In its annual meeting held on May 21, 2010, a majority of shareholders considered the executive compensation plan at KeyCorp (NYSE:KEY) and channeled Nancy Reagan. They just said no.

KeyCorp, headquartered in Cleveland, Ohio, is one of the nation's largest bank-based financial services companies, with consolidated total assets of approximately $95 billion. KeyCorp is the third U.S. company after Motorola Inc. (NYSE:MOT) and Occidental Petroleum Corporation (NYSE:OXY) that failed to get a majority support during a management-sponsored "say on pay" vote.

In the last fiscal year, KeyCorp's CEO Henry Meyer III saw a boost of 40.8% in his annual compensation to $8.7 million. For the corresponding period, the company reported a net loss of $1.335 billion. The raise in pay package came from an increase in the value of stock option grants and a large salary stock increase.

The company’s reputation has been in the doldrums. KeyCorp is a constituent of the S&P500 Composite Index. Compared to 283 other companies that are constituents of the S&P500 Composite Index – and have market capitalizations between $7 and 67 billion – the company’s Steel City Re Corporate Reputation Index ranking touches bottom.

Not surprisingly, there is no measurable intangible asset value in the company. As shown in the graph below, while the average S&P500 company’s value is about 82% intangible, KeyCorp has very little of that stuff. 

Many, such as Weber Shandwick’s Chief Reputation Strategist, Dr. Leslie Gaines Ross, have opined that the CEO is the focal point for corporate reputation. If this is the case, Mr. Meyer has some catch up work to do, quickly, for the pressure is building. On Tuesday 8 June, an investigation was announced on behalf of the long-term investors of KeyCorp alleging possible violations in fiduciary duty related to the past and future compensation of senior officers of the company.

Intangible assets are the primary source of enterprise value, and the Society’s mission is to advance best practices in their financial management through education, advocacy, and the promulgation of standards. The Society engages in several educational activities including a regular series of articles in Intellectual Asset Management magazine, regular call-in Mission Intangible Monthly Briefing, the recently published book, Mission: Intangible. Managing risk and reputation the create enterprise value, and of course, this blog. Click here to view the full menu of Mission: Intangible-branded educational opportunities.

One of the hallmarks of financial management is process monitoring through financial metrics and the collective measure of intangible asset value, reputation. Today we illustrate the value of intangible asset management with anecdotal metrics for constituents of the S&P500 Composite Index.

To recap and update, intangible assets comprise approximately 66% of the value of the median material publicly traded company. The chart below shows how the intangible asset fraction of companies over the past few years sampled from about 7000 publicly traded firms has dropped from its peak in 2007 of 78% and is now around 65% which, coincidentally, is the period median.


Using the Steel City Re Corporate Reputation Index as the reputation metric, only 61 constituents of the 10 June 2010 S&P500 Composite Index over the past 128 weeks has ranked in the top 1 percentile relative to approximately 7000 companies traded on the major western exchanges. The other 436 constituents of the current Composite Index have not held that reputation rank during this recent period. Of the 61 companies, the frequency at which they held rank in the top 1 percentile over the 128 week period is reflected in the order in which they appear in the table below, and is shown graphically on the chart. These are the reputation titans of the post-bubble period.




Berkshire Hathaway (NYSE:BRK.A) holds the distinction and lonely outpost at the far right of the graph having ranked in the top 1 percentile of all companies 97% of the time. To its left, the next three highest ranking firms comprising Colgate Palmolive (NYSE:CL), Google (NASDAQ:GOOG), and CR. Bard (NYSE:BCR)  each appeared 88.3%, 86.7%, and 85.2% of the time, respectively. 

Turning to corresponding economic performance, the 61 most highly ranked constituent members of the S&P500 Composite Index that had ranked at least once in the top 1% of the Steel City Re Corporate Reputation Index over the past 128 weeks -- Reputation Titans -- returned, as a group, -7.3% over the period compared with a negative 12.6% return for the portfolio as a whole (reflecting survivor bias) and a -23% return to the actual S&P 500 Composite Index. The remaining 436 (balance), of course, underperformed the portfolio. These data show that the Reputation Titans exhibited relative reputation resilience, a behavior fully consistent with a superior reputation and described in greater detail in the Society's book, Mission: Intangible.


Looking at the S&P500 Composite Index constituents from another perspective and dividing the group into top 15%, Mid Range Rankings, and Bottom Quartile as measured by the Steel City Re Corporate Reputation Index rankings, the top 50 most highly ranked firms over the entire period returned -8.7%, the 50 top-ranked companies that dominated the mid-range rankings returned -20.9%, and the 30 companies that essentially owned the bottom quartile for the period returned -28%. These compare, as expected, with the S&P500 Composite Index returns of -23%.


Summarizing, as shown repeatedly since 2005, there is a positive correlation between reputation ranking and economic return. Because superior reputations favorably impact pricing power, market share, vendor terms, operating costs, credit, costs, equity value, and price stability, executives seeking to maximize enterprise value would do well to concentrate on managing the intangible assets underlying reputation value.

One way to learn how to manage those assets is to become active in the Society. Why not sign up to our group on Linked-In to tap into a wealth of fresh content daily on intangible asset finance, management, policy, marketing and security? Or better still, become a member. We look forward to welcoming you.

This past Monday, the Society began publishing data from the Steel City Re RepuStars™ Composite Index. This equity markets composite index tracks companies with rising reputational metrics and draws from the S&P500™ Composite Index eligibility pool.

The purpose of publishing these metrics is to provide additional financial evidence for the value of superior reputation management. Reputation management is what the Society calls ‘intangible asset management’ when speaking to the general public. This nomenclature is captured in the Society’s book, Mission: Intangible, subtitled Managing risk and reputation to create enterprise value.

The Society’s mission is education, advocacy, and the promulgation of standards. When we provide content for general consumption, we talk about reputation rather than ‘intangible assets’. This is why. ‘Intangible asset’ is an esoteric term of accounting that once represented the corporate balance sheet equivalent of “petty cash” but now represents 70% of the value of the average company. More than a decade ago at the dawn of the knowledge economy, the term ‘intellectual property’ took on the meaning of ‘intangible asset.’ Alas, that term too is in relative decline as shown in the Google Trends chart below. (So is the term 'national security,' just to give you a reference point).



In contrast, ‘reputation’ is on the rise. It is a term that is being searched with increasing frequency. It is a term that is appearing in news stories with increasing frequency. It is a risk about which companies are fretting in greater numbers. In short, as we reported in Intellectual Asset Management magazine not long ago, reputation is the new IP.  Dowload a copy of the article here.

As April came to a close, Walmart Stores Inc. (NYSE:WMT) received bad news. The United States Court of Appeals for the Ninth Circuit, in San Francisco, ruled that the plaintiffs alleging unfair labor practices against female employees (read, unethical practices) can head to court as a class action. This decision transforms a nine year old matter into the largest class-action employment lawsuit in U.S. history.

Besides being a welcome break from the headline risk crises on safety, quality and ethics facing BP (NYSE:BP), Toyota (NYSE:TM), and Goldman Sachs (NYSE:GS), the issue provides an opportunity to test a central hypothesis held by the Society and described in detail in the book, Mission Intangible. This is it.

Reputation value is the sum of the value contributed by six key intangible assets (business processes) governing ethics, quality, innovation, safety, sustainability, and security. The assets create value cooperatively like the stones in a Roman arch; loss of any one key stone can destroy significant value.

Let’s also recap what is value. Market capitalization is the obvious one. More to the point, companies with superior reputations have enhanced pricing power, lower operating costs, lower credit costs, and higher earnings multiples. It's that simple.

Walmart has invested significant time and effort into building authentic credentials and a reputation for excellence in sustainability practices. Is its reputation for sustainability sufficient to compensate for its less-than-stellar reputation in labor (ethics)? The hypothesis would suggest that they are independent, and that failure in either could erase the reputation value created by the other. Let’s look at the numbers.



The Steel City Re Corporate Reputation Index, also described in greater detail in the book, Mission Intangible, shows that Walmart’s reputation ranking has slipped from the coveted #1 slot of the 100th percentile among 39 peers in the multiline retail sector. Over the past 16 months, Walmart has moved from the top ranking to the 94th percentile. Economically, its return on equity has underperformed both the median return of its peers (by 42%) and the S&P500 benchmark index.



In contrast, Target Inc. (NYSE:TGT), a rival whose charting in this Mission Intangible blog back in June 2009 has been the most popular post ever, raised its reputation ranking among this peer group from the 46th percentile to the 94th percentile. At the same time, it outperformed the median of its peers (by 27%) and the S&P500 index.



Also for contrast look at Walgreen Co. (NYSE:WAG). During this period, their reputation ranking rose from the 69th percentile to the 81st percentile, and it outperformed its peer group by a narrow 2%, but comfortably beat the S&P500 Index.



Last, note that the multiline retail sector, as a group, slipped in its median reputation ranking relative to the broad market. Furthermore, the variance among the individual companies comprising this sector narrowed. The sector's median reputation ranking drop stands out dramatically in contrast against Target's reputation ranking rise.

This Sunday is Mother’s Day in many parts of the world. Mother’s Day honors mothers and motherhood, and the unique feature of the mother-child relationship - unconditional love.

While there are many ways to commemorate the day festively, wouldn't your mother be happier knowing her child understood the intangible value of love? And what better way to signal unambiguously that you have internalized this lesson than to have your mother autograph your own personal copy of Mission: Intangible. Managing risk and reputation to create enterprise value? 

Buy your copy today at the Intangible Asset Finance Society bookstore. And throw in a membership, too. And while you are at it, buy your mother her own personal copy.  At the very least, she can gift it to some deserving child – your sibling -- whom she never really loved as much as you.

Happy Mother’s Day to all.

Palm, Inc. (NASDAQ:PALM) is on the block. E & Y reported that in 2007, only 30% of the value realized in M&A deals was tangible. While a smart phone is a discrete, countable, physical asset, its value is mainly intangible With the above in mind, what are the prospects for Palm?

Using the 3-element accounting-like framework favored by Society member and Member News Committee chair Mary Adams of Intellectual Capital Advisors, those intangibles are as follows:
1. Human capital – the founders, who left the company in 1998 to start Handspring, maker of the Treo, which Palm then purchased for $240 million in 2003
2. Relationship capital – agreements with cellular carriers (Sprint/Nextel initially) through which most cell phones are sold.
3. Structural capital – the business processes, patents, and methods comprising the innovation activities and marketing activities behind the solution

Using the six-element Roman arch model of reputation value as defined in the Society’s book, Mission: Intangible, the two key intangible asset drivers of reputation value for Palm are innovation and quality. Palm’s reputation is abysmal. According to the Steel City Re Corporate Reputation Index, Palm’s reputation ranking in the Computer Hardware and Peripherals sector has not been above the 33rd percentile for the past 16 months. This ~60-member sector, which includes the monotonously #1 ranked Apple, Inc., recently saw Palm drop to the 4th percentile.



Reputation is important because among other things, it confers pricing power. It is not surprising, therefore, that Palm’s two current carriers, Sprint and Verizon, heavily discount Palm’s phones. And even in the face of these discounts, Palm’s global share of smart phones has declined from a peak of 4% in 2004 to only 1.5% in 2009.

Cutting to the chase, Shaw Wu of the Kaufman Brother’s equity research firm opines, according to the Wall Street Journal, that “the company should be worth at least the $600 million to $700 million it has spent on research and marketing…” Valuing a company based on expenses related to innovation and building a brand? That’s intangible asset finance at its best!

Act on your intellectual curiosity!

If the above discussion piques your interest, here are several things you can do right now:

1. Register free of charge for the next IAFS Mission Intangible Monthly Briefing set for Friday 7 May. The conversation will feature Scott Childers from Walt Disney and Bob Rittereiser from Zhi Verden on “Process-driven reputation risk in supply chains”
2. Purchase the book, Mission: Intangible. Managing risk and reputation to create enterprise value, at the IAFS Store (or any online book retailer) 
3. Become a member of the Intangible Asset Finance Society.
4. Join our community on Linked-In.

Followers of Mission:Intangible know the mantra—reputations result from the perceptions stakeholders form about how a company manages its intangible assets. Superior reputations pay off with (i) stronger pricing power, (ii) lower operating costs, (iii) greater earnings multiples, (iv) lower beta, and (v) lower credit costs. Brands are the promises embedded in reputations. Trademarks are communications instruments that evoke brands.

David Ruder, an executive with RPX Corporation who chairs the Society’s Trademark Assets Committee, is an authority on trademarks, brands, reputation and value. In anticipation of a full article a forthcoming issue of Intellectual Asset Management Magazine, David writes about the benefits of reanimation:

In the recent financial downturn many companies have experienced extreme financial distress and some have even gone bankrupt. Because of the financial distress, many of these companies discontinued product or service lines and in the process stopped using the brands associated with the product or service lines. While some of these failed or distressed companies, product lines, or service lines may have been discontinued with little or no attention, there are many that have been high profile. Brands such as HUMMER, CIRCUIT CITY, and SHARPER IMAGE all had billions of dollars of revenues in their lifetimes, but were in serious danger of being permanently retired, never to be heard from again.

However, there are many investors, entrepreneurs, and operating companies that understand the value of brands; even the ones that look like they are dying or dead. Through the process of brand revival, many discontinued or retired brands are being brought back to life as viable and thriving businesses that consumers enjoy. Brand revival takes hard work and investment, but when done properly it can be a rewarding endeavor for those that choose to pursue the strategy.

Unfortunately, there is a small group of commentators that have cast aspersions against revived brands. They call these brands “zombie” brands (or sometimes “ghost” brands) and contend that because the revived brand is not the original, it is somehow not real. They believe that a brand that is revived by an owner other than the original owner is not authentic and can, at times, even be deceptive to consumers.

What these commentators fail to see, however, is that a revived brand is just as real as any other brand. Consumers that choose to buy products or services because of a brand will do so whether the brand is revived or not. Just like all brands, a revived brand requires product development, advertising, and marketing efforts. Brands are assets that require ongoing investment and management.

There are brands out there that can be called zombies, however. They are not ones that are available on any product or service, however. These are the brands that are discontinued yet still exist on trademark registers, corporate balance sheets, and “whatever happened to?” websites. Many of these brands have a great deal of value because consumers still remember them and may have strong positive feelings about the brands. Some business managers, however, just let these brands sit unused and often do so deliberately so that consumers are forced to choose one brand over another.

Once the economy returns to full strength in the coming years there should be many examples of brands that have been revived and grow with a strong economy. These brands will not be zombies but the realization of potential identified by savvy business managers. The commentators that deride these revived brands as zombies would rather that the brands they considered dead would just stay dead. These commentators do not understand brand value.

Intrigued? On behalf of the Society, David invites you to help his committee develop best practice standards for trademark asset management. For more information on membership, click here.

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?"

Ken Jarboe, President of Society partner Athena Alliance and Chair of the Society's Public Policy Committee has given us permission to share the following post from the blog, Intangible Economy.

As the U.S. economy evolves, intangible asset investments are becoming vital to economic growth and sustainability. But, as our new paper "Intangible Assets: Innovative Financing for Innovation" outlines, intangible assets can also be the source of financial capital. As industry has invested capital in research and development (R&D) to create new technology and advance other creative activities, a niche market of firms specializing in intangibles-based financing is springing up. Some intangible assets--traditional IP consisting of patents, trademarks, and copyrights--have been used in sale, leasing, equity, equity-debt, debt, and sale-leaseback transactions to finance the next round of innovation.

The paper outlines a number of public policy actions that can be taken to foster the use of intangible asset financing. These include streamlining the technology transfer process, developing underwriting standards to cover the use of intangible assets as collateral and making financial statements more transparent with respect to intangible assets.

The deals that have been done demonstrate that IP and other intangibles are viable assets to secure capital. Unlike other "exotic" financing vehicles, however, intangible-asset financial products are built on some of the most basic financing mechanisms. Far from exotic, they use traditional techniques in new ways to help companies innovate and grow. As the paper shows, there is plenty of opportunity to harness the power of intangibles.

The paper is a summary of our two reports: Intangible Asset Monetization: The Promise and the Reality and Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance. Published in the Winter issue of Issues in Science and Technology, the paper is also available on the Issues website.

It is water under the bridge, of course, but it is worth noting that insiders at Lehman (NYSE:LEH) thought that Repo 105 reeked of “headline risk.” And headline risk, as we have observed before, can snowball.

According to Jennifer Hughes writing in today’s Financial Times, Martin Kelly, global financial controller, warned his bosses about the “headline risk” to Lehman’s reputation if the deals were to become public. And now that the issue is public, it is snowballing.

Ms. Hughes further writes, “Lehman’s Repo 105s have attracted attention because attempts to hide assets by shifting them off the balance sheet are associated with dodgy accounting and best known for the interminable tangle of vehicles created by Enron, the failed US energy group, to hide its debts. But the reason this issue keeps rearing its head in so many guises is that the question lies at the very heart of accounting, which was originally intended to give a company’s owners a fair report of its business activities. Therefore, what goes on, and what stays off, the books is a permanent area of debate.”

Perhaps. But there is also a reputation angle to this story. In our opinion, the reason this issue is rearing its head and snowballing with the inevitable pile on of ‘litigators, regulators and Mommy bloggers’ is that it speaks to a central driver of market liquidity—trust. As former Fed Chairman Greenspan noted in October 2008, in a market system based upon trust, reputation has significant value. Linking ‘trust’ to ‘reputation’ is the ephemeral intangible asset of ‘ethics,’ for which accountants have yet to find a home.

Which is not to say that ‘ethics’ does not impact financial statements. As reported in the Intangible Asset Finance Society’s latest book, Mission: Intangible, companies with superior reputations deliver superior long-term shareholder returns by enabling (i) stronger pricing power, (ii) lower operating costs, (iii) greater earnings multiples, (iv) lower beta and (v) lower credit costs. And as for companies that do not foster conformance with ethical best practices, there are always alternatives to being a going concern. Just ask Lehman.