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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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Fast lane

Nir Kossovsky - Thursday, September 17, 2009
As he made his way here to Pittsburgh, home of the Intangible Asset Finance Society, to address a gathering of union leaders on Tuesday, US President Obama stopped by a General Motors plant in Ohio, where he said the government’s intervention in the automobile industry “may not have been popular,” but helped jumpstart the struggling sector. Let’s take a closer look at the sector from the Society’s perspective.

Let's first look at the reputation metrics from the Steel City Re IA (Corporate Reputation) Index? from 22 April when we last looked at this sector. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

At that time, Ford (NYSE:F) showed a rising IA index and decreasing EWMA IA Index volatility with a final log magnitude of 2 while GM (NYSE:GM) showed opposite directional movements and a final volatility log magnitude of 3. From these data, we projected great financial results for the former, and ongoing dismal financial results for the latter.  Honda (NYSE:HMC) was our highest ranked automotive firm on 22 April.

Let’s see how those financial projections panned out as demonstrated in these graphs from BigCharts.com.

Since April, Ford has returned nearly 100% on equity; GM has lost nearly 65%, and Honda (which had returned 45% for the year until 22 April) still had some firepower left and continued to move upwards, but underperformed the S&P500 for this period.

If we take the long view of a 2-year return, Honda just barely beats Ford but is in negative territory; both outshine the S&P500 which is about 30% off from the 2007 peak, and GM is, well, "underperforming."

Let's wrap this up with an homage to reputation management. Kudos to Ford for demonstrating the power of reputation mangement, and its ability to create value on the basis of expectations of further great things to come. This type of financial result is exactly what the Society seeks to promote. And kudos to Honda for demonstrating the power of a superior reputation to forge resilience. This type of financial resilience is exactly what the Society hopes will motivate companies to exercise best practices in the management of their intangible assets.

Photo finish

Nir Kossovsky - Tuesday, September 15, 2009
The objectives of the Intangible Asset Finance Society are to increase the visibility, transparency, and value of intangible assets through education, advocacy, and the promulgation of standards. Leverage is a common instrument of value deployment, and IP as collateral is one of several favorite topics among Society members. Which is why we couldn't pass the opportunity to share this note on an IP secured loan-gone-bad.

Celebrity photographer Annie Leibovitz, who has photographed everyone from the Rolling Stones to Queen Elizabeth II, put her art, intellectual property and even real estate assets up for collateral last year when she consolidated her massive debts into one $24 million loan.  Leibovitz made her creditor an “irrevocable, exclusive agent” in December 2008 in exchange for the loan at a 12 percent interest rate. The collateral specifically included all photographs she has taken or will take.  Last Tuesday was the deadline for repaying the loan or surrendering the collateral - a deadline not met.

Friday, Bloomberg reported that Liebowitz bought back control to her photographs and real estate by renegotiating the terms of a $24 million loan from Art Capital Group. In return, the lender dropped its lawsuit against her.

Table or menu

Nir Kossovsky - Thursday, September 10, 2009
Financial players are salivating over opportunities in the Food Products sector following Kraft Foods’ (NYSE:KFT) unsolicited $16 billion for Cadbury PLC (NYSE:CBY). According to Kraft’s CEO, Irene Rosenfeld, "We are eager to build upon Cadbury's iconic brands and strong British heritage through increased investment and innovation." Sounds to us like a reputation (brand) and intangible asset (innovation) opportunity.

So now that the sector is in play, we thought we’d look back over the past year and see how our predictions for value creation panned out. After all, when mergers and acquisitions are all the rage, if you are not at the table, you are on the menu.

Our last look at the Food Products sector was April 14 and was motivated by the sudden decline in the reputation standing of the HJ Heinz Company (NYSE:HNZ) as measured by the Steel City Re IA (Corporate Reputation) Index. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

Six months ago, the top dozen ranked companies in the Food Products sector, according to the Index, included Heinz and Cadbury. Kraft was number 17. Here is our recap of the baker’s dozen with market value as of the close of the markets Friday 4 September before Kraft's announcement.

Heinz, a company that was highly ranked in March 2009 but caught our attention because of a sudden drop in its reputation standing, underperformed the balance of the baker's dozen over the full year with a disappointing -24.5% ROE. Kraft, which lost only 11% over the year, outperformed Cadbury which lost 16.5%.  Firms that had a higher reputation ranking in March 09 slightly outperformed their peers. The correlation between rank and six month return was 16%. The top 12 firms, in a demonstration of reputation resilience, outperformed both the S&P Index and the Food Sector index with a loss, as a group, of less than 1%.

One other reputation note. Kellogg and Cadbury, both firms with strong reputation rankings and exceedingly strong brands, reported quality issues related to melamine and salmonella. We know that the impairment of reputation-linked assets such as quality have brought down companies from all sectors. We wonder, for the record, if business process challenges were responsible for making Cadbury an appealing target?

Note added after original posting:

Comments received after posting from readers of MISSION:INTANGIBLE focused on the relatively short window in which we reported economic results. The readers rightly pointed out that the Food Products sector is a long-term business. Tastes may evolve over time, but the business processes associated with delivering tens of millions of safe, quality meals reliably and repeatedly demand eternal vigilance. Consistency is the watchword, and therefore long-term financial results should be included in any discussion of reputation.

We agree. Below, the ten-year returns of the Baker’s Dozen listed above less Campbell’s soup (CPB) due to space limitations. Highest returns: JJSF; lowest returns shown KFT. The only major Food Products sector firm from our top 12 (sector rankings for reputation as of April, ’09) to underperform the S&P500 (10 yr equity return -20%) was CPB (not shown). Prices not adjusted for dividends.

Dominating Dominos

Nir Kossovsky - Tuesday, September 08, 2009

Copious amounts of ink and countless electrons have been deployed in the debate over the commercial impact of social media. The debate? Yes, there are contrarians such as Jon Baskin, a speaker at our 2008 fall conference, who discount much of the power attributed to social media venues like Facebook and Twitter. While wary, we are slowly being persuaded.

Consider the case of Dominos Pizza (NYSE:DPZ). In late May, we analyzed the affair where employees of a franchisee disparaged Domino’s reputation through YouTube. In short, they challenged the quality of the product. In as much as quality is a life-supporting intangible asset, we saw this as a reputation body blow; and so did a good part of the mainstream business media.

We were wrong. We succumbed to conventional wisdom, when we should have equivocated. After all, the Steel City Re Corporate Reputation Index reported a steady climb in Domino’s reputation ranking for the preceding 8 months indicating the potential for outperformance going-forward, or at the very least, some degree of resilience. The index beat our gut instincts.

In our May 27 note, we compared Dominos to the three highest ranking firms among 47 in the Restaurant sector, Panera Bread Co. (NASDAQ:PNRA), McDonald’s Corp. (NYSE:MCD), and Chipotle Mexican Grill Inc. (NYSE:CMG). To appreciate our error with respect to Dominos, we revisit their economic performance of all four since 11 May, a few days before the YouTube affair.

As shown in the chart pasted from BigCharts.com below, Dominos suffered a 10% market cap drop in the period immediately following the affair (red arrow). Trading volume surged. Then there was a rebound as the Company rolled out an aggressive and effective campaign to restore its reputation. And the metric for success? Its returns beat those of two of the three most highly ranked firms in the restaurant sector from that period.

While many might attribute the rebound to excellent marketing, the Society would posit that Dominos' reputation resilience was evidence of substantive business processes that drive quality, and a communications effort that allowed stakeholders to appreciate its value.

What are those quality processes? They are systems that improve managerial motivation, provide time for managerial oversight, and technology that enhances quality while reducing opportunities for adverse human intervention - malicious or otherwise.

Dominos' greatest reputation risk lurks in an among the employees of the franchisees. Its strategy to mitigate that risk comprises two creative HR-focused processes. First, it requires that every franchise owner be 100% committed to the business -- no outside (distracting) revenue opportunities. Dominos wants the fortune of its franchise owners to depend on the success of the franchise. Second, it provides vertically integrated dough manufacturing and supply chain systems that allow the franchise owner to dedicate more time to human resource management rather than engage in “back-of-store” activity typical of the industry. Then there is innovation and technology. Dominos is constantly innovating process and system improvements to increase quality: the efficient, vertically-integrated supply chain system described above, a sturdier corrugated pizza box and a mesh screen that helps cook pizza crust more evenly; and the Domino’s HeatWave® hot bag, which was introduced in 1998, that keeps pizzas hot during delivery.

In summary, Dominos showed reputation resilience because it understands that its value is tied to the quality of its product. Dominos also showed that it understands well that its reputation for delivering a quality product can be protected through business processes and systems.

Ethical pharmaceuticals II

Nir Kossovsky - Friday, September 04, 2009

Several months ago, we took a look at ethical pharmaceutical companies on the occasion of a publication by Ethisphere magazine that ranked the "most ethical companies." We now revisit those companies on the occasion of the formal announcement that Pfizer and a subsidiary have agreed to pay $2.3 billion to resolve criminal and civil claims stemming from the illegal promotion of certain pharmaceutical products (read, unethical behavior).

The Society is interested in the economic value of business processes that support intangible assets such as ethics, innovation, sustainability, etc that stakeholders percieve as reputation. Companies reputed to be more ethical, the Society suggests, will reward shareholders with above average returns.

In our 1 May MISSION:INTANGIBLE posting, we noted that the reputation ranking of Novartis (NYSE:NVS), as measured by the Steel City Re Corporate Reputation Index, was superior to Eli Lilly (NYSE:LLY), whose index ranking, in turn, was superior to Pfizer (NYSE:PFE). We noted, however, that Pfizer’s ranking appeared relatively stable while Lilly’s ranking was drifting down rather quickly.

In our experience, firms with superior reputation rankings as measured by the Steel City Re Reputation Index outperform their peers. Those with declining reputation indices tend to underperform their peers. We therefore expected that going forward, Novartis would outperform Pfizer, and that Pfizer would outperform Lilly. The stability of the reputation index data for Pfizer suggested that stakeholders had already factored the alleged ethical breaches into their respective assessments.

Yesterday’s announcement provided an excellent test of our expectations for economic behavior going forward from 17 April (4/17).

The data, summarized above from a Big Charts graph (pasted below), confirm the forecast we made based on the Reputation Index. From the period beginning 17 April (when we ran the index data for the 1 May blog note on these companies) through yesterday, Novartis rewarded its shareholders with a 29% return on equity. Pfizer rewarded its shareholders with an 18% ROE, and Lilly disappointed its shareholders with a ~0.5% gain.

Employer brand

Nir Kossovsky - Wednesday, September 02, 2009
Stefan Stern writes on management for the Financial Times. In yesterday’s issue, he reviewed the concept of “employer brand.” According to the consultancy Business in People, (BiP), the employer brand “encapsulates how your workforce behaves, the impression employees create while carrying out their work, how well they are managed and led, whether or not they feel engaged, and so on.” It is an intangible asset that attracts and retains employees.

In the language of the Intangible Asset Finance Society, “employer brand” translates to “business processes and reputation.” And as the call out in the FT article affirms, “when it comes to retaining good people or attracting new ones, your image and reputation count.”

So far so good. Stern writes that Hiscox Ltd (LON:HSX), an insurance firm, realized a 30% increase in EBITDA last year. The firm’s CEO engages BiP. Proof that a good reputation arising from good human resources business processes fosters above average returns. And we have no argument with the conclusion.

Stern then writes that BT Group plc  (NYSE:BT), the telecommunications conglomerate, failed to honor its commitment to attend a recruiting fair leaving an indelible stain on their reputation. And their stock price is down 30% over the past year. BT's attitude to people, he notes, is very different than Hiscox's and by implication explains the differences in economic performance. 

We can not independently test the contrasting reputations with the Steel City Re Corporate Reputation Index since it currently does not extend to companies trading on non-US exchanges, and we do not dispute the economic results. But we would like to verify the implied relationship since it is a core area of interest to the Society.

Fortunately, Stern’s newspaper, the FT publishes a sentiment index through its affiliate, Newssift. The FT Newssift sentiment data that offer rough measures of reputation as reflected in the business press, do not support Stern’s argument.

As shown below, for the twelve month period between 2 Sep 2008 and 2 Sep 2009, articles in the business press covering Hiscox were positive 43% of the time, and negative 23% of the time; articles covering BT were positive 49% of the time and negative 18% of the time. By this metric, BT has a superior reputation.

We have invited Stern to comment.

Reputation egalitarianism

Nir Kossovsky - Thursday, August 27, 2009
Coming off a summer of metrics presented through the Society’s monthly Mission Intangible Monthly Briefings, a recent posting by reputation futurist Ross Dawson seems timely. I summarize the article below. Further, in view of a posting earlier this week, Whole Feuds, on Whole Foods Markets comprising both the Financial Times Newssift sentiment metric and the Steel City Re’s Reputation Index, direct your attention to items #2 and 3 below.

1. Influence is democratized
In a world of blogging, Twitter, and social media anyone can become highly influential, shaping how we think, behave, and spend. Position and rank matter less; companies can ignore no-one.

2. Influence can be measured
New metrics for individual influence and reputation will replace subjective assessments and will guide who we hire, do business with, and even date.

3. Reputation shifts from the corporation to the individual
Today corporate reputation matters less than the reputation of the individuals in the company. People don’t trust companies, but they might trust the people working for them. The corporate war for talent will become the war to attract the influential and trustworthy.

4. “Influence is the future of media”
We now discover the movies, music, news, books, conversation and even new friends we like through influence – the recommendations of many are driving our choices.

5. Business models for influence are emerging
If you can earn directly from your trust and respect, through tools such as TweetROI and IZEA’s sponsored conversations, what is the future for the $500 billion advertising industry?

At the Society, we see the above embodied in decision and prediction markets and other market-based metrics; and of course, the best practices associated with the business processes that drive the reputations ultimately measured through these metrics. The art, from a financial perspective, will be identifying the leading indicators of a rising reputation. Indeed, data consistently show that firms with superior reputations reward their stakeholders with above average returns. 

Whole feuds

Nir Kossovsky - Tuesday, August 25, 2009
John Mackay, CEO of Whole Foods Market, Inc. (NASDAQ:WFMI), is no stranger to controversy.  Two years ago, Wall Street Journal journalists David Kesmodel and John R. Wilke discovered that John Mackey had been posting comments on the Yahoo Finance website using the pseudonym Rahobed, an anagram of his wife’s name Deborah, for eight years, boosting his own company and berating his nearest competitor Wild Oats. At that time, Harvey Pitt, a former Securities and Exchange Commission chairman, told the Wall Street Journal “It’s clear that he is trying to influence people’s views and the stock price, and if anything is inaccurate or selectively disclosed he would indeed be violating the law." He added that "at a minimum, it’s bizarre and ill-advised, even if it isn’t illegal."

The current fracas began 11 August when Mackay wrote an op-ed piece in the Wall Street Journal. Mr Mackey began his article with a quote from Margaret Thatcher and went on to add that Americans do not have an intrinsic right to healthcare - an idea strongly at odds with the views of a large proportion of Whole Foods' customer base. The response from the customer base has been swift and negative. Massachusetts-based playwright Mark Rosenthal's "Boycott Whole Foods" Facebook page has so far attracted 28,000 fans, including supporters in the UK and Canada.

As part of their damage limitation strategy, Whole Foods' in-house public relations division has created a forum on its website for customers to discuss the issue. There are more than 18,000 posts, compared with 63 posts on the dairy-free forum. On Newssift, the beta news filtering engine of the Financial Times, the sentiment ranking of 11 articles written in the 15 days  since 11 Aug covering Whole Foods and Reputation included three rated "negative" while the 11 articles covering the same topic written in the 15 days prior to 11 Aug were all positive or neutral.

With equity up 60% over the past year, while the S&P is still down 20%, Mackay may believe he has the reputation equivalent of "mad money." On the other hand, Whole Foods'overall reputation metrics and ROE relative to their peers in the Food and Staples Retailing sector were volatile and generally below average for most of the past year, and Whole Foods' share price is currently $28, more than 60% below its all-time high at the end of 2005.

The Intangible Asset Finance Society has consistently opined that the CEO, while an important element of a company's reputation, is only as good as the people and systems that drive quality, safety, security, ethics, sustainability, innovation, and ethics. Whole Foods appears to excel at all, so it remains to be seen what the reputation impact will be from a CEO whose personal values appear to be at odds with those of his customers.

Reader's indigestion

Nir Kossovsky - Thursday, August 20, 2009
We are of the opinion that reputation is a consequence of the impression formed by stakeholders based on how a company manages its intangible assets. This puts us at odds with many who argue that the CEO is the standard bearer. The truth, invariably, is in the middle ground. Unless the firm is a secretive private equity firm, in which case, the CEO is the standard bearer and the presumed manager of the fund's intangible assets -- namely, accumen for quality investments.

Which brings us to Ripplewood Holdings and its founder and Chief Executive, Timothy Collins. Earlier this week, Ripplewood and a consortium of other equity investors including heavyweights such as J Rothschild Group, GoldenTree Asset Management, CV Starr, GSO Capital Partners (a Blackstone fund), Merrill Lynch Capital Partners, and Magnetar Capital, saw their $600 million investment in Reader's Digest wiped out in that magazine's Chapter 11 filing.

Here's the reputation angle. According to the Financial Times, the collapse of the venerable magazine that was taken private for $2.8 billion at height of the debt bubble in March 2007 comes just as Collins is seeking to raise $2.5 billion for his next fund, It also comes as another firm in which he is a board member and major shareholder nears a critical stage in the politically loaded auction to buy General Motors' Opel and Vauxhall. Last, it appears he has no more dry powder as Ripplewood has fully invested its last fund.

Collins cemented his reputation with the big profits he made on the acquisition of Long Term Credit Bank in Japan in 2000. He reinforced it with his successful buyout of Japan Telecom in 2003. This year will test his reputation resilience; the proof will be in the speed with which he succeeds in raising the new fund.

Sifting for sentiment

Nir Kossovsky - Monday, August 17, 2009
We all know instinctively, if not by experience, that five minutes of headline risk can destroy years of reputation building. The IAFS is interested in the business processes that build reputation, the processes that transform perceptions into reputation, and how that value can be maximized. We focus on the intellectual properties that comprise business processes for innovation, safety, security, ethics, sustainability, and quality. We focus on artifacts of these processes, such as patents and trademarks, and we focus on metrics.

While the most important commercial metrics are financial, there are leading indicators of reputation that inform on reputation development through its value chain. That value chain is discussed in an article in issue 36 of the journal produced by the Society's publication partner, IAM magazine, IA Metrics for the Other IP Market. The value chain schematic from that article is reproduced below.

Today's note calls our readers' attention to a metric of public impression comprising, as shown above, "media tone." The source of the media tone metric is the Financial Times' new product now in beta, Newssift. From a recent Newssift blog, we provide a link, without addtional comment, on the FT's media tone metric, sentiment, as used to report on the retail sector.

To recap the leader of the most recent FT/Newssift blog, "How are discount retailers weathering the economy? Fresh on the heels of news that Wal-Mart missed its sales expectations, we’re using Newssift to explore sentiment in the discount retail sector."

For those who have participated in the Society's monthly call, Mission:Intangible Monthly Briefing, you will appreciate that the above fits well with our summer-of-metrics theme. Comments on the FT media tone instrument are welcome.

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