It is significant that there is little public gloating from other auto manufacturers as Toyota Motors’ (NYSE:TM) leadership globally offers mea culpas. Although it is Toyota’s reputation that is melting under the heat of headline risk, competitors are only too aware that the next tolling of the bell could be for them.

This is why. While the damaged intangible assets are three of the big six: ethics, safety, and quality, the underlying problem is the global supply chain. According to Bob Rittereiser, CEO of Zhi Verden, a supply chain systems and information management company, “the stark reality today is that the global supply chain is a business operating system with global reach, thousands of participants, established practices, government requirements, blazed paths, known bottlenecks and many known risks, yet no one is in charge!” Or, said differently by John Hurrell, Chief Executive, Association of Insurance and Risk Managers, “The complexity of supply chains puts your reputation in the hands of the lowest common denominator.”

Reputation drives intangible asset value. As reported in Mission: Intangible -- Managing Risk and Reputation to Create Enterprise Value (IAFS with Trafford Press, March 2010), research shows that superior reputations pay off with (i) pricing power , (ii) lower operating costs, (iii) greater earnings multiples, (iv) lower beta (i.e., stock price volatility) and (v) lower credit costs. And when reputation is damaged, these benefits are lost. All told, we estimate the reputational impact, so far, to be a $2 billion cost to Toyota's earnings and a $25 billion cost to its market capitalization.

Previously we shared Toyota's reputation metrics from the Steel City Re Corporate Reputation Index. We take time out from our membership drive to offer this financial breakdown shown at left.

Legend. Income Statement Impact (values in $‘000). Lost sales and a 3% loss in pricing power will reduce Toyota’s gross profit by around $900 million. Costs associated with the worldwide recalls, litigation, insurance subrogation, and regulatory compliance will cost at least another $500 million. The lower credit ratings will increase borrowing costs by at least another $71 million, and non-cash depreciation expenses associated with a 3% write down of Toyota’s automobile asset base will reduce earnings by another $540 million. Data source: Steel City Re.

Join Us

If the above intrigues you, frightens you, or challenges you to learn more, look no further. The Intangible Asset Finance Society wants to be your business resource. Join us and be part of an organization that provides a wealth of educational materials to further your executive career.

Innovation: Hot Policy and Practice Issues

Be sure, by the way, to register for a complimentary seat at the 5 March Mission:Intangible Monthly Briefing, held by phone at 12h00, EST. It's an innovation smack down. Athena Alliance President and intangible asset policy expert Kenan Jarboe goes head to head with Steel City Re's Judith Giordan, Managing Director of IA Finance and former senior technology executive with Pepsi, Henkel, International Flavors & Fragrances, and Polaroid. Yes, as always, registration is complimentary and slides are already posted on the website events page.

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.

Headaches. In case you've been unplugged this past year, Toyota Motors Corp (NYSE:TM) is experiencing an intangible asset value meltdown. Highly valued behaviors that became watchwords for Japanese manufacturers—ethics, quality, safety—appear to have recently fallen out of favor at this iconic firm.

It's been a few weeks since we looked at the automobile sector, and we will give this topical sector a robust treatment in our regular corporate reputation series in IAM Magazine issue 41. For now, a teaser.

At the of end of Q1 2009, the Steel City Re Corporate Reputation Index showed a precipitous decline in Toyota’s reputation relative to a sample of large publicly traded firms on the US exchanges. Honda Motors (NYSE:HMC), a Japanese-headquartered competitor, is one of the reputational beneficiaries. Its all relative. Shown in the charts below, the Reputation Index metric for TM drops from the 80th percentile to the single digits and generally holds there for the balance of 2009. HMC, on the upswing from early 2009, peaks at the 90th percentile before ending the year 30 percentage points net up at around the 50th percentile.

As for economic returns over this same period, TM rewarded its shareholders with a 45% ROE (S&P was up ~21%). HMC rewarded its shareholders with an 80% ROE.

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

For the few remaining skeptics who read the phrase 'intangible asset finance' as a joke without a punch line, consider this. In the Friday 8 January issue of the Financial Times, Gillian Tett noted that in recent months,

“some of the brightest minds at Moody’s rating agency have been mulling a fascinating question: should they introduce a formal rating of ‘social cohesion’ in sovereign debt indices, when they judge whether a government is likely to default on its debt—or not?”

In other words, if pressed for cash, does a country have enough political and social ‘cohesion’ to make truly tough choices—cutting services or raising taxes—without fomenting revolution? And how do you characterize that risk in a spreadsheet? Hardly a laughing matter, these intangibles, no? 

Dearest Reader:  If the above is winning you over, consider joining the Society and helping us create a rational framework around these critical intangible asset issues. Learn more about us at www.iafinance.org.

About one year ago, Heartland Payments Systems (NYSE:HPY) reported a record-breaking security breach. We reported previously on this event and its economic consequences. In today's note, we look quantitatively at the reputation effects of this breach and contrast them with two of Heartland's customers, Mastercard (NYSE:MA) and Visa (NYSE:V), who sued Heartland for damages. The intangible asset financial management point we wish to make is that there are useful financial metrics to help executives manage risk and reputation to create value from their intangible assets.

Let's begin with the Steel City Re Corporate Reputation Index. The fall in Heartland's reputation in January 2009 exhibits the typical cliff effect associated with events that speak to the heart of a company's intangible asset value -- in Heartland's case, data security. Contrast Heartland's reputation with Mastercard, a firm whose Steel City Re Reputation Index standing is pegged at the 100th percentile for most of the past year. Not surprising, Mastercard rewarded its stakeholders during this period with an above average 76% return on equity relative to both the S&P 500 index (20%) and the median return of the 72 companies in the IT Services sector (60%). Visa, with a public offering less than 2 years old, shows a climbing reputation index with values in the high 90's percentile, but its return is slightly less that the median of its peers. We'll call this less than above average performance the results of the hangover from Visa's IPO.



Let's look quickly at the book values. Heartland booked its loss in intangible asset value at the end of March, about 10 weeks after the equity markets panicked. Its intangible asset value dropped from around 100% of enterprise value to 70%, but has been climbing since. In contrast, Mastercard's intangible asset value has been climbing steadily to the 100% mark, while Visa showed some volatility over the year and ended up in the mid 90's.

To kick off the new decade, on Friday, January 8, we are hosting a live panel discussion among Society committee chairs about the critical intangible asset issues we will face in the '10s. Each of our chairs working in a different segment of the intangibles market will share their ideas on the most important issues. Our panel includes Scott Childers, Walt Disney Company; Marc Lucier, Deutsche Bank; David Hetzel, Motorola; Jon Low, Predictiv; Cathy Reese, Fish & Richardson; David Gould, Buchanan Ingersoll; Andy Gibbs, Andy Gibbs; Nigel Page, IAM magazine; and Judy Giordan, Steel City Re.

You too can participate in this special Mission:Intangible Monthly Briefing. You can register for free, and slides will posted on the website in advance of the event. Questions submitted by the audience in advance or during the broadcast will be fielded and addressed.

But we thought we would also reach out to a broader audience in the blogosphere and Twitterdom. We're talking to you. You may not be able to tune in to the Briefing, but you are interested in intangible asset finance. What do you think are the critical intangible asset issues for the coming decade? Please share your thoughts through comments on this post and help us spread the word about the discussion. If communicating by Twitter, please include #IAFS in your tweet. We will share highlights from the comments in the call as well as in follow-up posts on this blog. Or send us your questions directly at questions@iafinance.org.

We look forward to hearing from you and working with you in the coming decade to help spread the word about excellence in intangible asset management and corporate reputation.

And to all, best wishes for a happy, prosperous and new year.

Mary Adams, Moderator, M:I Monthly Briefings
Nir Kossovsky, Executive Secretary, IAFS

Operating costs such as internal frictional costs are the bane of any executive accountable for the bottom line. True, they can be cut – usually through workforce reductions – but the long-term effects on surviving employees may include net losses in productivity and even greater internal frictional costs.

Here is good news, executives. There is a proven strategy for lowering internal frictional costs. This is it. Be ethical. Be sustainable. Be safe. And be known for it.

In other words, all you need to do is apply the best practices found in other companies that are superior stewards of their intangible assets – the business processes that lead to reputations for ethics, safety, quality, innovation, security, and sustainability. Companies that follow these practices tend to out perform their peers and better reward their shareholders.

The relationship between these business processes, reputation, internal frictional costs, and value creation are illustrated on a webpage of one of our members, Steel City Re, a leader in risk and reputation management. The latest data affirming these principles comes from Kelly Services, Inc. (NASDAQ: KELYA, KELYB), a world leader in workforce management services and human resources solutions.

According to the Kelly study announced late last month,

Major public issues such as a company’s reputation for strong ethical practices have become critical factors in choosing where to work, even to the point where many employees are prepared to sacrifice pay or promotion in order to work for organizations that are actively engaged in good social responsibility practices. More specifically, concerns about ethical behavior outweigh concerns about the environment by all generations, when making employment choices.

Here are some other key findings:

• Almost 90 percent of respondents say they are more likely to work for an organization that is considered ethically and socially responsible, something that is consistent across all age generations.
• 80 percent are more likely to work for an organization that is considered environmentally responsible, a figure that is considerably higher among older age groups.
• In deciding where to work, an organization’s reputation for ethical conduct is considered ‘very important’ by 65 percent of Gen Y, 72 percent of Gen X, and 77 percent of baby boomers.
• 46 percent of Gen Y would be prepared to forego pay or promotion to work for an organization with a good reputation, rising to 48 percent for Gen X and 53 percent for baby boomers.
• In deciding where to work, policies to address global warming are considered ‘very important’ by 31 percent of Gen Y, rising to 35 percent among Gen X and 36 percent for baby boomers.

Here's the action part. Want to cut operating costs? Ramp up your company’s reputation for ethics, sustainability, safety, etc. Become a superior risk and reputation manager.

Want to know how to do it? Join the Intangible Asset Finance Society. We provide a forum for executives to discover better ways to increase the visibility, transparency, and value of intangible assets. These assets comprise 50% of the average company's value. Click here for information on membership and affiliate with us on LinkedIn.

The headline risk de jour is being realized by Maclaren, a premier British parenting lifestyle company “that produces the world’s most safe, durable, and innovative and styling baby buggies…” You get the drift from their website lead-in.

On Monday, U.S. Consumer Product Safety Commission (CPSC) announced the recall of some 1 million Maclaren strollers that were released nationwide from 1999 through November of this year. This is why. Maclaren received reports that 12 children had their fingertips amputated after they placed their fingers in the hinge where the stroller folds.

The blogosphere is active. Some parents are outraged, as would be expected. But the story is getting significant mainstream news uptake and that means a greater range of stakeholders will be impacted. This morning, for example, the Financial Times had a banner ad above the fold and below the masthead leading to an op-ed piece on page nine, “How not to take care of a brand.”



Safety is one of the six key intangible assets that support the Roman Arch of corporate reputation. Safety is the state of being certain that a set of conditions will not accidentally cause adverse effects on the well-being of people or the environment. The safety issue has grown into a reputation-driven existential issue at Maclaren. There are several reasons.

1. There was a design problem. The product design did not anticipate certain forms of use. Children walking alongside and using the strollers for support may hold on to the product at the amputating hinge.
2. The design problem could have been addressed at any point in time post-market release with a simple engineering fix: a hinge cover.
3. There was a surveillance problem. Safety is a core asset for a company that serves children and their parents. The company was not monitoring for indications and warnings of safety problems.
4. There was a preparedness failure. The company had no crisis management system in place.
5. There was a failure of execution. The company’s response to the crisis failed to conform to well established crisis management best practices:
   1. Instead of empathy, the company offered statistics
   2. Instead of contrition, the company suggested that parents were at fault for using the strollers as walkers rather than push carts
   3. Instead of reaching out to all stakeholders with the engineering fix (see #2), the company focused their attention on the US market (even though they are UK-based and sell worldwide)
There is a take home message. Even in private companies, reputation management may be one of the best investments an executive team can make. Join the Society and learn more about increasing, protecting, and restoring intangible asset value.

Among the educational services offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events 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. With this month’s M:I briefing, we begin serving answers to those leftovers on the first Monday after the event.

On Friday 6 November, Judith Giordan, Managing Director with Steel City Re, a Senior Advisor to the National Collegiate Inventors and Innovators Alliance and formerly, a Vice President with International Flavors and Fragrances, Pepsi Co, and Henkel, presented evidence that there is significant intangible asset value in diversity. She also addressed strategies for asset monetization. Last, she answered questions from the many listeners. The presentation and audio recordings of the session can be downloaded from the Society's events page. Here are the leftovers.
 
QUESTION: What would you say from the data are the top three concepts executives should repeat as a mantra for creating enterprise value from diversity?
 

1. There is a valid and documented BUSINESS CASE for the value of diversity and its linkage to building corporate value and reputation – tangibles and intangibles. There is no more need to validate this case. There is a need to take action.
2. To benefit from the value of diversity, PROCESSES that foster conformance and not programs for compliance must be built, nurtured, measured and improved – and leaders at all levels should have fostering diversity as a part of their performance goals linked to and not separate from business performance goals.
3. Follow the PLATINUM RULE: Do unto others (in this case women) as they would be done unto not as senior leadership believes is good for them. Use the conformance process as a means for defining the nexus of success requirements of women to move into leadership positions and the business and use this nexus as the basis to build and measure opportunities for mutual growth.

QUESTION: Are there data on the composition of the boards of companies with the more spectacular failures; e.g., Enron, Lehman, etc, and do these data support your model of the magic of 3 women?
 
First and foremost I want to be sure no one thinks I am trying to “take credit” for a model of 3 of any kind. I’m simply reporting data developed in surveys by organizations such as McKinsey, Catalyst and Pepperdine University – to name a few. My role in this is to summarize the data and attempt to draw constructs from which we can all learn and benefit going forward for enhancing corporate reputation and building a solid business case for the value of diversity – in this case gender diversity.

That said, IF my ability to surf the Internet is correct, the data below speak for themselves as to the question. Neither Enron, Lehman Brothers nor AIG had three women on their Board. 2 at max – for AIG; 1 each for Enron and Lehman. Indeed it would appear that: Lehman had no women in Senior Management positions either. Those who can surf better than I, please correct if I have this wrong.

Enron Board -17 members with 1 woman

Lehman Brothers Senior Management: no women
o Richard S. Fuld, Jr. - Chairman and Chief Executive Officer
o Riccardo Banchetti - Co-Chief Executive Officer, Europe and the Middle East
o Jasjit S. Bhattal - Chief Executive Officer, Asia-Pacific
o Gerald A. Donini - Global Head of Equities
o Eric Felder - Global Co-Head of Fixed Income
o Scott J. Freidheim - Co-Chief Administrative Officer
o Michael Gelband - Global Head of Capital Markets
o David Goldfarb - Chief Strategy Officer
o Alex Kirk - Global Head of Principal Investing
o Hyung S. Lee - Global Co-Head of Fixed Income
o Stephen M. Lessing - Head of Client Relationship Management
o Ian T. Lowitt - Chief Financial Officer and Co-Chief Administrative Officer
o Herbert H. McDade III - President and Chief Operating Officer
o Hugh E. McGee III - Global Head of Investment Banking
o Christian Meissner - Co-Chief Executive Officer, Europe and the Middle East
o Thomas A. Russo - Vice Chairman/Chief Legal Officer
o George H. Walker - Global Head of Investment Management

Lehman Brothers Board of Directors: 1 woman
o Richard S. Fuld, Jr.
o Michael L. Ainslie
o John F. Akers
o Roger S. Berlind
o Thomas H. Cruikshank
o Marsha Johnson Evans
o Sir Christopher Gent
o Jerry A. Grundhofer
o Roland A. Hernandez
o Henry Kaufman
o John D. Macomber

2007 Board of AIG: http://www.ezodproxy.com/AIG/2008/AR2007/HTML2/aig_ar2007_0052.htm
• 2 women 

ADDITIONAL INFORMATION
Packages comprising the audio recordings of all Mission:Intangible Monthly Briefings and their associated slides, including the 6 Nov 2009 program described above, can be purchased from the Society. Please visit the events page to obtain more information on a specific program, or contact the Executive Secretary.