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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Financial Institutions: Expecting rapacious behavior

C. HUYGENS - Monday, July 22, 2013
"It’s far too easy to decry what the financial firms do wrong," writes Mission Intangible Monthly Briefing moderator and Forbes columnist Jonathan Salem Baskin. "After all, they’re rapacious and unrepentant capitalists who seem too willing to follow the cruel logic of their mathematical equations despite the feelings of their critics."

If you agree, and if the above description comes as no surprise, then banks are meeting your expectations. You're not alone, explains, Baskin, and that's why they're making money hand over fist. Read more in Forbes.

Baskin will be moderating the Mission Intangible Monthly Briefing this coming Friday, 26 July, where he will take a sweeping view of the many intangible assets underpinning reputation.

Joining in the conversation will be Dale Furtwengler, a consultant's consultant specializing in bringing clarity to the value in intangible asset management; and Mary Adams, author, consultant, and Smarter Companies thought leader, and formerly a member of the Society's Reputation Leadership Council.

Three is no cost to register and listen to the broadcast. Register here.

Welcome Management Accountants

C. HUYGENS - Sunday, July 21, 2013
"These days," write the authors, "bad news spreads faster than ever. Management accountants can help companies prepare to inoculate their hard-earned reputations against damage on social media and repair the harm when it occurs. Here is the expert's prescription."

Come again? "Did you say management accountants?" One can almost hear the other executives chuckling around the water cooler -- or virtual analog, such as Facebook. "Accountants managing reputation is an oxymoron."

The smart money is on the accountants. As described on page 12 of the summer 2013 issue of Certified Global Management Accounting (CGMA) magazine, reputation risk is a core financial issue impacting every line of the P&L statement. "A good reputation can increase margins and reduce borrowing costs, inventory lead time, head-hunting costs, internal litigation costs, regulatory fines and supplier costs." Done properly, managing reputation risk presents a significant opportunity for the company, its directors and officers.

CFOs and their management accounting teams see the writing on the wall. It is alphanumeric.

The Society operates under a big tent, and we are delighted to welcome management accountants to the fold. In their honor, the Mission Intangible Monthly Briefing this coming Friday, 26 July, will take a sweeping view of the many intangible assets underpinning reputation.

Joining in the conversation will be Dale Furtwengler, a consultant's consultant specializing in bringing clarity to the value in intangible asset management; and Mary Adams, author, consultant, and Smarter Companies thought leader, and formerly a member of the Society's Reputation Leadership Council. Jonathan Salem Baskin, author of Tell the Truth, moderates.

Three is no cost to register and listen to the broadcast. Register here.

RepuStars 2013 July 20

C. HUYGENS - Saturday, July 20, 2013

Weekly Reputation Index Metrics


At the close of trading July 19, 2013, REPUVART and REPUVAR stood at 3334.37 and 2820.62 respectively. Over the past four weeks, the former has changed by 6.63%, while the latter has changed by 6.52%. The benchmark S&P500 Composite Index stood at 1421.41 (31 Dec 2001=1000) and has changed over the past four weeks by 6.26%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 27.71% and 25.22% respectively; the S&P500 Composite Index has changed by 24.18%. Over the trailing 36 months, the REPUVART and REPUVAR have changed by 77.71% and 69.59% respectively; the S&P 500 Composite Index has changed by 56.17%.

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

Analysis

Good news. Jack Lew, US Secretary of the Treasury, in a George W. Bush-like moment, reported that mission of restoring the US economy has been accomplished. Now, it’s Europe’s turn. The S&P500 reacted to the good news the way its been reacting to bad news. It rose.

RepuSPX, a portfolio that seeks algorithmically to find the best reputation-linked opportunities among the S&P500 constituent members, continues to benefit from this effect. It is ahead of the market index for the calendar year by 14.01% this week at 29.77%. Its trailing twelve-month return of 51.66% is beating the market by 28.74%. (Note Errata 17 July regarding prior errors in calculating the RepuSPX 12-month returns.)

Meanwhile, RepuStars decreased its spread loss for the year to date. The greatest gains in the portfolio for the year are being reported by GameStop Corp (GME), which holds on to first place with returns of 74.24%, Wellpoint Inc (WLP) which holds onto second place with returns of 46.4%, and Bed Bath & Beyond returns to third place with year to date returns of 33.88%. These are three of the 19 firms identified by the RepuStars Variety algorithm at the start of the year as value opportunities.

As for those whose reputational value has not panned out so far, Royal Gold Inc. (RGLD) is up further at -42.40%, scandal-plagued VeriFone Systems Inc. (PAY) is up at -41.19%, and Fusion I-O is more or less stable at -34.25%.

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). The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here 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 20 Jan 2012.

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

Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”), a subsidiary of The McGraw-Hill Companies, Inc. Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). “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 Dow Jones Indices LLC, Dow Jones, S&P and their respective affiliates (“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 S&P Dow Jones Indices 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.

Liquidity: You're at risk for doing it wrong

C. HUYGENS - Friday, July 19, 2013
Since the Pittsburgh Conference of the G20 in 2009, where Huygens used the skirmishes with anarchists to educate his daughter on the ideals of civil disobedience and the realities of tear gas, there’s been a coordinated effort to mitigate the risk of another global liquidity crisis. The consensus strategy among world governments is capital adequacy.

“Adequacy” is a fuzzy concept, but the intent is that institutions would hold capital sufficient to meet the expectations of stakeholders for unfettered access to funds on demand; i.e., liquidity. “Expectations” is also a fuzzy concept, but well appreciated by followers of this blog. The meaning here is that as long as stakeholders expect adequate capital to meet demand, there will not be a panic-driven run on financial institutions.

The word used in BaFin’s (Germany) regulations for this expectation of adequate capital is -- wait for it -- “reputation.” Similarly, this expectation of adequate capital is what Alan Greenspan meant when he said “In a market based on trust, reputation has enormous value.” Liquidity risk is therefore linked to reputation risk when the latter is defined as “the threat to enterprise value when myriad stakeholders perceive that corporate behavior violates their expectations."

Reputation risk is a governance and control problem, and it can be exacerbated through adverse publicity, but it is first and foremost not a PR issue. The legislative problem, and the source for "doing it wrong," is that the word “reputation” has a lay meaning -- likeability -- which is how at least some regulators are interpreting the word. Rereading the paragraphs above and replacing the notion of “expectation for capital adequacy” with “corporate likeability,” leads to a diversity of wrong activities.

The first group of wrong activities comprise restrictions on business counterparties -- not on the basis of creditworthiness, but rather on the basis of likeability. This is flat-out goofy, as discussed in American Banker and partially in Forbes. The second group of wrong activities comprise fostering business controls over the wrong business processes -- not on the controls that manage stakeholder expectations of capital adequacy, but rather over drivers of likeability. This will direct corporate resources in the wrong direction, and do nothing for addressing the core risk of capital adequacy, as discussed both in Forbes and an earlier Intangible Asset Finance Society blog note.

Not For Profits: Where reputation has added value

C. HUYGENS - Thursday, July 18, 2013
Not-for-profits are measured by their reputation. Readers of Huygens' missives know better than to conclude that a not-for-profit's path to success is maximizing likeability. Not one would mistake a reputation for operational excellence -- clinical excellence, academic excellence, effective resolution of malnourishment, or even effective advocacy of class rights -- with the marketing notion of "likeability." No, not one.

In late 2011, the Society sponsored a Mission Intangible Monthly Briefing on the problem of measurement at not-for-profit organizations. But perhaps reputation is not merely something to measure. Dennis Fischman, a not-for-profit communications expert, puts it this way. "Nonprofit organizations live and die by our reputation. It's what brings us clients, volunteers, funding, and dedicated staff who could earn more in a for-profit setting." Read more.

Ironically, not-for-profits whose worlds depend so much on trust, would do well to repeat the mantra of Alan Greenspan, former chairman of the Federal Reserve. "In a market based on trust, reputation has enormous value."

RepuStars 2013 July 13 RESTATEMENT

C. HUYGENS - Wednesday, July 17, 2013
Under the category of "You're Doing it Wrong," there was an arithmetic error in the formula TOPCAP used to calculate the trailing twelve month returns of REPUSPX. The error affected all REPUSPX Trailing Twelve Month returns reported on this blog during the 2013 calendar year. The error was discovered during a formula audit. Huygens apologizes.

It was previously reported that the trailing twelve month returns for REPUSPX were 30.63% beating the S&P500 by a spread of 4.74%. The correct value as of last Thursday is a trailing twelve month return of 58.15% that is beating the S&P500 by a spread of 32.27%.

The formula has been updated for reports going forward.

REPUSPX is a pocket index based on the same algorithm as REPUSTARS (Ticker: REPUVAR) but for which eligibility is restricted to constituent members of the S&P500. Unlike REPUSTARS which is calculated and reported by S&P/Dow Jones Indices, REPUSPX is manually calculated and reported by TOPCAP. All indices are informed by reputational value metrics from Steel City Re.

Blog readers interested in correct REPUSPX trailing 12 month returns for each of the 27 reports published this calendar year are invited to contact TOPCAP. Click Here.

Reputation: Lost in translation

C. HUYGENS - Tuesday, July 16, 2013
While losses in translation can be funny, there is a dark side. Last January, the press circulated a story about the British tourist who said he was going to "destroy America," meaning he was going to party hard. Homeland Security took the threat seriously.

The current government misunderstanding, involving liquidity risk and reputation, is causing grief on sources of revenue while missing the point about liquidity risk mitigation involving an estimated $800 billion in contingent capital. As described in the linked article from Forbes magazine earlier this month, senior regulators are misinterpreting ‘reputation’ in its lay sense of ‘likability.’ Regulators are suggesting banks avoid doing business with entities that may not be ‘likeable.’

However, as the term is employed in the Federal Reserve’s Interagency Policy Statement on Funding and Liquidity Risk Management (March 17, 2010), the term is used in its psychology sense as an ‘expectation of behavior.’ It's the meaning of ‘reputation’ Alan Greenspan intended when he explained that in a market based on trust, reputation has significant value. It's the meaning captured in the metrics from Steel City Re and Consensiv.

The Policy Statement (download here) recommends that to “mitigate the potential for reputation contagion, effective communication with counterparties, credit-rating agencies, and other stakeholders when liquidity problems arise is of vital importance...In addition, groupwide contingency funding plans, liquidity cushions, and multiple sources of funding are mechanisms that may mitigate reputation concerns.”

Expectation management, in other words, should be a combination of effective communication and authentic reliable sources of contingent capital. If counterparties expect that there will be no liquidity problem, they will not panic and trigger a bank run that will precipitate a liquidity crisis. This is a matter of balance sheet transparency. Likeability has no role here.

Boeing: In Fear of a BP Moment

C. HUYGENS - Sunday, July 14, 2013
On Friday, January 13, fire on an Ethiopian Airlines Boeing 787 at Heathrow Airport in London and a separate technical problem on a second 787 owned by Britain's Thomson Airways raised new questions about an aircraft seen as crucial to Boeing's future. Boeing said it had people on the ground working to understand the causes of the fire.

Have we seen this movie before? In the early days after the Deepwater Horizon explosion in the spring of 2010, then-BP CEO Tony Hayward provided this assurance. "I think the environmental impact of this disaster is likely to have been very, very modest." Trust us, he said, to get this under control.

For weeks, BP benefited from the doubt, and its image of environmental concern built up through a major investment in marketing and communications. Surely, a firm that is beyond petroleum will successfully protect the environment.

Of course, talking about protecting the environment while allegedly cutting back on investments in processes that actually protect the environment is a recipe for a modern-day reputational crisis. And so it came to pass that stakeholder disappointment in the eventual outcome, forced by reality trumping hope, was expensive for BP, its CEO, the board, and investors. (See detailed case study in Reputation, Stock Price and You.)

Enter Boeing, a highly reputable aerospace and defense manufacturer that has had a string of significant problems with the 787 Dreamliner, most recently being fires associated with the aircraft’s batteries. It is also a firm whose cost-saving strategy for 787 production produced a three-year delay, the ire of its unions, and allegations of cutting corners.

At the 20 May resumption of flights by United Airlines after the FAA-ordered stand-down, and nearly three years to the day after Hayward’s comments, Boeing CEO James McNerney said, “We are very sorry about the delay that was caused by some of the technology work-arounds that we had to implement. But,” he added, “the promise of this airplane remains unchanged. We are confident of that. More importantly, we are confident in the safety of this aircraft. Safety means everything to us. It’s in our DNA.” Trust us, he said.

“I trust Boeing that they know what they are doing,” said a Flight 1 passenger to Bloomberg. And the reputational value metrics, shown below as of Thursday, 11 July, affirm the return in trust. CRR, a measure of reputational value premium, is up. Current RVM volatility, a measure of consensus trend or stakeholder concurrence, is more favorable (down). So on Friday, 12 July, when another Boeing 787 caught fire, stakeholders were surprised. Equity investors registered their surprise by shaving 5% off the stock price. On Sunday, Bloomberg reports, In the early stages of the investigation, airlines said they would continue to fly their Dreamliners, while others confirmed they would stick to their plans to buy the aircraft. Jonathan Salem Baskin, Mission Intangible Monthly Briefing moderator, explains on CNBC how other stakeholders may respond to this latest surprise. Click here.

RepuStars 2013 July 13

C. HUYGENS - Saturday, July 13, 2013

Weekly Reputation Index Metrics


At the close of trading July 12, 2013, REPUVART and REPUVAR stood at 3334.37 and 2820.62 respectively. Over the past four weeks, the former has changed by 2.92%, while the latter has changed by 2.82%. The benchmark S&P500 Composite Index stood at 1421.41 (31 Dec 2001=1000) and has changed over the past four weeks by 3.29%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 26.43% and 23.95% respectively; the S&P500 Composite Index has changed by 23.84%. Over the trailing 36 months, the REPUVART and REPUVAR have changed by 73.51% and 65.50% respectively; the S&P 500 Composite Index has changed by 53.39%.

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

Analysis

The Financial Times said it best. “Like tipsy drinkers, financial markets are seeing the world upside down. Bad economic news is good news if it means more central bank action to support growth. Good news that means central banks may withdraw the punchbowl is bad news.” Witness the fabulous performance of the S&P500 this week after Ben Bernanke, US Federal Reserve chairman stressed he was still far from tightening monetary policy.

RepuSPX, a portfolio that seeks algorithmically to find the best reputation-linked opportunities among the S&P500 constituent members, continues to benefit from this effect. It is ahead of the market index for the calendar year by 13.35% this week at 28.13%. Its trailing twelve-month return of 30.63% is beating the market by 4.75%.

On the other hand, RepuStars increased its spread loss for the year to date. The greatest gains in the portfolio for the year are being reported by GameStop Corp (GME), which holds on to first place with returns of 74.07%, Wellpoint Inc (WLP) which holds onto second place with returns of 44.04%, and Bed Bath & Beyond returns to third place with year to date returns of 34.87%. These are three of the 19 firms identified by the RepuStars Variety algorithm at the start of the year as value opportunities.

As for those whose reputational value has not panned out so far, Royal Gold Inc. (RGLD) is up slightly at -46.83%, scandal-plagued VeriFone Systems Inc. (PAY) is up at -42.39%, and Fusion I-O is showing less of a loss of -34.12%.

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). The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here 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 20 Jan 2012.

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

Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”), a subsidiary of The McGraw-Hill Companies, Inc. Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). “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 Dow Jones Indices LLC, Dow Jones, S&P and their respective affiliates (“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 S&P Dow Jones Indices 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: Expectation, expectation, expectation

C. HUYGENS - Wednesday, July 10, 2013
Suspend for a moment the long held (mis)understanding of reputation as an affinity, and recast the word as an expression of forward-looking expectations. Suddenly, behaviors that seemed bizarre are patently rational. Follow Mission Intangible Monthly Briefing moderator Jonathan Salem Baskin as he drives this point home in Forbes magazine over the tawdry Paula Deen affair, and the even more tawdry marketing strategy of Abercrombie and Fitch.

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