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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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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).

Reputation Risk Disclosure is Not Exculpation

C. HUYGENS - Sunday, February 16, 2014
Disclosing reputation risk and doing nothing more may be a risk unto itself and a company's executives, suggests a recent district court decision. As reported by the law firm Morgan Lewis, in In re Longwei Petroleum Investment Holding Ltd. Securities Litigation, the U.S. District Court for the Southern District of New York denied a motion by the CFO to dismiss a case under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange Act) noting, among other things, that the signing of Form 10-K alone is sufficient evidence of control (even if control is ineffective or blatantly faudulent). Because of other facts in the case the court also found that the plaintiffs' allegations that the two audit committee members failed to take any action in response to "acknowledged reporting failures" established scienter.

There you have it. Disclose the risk and you help establish scienter without any of the immunities associated with evidencing real working controls. This is a bad hand when playing a high stakes game with an aggressive plaintiff's bar. It is also one more round of bad news for the authors of Forms 10-K who, with respect to reputation risk, were as a group charged with doing it all wrong in a study by Consensiv as reported in the Financial Times service, Agenda.

Richard Leblanc, Associate Professor, Law, Governance & Ethics, York University, observed, Just disclosing the risk may help to establish scienter, but control would be what investors want to see: namely what are the internal controls (or lack thereof) over reputation risk? And are these controls effective? Is the design and implementation of these controls regularly tested and independently reported to the board (or a committee)? Investors want to see how the various risks are being mitigated, not just that there exists reputation risk, which is blindingly obvious.

Real working controls would help exculpate Directors and Officers. Real controls, if sufficiently transparent, would signal value to investors and a red flag to the plaintiff's bar. Reputational value insurances, when designed properly with quantitative measures, provide that transparency.

CEO: In the cross hairs

C. HUYGENS - Tuesday, July 23, 2013
According to the cruel calculus of war, a wounded enemy combatant is much more valuable than one who is dead. The wounded consume more enemy resources.

How else to explain SEC's strategy of winging Steven Cohen, founder of the $15bn hedge fund SAC Capital rather than taking him out of action? The SEC claims Cohen was negligent by ignoring red flags of illegal trading and failing to “take reasonable steps to investigate and prevent such violations”. In an administrative action filed last Friday, the Financial Times reports, the SEC alleged that Cohen "failed reasonably to supervise” two portfolio managers who engaged in insider trading that generated profits and avoided losses of more than $275m in total for the hedge fund.

Is that the best SEC can do? Cohen is a bad manager who failed to recognize red flags? Apparently, it is sufficiently cathartic. Senior heads, if not actually roll, will at least list.

Davia Temin, a reputation management consultant and crisis management expert, explains, "People have so much pent up anger, I believe, coming from the high expectations of life that were then dashed, from 2008 onwards, that they lash out more quickly, and more completely than ever before. And thru social media they can do so. But there are still currents and eddies of popular opinion...and if they catch one, they can do a lot of damage."

How angry are they, Davia? "I started to experiment in my Forbes.com column with what catches on. Many thought pieces get about 300 views...while my "angry pieces" that rail against some injustice, can get almost 90,000! Anger is contagious!"

Beware CEOs and Board Members. Yes, they're gunning for you. And if they get you, it won't be through a single rifle shot. It will be slow, and it will hurt. As the Economist notes this week, the "... SEC has vowed to take more cases to their conclusion, be it a determination of guilt or innocence. As a result, even if the outcome of the case against Mr Cohen is by no means obvious, it is a good bet that his legal entanglements will not end soon."

Corporate Boards: Charge them with the usual crimes

C. HUYGENS - Monday, July 08, 2013
The CEO may be getting big bucks. Moreover, in the US, they're getting bigger notwithstanding efforts at France-inspired salary caps. But when it comes to where the buck stops, ground zero appears to be the boardroom. Last month, the Financial Times published a story by Peter Whitehead titled, Company disasters – boards are to blame. The article was accompanied by a somber promotional video clip from the consultancy, Reputability, embedded below, explaining why.

In a spirited discussion on the Boards and Advisors LinkedIn group triggered by the article, it was flatly alleged "...that - even with non-performance of management - boards must be to blame, by their very nature and power. There are no flawed companies, only flawed boards. Boards are responsible for everything - management selection, strategy approval, risk oversight, compensation setting, etc. Boards can't argue "we missed it" because increasingly regulators are saying we will hold you responsible if you do miss it because it is your responsibility to know and not to miss. So institute systems and reporting so you do not, and replace management if need be."

Huygens is all for rounding up the usual suspects and charging them with the usual crimes, but he's not sure this is the best path to improved operations, superior governance, or better risk management. Nor a particularly good route to value creation.

Blame for most company failures will concentrate in the boardroom, with a serious skills gap and risk blindness of Board members being the most common allegations. That is why company crises become personal reputational matters for Board members, and why management and insurance solutions that help Board members combat these allegations, reputation risks, are now in great demand.

However, operational risks and reputational risks can be bifurcated. Data show that a reputational crisis is not a necessary consequence of an operational crisis provided that the Board has made a reasonable concerted effort to anticipate and mitigate the risk. And that stakeholders are aware of the effort and are able to appreciate and value it.

Warren Buffet would approve. Remember, he would forgive a financial loss; not a reputational loss.

Boards can be forgiven just as Jamie Dimon was forgiven.  What is helpful is having an established track record, a reputation, that can counter allegations of incompetence etc. This is a strategy Board members concerned about their personal reputations would do well to understand as they seek personal reputation protection solutions.

Carnival Corp: Executive shore leave

C. HUYGENS - Thursday, June 27, 2013
Carnival Corporation, the vacation experience company, as been having a bad run of shows. Eighteen months ago, a ship in its Costa Crociere family ran aground with loss of life. Last week, that company's President, Gianni Onorato, left the company with immediate effect to "pursue a new career direction."

In February of this year, a ship in the parent company's portfolio lost power and drifted in the Gulf of Mexico for a few days. The rescue by by the US Navy and Coast Guard made for excellent TV fodder.

Passengers from both the Costa Concordia and the Carnival Triumph are unlikely to recommend the product to their friends, and the proof is that bookings for this year have fallen behind 2012 levels, even as its cruise fares have moved lower in a bid to win back wary travelers. Bloomberg reported that "Some three-night Carnival cruises are selling from prices as low as $209. Five nights? Those have sold for as little as $249. A seven-night Caribbean cruise in August? Yours for $369, if you don’t mind an interior cabin. In April, as Carnival desperately sought to restore sales from the Triumph debacle, some four-night cruises from Miami were being sold for a mere $149."

This week, Carnival's CEO and Chairman surrendered his operating executive title. Director Arnold Donald, a longtime Monsanto executive and Carnival board member, will take over as chief executive from Micky Arison, who will remain board chairman. Compared to the fate of most CEOs who've had to walk the plank after operational failures and subsequent reputational crises, it's not a bad outcome.

Turning to the Steel City Re reputational value metrics, updated since our last visit of Carnival Corp (CCL) in January 2012, the company's CRR, a measure of its relative Reputational Premium, is hanging on the the top quartile in its peer group of 39 companies in the Hotels/Resorts/Cruise Lines sector. How so? Well, it's all relative. As Bloomberg reported, the entire industry is having issues this year.

It’s been a choppy few months for cruise ship operators. Memorial University of Newfoundland professor Ross Klein, who studies the industry and is the publisher of CruiseJunkie.com, collected reports of 31 incidents on cruise ships in the first three months of 2013, finding more ships run aground and more propulsion problems than in all of 2012. (To be fair, there were far fewer collisions; Klein’s data are self-reported by cruisers.)

The rash of incidents helps explain why the median sector reputational value volatility, Current RVM volatility in the chart below or Consensus Trend, was hovering around 5% for the better part of this year. 7% is a threshold value for major market capitalization movements.

Procter & Gamble: Hope springs eternal

C. HUYGENS - Tuesday, June 25, 2013
A little over one month ago, AG Lafley returned amidst much fanfare to the helm of Procter & Gamble as Chairman, CEO, and President. Equity investors reacted favorably. Other stakeholders, less so. With four weeks and an awful equity week behind us, it's a good time to revisit the Steel City Re Reputational Value Metrics for the company.

As of this moment, 10h30 EDT Tuesday, PG is ahead of the S&P500 by around 1%. The 4% boost equity investors gave the company in the week following Lafley's formal arrival melted away, but the company on both a reputational and economic basis has inched up relative to its peers.

The vital signs (top chart, left) show increased historic and current reputational value volatility relative to peers moving from the 33rd and 73rd percentiles to the 35th and 75th percentiles respectively in a peer group comprising 44 household and personal care products companies. The CRR, a measure of relative reputational ranking (Reputation Premium in the language of Consensiv, the reputation consultancy and publisher of the Consensiv50), is up from the 83rd to the 86th percentile. Return on equity is up much more from the 29th to the 42nd percentile. Last, overall reputational value volatility, Current RVM volatility in the chart top right, (Consensus Trend in the language of Consensiv) is drifting downward to below 4%. The latter metric indicates overall, stakeholders aren't expecting any surprises

In summary, the equity measures are notably ahead of the reputational measures. Experience shows that in a stable market setting, equity is more likely to move down, than reputational value metrics are likely to move up. In a volatile downmarket, a Company like P&G is likely to move up reputationall relative to its peers; that won't keep the equity from sinking.

Huygens suggested P&G puts were in order June 2. With a net drop since then of only 0.34%, the data suggest there is more room to fall.

JPMorgan: Bowl Game Post-Mortem

C. HUYGENS - Wednesday, May 22, 2013
The votes are in and by a supermajority, Jamie Dimon is still both CEO and Chairman of JPMorgan Chase. Notwithstanding a concerted effort by the proxy services, ISS and Glass, he was returned to the dual role with a stronger showing than last year's simple majority.

For readers of this blog, the outcome was expected, according to an analysis of the Steel City Re reputation metrics by the advisory firm, Consensiv, and their Consensus Trend measure. While the outcome was not in doubt from a reputation-based model of behavior, a post-mortem is still valuable. In this regard, Huygens writes with authority having served as Deputy Coroner in Los Angeles County in a prior life.

Using Steel City Re's repetitional value metrics, Consensiv scores reputational value using a proprietary algorithm to calculate net expected behaviors. It is agnostic to qualitative values of what should matter to stakeholders, and measures instead the outcomes of whatever observably matters.

Like a jury, stakeholders as a group bring to the table a simple, unvarnished understanding of the facts. It is a valuable understanding described by James Surowiecki as the Wisdom of Crowds. The stakeholders understood that while companies are generally faceless, in times of crises or turmoil, their identity fuses with that of their leaders. This melding of CEO and company reputation has been studied by leading reputation experts such as Dr. Leslie Gaines Ross and summarized in the 2012 opus, Reputation, Stock Price and You.

Simply put, the stakeholders understood that the separation of CEO and Chair, allegedly on the basis of principles of good governance, would be perceived as a personal rebuke that would damage Jamie Dimon's reputation. They also understood that Dimon's personal reputation, that is, the expectations of the benefits of his leadership, were drivers of some of the excess value in JPMorgan Chase (what Consensiv terms Reputational Premium). Last, they understood that public humiliation, like a scarlet letter, would permanently stain Dimon and force his resignation. Reputational value insurances, which are designed to prevent such permanent damage to senior executives and board members, are not effective after the damage is done.

To remain in the limelight would only ensure repeated embarrassment, as the press would forever follow his name with a parenthetic reference to his fall; e.g., Tony (I want my life back) Hayward, Frederick (I would like my knighthood back) Goodwin, and the classic Michael (disgraced junk bond king) Milken. The stakeholders understood all that. The reputational value metrics, as Jonathan Salem Baskin explains in an article in Forbes today, captured behaviors that reflected those impressions.

JPMorgan: Bowl game, Tampa, 21 May - Dimon 1, Activists 0

C. HUYGENS - Sunday, May 19, 2013
It's last call at the betting window. Cold beers have been wagered on the outcome of the May 21 annual shareholder meeting of JPMorgan Chase. One one side, the status quo which has weathered risky times, rebounded from mistakes, and outperformed on a range of metrics. On the other side, philosophical and ideological notions of governance backed by the moral principle that less risk-taking is an inherent good. Governance blogs on LinkedIn provide ample background:

Boards and Advisors Blog 1
Boards and Advisors Blog 2
Boards and Advisors Blog 3

The quants, too, have their say. With five days, left, the Steel City Re reputational value metrics, as before,  show exceptionally low levels of current reputational value (Current RVM) volatility at JPM indicating stakeholders are not expecting change.

JPMorgan Chase: Saying foolish things?

C. HUYGENS - Sunday, May 12, 2013
The chattering classes are terribly excited about the upcoming annual meeting of JPMorgan Chase. True, the banking industry is generally not all that exciting, except when it is uncomfortably so. But JP Morgan Chase has much good news to share. This part quarter, for example, its trading team had a perfect record of no losses on any day bringing in a performance that beat both Morgan Stanley and Goldman Sachs. Its M&A team also topped the league tables for the prior year, again beating Goldman Sachs. The bank's borrowing costs are rock bottom, and its CEO was offered up as Secretary of the Treasury by none other than Warren Buffet.

None of that, however, is factoring in to the chatter. The press and airwaves are dominated by expressions of outrage by proxy advisory groups that CEO Jamie Dimon, the earstwhile Treasury secretary nominee, has the audacity of being his own boss by holding also the title of Chairman. Their distress, to be shared in Tampa, Fla., on May 21, is more broadly directed at the board as a whole comprising individuals who failed to monitor the bank’s risk management, a failure highlighted by last year’s $6 billion trading loss in the company’s chief investment office. The directors stand charged with "letting down outside shareholders."

Writing for the Financial Times, Gary Silverman offers a refreshing counterpoint. In an essay aptly named "Daydreams of supervising Dimon," Silverman concludes "that just about the only person who would be truly capable of supervising Mr Dimon at JPMorgan these days is Mr Dimon himself, and that means this column leaves him as it found him – in a lonely place."

Huygens, being a numbers man, seeks comfort in the wisdom of crowds. Yet as Jacques Anatole François Thibault, winner of the 1921 Nobel Prize in Literature observed, "If fifty million people say a foolish thing, it is still a foolish thing." Huygens, being a numbers man and being from Pittsburgh and and being an admirer of Andrew Carnegie, is less interested in what people say, and more interested in what they do (or are expected to do).

Stakeholders are generally rational. Activist investors have a point, and when a company is in trouble, things need to be shaken up. Witness the value created at JCPenny by activists investors who upon the departure of then CEO Myron Ullman and brought in Apple Inc. retail giant Ron Johnson to restore integrity to the sinking retail ship. Seeking Alpha's assessment: JCP's stakeholders must be furious that the company spent $170M of their money to hire Ron Johnson and his team...only to rack up dreadful five quarters of 15%+ year-over-year declines in comparable sales. So who's in charge now? Myron Ullman.

From a reputational value perspective, JPMorgan Chases remarkable journey over the past two years has been document here previously. At the risk of having a Karl Rove moment, Huygens opined recently on a LinkedIn blog, Boards and Advisors, that the Steel City Re Reputation Value Metrics indicated no major changes at JPMorgan Chase. Huygens shared the same with friends on the LinkedIn blog of the Intangible Asset Finance Society. Updated metrics from this past week, now only less than two weeks from the annual meeting, affirm Huygen's impression. JPMorgan Chase's reputation is in generally good standing, and the current volatility of its RVM, a non-financial measure of reputational value, is at a peer-group low of less than 1% (Chart, top, row, Vital Signs and Current RVM Volatility). The data, representing the wisdom of crowds including, but not limited to pundits and shareholder advisers, indicate that as a group, no one is expecting any surprises. Or in the words of Consensiv, an advisory group, the Consensus Trend for JPMorgan Chase reflects a remarkable coherence of expectations.

Which leads Huygens to predictions in the alternative. First, it is unlikely that there will be major changes at JPMorgan Chase's Board of Directors; second, if in the unlikely scenario there are, the stock price will become quite volatile.

Chesapeake: CEO's departure reduces risk

C. HUYGENS - Wednesday, January 30, 2013
It bears repeating: Reputational value is how the markets reward or punish a company in ways that are either joyfully or painfully transparent on corporate financials.

Reputation is an expectation, some say confidence, in an outcome. Because of the outsized influence CEOs have on a company's direction, stakeholders often (reasonably) confuse a CEO's personal reputation with a company's reputation.

Risk, a threat to a desired outcome, is equally influenced by a CEO's action. Today's Bloomberg Businessweek reports that five-year credit-default swaps on the Chesapeake Energy Corp.’s (CHK) debt dropped 72.5 basis points to 391.9 basis points (15% reduction) as of 7:30 a.m. in New York after the company announced yesterday that Chief Executive Officer Aubrey McClendon would retire. In other words, the chances of the firm defaulting on its debt is expected by investors to decrease with McClendon's retirement. All things being equal, that should translate into lower costs the next time Chesapeake rolls over its debt.

To understand how the expectations by other stakeholders -- customers, employees, vendors, equity investors, creditors, and regulators -- create or reduce value through behaviors that are equally transparent on corporate financials, read the new book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others.

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