Warren Buffet is well known and much respected for his earthy aphorisms. He is admired for his lofty valuation. Berkshire Hathaway (NYSE:BRK), an insurance-based conglomerate has been rewarded historically with outsized intangible asset values owing to the reputation of its founder. Those valuations are approaching the median of the Property and Casualty Insurance sector and the polish continues to come off.

What is the evidence? The man who made reputation management a "household" phrase in the C-suite and boardroom, who famously said, "“If you lose dollars for the firm from bad decisions, I will be very understanding. If you lose reputation for the firm, I will be ruthless,” is named in a shareholder suit alleging -- you guessed it -- loss of reputation for the firm.

The National Association of Corporate Directors NACD Daily (April 20), a compilation of other news sources, shares that "Warren Buffett and the rest of Berkshire Hathaway Inc.'s board of directors were sued by a shareholder Tuesday over presumed heir apparent David Sokol's trading in the stock of a company that was later bought by Berkshire," the Montreal Gazette (April 20, Hals) reports. Sokol, who purchased shares of Lubrizol Corp. before pitching the company as a possible acquisition, was also named in the lawsuit. He resigned from Berkshire Hathaway last month. "The lawsuit filed by Berkshire shareholder Mason Kirby in Delaware's Chancery Court calls for Sokol to give up any improper gains to Berkshire," the Gazette notes. "It also calls for Buffett and other directors, including vice-chairman Charlie Munger, to compensate Berkshire for the damage they caused to the company's reputation and goodwill."

In total, the Omaha World-Herald (April 20) states, Sokol purchased just over 96,000 shares of Lubrizol in early January prior to recommending that Omaha-based Berkshire acquire the company. In the suit, Kirby charges: "Sokol knew that Buffett would closely consider and likely take his recommendation. As a result of Sokol's unethical behavior, Berkshire suffered significant reputational losses and other damages."

The metrics affirm that something is up. The reputational value changes to the Steel City Re Corporate Reputation Index rankings noted two weeks ago persist, and both the reputation volatility and vector trends are on track upwards and downwards respectively.

Most telling, however, is that the loss of intangible asset fraction now makes the Company look like a typical property-casualty insurer. Sure, relative to other conglomerates, the Company's intangible asset fraction of some 10-20% was materially below the peer group's median. But seen as an insurer, the Company had a 20% higher valuation.

That valuation ascribable to intangibles, what we call for lack of a better term "reputation," is disappearing quickly (see asterisk below). Berkshire Hathaway's lofty intangible asset valuation is coming down to earth.
 

The Intangible Asset Finance Society is absorbed with issues at the interface of finance, risk, and the six major business processes that drive reputation: ethics, innovation, quality, safety, sustainability, and security. Today's note, courtesy of Society member Bruce Berman, CEO of Brody Berman Associates, Inc., a specialized management consulting and communications firm, is exemplary of core Society interests. Bruce writes,

In a story that received surprisingly scant media coverage, an appeals court has decided that two insurance companies must provide defense coverage to Hyundai against patent infringement claims by a non-practicing entity (NPE), also known as a patent troll, because the company’s policy covers advertising injury. As reported by the Courthouse News Service and IP Law 360 on April 7, the federal appeals court reversed a lower court decision when it ruled that Hyundai Motor America (SEO:011760) is entitled to defense coverage by National Union Fire Insurance Co. of Pittsburgh, Pa.,  a unit of AIG.

The case involved a patent infringement suit over an advertising method that ended with a $34 million verdict against the automaker. The U.S. Court of Appeals for the Ninth Circuit ruled Monday that Judge James Selna of the U.S. District Court for the Central District of California erred when he granted summary judgment to National Union and American Home Assurance Co. on the grounds that patent infringement does not constitute “advertising injury” for the purposes of an insurance policy.

As reported in IPL360 “ Gene Schaerr, a partner at Winston & Strawn LLP who represented Hyundai, called the ruling a ‘tremendous victory.’ Schaerr stated that the ruling is significant not only for Hyundai, but for a large number of other companies with similar policies that cover advertising injury. "The insurance industry has been taking the position that such policies don’t apply to patent infringement and other alleged wrongs involving Web sites,” he noted. The case began in 2005, when Hyundai was one of 20 automakers sued by patent-holding company Orion IP LLC, now known as Clear with Computers LLC, in the Eastern District of Texas over a patent for a method of generating customized product proposals.

Bruce adds, "I wonder how many companies are aware that some of their existing insurance coverages may fund IP defense if not liability?"

The IAFS launched its 2010 membership drive this past week. This is why. On February 28, new US SEC regulations will drive into the boardrooms risk, reputation and intangible asset management. 

You have a decision. Will you be at the table or on the menu?

These regs mean that every board member, in fact every top executive, can expect major new challenges. Members of the Intangible Asset Finance Society (IAFS) will be prepared. Here’s how:

1. Thought Leadership. The IAFS is the only interdisciplinary Society of professionals committed to the financial exploitation of intangible assets. That translates into enhanced pricing power; lower operating and credit costs; and higher net incomes and earnings multiples.

2. Risk Management. A lost reputation can destroy a firm overnight. IAFS can keep you up to date with risk management strategies for ethics, innovation, quality, safety, environmental sustainability, and security.

3. Preferential Pricing. Society members receive preferential rates for IAFS products at our new store and discounted registration to various professional meetings. Discounted registrations for the March ICAP Ocean Tomo meeting in San Francisco and the June IP Business Congress in Munich, for example, are now offered.

4. Incentive Premium. Sign on for your academic or corporate membership including payment by March 15 and receive a complementary copy of the IAFS’s latest book, Mission: Intangible. Managing risk and reputation to create enterprise value (a $29.95 value).

Click here to learn how our strengths in Thought Leaders and Risk Management, financial benefits such preferential pricing, and premiums such as the book shown at right make joining the Society today an offer you can't refuse.

Cadbury plc (NYSE:CBY), Kellogg (NYSE:K), Mattel (NYSE:MAT) are iconic firms whose products, cash flows, and reputations have been sullied by their business partners through ethical breaches including melamine in milk, salmonella in peanut butter, and lead paint. These three are but a sample of firms afflicted by an epidemic of trading partner (third party) risk who have placed their corporate reputation at financial peril.

Risk & Insurance magazine's senior editor, Dan Reynolds, reviews the Society's conference call from 3 April with the leading question, "Imposing best practices on trading partners today is considered vital, but how does one secure an increasingly global trading community?"  He then brilliantly summarizes Robert Rittereiser's hour-long presentation in a short, entertaining and accessible article.

Rittereiser knows risk. As Reynolds summarizes, "In Rittereiser's deep past, he was a chief financial officer and chief administrative officer of Merrill Lynch & Co. and a president and CEO of E.F. Hutton. On Wall Street, according to press coverage from his glory days, he had a reputation as a guy people hired to solve problems. These days, he is on the board or serving as an officer with several risk management companies, including the Pittsburgh, Pa.-based companies Zhi Verden and Steel City Re."
 
To link to the the Risk & Insurance article, click here. To acess the original slides from the Intangible Asset Finance Society call or inquire about purchasing a recording, click here.

Dear Reader,

Beginning this week and with surprising regularity, the Society will post a quantitative and qualitative analysis of the intangible asset management implications of a current news story involving a publicly traded company. These analyses will draw on IA index data published by Steel City Re. Periodically, the Society will also post announcements to supplement the monthly news alerts, the quarterly newsletter, and the bimonthly publication in IAM magazine.

As always, the Society welcomes your comments and feedback.

Nir Kossovsky
Executive Secretary