In prior postings, we quoted Alan Greespan, former Chairman of the Federal Reserve, asserting shortly after the financial markets collapsed that  “In a market system based on trust, reputation has a significant economic value.” 
 
Ab actu ad posse valet illatio. We now quote Robert Gates, Defense Secretary, affirming the point with respect to the most ethereal of the intangible assets, security, as described in an NPR story on the Afghan Wikileaks.

"It's amazing how much trust matters, whether it's with governments or with individuals around the world. And it seems to me that as a result of this massive breach of security we have considerable repair work to do in terms of rebuilding trust, because people are going to feel at risk."

And that's why reputation is so valuable. Quod est.

Weekly Reputation Index Metrics

At the close of trading 22 July 2010, the RepuStars and Repustars-II Composite Indices stood at 113.8 and 120.1, respectively. Over the past four weeks, the former Index has grown by 1.45%, while the latter has grown by 3.53%. The benchmark S&P500 Composite Index stood at 92.2 (rebased to 7 Jan 2005) and has grown over the past four weeks by 1.86%.

Since January 2009, the RepuStars and RepuStars-II Composite Indices have gained 27.8% and 42.84% respectively; the S&P 500 Composite Index has gained 17.37%. Other interval changes in the magnitude of the indices are shown below.

   

The RepuStars family of composite indices reflect the added value of reputation resilience. The RepuStars Composite Index comprises the two firms in each of 20 major sectors with the greatest periodic rise in their Steel City Re Corporate Reputation Index ranking sampled from the large cap segment of the U.S. equities market. Eligibility requirements are market capitalization >$3.5B, share price >$5.0, and reputation ranking between the 25th and 85th percentile. The RepuStars-II Composite Index selection criteria include market fundamentals. The benchmark metric is the S&P500 Composite Index. The Repustars indices are reconstituted biannually in the first weeks of January and July. Click here for additional information on the indices.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store or other leading online book retailers. 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow. 

The Securities and Exchange Commission’s fraud lawsuit against Goldman Sachs (NYSE:GS) is over. The SEC said the firm’s main offense was telling the German bank IKB that a company called ACA had selected the portfolio of mortgage-related investments underlying the deal, when actually the selection process was heavily influenced by Paulson & Co., a hedge fund that later made $1 billion shorting Abacus. Bloomberg reports that there is significant misinformation circulating, and the market is confused.

The reputation metrics confirm the apparent market confusion. First, the Steel City Re Corporate Reputation Index™ shows evidence of significant resilience. Goldman Sachs entered this period with a reputation rank of .97 and is currently at .94. A drop, for sure, but relative to the precipitous fall earlier this year, a remarkable return when compared to the 38 firms in the capital markets sector.

The equity markets are more sanguine and have the firm underperforming the median of its peers by 22%.

In fact, overall the firm has lost a significant amount of enterprise value. Remember that this value, according to Goldman Sachs, comprises its people, capital and reputation. Which leads us to conclude that the equity market is not appreciating the reputational value that other stakeholders see. Are the reputation data suggesting that the company is underpriced?

Perhaps. Stay tuned when next week on Monday we roll out RepuStars II, a new composite index whose constituents, numbering up to 57 companies, are selected on the basis of both reputational and fundamental metrics.

Weekly Reputation Index Metrics

At the close of trading 15 July 2010, the RepuStars Composite Index stood at 1348.79. Over the past four weeks, the Index has decreased by 3.42%, and the S&P 500 Composite Index has decreased by 1.75%. Since January 2005, the Index has gained 13.71%; the S&P 500 Composite Index has lost 7.56%. Other periodic data are shown below.

   

The RepuStars Composite Index comprises the two firms in each of 20 major sectors with the greatest periodic rise in their Steel City Re Corporate Reputation Index ranking sampled from the large cap segment of the U.S. equities market. Eligibility requirements are market capitalization >$3.5B, share price >$5.0, and reputation ranking between the 25th and 85th percentile. The benchmark metric is the S&P500 Composite Index. The Repustars Index is reconstituted biannually in the first weeks of January and July.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or purchase and read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store (or any online book retailer). 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow. 

A big box retailer’s reputation is driven by the price and quality of its products, but not by its propinquity. Such are the data from an analysis prompted by the July 2010 issue of Consumer Reports magazine whose headline reads, “Best stores for practically anything.”

The 2 June press release provides highlights of a survey of 30,000 readers of the consumer-oriented magazine on their big-store shopping preferences. The companies are Costco (NASDAQ:COST), Dillard's Inc. (NYSE:DDS), Kohl's Corporation (NYSE:KSS), JCPenny (NYSE:JCP), Target Corporation (NYSE:TGT), Sam's Club (NYSE:WMT), Sears (NASDAQ:SHLD), Macy's Inc. (NYSE:M), Meijer (private), Walmart Stores (NYSE:WMT), and Kmart (NYSE:SHLD). The results of the survey may surprise you. If you are a follower of this blog, the correlation of the results of the survey with the metrics of the Steel City Re Corporate Reputation Index should not.

According to the magazine, the Consumer Reports ratings are based on the experiences of 30,666 readers who characterized 56,922 trips to 11 retailers between April 2008 to April 2009. The Reader Score represents overall satisfaction. A score of 100 would mean all respondents were completely satisfied; 80 means they were very satisfied on average; 60, fairly well. The results are summarized in the table at left.

In the two charts below, we show the correlation of the consumer survey data with the Corporate Reputation Index metrics. Blog readers are generally familiar with the underpinnings of the rankings. For this analysis, we created a derivative metric, the Reputation Vector. The reputation vector takes three factors into account: the average Corporate Reputation Index ranking over the trailing twelve months; the trend, and the variance. The first graph shows the correlation of the Reader Score for all of the companies with the corresponding Reputation Vector value. The slope is positive, but the explanatory power of the trend line only accounts for about 20% of the variance.

According to the survey, for each of the stores, readers cited their primary reasons for shopping at that venue. The three reasons were low price, high quality products, and location. When the data are analyzed separately, a slightly more interesting pattern emerges. All three trend lines are still positive, but the explanatory powers are radically different. 77% of the variance in Reader Score is explained by variance in the Reputation Vector when shoppers were motivated by price; 100% of the variance is explained by the Reputation Vector when shoppers were motivated by quality (not that meaningful with only two data points); but only 4% of the variance is explained when shoppers were motivated by location.

The data suggest that the overall consumer experience as indicated by the Reader Score correlates well with the financially-relevant derivative metric of Reputation Vector – which captures the behavioral expectations of stakeholders -- when price or quality are the primary drivers of behavior. The moral: “Location, location, location” may still be important, but with so much now accessible through the internet, price and quality are by far more important drivers of reputation and the economic benefits and costs thereon.

Weekly Reputation Index Metrics

At the close of trading 8 July 2010, the RepuStars Composite Index stood at 1313.47. Over the past four weeks, the Index has decreased by 3.69%, and the S&P 500 Composite Index has decreased by 1.53%. Other periodic data are shown below.

   

The RepuStars Composite Index comprises the two firms in each of 20 major sectors with the greatest periodic rise in their Steel City Re Corporate Reputation Index ranking sampled from the large cap segment of the U.S. equities market. Eligibility requirements are market capitalization >$3.5B, share price >$5.0, and reputation ranking between the 25th and 85th percentile. The benchmark metric is the S&P500 Composite Index. The Repustars Index is reconstituted biannually in the first weeks of January and July.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or purchase and read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store (or any online book retailer). 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow. 

Weekly Reputation Index Metrics

At the close of trading 1 July 2010, the RepuStars Composite Index stood at 1264.11. Over the past four weeks, the index has decreased by 8.67%, and the S&P 500 Composite Index has decreased by 6.84%. Other periodic data are shown below.

   

The RepuStars Composite Index comprises the two firms in each of 20 major sectors with the greatest periodic rise in their Steel City Re Corporate Reputation Index ranking sampled from the large cap segment of the U.S. equities market. Eligibility requirements are market capitalization >$3.5B, share price >$5.0, and reputation ranking between the 25th and 85th percentile. The benchmark metric is the S&P500 composite index. The Index is reconstituted biannually in the first weeks of January and July.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Register free of charge for the next IAFS Mission Intangible Monthly Briefing set for Friday 9 July at 12h00 EDT. The conversation titled Building corporate reputation in the post-BP marketplace will feature Jonathan Salem Baskin, global brand strategist, speaker, and author of Branding only Works on Cattle and Bright Lights Dim Bulbs; in dialogue with Nir Kossovsky, CEO, Steel City Re a risk and reputation management consultancy, author of Mission: Intangible. Managing risk and reputation to create enterprise value, and Executive Secretary of the Society
2. Purchase and read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store (or any online book retailer) 
3. Become a member of the Intangible Asset Finance Society and engage.
4. Join our community on Linked-In and stay in the information flow. 

In its annual meeting held on May 21, 2010, a majority of shareholders considered the executive compensation plan at KeyCorp (NYSE:KEY) and channeled Nancy Reagan. They just said no.

KeyCorp, headquartered in Cleveland, Ohio, is one of the nation's largest bank-based financial services companies, with consolidated total assets of approximately $95 billion. KeyCorp is the third U.S. company after Motorola Inc. (NYSE:MOT) and Occidental Petroleum Corporation (NYSE:OXY) that failed to get a majority support during a management-sponsored "say on pay" vote.

In the last fiscal year, KeyCorp's CEO Henry Meyer III saw a boost of 40.8% in his annual compensation to $8.7 million. For the corresponding period, the company reported a net loss of $1.335 billion. The raise in pay package came from an increase in the value of stock option grants and a large salary stock increase.

The company’s reputation has been in the doldrums. KeyCorp is a constituent of the S&P500 Composite Index. Compared to 283 other companies that are constituents of the S&P500 Composite Index – and have market capitalizations between $7 and 67 billion – the company’s Steel City Re Corporate Reputation Index ranking touches bottom.

Not surprisingly, there is no measurable intangible asset value in the company. As shown in the graph below, while the average S&P500 company’s value is about 82% intangible, KeyCorp has very little of that stuff. 

Many, such as Weber Shandwick’s Chief Reputation Strategist, Dr. Leslie Gaines Ross, have opined that the CEO is the focal point for corporate reputation. If this is the case, Mr. Meyer has some catch up work to do, quickly, for the pressure is building. On Tuesday 8 June, an investigation was announced on behalf of the long-term investors of KeyCorp alleging possible violations in fiduciary duty related to the past and future compensation of senior officers of the company.

Weekly Reputation Index Metrics

At the close of trading 24 June 2010, the Steel City Re RepuStars™ Composite Index of 38-40 equity securities selected on the basis of their reputation ranking stood at 1330.55. Over the past four weeks, the index has decreased by 4.85%, and the S&P 500 Composite Index has decreased by 2.66%. Other periodic data are shown below.

   

The RepuStars Composite Index comprises the two firms in each of 20 major sectors with the greatest periodic rise in their Steel City Re Corporate Reputation Index ranking sampled from the large cap segment of the U.S. equities market. Eligibility requirements are market capitalization >$3.5B, share price >$5.0, and reputation ranking between the 25th and 85th percentile. The benchmark metric is the S&P500 composite index.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Register free of charge for the next IAFS Mission Intangible Monthly Briefing set for Friday 9 July at 12h00 EDT. The conversation titled Building corporate reputation in the post-BP marketplace will feature Jonathan Salem Baskin, global brand strategist, speaker, and author of Branding only Works on Cattle and Bright Lights Dim Bulbs; in dialogue with Nir Kossovsky, CEO, Steel City Re a risk and reputation management consultancy, author of Mission: Intangible. Managing risk and reputation to create enterprise value, and Executive Secretary of the Society
2. Purchase and read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store (or any online book retailer) 
3. Become a member of the Intangible Asset Finance Society and engage.
4. Join our community on Linked-In and stay in the information flow. 

Intangible assets are the primary source of enterprise value, and the Society’s mission is to advance best practices in their financial management through education, advocacy, and the promulgation of standards. The Society engages in several educational activities including a regular series of articles in Intellectual Asset Management magazine, regular call-in Mission Intangible Monthly Briefing, the recently published book, Mission: Intangible. Managing risk and reputation the create enterprise value, and of course, this blog. Click here to view the full menu of Mission: Intangible-branded educational opportunities.

One of the hallmarks of financial management is process monitoring through financial metrics and the collective measure of intangible asset value, reputation. Today we illustrate the value of intangible asset management with anecdotal metrics for constituents of the S&P500 Composite Index.

To recap and update, intangible assets comprise approximately 66% of the value of the median material publicly traded company. The chart below shows how the intangible asset fraction of companies over the past few years sampled from about 7000 publicly traded firms has dropped from its peak in 2007 of 78% and is now around 65% which, coincidentally, is the period median.


Using the Steel City Re Corporate Reputation Index as the reputation metric, only 61 constituents of the 10 June 2010 S&P500 Composite Index over the past 128 weeks has ranked in the top 1 percentile relative to approximately 7000 companies traded on the major western exchanges. The other 436 constituents of the current Composite Index have not held that reputation rank during this recent period. Of the 61 companies, the frequency at which they held rank in the top 1 percentile over the 128 week period is reflected in the order in which they appear in the table below, and is shown graphically on the chart. These are the reputation titans of the post-bubble period.




Berkshire Hathaway (NYSE:BRK.A) holds the distinction and lonely outpost at the far right of the graph having ranked in the top 1 percentile of all companies 97% of the time. To its left, the next three highest ranking firms comprising Colgate Palmolive (NYSE:CL), Google (NASDAQ:GOOG), and CR. Bard (NYSE:BCR)  each appeared 88.3%, 86.7%, and 85.2% of the time, respectively. 

Turning to corresponding economic performance, the 61 most highly ranked constituent members of the S&P500 Composite Index that had ranked at least once in the top 1% of the Steel City Re Corporate Reputation Index over the past 128 weeks -- Reputation Titans -- returned, as a group, -7.3% over the period compared with a negative 12.6% return for the portfolio as a whole (reflecting survivor bias) and a -23% return to the actual S&P 500 Composite Index. The remaining 436 (balance), of course, underperformed the portfolio. These data show that the Reputation Titans exhibited relative reputation resilience, a behavior fully consistent with a superior reputation and described in greater detail in the Society's book, Mission: Intangible.


Looking at the S&P500 Composite Index constituents from another perspective and dividing the group into top 15%, Mid Range Rankings, and Bottom Quartile as measured by the Steel City Re Corporate Reputation Index rankings, the top 50 most highly ranked firms over the entire period returned -8.7%, the 50 top-ranked companies that dominated the mid-range rankings returned -20.9%, and the 30 companies that essentially owned the bottom quartile for the period returned -28%. These compare, as expected, with the S&P500 Composite Index returns of -23%.


Summarizing, as shown repeatedly since 2005, there is a positive correlation between reputation ranking and economic return. Because superior reputations favorably impact pricing power, market share, vendor terms, operating costs, credit, costs, equity value, and price stability, executives seeking to maximize enterprise value would do well to concentrate on managing the intangible assets underlying reputation value.

One way to learn how to manage those assets is to become active in the Society. Why not sign up to our group on Linked-In to tap into a wealth of fresh content daily on intangible asset finance, management, policy, marketing and security? Or better still, become a member. We look forward to welcoming you.