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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Brand v. Reputation: Nissan edition

C. HUYGENS - Tuesday, April 01, 2014
British car buyers would rather buy Japanese-made Japanese branded cars than British-made Japanese branded cars. As the Consensiv blog explains, it was the reputation of Japanese workmanship and quality that sold the cars, not the brand.

Read more.


Planning to attend RIMS 2014 Denver 29 April? Come learn more on enterprise reputation risk.

JPMorgan Chase: You're doing it wrong

C. HUYGENS - Monday, March 31, 2014
"Doing it," a double entendre used extensively in the arts, rarely raises an eyebrow nowdays. But when used in banking?

Last week, start-up condom company Lovability learned that Chase Paymentech, an operating company of JP Morgan Chase, would not handle its credit card transactions. Lovability’s founder, Tiffany Gaines, who started the company as a way to discreetly sell condoms to women, told the Huffington Post that a representative told her on the phone that they would not work with her because doing so posed a “reputation risk” to the company.

The financial sector is under orders from the Office of Comptroller of Currency (OCC) to manage financial risk where "reputation risk" is a named component. But reputation risk, in this context, is a risk of negative future expectations -- which in the financial sector, means liquidity risk. Confounding reputation risk with social concepts such as likability and cultural acceptability, as Jonathan Salem Baskin wrote in Forbes,  is simply "doing it" wrong.

Planning to attend RIMS 2014 Denver 29 April? Come learn more on enterprise reputation risk.

Reputation Value: Sovereign nation edition

C. HUYGENS - Sunday, March 30, 2014
Recently, Huygens has shared stories on reputation value associated with the behavior of sovereign states (Illinois) and local school districts (Texas). Today, completing the Rule of Three, sovereign nations (Brazil).

Reputation is an odd intangible asset. By itself, it is nothing more than an expectation of behavior. Its value depends on the action or inaction it elicits from stakeholders. Capital markets capture some of this forward-looking expectation of stakeholder behavior. Lest this read like the opening paragraph of a PhD dissertation in Behavioral Economics, consider this report from Reuters this past Thursday, 27 March 2014.

Brazil's currency and benchmark stock index skyrocketed on Thursday after a poll showed a decline in President Dilma Rousseff's approval rating, fueling investor optimism that the nation's economic policies could take a market-friendly turn.

Thiago Montenegro, a trader at Quantitas Asset Management in Porto Alegre, Brazil, explained the market behavior to Reuters:

Any change in any percentage point that points to the possibility of the (Rousseff) government not being re-elected helps these shares. The market is starting from the premise that the state firms couldn't possibly be treated any worse.

For followers of Huygens and this blog, the above is crystal. If expectations are for rock bottom behaviors, and stakeholders are favorably surprised with news suggesting their expectations have been excessively pessimistic, the revised expectations will raise values. It is a form of insight not unlike that developed by Mike Milken years ago on bond performance. AAA bonds can only disappoint. BBB bonds have the potential to surprise.

Bond investors hate surprises. Equity investors live for them. When stakeholder expectations signal value, and equity investors have not come around to share that expectation, there is equity value to be discovered. The potential for discovery is the theory behind the design of the reputation index-linked portfolios, RepuStars and RepuSPX.

RepuStars 2014 March 28

C. HUYGENS - Saturday, March 29, 2014

Weekly Reputation Index Metrics


At the close of trading March 28, 2014, REPUVART and REPUVAR stood at 3538.03 and 2955.44 respectively. Over the past four weeks, the former has changed by 0.41%, while the latter has changed by 0.31%. The benchmark S&P500 Composite Index stood at 1618.02 (31 Dec 2001=1000) and has changed over the past four weeks by -0.10%. The current calendar year spread between REPUVAR and the S&P500 is -3.62%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 8.13% and 5.77% respectively; the S&P500 Composite Index has changed by 18.38%. The trailing 12-month spread between REPUVAR and the S&P500 is -12.61%.

Over the trailing 36 months, the REPUVART and REPUVAR have changed by 34.98% and 28.26% respectively; the S&P 500 Composite Index has changed by 40.79%.

The 4-week, trailing 12-month, and trailing 36-month returns for REPUSPX are -0.35%, 21.30%, and 83.38% respectively. The trailing 12-month spread between REPUSPX and the S&P500 is 2.92%.

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 -0.76% and 15.54%.

Other interval changes in the magnitude of the indices are shown in the tables and charts below.

Analysis

Consumer behaviors drive the lion’s share of the economy. Consumer expectations which shape behaviors are therefor very important for prognostication.

Politico, the business and politics-centered news journal, reported yesterday that the real state of the consumer is not very good, notwithstanding what appear at first blush to be cheery numbers from the Conference Board.

At first glance, it’s hard to tell from recent data just how people feel about their economic prospects. On the one hand, the Conference Board this week reported that its index of consumer confidence rose to 82.3 in March, the highest level since January of 2008. Happy days are here again, right? On the other hand, Gallup recently found that just 19% of Americans rate current U.S. economic conditions as excellent or good, while 34% say they are poor. Gallup also found that 44% say the economy is getting better while 51% say it is getting worse. Sounds pretty bad. And it is.

Read more from Politico.

The rising tide that has floated all ships, or at least the index-associated securities, for the past 18 months is about to recede. More rational expectations will prevail. For now, however, the fun continues.

The greatest gains in the RepuStars Variety portfolio for 2014 year are being reported by Cavium (CAVM), which holds on to first place with returns of 18.89%. Weatherford Intl Ltd leaps up to second with returns of 18.34%. Veolia Environmental SA (VE) is in third place with Yankee Doodle returns of 17.76% year to date. These are three of the 41 firms identified by the RepuStars Variety algorithm at the start of 2014 as value opportunities.

As for those whose reputational value may have been overestimated, Pharmacyclics (PCYC) crashes into the cellar with returns of -25.67, Staples (SPLS) holds with returns of -18.14%, and Rent-A-Center (RCII) is up 2% to -16.42% for the year.

Turning to RepuSPX whose constituents are limited to the S&P500 members, the top three performers in a portfolio of 35 names are Garmin (GRMN) at 19.10%, Ameren (AEE) at 12.80%, and PPL Corporation (PPL) at 10.45%.

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, and most recently January 1, 2014, by CFO.com.

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 18 Jan 2014.

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.

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)

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
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.

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.

CVS Caremark: Thank you for not smoking

C. HUYGENS - Friday, March 28, 2014
A few weeks back, CVS Caremark (CVS) caused quite a stir with this ethical shocker: the health retail chain was going to forgo $2 billion by no longer selling a family of anti-health products based on tobacco. The equity markets initially punished the firm; the reputation metrics according to Consensiv and based on Steel City Re's reputational value metrics, showed other stakeholders were bullish.  The Reputation Premium already at the top, stayed at the top. The Consensus Trend, CT, rose, along with that of the entire sector, so that CVS's relative positioning was unchanged. A shocker for the sector of all six drug store chains, indeed.

The equity markets have since figured it out. CVS has climbed 12.5% since 5 February while the S&P500 is up less than half that. CVS hit an all-time high on March 26th. The #2 sized firm, Walgreens, (WAG) is up almost 17%, down from its peak post-CVS announcement of 23%.

Experience shows that 20 weeks is a good window for recording major reputational changes after a shock. Usually, the shock is negative; here the shock is clearly positive. We'll be back.



For more background on the Consensiv reputation controls, click here. To view the December 2013 reputational value league table, based on Consensiv's metrics, and available exclusively at CFO.com, click here. Last, to read more about how reputational value is linked to stakeholder expectations and enterprise value, read, Reputation Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012) (click here).

Carnival Corp: Hidden value or fool's gold?

C. HUYGENS - Wednesday, March 26, 2014
Huygens has reflected in the past on the travails of Carnival Corp (CCL), the vacation experience company that at times has provided passengers with more than they bargained for. This week, the Consensiv blog picks up a discussion at Motley Fool in which is is observed that the stock price for CCL, while apparently a bargain, may also reflect outsized operating expenses, future liabilities, and ongoing adverse publicity.

Carnival does offer a dividend yield of 2.50%, which is more generous than Royal Caribbean at 1.90%, but considering the other factors — PR challenges and lack of efficiency — that shouldn’t be enough to lead investors in Carnival’s direction.


The key message from Motley Fool's discussion, notes Jonathan Salem Baskin, a reputation controls expert, is that different stakeholders will potentially view the reputational value of CCL differently. Equity investors speak through stock price, which is the most transparent to all outsiders; other stakeholders speak through more opaque channels that create or reduce revenue, increase or reduce expenses and operational efficiencies, etc.

The myriad "valuations" diverge most during and after shocks; over time, they converge. In between the two, there are arbitrage opportunities. Such opportunities are exploited in the RepuStars Variety and RepuStars SPX equity strategies whose weekly returns are posted on this blog.

Read more.

GM: Barra is owning it

C. HUYGENS - Tuesday, March 25, 2014
GM's got issues. Ten years of sweeping safety problems under the rug has come back to haunt it, just as it haunted Ford for its Pinto. Haunt is not the best word. The German's call it a "shitstorm," or what the UK's Financial Times called "the pile on of litigators, regulators and mommy bloggers." Huygens prefers the term "reputation crisis."

Now here's the funny thing. Typically, in a reputation crisis, the marketing types describe a Kabuki-like ritual of how the CEO needs to apologize, demonstrate contrition, and all will be forgotten. The New York Times quotes a prominent PR executive saying "She's owning it," which sounds good until the the rest of quote kicks in, "'She will not be able to distance herself from it. It's now hers,' said the P.R. man, Daniel G. Hill, in what sounded a bit like a threat." Barra has pundits scratching their heads. "It was puzzling, then, if not downright ill advised, for GM's CEO, Mary Barra to last week personally lay claim to the biggest crisis at her company since the financial crisis."

Barra's actions, however, are textbook reputation crisis management if you come from the school that a PR crisis is no more than a window into an operational crisis. To effectively manage stakeholder expectations going forward (the entire value proposition in reputation risk management), you have to promise to to the right thing...and have stakeholders believe you.

It takes only three steps: (1) Admit there is a problem; (2) Apologize for allowing the problem to arise, affirming that the problem violates everything you and the firm stand for; and (3) promise it will never happen again. Here's Barra last week from the New York Times: “'Our goal is to make sure that something like this never happens again,' she said." Extra points go to the firm that promises that something of this sort will never happen to any other firm in the industry.

If stakeholders find Barra credible, they may set high expectations going forward. The benefit is that GM may demonstrate reputational resilience. The risk, as Arthur C. Liebler, who was Chrysler’s top communications executive during Mr. Iacocca’s heyday told the New York Times, is "Ms. Barra and her team will be watched very closely now and will have to prove that they mean what they say. If they don’t deliver, there won’t be a second chance.”

The quantitative reputational value profile of GM, according to Consensiv and based on Steel City Re's reputational value metrics, is shown below. Not surprisingly, the Reputation Premium has been sinking, but interesting, not acutely. Its been on a bumpy ride down to 0.35 percentile for a while, suggesting stakeholders were increasingly discounting GM for some time. The Consensus Trend, CT, is much more interesting. It leaped from a very low level relative to the other 39 companies in the Motor Vehicles peer group to an absolute level of 5.2%. This indicates stakeholders have moved from a more or less uniform set of expectations of GM to a much more diverse mix.

It is a risky time for GM with its reputational heath approach the danger zone. Barra has stakeholders' attention. Early indications were promising, but the most recent additional drop these past two weeks in the Reputation Premium does not bode well. Stay tuned.



For more background on the Consensiv reputation controls, click here. To view the December 2013 reputational value league table, based on Consensiv's metrics, and available exclusively at CFO.com, click here. Last, to read more about how reputational value is linked to stakeholder expectations and enterprise value, read, Reputation Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012) (click here).

RepuStars 2014 March 21

C. HUYGENS - Saturday, March 22, 2014

Weekly Reputation Index Metrics


At the close of trading March 21, 2014, REPUVART and REPUVAR stood at 3557.10 and 2972.08 respectively. Over the past four weeks, the former has changed by 1.95%, while the latter has changed by 1.82%. The benchmark S&P500 Composite Index stood at 1625.78 (31 Dec 2001=1000) and has changed over the past four weeks by 1.65%. The current calendar year spread between REPUVAR and the S&P500 is -3.56%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 10.36% and 7.94% respectively; the S&P500 Composite Index has changed by 20.75%. The trailing 12-month spread between REPUVAR and the S&P500 is -12.81%.

Over the trailing 36 months, the REPUVART and REPUVAR have changed by 38.33% and 31.43% respectively; the S&P 500 Composite Index has changed by 44.27%.

The 4-week, trailing 12-month, and trailing 36-month returns for REPUSPX are 0.23%, 25.22%, and 88.81% respectively. The trailing 12-month spread between REPUSPX and the S&P500 is 4.47%.

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 -1.06% and 17.28%.

Other interval changes in the magnitude of the indices are shown in the tables and charts below.

Analysis

Andy Grove, former CEO of Intel Corp, put it this way: “"Success breeds complacency. Complacency breeds failure. Only the paranoid survive." Huygens firmly believes that froth warrants paranoia. The correction commeth.

The greatest gains in the RepuStars Variety portfolio for 2014 year are being reported by Cavium (CAVM), which holds on to first place with returns of 31.89%. Caesar’s Acquisition (CACQ) moves into second with returns of 19.75%. Right Aid Corp (RAD) drops to third with an 18.78% return year to date. These are three of the 41 firms identified by the RepuStars Variety algorithm at the start of 2014 as value opportunities.

As for those whose reputational value may have been overestimated, Rent-A-Center (RCII) is in last place at -18.4% for the year, Staples (SPLS) holds with returns of -17.57%, and Mobile TeleSystems (MBT) inches back to -17.5%.

Turning to RepuSPX whose constituents are limited to the S&P500 members, Huygens found four companies inadvertently left on the cutting room floor and added them back: Crown Castle (CCI), Fossil Group (FOSL), Garmin (GRMN) and PetSmart (PETM). The top three performers in a portfolio of 35 names are Garmin (GRMN) at 18.09, Ameren (AEE) at 11.92%, and AutoNation (AN) at 9.93%.

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, and most recently January 1, 2014, by CFO.com.

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 18 Jan 2014.

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.

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)

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
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.

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.

Reputation Value: School district edition

C. HUYGENS - Thursday, March 20, 2014
In the area of reputation risk arising from a failure in governance, controls and risk management in the public sector, a notable example was the public university in Happy Valley, Pennsylvania -- the Pennsylvania State University. Another notable example, discussed only yesterday, was the State of Illinois. Today, a school district in Texas. The Beaumont Independent School District (“BISD”) in Texas is in crisis.

Common to all: An operational crisis involving ethics, safety, or security; failure in governance and controls, and a long history of signs and symptoms that arguably were willfully ignored.

The Texas Education Agency has issued a 12-page report damning its finances, amidst reports that it paid one electrician $382,940 for materials that only cost $39,490, and that two senior officials may have embezzled $4 million...This is a classic reputation crisis, as the bad press is an outcome of underlying problems of governance and sustainability.

Read more.

Reputation Value: Sovereign state edition

C. HUYGENS - Wednesday, March 19, 2014
"In a market based on trust, reputation has value," noted Alan Greenspan, former chairman of the Federal Reserve, as Wall Street imploded.

Certainly reputation has value in the financial sector. In fact, the US Office of Comptroller of the Currency now recognizes reputation risk as one of eight sources of financial risk that institutions need to manage.

And reputation has value in public companies in general. Around two thirds of public company directors, and an equal number of public companies, disclose the materiality of reputation risk in their SEC filings (10K item 1A).

But what about the public sector? Does reputation impact budget line items in the public sector the same way it impacts line items in a public company’s P&L. Apparently, yes.

As far as state budgets go, Illinois has one of the worst, suffering from underfunded employee pension obligations and an economy that isn’t adding enough top-line cash. Its credit rating is the nation’s lowest, which means it’s considered the worst borrowing risk out of a list of 50 (and therefore pays the most for it).

But beyond this low credit rating, Illinois pays interest rates on its debt that are higher than the actual default risk that these ratings are designed to reflect. Illinois pays a reputation risk premium.

In a recent paper published by the University of Illinois' Institute of Government and Public Affairs, University of South Carolina professors Tima Moldogaziev and Martin Luby studied this reputation risk premium and found that it costs the state plenty. For bond sales between 2005 and 2010, they estimate that this reputation risk premium cost the state more than $80 million. That's $80 million over and above what the state should have been paying based on its worst-in-the-nation credit rating.

Read more.

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