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.

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.

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.

We’ve discussed reputation in many forms, but all roads lead to value creation and protection against value destruction. It appears that the Chairman of UBS (NYSE:UBS) concurs and has taken steps to align management’s interests in this regard.

According to Bloomberg (Groendahl and Logutenkova, 23 April), UBS Chairman Kaspar Villiger said, “The idea behind this is that you try to evaluate the CEO according to what’s necessary for executing the company’s strategy in the long term. There are nine criteria in total, of which some shall be qualitative. Reputation is one of them. It will count more than one ninth.”

The Steel City Re reputation metrics suggest UBS CEO Sergio Ermotti, who assumed the title in November 2011, is on the right course. Relative to the 262 companies in the Bank, Holding Company, and Security Brokerages sector, the company currently ranks in the 34th percentile, up from the 31st in November 2011. Its reputational volatility is down from historic levels and all reputational vectors indicate improvement and greater stability. Relative to its peers, the charts show UBS is within the pack at this point rather than being an outlier on all key indicators.



The firm’s return on equity is only in the 21st percentile relative to peers, but the reputational metrics in this instance appear to be leading indicators of a coming trend and we anticipate improving economic returns.

We wish Mr. Ermotti the best of luck. We’ll be watching. With reputation accounting for more than 11% of Mr. Ermotti's compensation, we are confident many others will be watching too.

In this month's issue of IAM magazine, #48, the regular contribution on reputation explains how this epiphenomenon can provide management with freedom to operate. In the words of editor Joff Wild, who also recently penned a much appreciated shout out, "Although it is intangible, reputation allows businesses and executives operational freedoms that lead to very tangible results."

Now for an update from the National Association of Corporate Directors. According to their daily newsletter, NACD Directors Daily (13 July), "In an rare example of how 'say-on-pay' votes can influence companies' relationships with some shareholders," Cincinnati.com (July 12, Boyer) reports that "a lawsuit has accused Cincinnati Bell Inc.'s outside directors of breaching their duty to investors and the company's top executives of 'unjust enrichment' over pay raises granted last year." The raises range from 54 percent to 80 percent for three of the company's top officers despite a 68 percent drop in 2010 net earnings. A non-birding shareholder vote in May opposed the pay raises. "The lawsuit was brought in U.S. District Court in Cincinnati last week by attorneys for the Illinois-based NECA-IBEW Pension Fund, a Bell shareholder," the website reports. "It seeks a court order and unspecified damages on behalf of the corporation, possible return or impoundment of the pay increases, and implementation of internal controls preventing excessive compensation to the company's top executives."

We've discussed "sue-on-pay" before. And we will again. It appears compensation is evolving into a contact sport.

NB: Further to recent queries from attentive followers of this blog, Huygen's will opine on the reputational crisis gripping News Corporation (NASDAQ:NWSA) presently.

Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events, moderated by Mary Adams who chairs our Member News Committee, comprise about 45 minutes of prepared remarks backed up by presentation materials, and about 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here are some more of the leftovers.

QUESTION TO JON LOW: You talked about how we shouldn't look to the accounting profession for support on intangibles yet you also call for comparability. If we don't get this from financial data, where will we find it? What will it look like?

ANSWER: Useful, comparable data supporting the growing economic importance of intangibles will most likely come from practitioners who perceive a financial benefit to themselves. Historically, this is where such innovations have come from as opposed to regulators or stolid, conservative and internally conflicted practitioner groups like the accountants. In the case of comparable data for intangibles we are already seeing growing interest in certain segments like reputation, brand and R&D as a proxy for innovation. Sustainability in its various manifestations is also gaining as a topic of interest.

From these basic roots, successive branches will grow as more factors become important to more industry segments. For instance, once M&A activity revives, data on post-merger integration success or failure – already a subject of considerable research – will probably also blossom.

It would be nice to think that some supra-national organization like the UN or OECD will take the lead, but they see no financial incentive or moral imperative to do so. Self-organized groups like WICI might have been able to lead had they adopted a more open-source approach, but they appear to be pursuing the secretive ‘let’s corner the market and see how much we can charge for our insights’ approach that has failed repeatedly in the past. Any group wedded to a particular technology or set of what they hope will be patented-able processes are similarly doomed because the market is simply too dynamic and unmanageable at this stage. Again, this is not a philosophical, political or doctrinal point of view, it is simply a reflection of natural phenomenon based on historical experience.

When comparable data emerge I believe they will look like the sort of ratios and benchmarks that managers use as a practical means of evaluating their performance. This is in contrast to the increasingly ambiguous or obfuscated metrics served up by GAAP or international accounting standards. The basis of intangibles importance to managers is their usefulness in evaluating and predicting performance, not in enabling arcane acts of financial sleight of hand. It is this usefulness that has prevented their oft-predicted demise and will support their ultimate adaptation.

Jon Low.
Predictiv

QUESTION TO NIGEL PAGE: You predicted a convergence of IP and IA/IC. I agree with you although in my experience, many folks in the IP space have a very strong prejudice that leads them to think (and often say) that intangibles outside of traditional IP (patents, trademarks, copyrights and trade secrets) have limited value. How do we cross this chasm?

ANSWER: I suspect that the events of the coming few years will see this prejudice start to disappear. Most organisations are likely to refocus their priorities as they emerge from recession and, as they do so, they will begin to pay far greater attention to the whole range of intangible assets they own, as well as the potential for monetising these assets. At the same time, CIPOs (or equivalent) will increasingly realise that the best way to secure C-suite attention for their efforts will be to make sure that they incorporate IP into a broader reputation-based 'package'. CEOs will sit up and pay attention to IP if and when they can be made to understand that it is a cornerstone of their corporate reputation, and not a techy side-avenue that's best left to in-house counsel.

Nigel Page
Intellectual Asset Management Magazine

While the CEO contributes materially to a company's reputation, the products and services also speak for themselves. This is true even when the CEO is a founder and a lightning rod for controversy. Consider John Mackey, CEO, Whole Foods Markets (NASDAQ:WFMI).

In late summer, we shared that he had courted controversy with the left-leaning segment of his customer base through a strongly worded op ed in the Wall Street Journal. We speculated about the reputation effects. On October 3, he reappeared in the Wall Street Journal in an interview that markedly softened the tone of the August writings. Last, at the end of last month, he finally agreed to relinquish the role of Chairman under pressure from a pension fund-based investment group.

Let's look at the numbers courtesy of Steel City Re , Big Charts.com and the FT's Newssift.com. Over the past twelve months, Whole Foods has had a volatile ride on the Corporate Reputation (IA) Index. It entered the year below the 40 percentile, and exited at about the same level having touched the 90th percentile in late October and diving below the 20th percentile in February. Meanwhile, its equity has returned to stakeholders about 140% for the year while the mean of the 24-member peer group matched the S&P500 returns of around 20%. Note the August 2009 dip on both the reputation index and the market cap.

Compare and contrast this extraordinary return for a company with a controversial CEO and a volatile corporate reputation with the returns of one of the highest reputation-ranked Food and Staples Retailing firms this past year, Costco Wholesale Corp (NASDAQ:COST). Its CEO, James D. Sinegal, is a quiet man, relatively speaking. The Steel City Re Corporate Reputation (IA) Index shows values in the 90th percentile or greater, excluding an early September 2009 dip. Yet the 12-month returns, while positive, are underperforming the S&P 500 by 13%.

With respect to sentiment, over the past 12 months, Newssift reports that of the 238 articles on Whole Foods and its high profile CEO, 32% were positive and 21% were negative for a ratio of 1.5. Of the 99 articles on Costco and its lower profile CEO, 35% were positive and 16% were negative for a ratio of 2. Yet Whole Foods outperformed Costco by a factor of 20. What gives?




There is a simple explanation -- reputation resilience. The financial benefits of Costco's high reputational standing are best seen over a two year window in the stock price chart below. While the markets suffered greatly in 2008 through March 2009, Whole Foods suffered massively with a 75% loss in market cap at its low point. Costco, however, outperformed the market over this two year window with a 24 month loss of about 7% compared to the S&Ps loss of about 22% and Whole Foods' loss of around 25%.

The dark lining to the silver cloud of reputation resilience is that there is less ground lost, and therefore less ground that can be made up. The polish on the silver cloud, however, is in cost of credit. Firms with superior reputations exhibit resilience and lower volatility. Firms with superior reputations have lower betas, lower costs of credit, and credit protection (credit default swaps). Whole Foods' beta is 1.19; Costco's is 0.79.

Nell Minow, editor and co-founder of the Corporate Library, a provider of corporate governance research, ratings and investment risk analysis, penned a Financial Times op ed piece on 2 October suggesting that going forward, fund managers and analysts will look at four new fundamental elements “that will become as important as cash flow and return on investment.” To no surprise around here, these four comprise intangible asset metrics and business processes. While we do not necessarily agree with Minow's views, her comments are worth noting. This is what she wrote, briefly:

1. Accounting: Investors will demand better information about human and intellectual capital, risk management processes, and sustainability. Our friend, Ken Jarboe of the Athena Alliance, has been delving into this topic for years. You can link to the Athena Alliance here.

2. Boards of Directors: Investors will demand greater competence and selfless engagement from members of the Boards of their companies. They will want from Directors what private equity firms demand of early stage company executives: "skin in the game." This notion compresses to the concept of Governance, about which the Society has organized a Committee chaired by Cathy Reese. Without leaving with us a pound of flesh, you can download her 6 Feb 09 "how to" presentation on this subject from our Events page.

3. Compensation: We read Minow’s comments in this light: executive compensation must better align the interests of senior management with the long-term interests of the firm and its stakeholders. Compensation processes, writes Minow, are a key indicator of risk. While we still see benefits in incentives and material compensation, notwithstanding the growing chant of mobs with pitchforks, we like the part in Minow's piece about processes and risk management. In fact, we like anything that links risk management to overall corporate reputation. This is especially when a company uses financial instruments to signal superior risk management. The Society presented a Mission:Intangible Monthly Briefing on Risk and Reputation Management 10 July 09 that you can download from our Events page.

4. Investors: Going forward, investors will look to see if the existing investors are providing sufficient oversight to ensure that the Board of Directors is providing sufficient oversight to ensure that management is providing sufficient oversight of the firm’s operations. Did you follow that? The business process is oversight; the intangible asset affected is trust. To us, the take home message is this. The greater the trust (a product of transparency), the less oversight burden for all. And how can investors signal trust? According to Minow, investors can signal trust by being "overweight relative to the index." In other words, extra skin in the game. See #2 and #3 above. 

The bottom line is this. Investors will seek companies that have their business processes under better control, can quantify and report the value of these proceses to their stakeholders, can manage their risks, and can signal their material conformance with the preceding  through non-traditional channels. The Society provides a working environment for best-practices discovery for executives seeking to accomplish the above. Won't you join us?

In the world of intangible asset management and value, there are those who argue that the CEO's reputation is the main driver of corporate intangible asset value. We touched on this a few weeks back in the context of Whole Foods and their outspoken CEO, John Mackey. While we agree that the CEO alone can impact reputation-linked value, the magnitude is often far less than might be expected.

The Chicago Tribune posted a recent story titled: More CEOs cast themselves in company commercials: Corporate commercials: GM, Walgreens, Sprint put executives on the air, but effect is debatable. The short article includes a quote from Jon Baskin who spoke at our 2008 Fall Conference and is worth a read. We thought we would cut to the chase on motivation. The Tribune reports that "GM is trying to resurrect its image after a trip through bankruptcy court and a government bailout. Walgreens is undergoing a marketing makeover as it aims to return to steady profit growth. And Sprint is attempting to stem the loss of subscribers." The two year equity returns, shown below, speak volumes.



In the chart above, General Motors (NYSE:GM) is blue, Sprint-Nextel (NYSE:S) is in red, Walgreens (NYSE:WAG) is in black, and the S&P 500 index is golden yellow. We have looked at both General Motors  and Sprint  in the past and noted significant reputation losses. We have also shown in our forthcoming book, Mission:Intangible, that the business processes driving quality, integrity etc. are the primary sources of reputation value. The role for the CEO is to champion value-creating best intangible asset management practices.

But, fundamentally, we are empiricists, so we'll return in a few months to gauge effectiveness of the "CEO as brand" strategy.

John Mackay, CEO of Whole Foods Market, Inc. (NASDAQ:WFMI), is no stranger to controversy.  Two years ago, Wall Street Journal journalists David Kesmodel and John R. Wilke discovered that John Mackey had been posting comments on the Yahoo Finance website using the pseudonym Rahobed, an anagram of his wife’s name Deborah, for eight years, boosting his own company and berating his nearest competitor Wild Oats. At that time, Harvey Pitt, a former Securities and Exchange Commission chairman, told the Wall Street Journal “It’s clear that he is trying to influence people’s views and the stock price, and if anything is inaccurate or selectively disclosed he would indeed be violating the law." He added that "at a minimum, it’s bizarre and ill-advised, even if it isn’t illegal."

The current fracas began 11 August when Mackay wrote an op-ed piece in the Wall Street Journal. Mr Mackey began his article with a quote from Margaret Thatcher and went on to add that Americans do not have an intrinsic right to healthcare - an idea strongly at odds with the views of a large proportion of Whole Foods' customer base. The response from the customer base has been swift and negative. Massachusetts-based playwright Mark Rosenthal's "Boycott Whole Foods" Facebook page has so far attracted 28,000 fans, including supporters in the UK and Canada.

As part of their damage limitation strategy, Whole Foods' in-house public relations division has created a forum on its website for customers to discuss the issue. There are more than 18,000 posts, compared with 63 posts on the dairy-free forum. On Newssift, the beta news filtering engine of the Financial Times, the sentiment ranking of 11 articles written in the 15 days  since 11 Aug covering Whole Foods and Reputation included three rated "negative" while the 11 articles covering the same topic written in the 15 days prior to 11 Aug were all positive or neutral.



With equity up 60% over the past year, while the S&P is still down 20%, Mackay may believe he has the reputation equivalent of "mad money." On the other hand, Whole Foods'overall reputation metrics and ROE relative to their peers in the Food and Staples Retailing sector were volatile and generally below average for most of the past year, and Whole Foods' share price is currently $28, more than 60% below its all-time high at the end of 2005.



The Intangible Asset Finance Society has consistently opined that the CEO, while an important element of a company's reputation, is only as good as the people and systems that drive quality, safety, security, ethics, sustainability, innovation, and ethics. Whole Foods appears to excel at all, so it remains to be seen what the reputation impact will be from a CEO whose personal values appear to be at odds with those of his customers.