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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D&O's Weakened DNA

C. HUYGENS - Wednesday, June 17, 2015
That ol' liability insurance just ain't what it used to be. Gone is the roar of certain protection. "D&O insurance today merely whispers relative to the noise of 21st century threats — especially from social media, regulatory scrutiny, and investor activism — to directors’ 'personal capital or their reputations.'”

And while these threats are at least discussed in corporate filings, disclosures do not have great signaling gravitas or impact, nor are they as robust and convincing as talking money.

Read More at Risk & Insurance.

Procter & Gamble: So what's new

C. HUYGENS - Monday, June 15, 2015
When A.G. Laffley took over Procter & Gamble in June 2000, he engineered a turnaround by focusing his managers on selling the company's major brands such as Tide, Pampers, and Crest. And he strategically moved the firm's focus away from trying ot develop the next big thing, because in the 15 prior years, P&G had develped exactly one successful new brand--the Swiffer dust mop.

In 2003, Bloomberg described the R&D transition this way:

"No bastion has been more challenged than P&G's research and development operations. Lafley has confronted head-on the stubbornly held notion that everything must be invented within P&G, asserting that half of its new products should come from the outside. (P&G now gets about 20% of its ideas externally -- up from about 10% when he took over.) "He's absolutely breaking many well-set molds at P&G," says eBay (EBAY) Inc.'s CEO, Margaret C. "Meg" Whitman, whom Lafley appointed to the board.

Lafley's quest to remake P&G could still come to grief. As any scientist will attest, buying innovation is tricky. Picking the winners from other labs is notoriously difficult and often expensive. And P&G will remain uncomfortably reliant on Wal-Mart (WMT) Stores Inc., which accounts for nearly a fifth of its sales. Lafley is looking to pharmaceuticals and beauty care for growth, where the margins are high but where P&G has considerably less experience than rivals.

The biggest risk, though, is that Lafley will lose the P&Gers themselves. Theirs is a culture famously resistant to new ideas. To call the company insular may not do it justice. Employees aren't kidding when they say they're a family. They often start out there and grow up together at P&G, which only promotes from within. Cincinnati itself is a small town: Employees live near one another, they go to the same health clubs and restaurants. They are today's company men and women -- and proud of it."


When a firm's reputation as a marketing powerhouse is undercut by the firm's departure from the big M of marketing (Product, Price, Promotion and Placemant) to the little m of marketing (Promotion and Placement), what becomes of that reputation? And what value is left in a firm that can promote products in an age where innovation and experiences, as well as innovative experiences enabled by innovative products, top the value-generation charts?

Lafley's been back at the helm for a little over two years (Click on prior blog note). Notwithstanding his personal charm, his prior success, and the fact that sequels are usually the smarter bet, the metrics suggest his slash and burn approach is unlikely to generate sustainable value this time around.

Twitter: Canary in the coal mine

C. HUYGENS - Sunday, June 14, 2015
Life for an actual canary in a coal mine, like that of Twitter CEO Dick Costolo, could be described in three words: "short but meaningful."

Canaries are especially sensitive to toxic gases like methane and carbon monoxide, which made them ideal for detecting any dangerous gas build-ups. As long as the bird kept tweeting, the miners knew their air supply was safe.

After five years at the helm, the toxicity of criticism proved to be too much. Last week, one of the company’s biggest shareholders and cheerleaders, Chris Sacca, publicly called for a change in management. Mr. Costolo announced that he plans to stop singing July 1.

Investor hope springs eternal. Twitter shares rose more than 7 percent in after-hours trading immediately after the change in leadership was announced. The Reputational Value Metrics, ranking Twitter's Reputation Premium at below the first decile  (shown below), suggest other stakeholders have modest expectations.

In the coal mines, the sudden end to a canary's incessant tweeting signaled need for an immediate evacuation.

RepuStars 2015 June 12

C. HUYGENS - Saturday, June 13, 2015

Weekly Reputation Index Metrics


At the close of trading June 12, 2015, REPUVART and REPUVAR stood at 4245.21 and 3468.78 respectively. Over the past four weeks, the former has changed by 2.12%, while the latter has changed by 1.95%. The benchmark S&P500 Composite Index stood at 1824.01 (31 Dec 2001=1000) and has changed over the past four weeks by -1.35%. The current calendar year spread between REPUVAR and the S&P500 is 13.66%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 14.51% and 12.74% respectively; the S&P500 Composite Index has changed by 8.50%. The trailing 12-month spread between REPUVAR and the S&P500 is 4.24%.

Over the trailing 36 months, the REPUVART and REPUVAR have changed by 58.77% and 50.09% respectively; the S&P 500 Composite Index has changed by 58.14%.

The 4-week, trailing 12-month, and trailing 36-month returns for REPUSPX are -0.47%, 14.58%, and 101.39% respectively. The trailing 12-month spread between REPUSPX and the S&P500 is 6.08%.

The spreads between the S&P500-only index informed by reputation metrics, REPUSPX, and the broad market index informed by reputation metrics, REPUVAR, for the calendar year and for the trailing twelve months respectively are -8.63% and 1.83%.

Side Note: A description of the portfolio constituents and historical returns data from December 31, 2001 can be obtained on request from Technology Option Capital, its manager. Click Here.

Background

The RepuStars® Variety Corporate Reputation Index calculated by S&P/Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re Reputational Value Metrics. The metrics comprise non-financial indicators of reputational value (RVM) and ranking (CRR). These are the same metrics that power the reputation controls provided by Consensiv, and the league table of reputational value, the Consensiv 50,  published periodically on the Society's website (click here), and elsewhere.

The RepuStars Variety Corporate Reputation Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click on the ticker names for real time quotes.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to  Steel City Re’s proprietary Reputational Value Metrics™, which track 7400 companies weekly. The principles behind measuring reputational value are described in the book, Reputation, Stock Price, and You: Why the market rewards some companies and punishes others (2012, Apress).

The RepuStars indices are reconstituted annually in the first week of January and posted by S&P/Dow Jones Indexes in the third week. The Indices were last reconstituted at the close of the markets 16 January 2015.

REPUSPX  is a pocket index with portfolio constituents being selected algorithmically by the same criteria as the constituents for REPUVAR and REPUVART, except that the field of eligible companies is limited to constituents of the S&P500 composite equity index. Click here for an analysis of periodic returns.

The strategy used to pick the constituent members of REPUSPX, REPUVAR and REPUVART is discussed in the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012). (Link below). Briefly, the design of the portfolio is governed by the theory that sometime over the course of the forward twelve months from portfolio construction, 3rd week of January in the current application, equity investors will come to appreciate the value implied by the reputation metrics.

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 second Friday of every month, read the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (2012)  or its predecessor, Mission: Intangible. Managing risk and reputation to create enterprise value (2010), available at the IAFS Store, specialty finance sector retailers, or other leading online book retailers
Society and engage.
2. Join our community on Linked-In and stay in the information flow and/or follow Twitter missives at #ReputationRisk.

Notices

S&P Dow Jones Indices is a registered trademark of S&P Dow Jones Indices LLC, a part of McGraw Hill Financial; RepuStars and Steel City Re” are registered trademarks of C. Huygens & Co. LLC. The method underpinning the RepuStars Variety indexes is subject to a pending patent assigned to C. Huygens & Co. LLC. S&P McGraw Hill Financial and its affiliate (S&P Dow Jones Indices) makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and McGraw Hill Financial shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. Past performance of an index is not an indication of future results. All information provided by S&P Dow Jones Indices is general in nature and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments offered by third parties that are based on that index. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that seeks to provide an investment return based on the performance of any Index. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes.

RepuStars 2015 June 5

C. HUYGENS - Saturday, June 06, 2015

Weekly Reputation Index Metrics


At the close of trading June 5, 2015, REPUVART and REPUVAR stood at 4245.15 and 3470.97 respectively. Over the past four weeks, the former has changed by 2.93%, while the latter has changed by 2.82%. The benchmark S&P500 Composite Index stood at 1822.90 (31 Dec 2001=1000) and has changed over the past four weeks by -1.10%. The current calendar year spread between REPUVAR and the S&P500 is 13.80%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 14.54% and 12.76% respectively; the S&P500 Composite Index has changed by 7.85%. The trailing 12-month spread between REPUVAR and the S&P500 is 4.91%.

Over the trailing 36 months, the REPUVART and REPUVAR have changed by 62.58% and 53.77% respectively; the S&P 500 Composite Index has changed by 62.80%.

The 4-week, trailing 12-month, and trailing 36-month returns for REPUSPX are -0.03%, 13.00%, and 100.75% respectively. The trailing 12-month spread between REPUSPX and the S&P500 is 5.14%.

The spreads between the S&P500-only index informed by reputation metrics, REPUSPX, and the broad market index informed by reputation metrics, REPUVAR, for the calendar year and for the trailing twelve months respectively are -9.53% and 0.24%.

Side Note: A description of the portfolio constituents and historical returns data from December 31, 2001 can be obtained on request from Technology Option Capital, its manager. Click Here.

Background

The RepuStars® Variety Corporate Reputation Index calculated by S&P/Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re Reputational Value Metrics. The metrics comprise non-financial indicators of reputational value (RVM) and ranking (CRR). These are the same metrics that power the reputation controls provided by Consensiv, and the league table of reputational value, the Consensiv 50,  published periodically on the Society's website (click here), and elsewhere.

The RepuStars Variety Corporate Reputation Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click on the ticker names for real time quotes.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to  Steel City Re’s proprietary Reputational Value Metrics™, which track 7400 companies weekly. The principles behind measuring reputational value are described in the book, Reputation, Stock Price, and You: Why the market rewards some companies and punishes others (2012, Apress).

The RepuStars indices are reconstituted annually in the first week of January and posted by S&P/Dow Jones Indexes in the third week. The Indices were last reconstituted at the close of the markets 16 January 2015.

REPUSPX  is a pocket index with portfolio constituents being selected algorithmically by the same criteria as the constituents for REPUVAR and REPUVART, except that the field of eligible companies is limited to constituents of the S&P500 composite equity index. Click here for an analysis of periodic returns.

The strategy used to pick the constituent members of REPUSPX, REPUVAR and REPUVART is discussed in the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012). (Link below). Briefly, the design of the portfolio is governed by the theory that sometime over the course of the forward twelve months from portfolio construction, 3rd week of January in the current application, equity investors will come to appreciate the value implied by the reputation metrics.

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 second Friday of every month, read the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (2012)  or its predecessor, Mission: Intangible. Managing risk and reputation to create enterprise value (2010), available at the IAFS Store, specialty finance sector retailers, or other leading online book retailers
Society and engage.
2. Join our community on Linked-In and stay in the information flow and/or follow Twitter missives at #ReputationRisk.

Notices

S&P Dow Jones Indices is a registered trademark of S&P Dow Jones Indices LLC, a part of McGraw Hill Financial; RepuStars and Steel City Re” are registered trademarks of C. Huygens & Co. LLC. The method underpinning the RepuStars Variety indexes is subject to a pending patent assigned to C. Huygens & Co. LLC. S&P McGraw Hill Financial and its affiliate (S&P Dow Jones Indices) makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and McGraw Hill Financial shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. Past performance of an index is not an indication of future results. All information provided by S&P Dow Jones Indices is general in nature and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments offered by third parties that are based on that index. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that seeks to provide an investment return based on the performance of any Index. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes.

Consensiv 50 June 2015

C. HUYGENS - Monday, June 01, 2015
The Consensiv 50 is an unweighted ranking of indicated reputational value drawn from the world's 1000 most valuable traded companies. The underlying reputational value metrics, calculated weekly for more than 7000 companies, are the underpinnings of Steel City Re’s reputational value insurances and the S&P Dow Jones RepuStars Variety Corporate Reputation Index (Ticker: REPUVAR), the world’s only reputation-linked composite equity index*. Read more about Consensiv's reputation insights and controls.


Ruthless Blame Game: From 2x4s to nuclear weapons

C. HUYGENS - Sunday, May 31, 2015
It's the CEO's fault, of course, reports Fortune Magazine. According to a survey of 200 Directors conducted by the New York Stock Exchange, more than 2 in 5 respondents said the CEOs should face the brunt of…breach-related backlash. The same seems to be true for any enterprise-level risk.

Damage the firm's reputation, and Directors can get very aggressive. It's no different than in the 1990's when Warren Buffet warned employees at Solomon that if they damaged "a shred" of the firm's reputation, he would be ruthless. Except it is different.

Today, investors are getting very aggressive. They are using enterprise-level disasters to indict the Board of Directors, and build the case that Proxy Access--the right to nominate directors without approval of the Board--is an essential strategic "weapon" to help focus the board's attention. Apparently, we've come a long way from needing merely a 2x4.

Read more (Fortune)

RepuStars 2015 May 29

C. HUYGENS - Saturday, May 30, 2015

Weekly Reputation Index Metrics


At the close of trading May 29, 2015, REPUVART and REPUVAR stood at 4158.40 and 3400.85 respectively. Over the past four weeks, the former has changed by 1.33%, while the latter has changed by 1.14%. The benchmark S&P500 Composite Index stood at 1835.58 (31 Dec 2001=1000) and has changed over the past four weeks by -0.04%. The current calendar year spread between REPUVAR and the S&P500 is 10.76%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 12.94% and 11.16% respectively; the S&P500 Composite Index has changed by 9.76%. The trailing 12-month spread between REPUVAR and the S&P500 is 1.40%.

Over the trailing 36 months, the REPUVART and REPUVAR have changed by 53.46% and 45.14% respectively; the S&P 500 Composite Index has changed by 58.16%.

The 4-week, trailing 12-month, and trailing 36-month returns for REPUSPX are -0.45%, 14.97%, and 99.96% respectively. The trailing 12-month spread between REPUSPX and the S&P500 is 5.21%.

The spreads between the S&P500-only index informed by reputation metrics, REPUSPX, and the broad market index informed by reputation metrics, REPUVAR, for the calendar year and for the trailing twelve months respectively are -6.69% and 3.82%.

Side Note: A description of the portfolio constituents and historical returns data from December 31, 2001 can be obtained on request from Technology Option Capital, its manager. Click Here.

Background

The RepuStars® Variety Corporate Reputation Index calculated by S&P/Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re Reputational Value Metrics. The metrics comprise non-financial indicators of reputational value (RVM) and ranking (CRR). These are the same metrics that power the reputation controls provided by Consensiv, and the league table of reputational value, the Consensiv 50,  published periodically on the Society's website (click here), and elsewhere.

The RepuStars Variety Corporate Reputation Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click on the ticker names for real time quotes.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to  Steel City Re’s proprietary Reputational Value Metrics™, which track 7400 companies weekly. The principles behind measuring reputational value are described in the book, Reputation, Stock Price, and You: Why the market rewards some companies and punishes others (2012, Apress).

The RepuStars indices are reconstituted annually in the first week of January and posted by S&P/Dow Jones Indexes in the third week. The Indices were last reconstituted at the close of the markets 16 January 2015.

REPUSPX  is a pocket index with portfolio constituents being selected algorithmically by the same criteria as the constituents for REPUVAR and REPUVART, except that the field of eligible companies is limited to constituents of the S&P500 composite equity index. Click here for an analysis of periodic returns.

The strategy used to pick the constituent members of REPUSPX, REPUVAR and REPUVART is discussed in the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012). (Link below). Briefly, the design of the portfolio is governed by the theory that sometime over the course of the forward twelve months from portfolio construction, 3rd week of January in the current application, equity investors will come to appreciate the value implied by the reputation metrics.

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 second Friday of every month, read the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (2012)  or its predecessor, Mission: Intangible. Managing risk and reputation to create enterprise value (2010), available at the IAFS Store, specialty finance sector retailers, or other leading online book retailers
Society and engage.
2. Join our community on Linked-In and stay in the information flow and/or follow Twitter missives at #ReputationRisk.

Notices

S&P Dow Jones Indices is a registered trademark of S&P Dow Jones Indices LLC, a part of McGraw Hill Financial; RepuStars and Steel City Re” are registered trademarks of C. Huygens & Co. LLC. The method underpinning the RepuStars Variety indexes is subject to a pending patent assigned to C. Huygens & Co. LLC. S&P McGraw Hill Financial and its affiliate (S&P Dow Jones Indices) makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and McGraw Hill Financial shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. Past performance of an index is not an indication of future results. All information provided by S&P Dow Jones Indices is general in nature and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments offered by third parties that are based on that index. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that seeks to provide an investment return based on the performance of any Index. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes.

Activists Play the Nuclear Option

C. HUYGENS - Wednesday, May 27, 2015
The existence of the shareholder right to nominate directors "should obviate the need for its use" against rational board members, explained Zach Oleksiuk, head of the corporate governance team for BlackRock America. The activists' bold strategy would have won approval from none other than the fictional presidential adviser in the cold war cult classic film, Dr. Strangelove.

In the war for the hearts and minds of institutional and retail investors, what makes proxy access so effective is that it is a gut-wrenchingly simple message for board members to understand. And right now, Directors have strategic countermeasures that send an equally compelling message to the activists, that they too have a strategic means of securing the hearts and minds of institutional investor. They allocate dividends, and buy back shares.

Read more and see an amusing film clip at Consensiv.

McDonald's - Curb Your Enthusiasm

C. HUYGENS - Sunday, May 24, 2015
McDonald's is objectively in difficult straights. Economic news for Q1 reported in mid April was dismal with global sales down by 2.3%, revenues down 11%, and income down 28%. Strategically, the company mollified investors by returning $1.4 billion to shareholders through dividends and share repurchases.

But there is reason for guarded optimism. The company is beginning to understand what drives its reputation, if its public reporting is a valid indicator. Mentions of reputation are up 300% in item 1A Risks.

For the first time in the company's K's and Q's, it acknowledged in 2015Q1 that quality impacts the firm's reputation. "Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe food products…In 2014, food quality issues were discovered at a supplier to McDonald’s and other food companies in China. As a consequence of this issue, results in China, Japan and certain other markets were negatively impacted due to lost sales and profitability, including expenses associated with rebuilding customer trust. Any future instances of food tampering, food contamination or food-borne illness could adversely affect our brand and reputation as well as our revenues and profits."

"With new U.S. leadership, the U.S. is focused on a strategic roadmap that includes a revamped marketing approach…" Might quality by part of the turnaround? Hard to say. There is no indication that it is part of the increased investment into marketing. "Selling, general and administrative expenses as a percent of revenues increased to 9.8% for the quarter 2015 compared with 9.3% for 2014, and as a percent of Systemwide sales increased to 3.0% for the quarter 2015 compared with 2.9% for 2014, as weaker foreign currencies are having a bigger impact on revenues and sales."

Exuberance should be tempered by the sobering fact that the term quality only makes one other appearance in the filing. Quality is mentioned in a string of attributes on which the company competes, "We compete on the basis of product choice, quality, affordability, service and location"-- issues that are relevant to marketing. Quality is not discussed in the context of operations or controls.

Turning to the reputation value metrics, which can be viewed as either controls on the process that affect reputation or a window into stakeholder assessment of governance, and there are again reasons for guarded optimism. McDonald's Reputation Value Metric is still in the 99th percentile among the 76 firms in the restaurant peer group with a very low Consensus Trend. On the other hand, the sobering news is that its reputation value metric has been declining for nearly a year.

The data suggest that the enterprise's reputation for a reliable, repeatable quality experience, currently at 80% of its potential, may be restored. First, McDonald's should recognize that the aforementioned list are the core values that underpin the expectations of the stakeholders who consumer McDonald's products. That would tackle the quality challenge.

The Company also faces significant pressures on the labor front. The Company should appreciate that employees who are engaged with a Company that is well respected will find intangible benefits of employment  will offset some fraction of wage costs.

These benefits become transparent on the P&L, and in enterprise value, but they come only to those whose governance organization understands the rules of doing business in the 21st century.


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