MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Costco: Food for thought

Nir Kossovsky - Tuesday, January 05, 2010
While the CEO contributes materially to a company's reputation, the products and services also speak for themselves. This is true even when the CEO is a founder and a lightning rod for controversy. Consider John Mackey, CEO, Whole Foods Markets (NASDAQ:WFMI).

In late summer, we shared that he had courted controversy with the left-leaning segment of his customer base through a strongly worded op ed in the Wall Street Journal. We speculated about the reputation effects. On October 3, he reappeared in the Wall Street Journal in an interview that markedly softened the tone of the August writings. Last, at the end of last month, he finally agreed to relinquish the role of Chairman under pressure from a pension fund-based investment group.

Let's look at the numbers courtesy of Steel City Re , Big Charts.com and the FT's Newssift.com. Over the past twelve months, Whole Foods has had a volatile ride on the Corporate Reputation (IA) Index. It entered the year below the 40 percentile, and exited at about the same level having touched the 90th percentile in late October and diving below the 20th percentile in February. Meanwhile, its equity has returned to stakeholders about 140% for the year while the mean of the 24-member peer group matched the S&P500 returns of around 20%. Note the August 2009 dip on both the reputation index and the market cap.

Compare and contrast this extraordinary return for a company with a controversial CEO and a volatile corporate reputation with the returns of one of the highest reputation-ranked Food and Staples Retailing firms this past year, Costco Wholesale Corp (NASDAQ:COST). Its CEO, James D. Sinegal, is a quiet man, relatively speaking. The Steel City Re Corporate Reputation (IA) Index shows values in the 90th percentile or greater, excluding an early September 2009 dip. Yet the 12-month returns, while positive, are underperforming the S&P 500 by 13%.

With respect to sentiment, over the past 12 months, Newssift reports that of the 238 articles on Whole Foods and its high profile CEO, 32% were positive and 21% were negative for a ratio of 1.5. Of the 99 articles on Costco and its lower profile CEO, 35% were positive and 16% were negative for a ratio of 2. Yet Whole Foods outperformed Costco by a factor of 20. What gives?




There is a simple explanation -- reputation resilience. The financial benefits of Costco's high reputational standing are best seen over a two year window in the stock price chart below. While the markets suffered greatly in 2008 through March 2009, Whole Foods suffered massively with a 75% loss in market cap at its low point. Costco, however, outperformed the market over this two year window with a 24 month loss of about 7% compared to the S&Ps loss of about 22% and Whole Foods' loss of around 25%.

The dark lining to the silver cloud of reputation resilience is that there is less ground lost, and therefore less ground that can be made up. The polish on the silver cloud, however, is in cost of credit. Firms with superior reputations exhibit resilience and lower volatility. Firms with superior reputations have lower betas, lower costs of credit, and credit protection (credit default swaps). Whole Foods' beta is 1.19; Costco's is 0.79.

Reputation egalitarianism

Nir Kossovsky - Thursday, August 27, 2009
Coming off a summer of metrics presented through the Society’s monthly Mission Intangible Monthly Briefings, a recent posting by reputation futurist Ross Dawson seems timely. I summarize the article below. Further, in view of a posting earlier this week, Whole Feuds, on Whole Foods Markets comprising both the Financial Times Newssift sentiment metric and the Steel City Re’s Reputation Index, direct your attention to items #2 and 3 below.

1. Influence is democratized
In a world of blogging, Twitter, and social media anyone can become highly influential, shaping how we think, behave, and spend. Position and rank matter less; companies can ignore no-one.

2. Influence can be measured
New metrics for individual influence and reputation will replace subjective assessments and will guide who we hire, do business with, and even date.

3. Reputation shifts from the corporation to the individual
Today corporate reputation matters less than the reputation of the individuals in the company. People don’t trust companies, but they might trust the people working for them. The corporate war for talent will become the war to attract the influential and trustworthy.

4. “Influence is the future of media”
We now discover the movies, music, news, books, conversation and even new friends we like through influence – the recommendations of many are driving our choices.

5. Business models for influence are emerging
If you can earn directly from your trust and respect, through tools such as TweetROI and IZEA’s sponsored conversations, what is the future for the $500 billion advertising industry?

At the Society, we see the above embodied in decision and prediction markets and other market-based metrics; and of course, the best practices associated with the business processes that drive the reputations ultimately measured through these metrics. The art, from a financial perspective, will be identifying the leading indicators of a rising reputation. Indeed, data consistently show that firms with superior reputations reward their stakeholders with above average returns. 

Whole feuds

Nir Kossovsky - Tuesday, August 25, 2009
John Mackay, CEO of Whole Foods Market, Inc. (NASDAQ:WFMI), is no stranger to controversy.  Two years ago, Wall Street Journal journalists David Kesmodel and John R. Wilke discovered that John Mackey had been posting comments on the Yahoo Finance website using the pseudonym Rahobed, an anagram of his wife’s name Deborah, for eight years, boosting his own company and berating his nearest competitor Wild Oats. At that time, Harvey Pitt, a former Securities and Exchange Commission chairman, told the Wall Street Journal “It’s clear that he is trying to influence people’s views and the stock price, and if anything is inaccurate or selectively disclosed he would indeed be violating the law." He added that "at a minimum, it’s bizarre and ill-advised, even if it isn’t illegal."

The current fracas began 11 August when Mackay wrote an op-ed piece in the Wall Street Journal. Mr Mackey began his article with a quote from Margaret Thatcher and went on to add that Americans do not have an intrinsic right to healthcare - an idea strongly at odds with the views of a large proportion of Whole Foods' customer base. The response from the customer base has been swift and negative. Massachusetts-based playwright Mark Rosenthal's "Boycott Whole Foods" Facebook page has so far attracted 28,000 fans, including supporters in the UK and Canada.

As part of their damage limitation strategy, Whole Foods' in-house public relations division has created a forum on its website for customers to discuss the issue. There are more than 18,000 posts, compared with 63 posts on the dairy-free forum. On Newssift, the beta news filtering engine of the Financial Times, the sentiment ranking of 11 articles written in the 15 days  since 11 Aug covering Whole Foods and Reputation included three rated "negative" while the 11 articles covering the same topic written in the 15 days prior to 11 Aug were all positive or neutral.



With equity up 60% over the past year, while the S&P is still down 20%, Mackay may believe he has the reputation equivalent of "mad money." On the other hand, Whole Foods'overall reputation metrics and ROE relative to their peers in the Food and Staples Retailing sector were volatile and generally below average for most of the past year, and Whole Foods' share price is currently $28, more than 60% below its all-time high at the end of 2005.



The Intangible Asset Finance Society has consistently opined that the CEO, while an important element of a company's reputation, is only as good as the people and systems that drive quality, safety, security, ethics, sustainability, innovation, and ethics. Whole Foods appears to excel at all, so it remains to be seen what the reputation impact will be from a CEO whose personal values appear to be at odds with those of his customers.

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