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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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Ethical investigations

Nir Kossovsky - Tuesday, August 11, 2009
As a follow on to last week's note on the fall of Huron Consulting due to ethical issues, the Financial Times reported Monday  that a study commissioned by KPMG of UK companies found that four out of 10 respondents had begun investigations in the past three years. This compares with 27 per cent a 2007 survey.

Companies had a further incentive to set up better anti-corruption practices after big fines were imposed on Siemens of Germany and KBR-Halliburton of the US for overseas bribery.

Despite the rise in anti-fraud activity by British business, however, the survey showed that an even greater number – 43 per cent – had no anti-corruption measures in place, suggesting that many companies still did not take the issue seriously.

And while 67 per cent of respondents said there were places where it was impossible to do business without bribery, only 35 per cent had ever declined to work in a country because of fears of corruption.

Even among companies that had adopted anti-bribery measures, the survey found that only 42 per cent conducted regular audits of overseas agents – the middlemen who have been found at the centre of corruption allegations.

There was also a lack of awareness about the far-reaching “extra-territorial” powers of US authorities through the Foreign and Corrupt Practices Act, which had been used to pursue British companies and executives.

Six out of 10 companies said they worked in the US, but only three in 10 realised they were subject to the law.

In the UK, a new bribery bill which could become law next year creates an offence of “negligent failure of a commercial organisation to prevent bribery”. Executives could be held responsible for wrongdoing in their company or by third-party agents, regardless of whether they knew about it. In the US, that standard is already in place as the result of In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996), and Stone v. Ritter, 2006 Del. LEXIS 597 (Del. 2006).

Andersen's ashes

Nir Kossovsky - Monday, August 03, 2009

We return from our summer holidays to see the stock price of Huron Consulting plummet in early morning trading.

We excerpt from the Reuter's story.

Huron Consulting Group (NASDAQ:HURN), a member of the Diversified Commercial & Professional Services sector, which rose in 2002 from the ashes of collapsed accounting giant Arthur Anderson, said late on Friday that its entire top management team would leave the company and that it would restate more than three years of results.

Oppenheimer analyst Scott Schneeberger said: "The damage to Huron's reputation will likely be significant."

Two law firms are investigating potential shareholder claims against Huron over possible securities violations, while an analyst raised questions about the company's ability to survive.

Huron, which was on Fortune magazine's 2008 list of the 100 fastest-growing U.S. companies, said it is also conducting a separate investigation into its allocation of chargeable hours in response to an inquiry from the U.S. Securities and Exchange Commission.

Chicago-based Huron was founded in 2002 by 25 partners from Arthur Andersen, the accounting firm that collapsed in connection with the Enron Corp accounting scandal in 2002.

Were there any warning signs? We look for indications in 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.

And indeed, there are indications and warnings of a reputation challenge. The Steel City Re Index shows that over a one year period, Huron rose meteorically from a low of 0.35 to a high of 1.0 and then back down to 0.83. That's a significant fluctuation in reputation in advance of any public disclosure.

At the end of trading today, Huron is down 69%.

NGO no no

Nir Kossovsky - Thursday, July 16, 2009
We dedicate most of the time and effort of this communication channel to a discussion of the intangible assets that underpin reputation. Usually, the subject matter involves corporate behavior.  Awareness of issues associated with corporate behavior may come to light because of government regulatory action. More often, it is the result of NGO-driven publicity. In a break with tradition, the subject of today's note comprises NGO transparency. 

An on-line Wall Street Journal op-ed posted earlier this week alleged that Human Rights Watch, a 30-year old NGO dedicated to defending and protecting human rights, sent its leading Middle East official, Sarah Leah Whitson, to extract money from potential Saudi donors by bragging about the group's "battles" with the "pro-Israel pressure groups." The ongoing dialogue appears to affirm the allegations.

NGOs are important actors in both the geopolitical and commercial worlds. They encourage and monitor corporate compliance with many of the best practices comprising key business processes that underpin reputations for ethics, safety, and sustainability. They are respected and feared by much of the business community. Their primary tool is the threat of headline risk. Their moral authority depends on their reputation for independence. Their value is ephemeral. Loss of reputation and moral authority can be catastrophic.

Ronelle Burger and Trudy Owens from the University of Nottingham recently published a study that was motivated by “widespread calls for NGOs to become more accountable and transparent.” They conclude that “… NGOs with antagonistic relations with the government may be more likely to hide information and be dishonest.“

Human Rights watch has an antagonistic relationship with the Israeli government. The Israeli government wasted no time questioning HRW's "moral compass. "

Quis custodiet ipsos custodes?

Sustainable sustainability?

Nir Kossovsky - Monday, July 13, 2009
Amongst our master list of key drivers of reputation recognized by the Society are ethics, innovation, quality, safety, sustainability and security. We gave the top post to ethics and its derivatives, confidence and credibility. We haven’t shared our thoughts on the pecking order for the five remaining intangible asset business processes, although recent events suggest that the market is moving sustainability into a lower ranking.

What is happening? A few weeks ago we noted that United Technologies (NYSE:UTX) had quietly terminated its sustainability-led advertising strategy. Now we read that BP (NYSE:BP) is moving from renewables back to petroleum.

We intend no offense. However, in light of the above, there is a open question: while sustainability is certainly a public good, can it be practiced by individual companies profitably? Or more specifically to the intangible asset aspects, "is a reputation for sustainability valued?" We invite your comments here and on the IAFS Linked-In platform.

Aeros and omissions II

Nir Kossovsky - Wednesday, July 08, 2009
Supply chain continue to hurt Boeing's (NYSE:BA) reputation. Strategies executed earlier in the 787 program to (1) reduce costs and (2) garner intangible political benefits associated with global job creation introduced lurking risks in the supply chain that are dogging this company. At the heart of the matter is oversight and control.
Indeed, a key economic lesson learned these past two years is that iconic firms with global operations, a stable of business partners, and reputations for ethics, safety, security, and quality; must have better managerial oversight of their partners. There are several strategies for improving oversight. To protect and restore its reputation rapidly, Boeing appears to be pursuing a strategy of total control by acquiring troubled suppliers. It is not an inexpensive proposition. The latest acquisition is reported today in the Financial Times:


"Boeing has been forced to take over one of the key suppliers to the 787 Dreamliner, its troubled new jet, in an effort to gain tighter control of the production process.

It has agreed to pay at least $580m for the facility that makes chiefly composite sections for the 787, a planned family of long-range jets that is running more than two years behind schedule.

The purchase of the South Carolina plant from Vought Aircraft Industries - owned by the Carlyle Group, the private equity firm - is the second time Boeing has been forced into an acquisition to strengthen its global supply chain.

Last year, the US aircraft maker took over Vought's stake in Global Aeronautica, a joint venture with Alenia of Italy that assembles 787 fuselage sections. Vought said it received $55m from that deal."

Aeros and omissions

Nir Kossovsky - Tuesday, June 30, 2009
The Boeing Company (NYSE:BA) reported today that it would again delay the first flight of its new jet, the 787, the latest setback in a program that is considered crucial to the plane maker’s future. The New York Times reports that Howard Rubel, an analyst at Jefferies & Company, said the problem “doesn’t help the company’s credibility.”

Not so fast, Mr. Rubel. Credibility has many facets. The most important driver of reputation in the commercial aerospace sector is safety, and with the recent string of air disasters involving aircraft made by Boeing’s rival EADS NV (EPA:EAD), safety is very much on every stakeholder's mind.

The operational setbacks both Boeing and EADS have suffered highlight the difficulty of pulling off increasingly complex engineering feats involving new materials and global supply chains. And at least one financial lesson from the effort to create a global supply chain is that the savings from direct and tangible costs are being offset by intangible costs arising in the risks of a greater business network entailing less visibility and control.

Managing a complex supply chain is a business process, and failure to do it well – when stakeholders have been led to expect benefits – can be costly in terms of reputation. So returning to Howard Rubel’s comments, what is the net reputation impact?

We turn to the data from 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.

The index shows that over this past year, Boeing’s reputation ranking has sunk from the 69th percentile to the 48th percentile among the 47 companies in the Aerospace and defense sector. Worst, volatility has been climbing and the Exponentially Weighted Moving Average volatility is now four log orders of magnitude. Not surprisingly, return on equity is 14% below the median of the peer group.

Looking at industry more broadly, we see that the overall reputation ranking of the Aerospace and defense sector relative to other industry sectors has been generally rising while variance within the group has been declining and assuming greater homogeneity.

Within this environment, the outstanding reputation holders comprising the top decile as measured by the Steel City Re Reputation Index are: American Science & Engineering (NASDAQ:ASEI); Precision Castparts Corp. (NYSE:PCP); TransDigm Group (NYSE:TDG); and United Technologies Corp (NYSE:UTX).

United Technologies interests us because our colleague, Nancy Lintner, former Chief Marketing Officer and a speaker at one of our annual meetings, developed an award winning communications campaign that highlighted a number of corporate intangibles. Over the past year, the Reputation Index ranking for United Technologies has climbed slightly from an already high 89th percentile to the 92nd percentile, and its EWMA volatility has declined. The company has rewarded investors with an ROE that is 6% above the median return of the Aerospace and defense peer group.

Toll House cookie crumbles

Nir Kossovsky - Monday, June 22, 2009

A few weeks ago, we commented on the-then topical food safety issue of Salmonella and peanut butter. In that note, we lauded Nestle SA (VTX:NESN), the food conglomberate that seemed to have steered clear of the mess that left Kellogg mired.

Now it appears that Nestle has its own food safety mystery. According to the Washington Post, the Nestle plant in Danville, VA, that makes their refrigerated Toll House cookie dough is the suspected source of an outbreak that has sickened at least 65 people in 29 states with with E. coli 0157.

In supermarkets this past Saturday, Nestlé products had been pulled from the refrigerated section, and consumers were once again left to ponder the safety of the U.S. food system.

Nestle is proud of its risk and reputation management processes. We will watch closely to see how Nestle manages the operational and headline risks from this latest Food products sector peril.

The new Sprint

Nir Kossovsky - Friday, June 12, 2009
Last Friday June 5 2009, Sprint Nextel Corp’s CEO Dan Hesse told analysts and reporters, "We're a very different company than we were 12 months ago. The Pre is the coming-out party for the new Sprint, to show off the new Sprint." The reputation metrics provided by Steel City Re’s IA (Corporate Reputation) Index, have yet to reflect this corporate change.

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.

The Steel City Re Index shows that over the last twelve months, Sprint's reputation has deteriorated from the 33rd percentile to the 12th percentile among the 34 companies that comprise the Wireless telecommunications services sector. The Company's EWMA IA volatility has generally been increasing and hovers around 4 log orders of magnitude. These are all features seen in companies that are inferior stewards of their intangible assets, and it is therefore not surprising that Spring has underperformed the median of its peers by 8.5%.

As for the hot play as of 10 June 2009, the firm with the top reputation ranking among Wireless telecommunications services sector entities is China Mobile Ltd. (ADS) (NYSE:CHL). For those of you who do not follow this company, we reproduce the following from their home page: "We are pleased to note that the Company ranked number 1 in the China Section of FinanceAsia's 2009 Asia's Best Companies poll in the four categories: Best Managed Company, Best Corporate Governance, Best Corporate Social Responsibility and Most Committed to a Strong Dividend Policy." With an ROE that is 0.5% above the median of this sector to date, this is one to watch.

Nobody doesn't like Sara Lee

Nir Kossovsky - Wednesday, June 10, 2009
On June 30 2008, Margaret (Peggy) M. Foran was appointed to executive vice president, general counsel and corporate secretary of Sara Lee Corp (NYSE:SLE).  In addition to overseeing the company’s worldwide legal activities, Peggy led Global Business Practices, risk management, internal audit and insurance activities, as well as environmental, safety and sustainability efforts. In our parlance, she was Sara Lee’s risk and reputation officer. She reported to Brenda C. Barnes, chairman and chief executive officer, Sara Lee Corp. On June 9th, after less than one year on the job, she abruptly stepped down “for personal reasons.”

What’s going on in the background? Dogs -- hot dogs, to be exact. There is the May 2009 lawsuit filed by Sara Lee against Kraft Foods (NYSE:KFT) for false advertising – the so called hot dog wars. There is the concurrent recall of 1700 pounds of Sara Lee Ball Park brand hot dogs for mislabeling.  Hardly steamy stuff.

Is there some reputational risk lurking for which an indication or warning might be found in 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.


The Steel City Re Index shows that the reputation metric has been hovering in the 40th percentile amond the 48 companies in the Packaged foods & meats sector this past year. Although there is a distinct upward movement from the 40th to the 50th percentile co-incident with Ms. Foran's appointment, the trend has otherwise been downward until a recent recapture of lost ground. Although EWMA volatility has been declining, it is still at 4log orders of magnitude. Economically, over the past twelve months, SLE has underperformed its peers by 16.5%. In short, the mystery is why the dog didn't bark.

By our indications and warnings metrics, this type of economic underperformance in the setting of an already low reputation index increases the risk of business process corner-cutting -- actions that can lead to business process failures and expose a company's reputation to a myriad of perils and headline risk.

Ms Foran joined Sara Lee with a stellar reputation of her own. In CEO Barnes' welcome announcement last year, she said "During her three-decade long career, Peggy has earned the respect of corporate leaders, stakeholders, directors, investors and peers. She is recognized worldwide as a true leader with a reputation for the highest levels of personal integrity." She had tours of duty at Pfizer, ITT, and JP Morgan. 

We'll be following this one closely.

Target v. Wal-Mart

Nir Kossovsky - Friday, June 05, 2009
Note added May 2010: Click here to view an updated post.

We recently commented on activist investor Bill Ackman's unsuccessful efforts to make Target Corporation (NYSE:TGT) more like Wal-Mart Stores (NYSE:WMT). Using the Steel City Re Corporate Reputation Index, we showed that Target's reputation has been on the upswing for the past six months while volatility has been declining. Today we compare and contrast the recent reputation metrics of these two companies seeking further insight into Ackman's surprising defeat,

The 180-day measures of the Target and Wal-Mart Index values and the associated measures of volatilty show opposite patterns. Over the past six months, Target's corporate reputation index values have been rising from approximately the 50th percentile of the 16-member Multiline retail sector to the 75th percentile. Over the same period, its exponential weighted moving average volatility has been steadily declining and as of ealier this week, was below four log orders of magnitude. On the other hand, Wal-Mart, which began this period near the 100th percentile, has slipped to the low 80's while its Index volatility has been climbing and is greater than Target's.

In short, the data show that Target is on the rebound while Wal-Mart appears to be slipping. Small wonder, then, that shareholders sided with Target's management and its strategy at the annual meeting last month.

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