I wouldn't be surprised if Wells Fargo eventually gets snapped up by one or more buyers."



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