Leaked information is rattling executives and politicians globally. But the literal elements of a leak stem from uncontainable fluids, and the adverse consequences can be more immediate. Rolls Royce (LON:RR) is facing just such a problem. Their Trent 900 engine, the power source for a number of airlines such as Quantas that fly the Airbus A380, appears to have a welding flaw in an oil pipe. The pipes are at risk of leaking, and the consequences of an oil leak include catastrophic engine failure. In reputation speak, this is a "safety" issue. In operations speak, this may be another example of a reputation risk arising from the supply chain. A quick word on Rolls Royce and their supply chain. As summarized by then chairman Sir Ralph Robins in 2000, "Seventy per cent of an engine's content is in the supply-chain and only 30% comes from in-house. We get all excited about cost-reduction in-house, but the supply chain is where it really counts."

According the the Financial Times, the current problem may cost the company up to $500m. According the to the Steel City Re Corporate Reputation Index metrics, the reputation cost is just beginning to manifest. The reputation index began the trailing twelve month period in the 63rd percentile and is currently in the 71st percentile relative to the 14 companies in the Aerospace and Defense peer group. However, the Index had been as of late in the low 80th percentile, and several dynamic metrics are providing indications of adverse value change: the exponentially weighted index moving average (EMWA) is up to 17%, and both the vector and velocity over the trailing twelve weeks are negative.

For the present, however, the equity returns over the trailing twelve months are equal to the median of the peer group, while the intangible asset fraction is below that of the peer group but equal to the mean of the S&P500 Index constituent members. Look to IAM magazine issue 46, due in March 2011,  for an extended examination of this Company from an intangible asset, risk, and reputation management perspective.

Supply chain continue to hurt Boeing's (NYSE:BA) reputation. Strategies executed earlier in the 787 program to (1) reduce costs and (2) garner intangible political benefits associated with global job creation introduced lurking risks in the supply chain that are dogging this company. At the heart of the matter is oversight and control.
 
Indeed, a key economic lesson learned these past two years is that iconic firms with global operations, a stable of business partners, and reputations for ethics, safety, security, and quality; must have better managerial oversight of their partners. There are several strategies for improving oversight. To protect and restore its reputation rapidly, Boeing appears to be pursuing a strategy of total control by acquiring troubled suppliers. It is not an inexpensive proposition. The latest acquisition is reported today in the Financial Times:

http://www.ft.com/cms/s/0/cd36e146-6b56-11de-861d-00144feabdc0.html

"Boeing has been forced to take over one of the key suppliers to the 787 Dreamliner, its troubled new jet, in an effort to gain tighter control of the production process.

It has agreed to pay at least $580m for the facility that makes chiefly composite sections for the 787, a planned family of long-range jets that is running more than two years behind schedule.

The purchase of the South Carolina plant from Vought Aircraft Industries - owned by the Carlyle Group, the private equity firm - is the second time Boeing has been forced into an acquisition to strengthen its global supply chain.

Last year, the US aircraft maker took over Vought's stake in Global Aeronautica, a joint venture with Alenia of Italy that assembles 787 fuselage sections. Vought said it received $55m from that deal."

The Boeing Company (NYSE:BA) reported today that it would again delay the first flight of its new jet, the 787, the latest setback in a program that is considered crucial to the plane maker’s future. The New York Times reports that Howard Rubel, an analyst at Jefferies & Company, said the problem “doesn’t help the company’s credibility.”

Not so fast, Mr. Rubel. Credibility has many facets. The most important driver of reputation in the commercial aerospace sector is safety, and with the recent string of air disasters involving aircraft made by Boeing’s rival EADS NV (EPA:EAD), safety is very much on every stakeholder's mind.

The operational setbacks both Boeing and EADS have suffered highlight the difficulty of pulling off increasingly complex engineering feats involving new materials and global supply chains. And at least one financial lesson from the effort to create a global supply chain is that the savings from direct and tangible costs are being offset by intangible costs arising in the risks of a greater business network entailing less visibility and control.

Managing a complex supply chain is a business process, and failure to do it well – when stakeholders have been led to expect benefits – can be costly in terms of reputation. So returning to Howard Rubel’s comments, what is the net reputation impact?

We turn to the data from the Steel City Re IA (Corporate Reputation) Index. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

The index shows that over this past year, Boeing’s reputation ranking has sunk from the 69th percentile to the 48th percentile among the 47 companies in the Aerospace and defense sector. Worst, volatility has been climbing and the Exponentially Weighted Moving Average volatility is now four log orders of magnitude. Not surprisingly, return on equity is 14% below the median of the peer group.



Looking at industry more broadly, we see that the overall reputation ranking of the Aerospace and defense sector relative to other industry sectors has been generally rising while variance within the group has been declining and assuming greater homogeneity.



Within this environment, the outstanding reputation holders comprising the top decile as measured by the Steel City Re Reputation Index are: American Science & Engineering (NASDAQ:ASEI); Precision Castparts Corp. (NYSE:PCP); TransDigm Group (NYSE:TDG); and United Technologies Corp (NYSE:UTX).

United Technologies interests us because our colleague, Nancy Lintner, former Chief Marketing Officer and a speaker at one of our annual meetings, developed an award winning communications campaign that highlighted a number of corporate intangibles. Over the past year, the Reputation Index ranking for United Technologies has climbed slightly from an already high 89th percentile to the 92nd percentile, and its EWMA volatility has declined. The company has rewarded investors with an ROE that is 6% above the median return of the Aerospace and defense peer group.