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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Apple v Google: Great expectations chapter 3

C. HUYGENS - Wednesday, September 18, 2013
What can Huygens add to the conversation that has not already been said? With no further ado, the reputation statistics from Steel City Re for Apple (AAPL) and Google (GOOG). Looking at the vital signs, the two giants weighing in at $429 billion and $245 billion respectively, are surprisingly similar if one is willing to ignore ROE.



The funny thing is that investors are unlikely to ignore that metric, and Apple's is rock bottom for its peer group of 17 companies in the computer processing hardware sector.  Google, on the other hand, is just below average among the 130 members of its peer group.

The key metric in this mix is the current RVM volatility (Consensus Trend). For both, this measure is also at rock bottom among peers with absolute measurements near 1%. These data suggest that stakeholders are getting comfortable with their expectations of both firms and, as a group, are generally in agreement (hence, consensus). Google is the newly crowned prince; Apple's halo is now tarnished and reputational value has been surrendered. Lots of it. Prices for both should now stabilize provided that Apple doesn't end up surprising everyone with a new new thing based on the M7 chip that is being tested in the iPhone 5S.

Apple: Forward guidance needed

C. HUYGENS - Thursday, September 12, 2013
"Spare the rod, spoil the child," advises the behavioral dictum. Reputation controls expert Jonathan Salem Baskin believes the same holds for Apple Inc.'s (AAPL) stakeholders.

Writing in Forbes, the moderator of the Society's Mission Intangible Monthly Briefings and Managing Director of Consensiv notes that "…analysts of all stripes are opining that the company is long overdue for a big success. They’re wrong," he asserts. "It needs to give us a failure. Something spectacularly bad could be just what it needs."

The reputational value metrics from Steel City Re shown below paint an unattractive picture. It appears that in November of 2012, Apple Inc. fell off its pedestal and shed an enormous amount of reputational value (Reputation Premium) dropping from the 100th percentile of its peer group to around the 67th percentile. However, since then it has regained ground as stakeholders talked themselves into, again, unrealistic expectations.

Not so the investors. Consistent with prior observations of RVM volatility reported by Consensiv, the company's RVM volatility spike of 8% (Consensus Trend) in November was followed by market value turbulence. (RVM is a non-financial measure of reputational value). But even investors began to feel optimistic over the summer giving the stock price a boost from what was already a dismal performance for the year.

After years of having a coherent view of Apple and expectations of infallibility, all evidenced by a dangerously low Consensus Benchmark, stakeholders who forgot that real companies blunder from time to time are having doubts. But fears are still being masked by hopes, so disappointment hurts even more. Ergo, a very recent RVM volatility spike of hope and fear that was followed by more market value loss reflecting further disappointment. Read the full story here.

Apple: Golden

C. HUYGENS - Wednesday, May 01, 2013
Apple Inc., rated AA-plus by Standard & Poor's Ratings Services which a notch below rival Microsoft's AAA, borrowed $17B at record low rates yesterday. Notwithstanding S&P's rating and misgivings of some equity investors, it borrowed $5.5B for 10 years at 2.415% which is comparable to Microsoft's cost last week of 2.413%. Overall, Apple sold $17B in bonds to a market that expressed an appetite for $50B of the company's notes.

Reputation is best valued through behavior. Apple is being offered credit at such low rates because the market expects to be repaid--the benefit of an excellent reputation in the credit market. "There was $52 billion worth of orders for the deal, making it one of the most hotly desired bond deals Wall Street has ever seen, said bankers at Deutsche Bank," reported the Wall Street Journal.

For a broader understanding of the relationship between expectations, stakeholder behavior, and value, read Reputation, Stock Price and You: Why the markets reward some companies and punish others. For an understanding how how measures of reputational value such as those calculated by Steel City Re can inform managerial decision making, visit Consensiv.

Apple: Unspoiled barrel

C. HUYGENS - Monday, April 22, 2013
Legendary investor Warren Buffett advises to be fearful when others are greedy, and be greedy when others are fearful. For as Anatole France noted, "If fifty million people say a foolish thing, it is still a foolish thing." Then again, they could be right.

One way to hedge the risk of betting with the wrong team is to separate the people into those who may know more, and those who don't. The Steel City Reputational Value Metrics have established a good track record of flushing out the know-nothings, as evidence by the long-term returns of RepuStars, the reputation-linked index calculated by S&P/Dow Jones Indices (Ticker:REPUVAR).

Apple, Inc. (AAPL) is a great case in point. As a result of shareholder activity, equity value has plummeted. But do equity investors really know what is going on, or are they doing a foolish thing? The key summary measures based on the Steel City Re metrics and calculated by Consensiv, reputation value quality and reputation value independence, suggest that the non-investor stakeholders are confident in their expectations of the firm.



The more detailed metrics from Steel City Re give insight into those expectations. The company's reputation rank (CRR) relative to its peers in the 22-member computer processing and hardware sector is at the 95th percentile. The volatility of it reputational value metric, RVM, a non-financial measure of reputational value, is at the opposite end of the spectrum at the 5th percentile with a current value of under .5%. The company's stakeholders are exceedingly confidendent that there is a great deal of reputational value in this company. By a variety of other measures of the company's economic performance relative to its reputational metrics, it is -- as they say on Wall Street -- heavily oversold. Ah, but the year is only 30% through, and by the same metrics that indicate Apple's upside, the S&P500 is probably in a bubble. Stay tuned.

Microsoft: The big yawn

C. HUYGENS - Friday, April 12, 2013
While Apple (AAPL) has given its shareholders, and more broadly its stakeholders, an exhilarating roller coaster ride,  Microsoft (MSFT) has been plodding along. Its not exciting anyone. Its not really disappointing anyone. Its just lumbering along. Which is great for a utility or an oil company or even a giant pharmaceutical, but its not the sort of thing technology companies are supposed to do.

Jonathan Salem Baskin, who moderates the Society's Mission Intangible Monthly Briefing, wrote this week in Forbes magazine, "Can Microsoft maintain its holding pattern going forward? Again, there’s no crime in being consistently unremarkable, and Microsoft makes money hand over fist. But its reputation — the intangible value it gets from its stakeholders — seems stuck in the mud. And if there’s one thing I’ve learned over the years, it’s that reputations aren’t static, they’re earned anew every day. Performing down to expectations isn’t a value-add strategy, and it leaves open the room for other businesses to grab the reputation high ground, or market conditions to ultimately pass you by."

The Steel City Re Reputational Value Metrics, described further in the book, Reputation, Stock Price and You, are measures of reputational value and ranking. The former is represented by the RVM and is expressed in Gerken Units; the latter is expressed in percentile units. To Mr. Baskin's point, the one-year historical RVM volatility is only in the 10th percentile of the peer group, and while the current RVM volatility is above the group median, the company's ranking, the CRR, has actually drifted downward slightly over the trailing twelve months from aroun the 77th percentile to the 72nd percentile. On the bright side, indicators of change show expectations of some transition with a greater than even probability. Still, given that this was a year Microsoft was expected to "wow" the market, the silence associated with the company's reputational volatility is deafening.



Apple: Core disagreement

C. HUYGENS - Thursday, February 28, 2013
Apple Inc. is a firm that has sought to communicate a singular message through every channel. Whether the message was sent by the marketing department, investor relations, or the product team, the content was the same: Apple is an innovative company producing the coolest products on the plan.

It so happens that even with such clarity, stakeholders can get confused when it comes down to the details. Consider this post, a few weeks ago, labeled "contrarian." (1) Tim Cook is an innovator on the supply-chain side despite his stuffy reputation, (2) Apple Inc. (NASDAQ:AAPL) has the potential to "become a massive mobile-payment provider," (3) it still has the "best selection of apps of any mobile operating system," and most notably, (4) it predicts that "Apple’s sales in China are only beginning their upward arc."

Now fast forward to this week's shareholder meeting where investors are battling over Apple's use of cash and are expressing their unhappiness with executive compensation plans. The company is under pressure to return more of its cash hoard to investors after David Einhorn’s Greenlight Capital Inc. persuaded a judge to block a vote on whether to limit creation of preferred shares. According to Bloomberg, "Einhorn has used the lawsuit to drum up support among fellow investors to get Apple to return some of its $137.1 billion in cash and investments back to shareholders. The push comes as Apple’s stock has declined 36 percent from a record in September on concern that growth is slowing." The Financial Times reported that "at least a third of Apple’s shareholders have declined to back the company’s executive pay at its annual meeting, after chief executive Tim Cook was given a 51 per cent increase in his basic salary last year and other members of the management team were given big equity awards."

Wait. There's a contrarian view. Calpers, the largest US pension fund, disagrees with Einhorn. According the the Financial Times, Anne Simpson, head of corporate governance for Calpers, said that shareholder support for Apple’s proposed changes reflected a fundamental difference in approach between activists and long term shareholders. “Do you throw a brick through the window, or do you walk smartly up to the front door and ring the doorbell?” One of Einhorn's own investors took issue, too. In a letter to the founder of Greenlight Capital, the Nathan Cummings Foundation said: “By threatening to disenfranchise Apple shareholders, Greenlight Capital has acted in a manner that is not consistent with our understanding of Greenlight Capital’s own orientation and investment philosophy.”

There is ample anecdotal evidence that Apple's stakeholders are confused. What say the measures of reputation, which are nothing more than an indication of the economic consequences of stakeholder expectations. As provided by Steel City Re, the measures show, well, confusion.  Call it lack of consensus. RVM is a non-financial measure of reputational value, and its volatility is an indicator of alignment. Apple's current RVM volatility is up from the 33rd percentile among its peer group, its historical value, to the 48th percentile with recent spikes as high as 8% after running lows of sub 2%.  Stakeholders are surprised. They're not used to dealing with an unclear picture from Apple, and the cost of that confusion is the equity investors are fleeing.  In local parlance, Apple's reputational value premium, while still at the 86th percentile of its peer group, is no longer at the 100th percentile. The company is losing reputational value, which, as described in great detail in Reputation, Stock Price, and You, rarely goes unnoticed.



Nokia vs. Apple: Yearning for a bite

C. HUYGENS - Thursday, February 17, 2011
On Monday 14 February, Barron’s released its list of the world’s most respected companies. Apple (NASDAQ:APPL) tops the list at #1 yet again. And lest your curiosity be left hanging, finishing off the top 5 are Amazon (NASDAQ:AMZN), Berkshire Hathaway (NYSE:BRK), IBM (NYSE:IBM) and McDonald’s (NYSE:MCD).

And then there is Nokia (NYSE:NOK), the world’s biggest telephone handset-maker. Quotes the Economist, “We are standing on a burning [oil] platform,” Nokia’s CEO, Stephen Elop, wrote in a memo to all 132,000 employees. If Nokia did not want to be consumed by the flames, it had no choice but to plunge into the “icy waters” below. In plainer words, the company had to innovate -- quickly.

The value of Apple’s reputation for innovation, earned by actually being innovative, is that while the most respected company in the world only commands 4% of the telephone handset market, it commands 50% of the profits. That's pricing power, a benefit of a superior reputation, in the extreme.

Turning to the reputation metrics, Apple’s popular standing is reflected in its stable top ranking in the Steel City Re Corporate Reputation Index. Over the trailing twelve months, it has made the jump from the 97th percentile to the 100th percentile among the 51 companies in the Electronic Data Processing Equipment sector, and over the past six months, it hasn’t budged from that spot. Its corresponding trailing twelve month return on equity is 58.63% greater than the median of its peer group, its EWMA volatility is 1%, its trailing twelve week reputation velocity is 0.0, and its trailing twelve week reputation vector is undefined.

Its peer group shows a U-shaped drop and recovery in reputation standing relative to the market as a whole, and the intra-sector volatility is at the upper end of average. Significantly, the intangible asset fraction of the group has been progressively rising these past 12 months.

Nokia should wish for such metrics. Over the trailing twelve months, it has dropped from the 36th percentile to the 19th percentile among the 30 companies in the Diversified Electronics sector. Its corresponding trailing twelve month return on equity is 52.22% below than the median of its peer group, its EWMA volatility is 2%, its trailing twelve week reputation velocity is -10%, and its trailing twelve week reputation vector is -.8% which is a material level.

Its peer group shows a slight rise is reputation standing relative to the market as a whole, and the intra-sector volatility is at the low end of average. Last, its intangible asset fraction has dropped from 86% to 78% of market capitalization while the median of its peer group now stands at 88% of market cap.

Mr. Elop believes that one advantage Apple has over Nokia that he believes he can overcome is its access to the innovative genius that is resident in Silicon Valley. Stay tuned, as Finland comes to California.

Apple: Teacher’s pet

C. HUYGENS - Tuesday, November 23, 2010
In the classroom, teachers signal their expectations of high-achieving students through their own behaviors, and in doing so, further motivate the students. The behaviors showing the most substantial effects are affective behavior, including warmth, supportiveness, negative affect, and so forth, physical distance, off-task behavior, input (i.e., amount and level of teaching), and duration of interaction. Students benefiting from such attention are at times jealously derided as “teacher’s pets.”

Analogously, in the capital markets, stakeholders signal their expectations of high-achieving companies through their own behaviors. They create demand for product and pay a price premium, provide labor and inventory on better terms, provide credit on better terms, and pay higher multiples for equity. Companies benefitting from such attention are “admired,” “respected,” and are “most reputable.” Competitors jealously watch as these “market pets” outperform.

Consider Apple, Inc. (NASDAQ:AAPL), as reflected in the Steel City Re Corporate Reputation Index™. Over the trailing twelve months, the company has been ranked  in the 100th percentile among its 51 peers in the Electronic Data Processing Equipment sector for nearly the entire period. The exponentially weighted moving average of its reputation ranking volatility is 1%, and its twelve-week velocity is 0. The company is outperforming its peers over this period by 37%.

Hewlett Packard: Curse of the C-suite

Nir Kossovsky - Wednesday, August 25, 2010
It would be difficult to top the language of the Silicon Valley Mercury News. “In a stunning plot twist in the long-running Silicon Valley soap opera that is Hewlett-Packard (NYSE:HPQ), Mark Hurd resigned as CEO of the Palo Alto tech giant after an investigation into a sexual-harassment claim.” While a company "investigation determined there was no violation of HP's sexual harassment policy, the probe concluded Hurd filed false expense reports to conceal his relationship with the woman. Blame it on whatever is in the water cooler servicing the C-suite.

The Steel City Re Corporate Reputation Index indicates the event was material. To quote an HP employee website, “The performance of a leader must be measured -- and rewarded -- based on more than the numbers. Integrity matters. Trust matters. We're talking about "violations of HP's Standards of Business Conduct" by the man who held ultimate responsibility for corporate conduct.”

HP began the period with a reputation ranking in the 95th percentile and exhibited little volatility (EWMA=0.014) until the events of the recent past. At this writing, the company’s reputation index has drifted down to the 84th percentile to the benefit of both Fugitsu Ltd (OTC:FJTSY) and Lenovo Group Ltd. (OTC:LNVGY), and further distancing itself from the 22-company Computer Processing Hardware sector leader, Apple Inc. (NASDAQ:AAPL).



Economically, HP is currently underperforming the median of this sector by 27.53%, but this is largely legacy effect from having both outperformed most of the sector, and having shown material resilience over the past five years. However, the future is not promising. The sector, as a whole, is in decline with the median reputation ranking relative to the whole market drifting from the low 40th percentile to the high teens over the trailing twelve months. Thus HP’s reputation slippage at this juncture does not bode well for teh company's future economic returns.

Apple: What stakeholders want

Nir Kossovsky - Wednesday, March 10, 2010
Stakeholders own a company’s reputation, and their behaviors are outward expressions of their true feelings.

The behaviors that are relevant to this Society are those that create enterprise value. Among them are acceptance of higher price points, extension of superior credit and labor terms, lower operating friction, higher earnings multiples, and lower credit costs. For readers of this blog or the recently published book, Mission: Intangible, this is old news.

More to the point, in Mission: Intangible, we noted that mutual funds comprising companies with reputations for advancing social values tended to underperform their benchmarks. Among the six major intangible assets that underpin reputation (ethics, innovation, quality, safety, sustainability and security), only excellence in sustainability seemed not to correlate with superior economic performance.

So from time to time, we revisit the issue of the value of green. The triggers for our current revisit are three:

First, a blog note from a friend of the Society, author, and marketing consultant Jon Baskin in which he noted that shareholders at Apple (NASDAQ:AAPL)  recently defeated a new corporate social responsibility initiative.

Second, is the growing movement to create a third class of corporate structure – the “beneficial corporation.” Vermont currently leads this movement with legislation that would allow companies to both (a) return gains to investors and (b) provide social good for the community. The law would give “for profit” companies legal cover to pursue societal goals that may yield less profit. The Vermont initiative is driven by the remorse of socially-conscious shareholders who supported Ben & Jerry’s acceptance of Unilever NV’s (NYSE:UN) buyout offer under threat of litigation from financially-motivated shareholders.

Third is an advertisement of comparative derision that caught our eye in the Wall Street Journal. In the ad run by Oracle (NASDAQ:ORCL), they contrast the following under the headline of “IQ Test”: (their) Sun SPARC computer that run 7x faster versus IBM’s (NYSE:IBM) fastest computer that consumes 6x energy. They ask the consumer tongue in cheek to choose: Faster Computers or Smarter Planets.

We believe that the question of being green or being profitable is a false choice. At the same time, it is self evident that the transfer of corporate profits into social benefits both within and outside the company will at some point reduce cash flows available to shareholders. We will continue to observe and share what we see.

Heads Up - Date Change

The Mission: Intangible Monthly Briefing for April 2010 will be held one week later than usual in deference to those who celebrate Good Friday. On 9 April 2010 at 12h00 EDT, the second Friday of the month, we will host a conversation featuring incoming Integrity and Corporate Responsibility Committee Chairman Paul Liebman from Dell  (NASDAQ:DELL) and IA Value Signaling Committee Chairman Jon Low from Predictiv. The title for the one hour moderated discussion is: Ethics - A valuable intangible asset? Mary Adams from Intellectual Capital Advisors hosts.

As always, registration for this popular series is complimentary and slides will be available for download in advance of the event. To register now, click here.

Join Us

If the above intrigues you or challenges you to learn more, look no further. The Intangible Asset Finance Society wants to be your business resource. Join us and be part of an organization that provides a wealth of educational materials, including a new book, to further your executive career, and exciting monthly conferences such as the upcoming one on ethics mentioned above.

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