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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This Week at Lake Reputation-be-gone

C. HUYGENS - Friday, July 25, 2014
"It was hardly a quiet week at Lake Reputation-be-gone," Garrison Keeler might have said. "Walgreen, McDonald's & Yum!, and current poster-child GM had their respective moments in the sun...again."

Walgreen's issue is an ethical one. The company whose motto proclaims it to be "the pharmacy that America trusts" would just as soon not pay America $4 billion in taxes over the next five years. The company is now deciding whether to take advantage of the US tax law loophole that would reward it substantially with a lower tax base were it to acquire controlling interest in a Swiss-based company and nominally relocate its headquarters overseas.

McDonald's and Yum! were apologizing for supply chain issues that again raised questions of food quality and safety in the Chinese operations. Earlier this week, Chinese regulators closed the Chinese division of an Illinois-based good supplier (OSI) after a TV report showed workers picking up meat from a factory floor and mixing expired lots with fresh lots of meat. Upton Sinclair would have been proud.

GM announced six additional automobile recalls this week bringing its total for the year to 60 announcements covering 29 million cars worldwide. Quality and safety issues are at the forefront, but they are not all associated with supply chain failures. Some, in fact, are due to assembly and integration issues in GM's wholly-owned operations.

As is the case after every major operational issue, the press is making much ado about the damaged reputations of these firms. The events are certainly news-worthy and embarrassing. Whether they cause stakeholder to reassess their respective relationships with the companies, however, is the central issue in a reputation crisis.

Walgreen's issue is unlikely to have any effect on most stakeholders. Equity investors will be thrilled, and creditors equally so. Legislators are unhappy, but it is not clear their opinion matters much since they have proven their inability to do much of anything.

This is Yum!'s second bout of China-related supply chain safety and quality. The toxic chickens of 2012/2013 gave them quite a reputation scare, which is why they may have dumped OSI like a hot pan. McDonald's is new to this type of crisis and is sticking with OSI. Also, McDonald's maintains qualitatively different types of relationships than Yum! with its suppliers. By forgiving OSI, McDonald's is demonstrating the benefit of OSI's historically stellar reputation…to OSI.

GM is now in a league of its own. Credit the company with fabulous spin control by declaring that Wednesday's additional recalls signified how the company had enhanced its approach to safety.

Ethics: Report slams US tobacco child labour

C. HUYGENS - Wednesday, May 14, 2014
Companies producing tobacco products have come to terms with society; in exchange for contributing to the tax bases of the reigning authority and relative transparency into the health effects of their products, they are accepted as commercial members in good standing. Alas, beyond safety, there are five other key issues that matter. One of them is ethics - child labor to be exact.

According to the Financial Times, a Human Rights Watch report on the US and the world’s biggest tobacco companies discloses young children are working 12 hour shifts in dangerous conditions. "The report highlights an area of reputational risk for an industry that is already spending billions of dollars a year complying with a patchwork of national and international regulations."

For companies now investing $millions into compliance solutions, the Human Rights Watch compliance standard should be disconcerting. Mere documentation of compliance standards is not good enough. Fostering conformance with compliance standards is, well, the new standard. “The burden falls on [the companies] to say that this isn’t happening on their farms.”

The report is not pure opprobrium, and credit is given for good effort. According to the Financial Times, "Human Rights Watch cited Philip Morris International, which sells Marlboro, L & M and Parliament outside the US, with creating 'the most detailed and protective set of policies and procedures' on child labour."

The credit given by HRW appears to mirror credit given by Philip Morris' other stakeholders. As shown in the reputation metrics below, the firm's Reputation Premium relative to its peers is top of the heap with the firm ranking #1 out of 13 companies in the Tobacco peer group. Not that PM should be complacent. The relatively high Consensus Trend indicates not all stakeholders are sure they know the company or agree on its reputation value. Some, perhaps not being used to compliments from HRW, may fear the news is too good to be true.

Read more

GM: Barra is owning it

C. HUYGENS - Tuesday, March 25, 2014
GM's got issues. Ten years of sweeping safety problems under the rug has come back to haunt it, just as it haunted Ford for its Pinto. Haunt is not the best word. The German's call it a "shitstorm," or what the UK's Financial Times called "the pile on of litigators, regulators and mommy bloggers." Huygens prefers the term "reputation crisis."

Now here's the funny thing. Typically, in a reputation crisis, the marketing types describe a Kabuki-like ritual of how the CEO needs to apologize, demonstrate contrition, and all will be forgotten. The New York Times quotes a prominent PR executive saying "She's owning it," which sounds good until the the rest of quote kicks in, "'She will not be able to distance herself from it. It's now hers,' said the P.R. man, Daniel G. Hill, in what sounded a bit like a threat." Barra has pundits scratching their heads. "It was puzzling, then, if not downright ill advised, for GM's CEO, Mary Barra to last week personally lay claim to the biggest crisis at her company since the financial crisis."

Barra's actions, however, are textbook reputation crisis management if you come from the school that a PR crisis is no more than a window into an operational crisis. To effectively manage stakeholder expectations going forward (the entire value proposition in reputation risk management), you have to promise to to the right thing...and have stakeholders believe you.

It takes only three steps: (1) Admit there is a problem; (2) Apologize for allowing the problem to arise, affirming that the problem violates everything you and the firm stand for; and (3) promise it will never happen again. Here's Barra last week from the New York Times: “'Our goal is to make sure that something like this never happens again,' she said." Extra points go to the firm that promises that something of this sort will never happen to any other firm in the industry.

If stakeholders find Barra credible, they may set high expectations going forward. The benefit is that GM may demonstrate reputational resilience. The risk, as Arthur C. Liebler, who was Chrysler’s top communications executive during Mr. Iacocca’s heyday told the New York Times, is "Ms. Barra and her team will be watched very closely now and will have to prove that they mean what they say. If they don’t deliver, there won’t be a second chance.”

The quantitative reputational value profile of GM, according to Consensiv and based on Steel City Re's reputational value metrics, is shown below. Not surprisingly, the Reputation Premium has been sinking, but interesting, not acutely. Its been on a bumpy ride down to 0.35 percentile for a while, suggesting stakeholders were increasingly discounting GM for some time. The Consensus Trend, CT, is much more interesting. It leaped from a very low level relative to the other 39 companies in the Motor Vehicles peer group to an absolute level of 5.2%. This indicates stakeholders have moved from a more or less uniform set of expectations of GM to a much more diverse mix.

It is a risky time for GM with its reputational heath approach the danger zone. Barra has stakeholders' attention. Early indications were promising, but the most recent additional drop these past two weeks in the Reputation Premium does not bode well. Stay tuned.



For more background on the Consensiv reputation controls, click here. To view the December 2013 reputational value league table, based on Consensiv's metrics, and available exclusively at CFO.com, click here. Last, to read more about how reputational value is linked to stakeholder expectations and enterprise value, read, Reputation Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012) (click here).

GM: In German, the word is "shitstorm"

C. HUYGENS - Wednesday, March 12, 2014
In the UK's Financial Times, the escalating events following public disclosure of an adverse situation have been described as "the pile on of litigators, regulators and mommy bloggers." The Germans invented a new word, "shitstorm." Whatever you call it, GM's failure to learn from Ford's Pinto is providing another generation with an object lesson in reputation risk - failing to meet the expectations a company has set among stakeholders.

Federal prosecutors are examining whether General Motors is criminally liable for failing to properly disclose problems with some of its vehicles that were linked to 13 deaths and led to a recall last month…The federal probe by the U.S. attorney in Manhattan adds to a growing list of U.S. authorities examining the recall, which GM announced in February. The National Highway Traffic Safety Administration (NHTSA) previously opened an investigation into whether GM reacted swiftly enough in its recall….a U.S. Senate committee chairman is seeking a hearing on the issue. The U.S. House Energy and Commerce Committee also ordered GM and NHTSA to turn over information about GM's ignition switch problems.

GM declined to comment on yesterday as shares of GM closed down 5 percent to $35.18 on the New York Stock Exchange. "The immediate financial impact is insignificant; however, there could be some reputational risk which could impact share," RBC Capital markets analyst Joseph Spak said.


Here's another object lesson. For those who are still confusing brand with reputation (Brand v reputation, GM Impala edition), consider this from Steel City Re, a provider of reputation assurance solutions.

A 21st century reputation is testament to how stakeholders expect a company to behave. It includes responsible behaviors such as supply chain integrity; manufacturing or production quality; ethical standards; innovation and intellectual property management; environmental sensitivity; and security management. It specifically includes C-suite and Board-level behaviors including governance, controls and risk management policies. Reputation risk arises when a company fails to properly set expectations or fails to meet them. Stakeholder disappointment at such shortfalls can have significant personal consequences for the company’s Directors and Officers; and it can result in potentially unlimited costs of damaged stakeholder relationships going-forward.

Reputation Risk is a strategic risk.

Read more from Reuters.

GM: Lessons lost from Ford's Pinto

C. HUYGENS - Friday, March 07, 2014
Just the other day, Huygens was explaining how short-term investments in safety can avert long-term reputation damage. The reasoning is simple: if stakeholders understand and appreciate that you value safety by actually doing something about it, then they'll give you the benefit of the doubt if and as when an adverse event occurs. Being a beneficiary of doubt is especially valuable to corporate officers and board members who are the first to be blamed when things go bad. It's the time when grown men and women wish they could get their lives back.

The poster child for excellence in reputation management through operational risk mitigation was…Warren Buffett's Berkshire Hathaway, which had invested $600m in new, safer rolling stock to transport volatile petrochemical products. The current rolling stock catches fire too easily.

To underscore the value of Buffett's investment, the poster child for wrong thinking was presented in contrast. The logic behind the acceptable losses for Ford's Pinto and its exploding gas tank was enabled by bad math. Sure, the costs in lives lost, after insurance, was less than the costs of recall. Nobody thought to factor in the cost of lost reputation -- the costs when stakeholders don't want to buy any of your cars, employees don't want to work for you, suppliers are thrilled being associated with you, the capital markets look at you funny, and the regulators come down hard.

Alas, lesson lost. It appears malfunctioning ignition switches have flummoxed GM engineers for over a decade, even as they resulted in 31 fatalities in Chevy Cobalts. Only last week did the company expand its recall of impacted cars to almost 1.5 million units. The government has initiated a probe into how GM has handled its investigation. GM North America President Alan Batey said in a statement. ‘The chronology shows that the process employed to examine this phenomenon was not as robust as it should have been.’”

Read more.

Business Maxim from the Beach

C. HUYGENS - Tuesday, March 04, 2014
It may be too cold to be on a beach, but if you're going to think about it anyway, think about this: beach safety.

To build a better reputation, it is far better to identify and mitigate the sources of risk than to try and respond to a crisis, even on the beach. Jonathan Salem Baskin explains that for lifeguards in Florida,

success is measured by how many so called ‘prevents’ are made. That’s the number of people lifeguards approach to prevent them from getting into trouble by pointing out rip currents and other beach hazards. In 2009, there were 4,879 prevents. That number swelled to 16,450 in 2013 by pushing the notion that a lifeguard’s job is about serving the people who come to the island instead of sitting in a lifeguard tower waiting for someone to yell ‘Help!’”

Read more.

Berkshire Invests $600M for Its Reputation

C. HUYGENS - Wednesday, February 26, 2014
Canadian National Railway is charging shippers more to transport crude oil in older tank cars, one of the first signs that rail operators are actively discouraging use of the type of cars involved in several dramatic explosions. BNSF, on the other hand, is investing $600m to buy a fleet of 5,000 tank cars to ship crude oil and ethanol, using specs that exceed the most stringent industry standards approved in October 2011.

If you are a customer, which of the three railroads is telling you they care that you are operating as safely as possible? Will it impact your purchase decision? Of if you are an employee, which of the three is offering you a source of pride? Now view the above from the perspective of creditors: which railroad is the longer term safe bet,? How about from the perspective of regulators: which one has signaled to you they are really trying -- a factor that you as a regulator must by law consider if an adverse event occurs?

Cutting to the chase, the potential for reputational value is created through operational controls that enable a business to meet or exceed stakeholder expectations. Reputational value is realized when stakeholders are able to transparently appreciate and value the investment.

When you are Warren Buffett, analysts watch your every move and report it to the world in big headlines. If you are not Warren Buffett, then you need a more creative approach to communicating reputational value in a way analysts will recognize that your commitment is authentic and not merely marketing pablum. Reputational Value Insurance, anyone?

Lest the concern over cost lead to hesitation, remember, when things go wrong for a company, they can go terribly wrong for its directors and officers on a very personal level. Warren Buffet would not risk the reputation he built over a lifetime; neither should you. Read more.

Don't Drink the Water and Don't Breathe the Air

C. HUYGENS - Wednesday, January 29, 2014
Although Huygens generally addresses the link between corporate reputation and economic behavior, it is helpful from time to time to descend from the clouds of economic theory and remember that these principles are based on basic rational human behaviors and apply to everyday events. In other words, behavioral economics applied to issues such as ethics, innovation, quality, safety, sustainability, and security has practical applications.

Consider the safety reputation of Mexican water. Reputation is the expectation of future performance informed by past experience and moderated by actions in the present. There are enough personal and vicarious experiences with Mexican water to substantiate its reputation as "non-potable." Mexico City’s legislators have decided to combat this reputation by requiring that 65,000 restaurants install filters and offer patrons free, safe drinking water.

But just as you can lead a horse to water but not make it drink, this strategy is doomed. Requiring that restaurants serve safe water isn’t the same thing as ensuring it, even if they risk fines if the law is violated. Further, behaviors are the outcome of a sometimes implicit balancing of potential risks and rewards, and the upside for drinking free water out of a pitcher may well continue to be outweighed by the risks of doing so.

As with all the corporate examples of reputation leading to behaviors with economic consequences, this one has a monetary value too. Martinez-Robles [an industry consultant] estimates the bottled-water market in Mexico reached $5 billion in 2012. Read more.

Yum!: Tums, please

C. HUYGENS - Wednesday, October 09, 2013
Reputation is the confidence stakeholders have that a company will fulfill expectations. A reputational value crisis arises when a company fails to do so and stakeholders realign their expectations.

Last year, Yum! Brands' supply chain quality control processes failed and toxic chickens were served through their KFC outlets in China. The problem has come home to roost. From yesterday's Associated Press wire story, "KFC's parent company Yum Brands says its profit fell 68% in the third quarter, as its China unit struggles to recover from a controversy over its chicken supply and bird flu scare. Results missed expectations and Yum lowered its outlook. Shares fell 6% in aftermarket trading."

Expectations of food quality appear to be near-universal, and customers the world over, provided they have a choice, will do just that: choose. For the time being, Yum! is not top choice.

Kanebo: It looks bad

C. HUYGENS - Thursday, September 19, 2013
Charles Haskell Revson, founder of Revlon, liked to remind people that while his company manufactured cosmetics, it sold hope. Kanebo, a division of Kao Corporation (TYO:4452), ranking hope higher than safety or "confusion," continued selling defective skin whitening products more than a week after it was discovered that the product caused blotching.

Skin whitening products are popular among women all over east Asia, with users seeking lighter tones. The recall, involving almost 4.75 million products on retail shelves, was announced July 4, almost a week after Kanebo first decided to take them off the shelves.

News of the delay emerged in early September with pundits concluding that this will probably damage Kanebo's (and therefore Kao's) reputation. Perhaps, writes reputation controls expert Jonathan Salem Baskin. "Reputation, however, isn’t the purview of marketing or the outcome of good or bad publicity, but rather the result of financially-relevant stakeholder behaviors...Kanebo’s sourcing, manufacturing, and distribution operations are the drivers of its reputational value, and it will be interesting to see how it addresses any failures or shortcomings its investigation uncovers in areas such as sustainability, quality, and reliability. And only then will it see how deep its problems may go."  Read more.

The ethical issues associated with the recall delay raise another concern. It is possible that stakeholders' expectation of prompt action will conform to a standard that arguably was set by Johnson & Johnson in 1982. Or not. Much depends on the degree of goodwill Kanebo had established with its customers prior to this process failure, and the degree with which those customers concur with Kanebo's decision to delay notification "...(not to cause) confusion among customers... Concerns among customers could get worse if we were not properly prepared to answer their questions."

According to the news source Happi, "as of August 25 a total of 8,678 consumers in Japan had been confirmed to have blotches after using creams such as "Blanchir Superior", with 65 people reported as having the trouble overseas, according to Kanebo. The value of shares in the parent company Kao has fallen more than 15 percent since the recall was announced." Read more. 

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