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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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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.

Targeting Target

Nir Kossovsky - Wednesday, June 03, 2009
On 28 May, activist investor Bill Ackman’s $15m campaign to effect changes in Target Corporation (NYSE:TGT) at the board level ended in an apparent defeat. Although some observers predicted Ackman's slate would win one or two seats out of the five he was seeking, he came away empty-handed. Target announced at the meeting that all incumbent directors were re-elected with at least 70% of the vote.

Advocates for activist investors and incumbent management have spun the outcome in many ways. Notwithstanding the merits of the differing arguments about investor's rights and corporate governance, we see here a simple story. Target is on the mend and current management has been given a mandate to proceed.

Supporting our version of the significance of the proxy fight outcome are the data from the Steel City Re IA (Corporate Reputation) Index. The Index, which correlates with reputation surveys such as those published by ForbesFortune, 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 after sliding from the #1 slot to below the 50th percentile late in 2008, Target has rebounded steadily over the past six months and is now ranked in the 75th percentile among its 15 peers in the Multiline retail sector. Over the last year, Target has outperformed the median of this group by 3.26%. Further, the exponentially weighted moving average index volatility has been steadily decreasing recently.

Ackman has specific ideas he would like management to implement. Management has accepted some and rejected others. Over the past six months, stakeholders have been rewarding  CEO Gregg W. Steinhafel and Target’s management for its balancing act with Ackman. Last week, shareholders voted to stick with management to the detriment of Ackman, whose fund, Pershing Square IV, has lost much of the $2 billion it bet on Target in 2007. We suspect the tussle is not over yet. 

Instituting intellectual property finance

Nir Kossovsky - Thursday, May 28, 2009
The Society is pleased to announce the 28 May 2009 launch of the IP Finance Institute and to welcome the Institute into the Society’s global alliance. The Society also congratulates Pier Biga, managing partner of ICM Advisors, who is Executive Director.

The Intellectual Property Finance Institute is the first European research and competence centre focused on IP Economics & Finance. The Institute is a non-profit organization which promotes and develops know-how transfer, research initiatives and projects about the IP as an economic asset and its use in IP-based financing solutions.

The Institute was co-founded by the Innovation Studies Group of the Politecnico di Torino, a leading international technology university, and ICM Advisors, a leading international advisory and research firm specializing in intangible asset valuation and IP-based financing.

Flight safety

Nir Kossovsky - Tuesday, May 19, 2009
Recent news of Colgan Air, Inc., an operating company owned by Pinnacle Airlines Corporation (NASDAQ:PNCL) prompted us to consider the intangible asset of safety and the financial consequences of the reputation arising.

On 12 February, flight 3407 from Newark to Buffalo crashed while on an approach to Runway 23. A total of 50 people were killed. This loss of lives in Colgan Air Flight 3407 the greatest loss of lives on a domestic American flight due to an accident since 2001. Then on 12 May, flight 3260 from Newark to Buffalo lost a wheel after landing on Runway 23. There were no injuries and the passengers deplaned normally. The next day, the NTSB began its hearings on the 12 February crash.

Colgan Air operates under the brand of three iconic companies: Continental Connection, United Express and US Airways Express. It has been involved in two well publicized safety incidents. From an intangible asset perspective, what are the reputations of Pinnacle, Continental, United, and US Airways and is there any evidence that the two events had an impact?

We turned to the Steel City Re Intangible Asset (corporate reputation) Index for insight into stakeholder’s perceptions. As shown in the chart below, the relative rise in Pinnacle’s index ranking ends abruptly twice in a temporal association with the safety events described above. Also of note is that Pinnacle’s index shows a progressive drop -- ongoing reputation erosion – for the 8 months prior to the February crash. Financially, over this period, Pinnacle has underperformed the median of its 20 peers by 22%. Index EWMA volatility is very high at 5 log orders.

Among the 21 companies tracked and ranked in this index, all four companies -- Pinnacle, US Airways (NYSE:LCC), United Airlines (NASDAQ:UAUA), and Continental Airlines (NYSE:CAL) -- rank in the bottom quartile as of 15 May 2009. In the period following the 12 February crash, and measuring rank on a percentile scale, Pinnacle’s rank dropped 20%, US Airways dropped 15%, Continental dropped 10%, and United was unchanged. Other members of the bottom quartile are Jet Blue (NASDAQ:JBLU) and American Airlines (NYSE:AMR).

The membership of the top quartile among 21 publicly traded airlines as of 15 May comprises Copa Holdings (NYSE:CPA), Allegiant Travel (NASDAQ:ALGT), LAN Airlines (NYSE:LAN), Ryanair Holdings (NASDAQ:RYAAY), and Southwest Airlines (NYSE:LUV).

Banking on reputation

Nir Kossovsky - Friday, May 15, 2009
On May 11, JD Powers released a study showing that nearly a third of consumers who switched banks said the deliberately excluded ones seen as financially unstable, or as having a bad reputation or questionable ethics.

Reputation is the impression formed by stakeholders of how a company manages its intangible assets. Risk management and ethics compliance are exemplary business processes for intangible asset management.

Stakeholders comprise employees, suppliers, customers, competitors, and investors. Reputation creates among stakeholders a set of expected behaviors. The Steel City Re Reputation Index is designed to capture the financial implications of both the aforementioned stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. We used the Steel City Re Corporate Reputation (IA) Index to determine if there was a relationship between a bank’s financial stability, as reflected in its one-year ROE, and its reputation.

The table below shows the top 10 companies in the 175-company Regional banks sector. Over the past year, their median ROE was -10%. The median ROE for the year for the sector as a whole was -49% and the ROE for the bottom ten banks in this sector was -89%.

The data suggest that banks may benefit from transforming their current risk management processes into holistic risk and reputation management systems.




Index Value
11 May

Volatility Percentile








First Financial Bankshares Inc.





Cullen/Frost Bankers Inc.





Peoples Financial Corp.





Bank of Marin Bancorp





UMB Financial Corp.





Westamerica Bancorp





Commerce Bancshares Inc.





National Bankshares Inc.





BOK Financial Corp.



Popularity, reputation, and financial metrics

Nir Kossovsky - Friday, May 08, 2009
On 29 April 2009, the Reputation Institute released its annual survey on the nation’s most respected companies. Based on its surveys of the general public, the Institute ranked 153 companies on how esteemed, admired, trusted and liked each was. The top and bottom ranks were held by Johnson and Johnson (NYSE:JNJ) and Halliburton (NYSE:HAL), respectively.

The Intangible Asset Finance Society is interested in the relationship between the intangibles (the business processes that underlie reputation) and finance. So we turned to the Steel City Re Index for an independent quantitative view (and second opinion) of stakeholders’ collective assessments of the corporate reputations of these two iconic firms.

Unlike the Institute survey, the Steel City Re index is designed to capture forward looking indications of expected stakeholder behaviors that impact cash flow, enterprise value, and cost of credit. These indicators are good predictors of stock price, which remains the single most useful metric of value.

Data through 1 May 2009 show that Johnson & Johnson is in the top tier of the Pharmaceutical sector (see Ethical Pharmaceuticals) with an index ranking this past year that started in the 98th percentile and ended in the #1 position (100th percentile). Index EWMA volatility was low averaging only two orders of magnitude. It is therefore not surprising that its return on equity outperformed the median of 84 of its peers by 13%.

Halliburton, on the other hand, bounces between the upper quartile and second quartile of the Energy equipment and services sector having started the year in the 91st percentile and ended the year in the 86th percentile. Index EWMA volatility was much higher averaging four orders of magnitude. A falling index and high volatility, notwithstanding an above average percentile ranking, is rarely associated with superior economic returns. And indeed, over the past year, Halliburton outperformed the median of 69 of its peers by only .75%.

In fairness, there are significant sector effects behind these numbers. The median pharmaceutical index value among the 5000 companies tracked by Steel City Re ranged between the 20th and 30th percentile and the sector showed an index variance of between .35 and .4. In contrast, the Energy equipment and services sector began the year with a median index ranking in the 70th percentile which then fell precipitously in the fall of 2008 to a median in the 50th percentile. Overall variance, however, is much narrower indicating that the perceived differences among firms in this sector are much smaller than the perceived differences among pharmaceutical firms.

In summary, these data show that a top performer in a sector that is in the reputation doldrums will effectively surprise the markets and significantly outperform its peers; and that a good performer in a sector that has disappointed the markets may still marginally outperform its peers. But with the median pharmaceutical ROE closely matching the S&P500 returns, and the median energy equipment and services ROE underperforming the S&P500 by 20%, Halliburton’s low “popularity” is not surprising.

Bonus: Top and bottom ranked firms on the Steel City Re corporate reputation index for the Pharmaceutical and Energy services sectors as of 1 May are, for Pharma: Johnson & Johnson and Discovery Laboratories, Inc. (NASDAQ:DSCO); and for Energy equipment and services: Seacor Holdings, Inc. (NYSE:CKH) and ION Geophysical Corporation (NYSE:IO).

Beverage grandmasters

Nir Kossovsky - Wednesday, May 06, 2009
This note explores whether a proposed transaction by a $75B beverage company, Pepsi Inc. (NYSE:PEP), is motivated by costs savings, brand enhancement, or reputation protection. Seeing no perceptible movement in the reputation index of either the company or its arch rival, we conclude that notwithstanding which of the three was the initial trigger, the greatest value may be in reputation risk management.

On 20 April 2009, Pepsi proposed buying the outstanding shares it does not own in its two largest bottlers, Pepsi Bottling Group (PBG.N) and PepsiAmericas (PAS.N), in a $6 billion cash and stock deal. Many in the financial press suggested it was a cost-cutting initiative. Jon Baskin, a marketing iconoclast, a keynote speaker at the Society’s 2008 annual conference, and the author of the book, “Branding OnlyWorks on Cattle,” opined that the move represented brilliant, strategic branding. In Jon’s words:

Think about it. New packages and formulations, available at new and different locations, priced and supported in novel ways...all thanks to a holistic approach to the brand, vs. some archaic top-down application that sees it only as image and words. It's these actions, and real investments, that will build sustainable, long-term brand growth.

Cost savings and long-term brand growth are both good things, reflect well on management and enhance reputation. So, with two weeks having now elapsed during which the market has had an opportunity to digest the news, and while the deal is still in the negotiation phase (the bottlers rejected it on Monday), we called on the Steel City Re corporate reputation index to see what impact the news has had on the reputations of Pepsi and its arch rival, The Coca Cola Company (NYSE:KO).

As shown in the charts below, the short answer is “not much.” Pepsi tops the fifteen-member Soft drink sector; Coke is in the 92nd percentile. Volatility is nil. In fact, in the midst of the most tumultuous market since the great depression, these two iconic firms emerge with nearly identical profiles comprising exceedingly stable reputation metrics. With Pepsi and Coke’s market caps at $75B and $100B respectively, are they too big to budge?

Big, yes, but not too big to trip and fall. As we see it, both pay exquisite managerial attention to their reputations. Ethics, quality, safety, security and sustainability are all watchwords. Innovation is alive and well. So the competition between these two is analogous to that of two chess grandmasters. They see all, know all, and understand the implications of every move and its derivatives. The game, therefore, is waiting for one or the other to make a mistake. It is a game where risk management is the winning play. And given the relative values of the physical assets and intangible assets at the two companies, reputation loss arising from a business partner where visibility and control are weaker – supply chain headline risk, if you will – is one of the major risks we believe needs to be managed.

So let us put our own spin on Pepsi’s announced acquisition: from an intangible asset finance management perspective, it is a prudent move to manage reputation risk arising from a third party. While it may not increase Pepsi’s brand value or enhance its reputation, it may prevent the sort of reputation loss that destroyed nearly 14% of Coke’s value 10 years ago.

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