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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Headline risk reprieve

Nir Kossovsky - Thursday, December 03, 2009
Six weeks have passed since the Chairman of the Galleon Group, the hedge fund at the center of a suspected insider trading ring, and several executives, have been charged. Three of the companies caught in this scandal are going concerns. Their executives are accused of divulging confidential non-public information. Those companies are McKinsey & Company, IBM (NYSE:IBM), and Intel Corporation (NASDAQ:INTC).

Of the three, McKinsey & Company has a widely held reputation for discretion – an intangible asset that is essential to their operational effectiveness. Last month, we hypothesized that this reputation would help mitigate McKinsey’s headline risk. Evidence of this mitigation would be fewer articles in the business and legal press relative to the other two firms.

Once again, Society member Jim Singer of the Pepper Hamilton law firm and author of the blog IP Spotlight, helped us with the analysis. Lexis Nexis searches were conducted combining 2 comprehensive databases - Business News Publications and Legal News Publications for the dates 9/3/2009-11/22/2009. The first search was for the pairing of “Galleon OR Rajaratnam.” Jim then searched the resulting articles for the additional terms of McKinsey, IBM, or Intel. 

There were no citations meeting the search criteria prior to the government announcement of allegations. Following the announcement, the data show that McKinsey’s name is less frequently associated than the other two firms with the disgraced hedge fund. This observation is statistically significant for the first three weeks of the alleged scandal.



While the findings are not conclusive—McKinsey is privately-held whereas the other two are public—these data are consistent with our general observation that companies with strong reputations based on rigorous business processes make for sympathetic actors that are treated as victims rather than culpable agents when adverse events occur. In short, reputations arising from superior intangible asset stewardship help mitigate headline risk.

NB: Statistical analysis using the Chi Square test for the five weeks of data yields a p<.03, p<.001, p<.01, for the first three weeks, respectively, and then not statistically significant differences thereafter.

Galleon's wake

Nir Kossovsky - Friday, October 30, 2009
Thirteen days have now passed since the Chairman of the Galleon Group, the hedge fund at the center of a suspected insider trading ring, and several executives, have been charged. The fund has liquidated about 90 percent of its nearly $3.7 billion portfolio of technology stocks and other securities and will be consigned to history, shortly. 

Three of the companies caught in this scandal are going concerns. Their executives are accused of divulging confidential non-public information. Those companies are McKinsey & Company, IBM (NYSE:IBM), and Intel Corporation (NASDAQ:INTC). Of the three, McKinsey & Company has a widely held reputation for discretion – an intangible asset that is essential to their operational effectiveness.

We hypothesized that this reputation would help mitigate McKinsey’s headline risk. Evidence of this mitigation would be fewer articles in the business and legal press relative to the other two firms.

Society member Jim Singer of the Pepper Hamilton law firm, and author of the blog IP Spotlight, helped us with the analysis. Lexis Nexis searches were conducted combining 2 comprehensive databases - Business News Publications and Legal News Publications for the dates 10/1/2009-10/29/2009. The first search was for the pairing of “Galleon and Rajaratnam.” Jim then searched the resulting 112 articles for the additional terms of McKinsey, IBM, or Intel.



The data show that McKinsey’s name is less frequently associated than the other two firms with the disgraced hedge fund. This observation is statistically significant. It is consistent with our general contention that companies with strong reputations based on rigorous business processes make for sympathetic actors that are treated as victims rather than culpable agents when adverse events occur. In short, reputations arising from superior intangible asset stewardship help mitigate headline risk.

NB: Statistical analysis using the Chi Square test yields a p<.03 (statistically significant).

McKinsey is mum

Nir Kossovsky - Friday, October 23, 2009
Of the various companies caught up in the Galleon Hedge Fund matter, the headline that caught our attention was from Reuters and exclaimed, “McKinsey shocked by insider-trading allegations.” It has a whiff of Claude Rains, in the role of Captain Renault, expressing shock at the gambling in Casablanca. This is why.

One one hand, McKinsey has strict standards barring its consultants from trading stocks or funds that relate to the companies they are advising, a source close to the company said. The company's partners sign off each year on the policies. On the other hand, according to the Reuter’s story, McKinsey was aggressively recruiting college graduates by offering them new investment options, including getting a stake in a pool of McKinsey clients that gave the firm equity instead of cash for their consulting services. “A slippery slope,” says Lawrence White, a professor at the New York University's Stern School of Business.

McKinsey is looking at headline risk. The Financial Times' Newssift sentiment index reports that for the past week, the 9 article in the business press on McKinsey that included the word reputation were evenly divided at 33% each positive, negative, and neutral giving a positive/negative ratio of 1.0. For the month before the scandal broke, of the 11 articles, four were positive and two were negative for a p/n ratio of 2.0. (For comparison, Johnson & Johnson (NYSE:JNJ), the reputation leader for early 2009, had a one-year p/n ratio of 8.3)

Ironically, earlier this year, consultants from McKinsey authored an article on the importance of reputation management. The article called for substantive business process controls, and highlighted the limitations of public relations. Perhaps this is why McKinsey, so far, has been tight lipped?

Hedge fund homily

Nir Kossovsky - Tuesday, October 20, 2009
Former Fed Chairman Greenspan noted last year that in a market system based upon the intangible asset of trust, reputation has significant value. Madoff aside, trust is having a hard time on Wall Street. We share two recent stories of reputation malignment (vilification?) in the Financial services sector.
 
The first, reported by the Financial Times last Thursday, is that one in five hedge fund managers misrepresents their fund or its performance to investors during formal due diligence investigations, according to research from New York University's Stern School of Business. Researchers found that the most common misrepresentations by hedge fund managers was the amount of money they had entrusted to their funds; Performance and regulatory and legal histories are also often misrepresented.
 
The second, which broke widely on Friday, involves allegations of trading on insider information at the hedge fund, Galleon Group. According to prosecutors, co-conspirators of fund founder Raj Rajaratnam include a McKinsey & Co. consultant, an IBM (NYSE:IBM) senior vice president, an Intel Corp. (NASDAQ:INTC) treasury manager and two executives from the New Castle hedge fund group of the defunct Bear Stearns.

The reputation angle obviously interests the Society. But there is more. What really interests us is how McKinsey, IBM, and Intel will manage the headline risk. Will their intangible asset risk management systems allow them to characterize the malfeasance as the product of rogue actors? Or will they be held culpable for the non-compliance of their employees?

Stay tuned.

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