Wells Fargo Addresses Its Image Problem as United Airlines Takes On a New One

A full transcript follows the video.

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This video was recorded on April 10, 2017.

Chris Hill: It'sMonday, April 10th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, from Million Dollar Portfolio,Jason Moser, and from Stock Advisor Canada, Taylor Muckerman. Happy Monday, gents! This isone of those, we should have class outsidekind of days.

Taylor Muckerman: It really is.

Hill: It's so nice. So let's bang out this episodeso we can go hang out outside,because it's a gorgeous spring day here inAlexandria, Virginia. We're going toget to the big e-commercenews out of India. And yes, of course, we'regoing to talk aboutUnited Airlines withthe day that they are having. But I think we have to start with a shout out to the board of directors atWells Fargo,which is a sentence I really never thoughtI would actually say. In the wake of the salesscandal last year, the board of directors at Wells Fargo is clawing back $75 million incompensation from two people:former CEO John Stumpf, andCarrie Tolstedt, who was the head ofCommunity Banking. I have to say, Jason,I was surprised by this.I was surprised that this happened, given the fact that Stumpf knew about the salesscandal back in 2012,didn't really do anything about it for three years, and then it came to light. I just assumed that there would befinancial equivalent of a slap on the wrist for both of these people andthe fact that they're getting $75 million taken away, good for the board.

Muckerman: On top ofwhat they already had taken away from them.

Jason Moser: Yeah.I feel like, up to this point,I've kind of felt like they weren't really sorry that this happened,they were more sorry that they just got caught. Andon the one hand, to your point, youlove to see a board take strong action like this. Onthe other hand,it at leastmakes you want to ask the question,what the hell were they doing all this time from 2012 up until now? How was this going onunderneath their noses? So it leads me to my greater thinking in regard to boards -- boards areessentially as good as an executive team wants to make them. At its very core,you have to look at a board and think,these folks are actually just beingincentivized to show up once a quarter for a year and nod and smile politely and say, "Everything is going well," andthey're getting paid like kings to do that. They'reincentivized to not rock the boat,because if they do, chances are they may not be asked toserve on the board anymore. Certainly, there's the financial benefit they get fromactually serving on the board.I feel like a board can only really be as strong as a company'sleadership wants it to be. So please understand that I'm not saying that all boards suck. I think a lot of boards are really good. It is really one of those things, though, where you look and say,how in the world was this all going on,and it's now really just coming to light? Yeah, I do applaud them for taking such a bold move here. Hopefully, we'll seefuture leadership here with Wells Fargobe able to distance itself from this verynegative culture that's been going on for some time.

Muckerman: I think they're trying to protect their neck a little bit in hindsight. I saw that the Institutional ShareholderServices, anindependent firm, suggested thatshareholders vote against 12 out of 15 board members in the April proxy. So I think a few of them were like, "Maybe we claw some of this back,return to some good favor withshareholders in hopes that 12 of 15 aren't voted off the board in a month's time." And to see 5,300 people get fired over five years from the same exact division and maybe not ask a question as to why ...it's only about 2% of Wells Fargo's workforce, amassive company, about 268,000 people at the end of last year. Bu,2% of your employment,all from the sales team, and seeing those huge spikes in new accounts being signed up,over a million unauthorized accounts,there's some red flags there. At least, some things to maybe ask a question or two about, like how are we doing so well? And yet we're firing people? So,I think it's a little bit reactionary, trying to protect themselves a little bit,ahead of a very important shareholder vote fora lot of these board of directors members.

Hill: Oh,I think both those things can be true at the same time. I think I can be the right thing to do, and it is absolutely a level of self-interest going on as well. But I remember whenthis story first broke,and one of the things we talked about was the trust factor with Wells Fargo. If you're aninvestor, if you're an existing shareholderor a potential shareholder,whether you're someone like us or you're running a fund on Wall Street,one of the things we kicked around was, how is Wells Fargogoing to restore trust in the investor community? And I think this is a move in that direction.

Muckerman: Sure.I don't know how much shares sold off the first time when thisoriginally happened. But yeah, if it happened again,certainly much more damage would happen toshareholder value.

Moser: Yeah. I think whathappened to the stock wasrelatively predictable. Itdidn't seem like it really sold off all that much. But it's a huge company. Obviously, they have a stranglehold on the mortgage market,and that's not likely to change. ButI think that's probably one of the things that investors shouldat least be concerned with going forward. Because they're going to continue to have thestranglehold on the mortgage market --and there's no real control over that. We just bought a home, and we didn't use Wells Fargo as our lender, but the chances are Wells Fargois going to end up getting that mortgageto service it,and I'm not going to have any say-so in it. To me, I would be a little bit more convinced had, maybe,Timothy Sloan notnecessarily been named the new CEO, because Sloan was there during this whole time. He was the COO, he served as the CFO. It's not like he's completelyinnocent here. There's no way he didn't know what was going on. Hehad to know something.

Hill: You're sayingTimothy Sloan doesn't have fresh eyes?

Moser: I'm just throwing it out there for discussion. Maybe ourlisteners candeliberate and send us their thoughts on Twitter and email and whatnot. But, again,I think this is a great move from the board. I would personally be a little bit more convincedif they completely cleaned houseon the leadership side.I'm not saying that Timothy Sloan is guilty of anything here, but the perception is the reality in most cases, andcertainly the perception is thathe had to have known something.

Hill: The head ofpublic relations for United Airlines,whoever he or she is, ishaving a tough day,and that is because,as you have probably already seenby the time you're listening to this episode of Market Foolery, video has surfaced of a passenger being forciblyremoved from a flight that was going from Chicago toLouisville. This was on Sunday. Everything about this, I think, is bad for United Airlines, because the backstory -- this is not somepassenger who was drunk or causing trouble. This was,United overbooked the flight, they asked forvolunteers to leave so that they could get four United employees to Louisville to service another flight. And they offered $400, and then they offered $800, and then they said, "You know what? We'rejust going to have a computer pick people at random." So apassenger who had paid for his flight got removed. And Taylor, as you were saying before we started taping, theaviation police,who were doing their job,seemed relatively unconcerned that so many people on that flight had their phones outand were videotaping thissituation. And I know this isn't going to hurt their stock today, but among other things, I think,if I were another airline,I would be trolling Unitedso hard with this for so long.I don't know. I think there could be some potential long-term trouble here for United,but maybe I'm wrong.

Muckerman: It'sunfortunate for them, because like you said,it was the Chicago Aviation Police. It wasn't their employees thatapparently knocked this gentleman unconscious whiletrying to drag him off the airplane. Yeah, the Facebook video I saw I had been viewed 360,000 times, and it wasn't a company's page that was liked 360,000 times,it was a regular citizen who probably only had a few thousand friends on there, but 360,000 views shows the virality of this video andhow widespread it become in less than 48 hours. Was it yesterday that this happened?

Hill: This was yesterday.

Muckerman: Less than 24 hours, viewed almost 400,000 times on one person's account. Yeah,they're definitely going to see this on social media for quite some time.

Hill: And,you're right, it wasn't United employees who removed this guy. But I look at the underlying business systems that United put in place, and I think,ultimately, it falls back on them. It highlights how airlines overbook.

Muckerman: Yeah,they're not the only ones that overbook. All of them do it.

Hill: Yeah. But in this case, they'reoverbooking so that they can get employees from point A to point B. Why are you stopping at $800 if you'retrying to get people to leave a flightvoluntarily?

Muckerman: This is going to cost them way more than $800.

Moser: And if you think, too, if you go 10 or 20 years back, to when this was something airlines would do, and I think travelers probably assigned more value to thattravel voucher back then than they do. I think a lot of that is because the waythe internet has changed everything we do, from e-commerce to travel to banking. What I think the internet hasultimately done is helped us realize placing more value on our time. In any scenario,you value your time moreso today than I think we could have 10 or 20 years ago,because there were not as many choices. So when you get stuck on an airplane and they're trying to get people to take off andtake a travel voucher and take a later flight, like, "That $400,I guess I could do something, butit's such a nightmare going to the airport anddealing with getting through security and getting on the plane,nobody likes flying on those planeswith those little tiny seats." All of the sudden, United becomes ...any airline is going to have to look at that and say, "Maybe$400 isn't going to cut it." Maybe $800 does cut it. Maybe there are a few people on the plane that will go ahead and take that offer. But, again, I think,why in the worlddo they so consistently overbook flights? You have a fixed number of seats. It's not like it takes a PhD to figure this out. So obviously, they do something where they're relying on some sort of statistical measure, where it sayshow many people might not show up for a flight, orhowever many cancellations might exist, and they can overbook by this amount. But, I do think, for someone, I look at myself and I am, generally speaking, about asapathetic to any given airline brand when it comes to flying.I'm just looking for a plane that's not going to go down,and I want a reasonable price, andI want you to get me there quickly. But man, after this, I have to say,I don't think I would want to buy a ticket for a United flight because of this. I don't seeanything good that came of this. There was thedress code thing that wasn't too terribly long ago, either,which I found to be pretty absurd, honestly. They'rejust not doing themselves any favors.

Hill: AndI don't know if you saw this, but in response to the whole United flight not letting the two young women on because they had leggings,Delta Air Linestweeted outsomething about how, "Flying Delta means flying comfortable,even if you just want to wear leggings."

Moser: Yeah,you should go out in public and you should be dressed insuch a way that is not provocative or questionable. But hey,instead of focusing on the dress code,why don't you focus on people that smell bad? Right? Have you ever sat on a planenext to somebody who stinks? Because that's offensive.

Hill: I think that's going to be a tough one to put into a system.

Muckerman: Well, they're both subjective.

Moser: I don't think so. I think fashion is subjective. Objectively,you either smell or you don't. And if you smell, I don't want to sit next to you.

Hill: The e-commerce battle in India is starting to heat up. Flipkart, which is an e-commerce start-up in India, has raised $1.4 billion from Microsoft, eBay, and Tencent. This puts Flipkart's valuation at about $11.5 billion. Part of thefundraisingin this roundinvolves Flipkart acquiring eBay'soperations in India. Let me go back a little bit to give some context here. Last June, one of the stories we talked about on Market Foolery was Amazon (NASDAQ: AMZN) investing $3 billion to their operations in India. A few of the dozens live in India, so at that point,I asked any of our listeners who lived in India toshare their experience with e-commerce and got somephenomenal information back from folks. Flipkart is one of those brandsI was completely unfamiliar with, and it was actually started by some guys who used to work forAmazonin the United States. Jason, even if you take into account the valuation of Flipkart coming down a little bit, these are serious backers in the likes of Microsoft and Tencent and eBay.

Moser: Yeah,serious backers in a very serious market. This isn't something that'sgoing to materialize over the next two years. I think, really, you have to look at this from theperspective of the next decade. And certainly, it seems like Flipkart hasestablished itself as a pretty crediblepresence there, based on the feedback we got from our listeners last year. So I think the one thing that would give me pause when it comes to Flipkart is,essentially, I think the clock is ticking. And I think it'smoving a little bit faster for Flipkart than it is for Amazon. Flipkart is a little bit moreunder the gun and needing to raise capital and really building out this business. I think they have, obviously, the founders have a good idea of what Amazon is all about, and how Jeff Bezos has built that business, why he built it the way he has. So,I would like to believe thatthey are focused on some of the very things that he's beenfocused on,primarily, awesome customer service, thenlow prices as well. The thing is, Amazon is already sosuccessful and so big,and has really already done it heredomestically -- I mean,that's what they're doing, they're taking what they've done domestically and doing it elsewhere. So, we're seeing theEuropean operation, for example, coming online. And we see thatoperating profit starting to strengthen there as theycontinue to realize more return on those investments. We're watching them try to do the same thing in markets like China and India and the Middle Eastacquisition that they just made there. So,I think that is just where the biggest challenge for Flipkart lies. Amazon hasa little bit more luxury herein the form of capital and time and, obviously, the know-how. They've learneda lot from their successes and their failures. But it does seem like Flipkart is onto something here. When you're raising that kind of money, and your company is valued anywhere between $10 to $15 billion, you're doing something right.

Hill: Absolutely.

Muckerman: With your competitive advantage,if you're just trying to beat Amazon, against Amazon, I think you're running up against a wall there. Amazon is already No. 2 in e-commerce in India, and they've only been there since 2013. $5 billion from them versus a few billion from these other companies, a little smaller bet for Microsoft, because it's only chipping in, whereas Amazon is putting their own moneyinto this and they're doing it on their own. I think it's a great market to get into because you saw inNovember of last year whenPrime Minister Narendra Modi removed the 500 and 1,000 rupee notes out of circulation, which was, I read, about 86% of cash in circulation. So,the country is not yet set up for a cashless society, but they'recertainly trying to move in that direction -- 1.5 billion people, and you have only about 40million that have used online e-commerce. Huge market, but like you said, it's not going to be a couple years where you really start to tap into it.

Moser: Yeah. Andyou're going to see, like we saw withMercadoLibre,which is basically like in the Amazon of Latin America. MercadoLibre, the founders and leaders there had thewherewithal to really invest in this early on, which is why they've been so successful, and I think they're discovering the tailwinds of not only the growth in e-commerce but also in emerging middle class. I think that'ssomething we should expect with India over the course of the next decade and beyond, is this emergence of a more powerful consumer, as time goes on, withsuch a massive population there. The financialimplications could be huge. I don't think it's winner-take-all thing. I think Amazon isprobably going to succeed, because they tend to succeed inwhatever they do. And I think Flipkart is wise to be making as big and bold a bet as they are right now in that market. They seem like they're long-term thinkers likeJeff Bezos is,which is why I'm sure they're not looking at this as, No. 1, they'renot looking at this as a winner-take-all scenario, and No. 2,I'm sure they're looking at this and thinking, "Howdo we build this business to succeed over the course of the next decade and beyond?" Because that's reallywhat this is all about -- consumer behavior over the course of the next 50 years. I think e-commerce is proving itself to be where it's at.

Hill: Two moreinteresting notes that we got from our listeners that I think probably point to areas thatthese two companies are working on. One was thatFlipkart is better at apparel. We know, even here in the U.S., Amazon is trying to do more with apparel. So,that's clearly something they're going to be working on. Amazon in India appears to be doing better with third-party sellers. If you think about the vast network ofthird-party sellers that they have on the platform here in North America,that's already paving the way for some success in India, as well. So,presumably, Flipkart is working on that as well,trying to get better at third-party sellers.

Moser: Absolutely. That is a greatopportunity that exists. You have to look at these businesses beyond just the consumers like us. These are greatplatforms for other sellers to be able to, basically, take their small businesses and focus on growing the businesswithout having to worry about investing in all of thatinfrastructure and inventory management, internet platform, mobile, whatever it may be. Amazon has proven to be an excellent third-party provider. So, that'scertainly a big opportunity as well.

Hill: Twohousekeeping notes before we wrap up. First,thank you to Scott Newhouse, one of our listeners, for stopping by today, and bringing some donuts in the process.

Muckerman: Couple boxes, yeah. I'll take it.

Moser: The man knows us well.

Hill: You know what? Given the nice weather,I think we could take our donuts outside.Second, tonight, 10 o'clock on AMC,Better Call Saul returns, the season 3premiere. That'swhere you'll find me at 10 o'clock tonight.

Moser: I hear this season is chock-full of goodies,we're going to get a lot of backstories on a lot of that Breaking Bad goodness.

Hill: I'm very excited. Thanks for being here, guys. As always,people on the program may have interestsin the stocks they talk about, and The Motley Fool may have formal recommendationsfor or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition ofMarket Foolery, the show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow!

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Hill owns shares of Amazon and eBay. Jason Moser owns shares of Twitter. Taylor Muckerman owns shares of Amazon and Twitter. The Motley Fool owns shares of and recommends Amazon, eBay, Facebook, MercadoLibre, and Twitter. The Motley Fool has a disclosure policy.