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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Palm: Worth its IP

Nir Kossovsky - Wednesday, April 21, 2010
Palm, Inc. (NASDAQ:PALM) is on the block. E & Y reported that in 2007, only 30% of the value realized in M&A deals was tangible. While a smart phone is a discrete, countable, physical asset, its value is mainly intangible With the above in mind, what are the prospects for Palm?

Using the 3-element accounting-like framework favored by Society member and Member News Committee chair Mary Adams of Intellectual Capital Advisors, those intangibles are as follows:
1. Human capital – the founders, who left the company in 1998 to start Handspring, maker of the Treo, which Palm then purchased for $240 million in 2003
2. Relationship capital – agreements with cellular carriers (Sprint/Nextel initially) through which most cell phones are sold.
3. Structural capital – the business processes, patents, and methods comprising the innovation activities and marketing activities behind the solution

Using the six-element Roman arch model of reputation value as defined in the Society’s book, Mission: Intangible, the two key intangible asset drivers of reputation value for Palm are innovation and quality. Palm’s reputation is abysmal. According to the Steel City Re Corporate Reputation Index, Palm’s reputation ranking in the Computer Hardware and Peripherals sector has not been above the 33rd percentile for the past 16 months. This ~60-member sector, which includes the monotonously #1 ranked Apple, Inc., recently saw Palm drop to the 4th percentile.



Reputation is important because among other things, it confers pricing power. It is not surprising, therefore, that Palm’s two current carriers, Sprint and Verizon, heavily discount Palm’s phones. And even in the face of these discounts, Palm’s global share of smart phones has declined from a peak of 4% in 2004 to only 1.5% in 2009.

Cutting to the chase, Shaw Wu of the Kaufman Brother’s equity research firm opines, according to the Wall Street Journal, that “the company should be worth at least the $600 million to $700 million it has spent on research and marketing…” Valuing a company based on expenses related to innovation and building a brand? That’s intangible asset finance at its best!

Act on your intellectual curiosity!

If the above discussion piques your interest, here are several things you can do right now:

1. Register free of charge for the next IAFS Mission Intangible Monthly Briefing set for Friday 7 May. The conversation will feature Scott Childers from Walt Disney and Bob Rittereiser from Zhi Verden on “Process-driven reputation risk in supply chains”
2. Purchase the book, Mission: Intangible. Managing risk and reputation to create enterprise value, at the IAFS Store (or any online book retailer) 
3. Become a member of the Intangible Asset Finance Society.
4. Join our community on Linked-In.

Trademarks: Reanimating zombies

Nir Kossovsky - Monday, April 19, 2010
Followers of Mission:Intangible know the mantra—reputations result from the perceptions stakeholders form about how a company manages its intangible assets. Superior reputations pay off with (i) stronger pricing power, (ii) lower operating costs, (iii) greater earnings multiples, (iv) lower beta, and (v) lower credit costs. Brands are the promises embedded in reputations. Trademarks are communications instruments that evoke brands.

David Ruder, an executive with RPX Corporation who chairs the Society’s Trademark Assets Committee, is an authority on trademarks, brands, reputation and value. In anticipation of a full article a forthcoming issue of Intellectual Asset Management Magazine, David writes about the benefits of reanimation:

In the recent financial downturn many companies have experienced extreme financial distress and some have even gone bankrupt. Because of the financial distress, many of these companies discontinued product or service lines and in the process stopped using the brands associated with the product or service lines. While some of these failed or distressed companies, product lines, or service lines may have been discontinued with little or no attention, there are many that have been high profile. Brands such as HUMMER, CIRCUIT CITY, and SHARPER IMAGE all had billions of dollars of revenues in their lifetimes, but were in serious danger of being permanently retired, never to be heard from again.

However, there are many investors, entrepreneurs, and operating companies that understand the value of brands; even the ones that look like they are dying or dead. Through the process of brand revival, many discontinued or retired brands are being brought back to life as viable and thriving businesses that consumers enjoy. Brand revival takes hard work and investment, but when done properly it can be a rewarding endeavor for those that choose to pursue the strategy.

Unfortunately, there is a small group of commentators that have cast aspersions against revived brands. They call these brands “zombie” brands (or sometimes “ghost” brands) and contend that because the revived brand is not the original, it is somehow not real. They believe that a brand that is revived by an owner other than the original owner is not authentic and can, at times, even be deceptive to consumers.

What these commentators fail to see, however, is that a revived brand is just as real as any other brand. Consumers that choose to buy products or services because of a brand will do so whether the brand is revived or not. Just like all brands, a revived brand requires product development, advertising, and marketing efforts. Brands are assets that require ongoing investment and management.

There are brands out there that can be called zombies, however. They are not ones that are available on any product or service, however. These are the brands that are discontinued yet still exist on trademark registers, corporate balance sheets, and “whatever happened to?” websites. Many of these brands have a great deal of value because consumers still remember them and may have strong positive feelings about the brands. Some business managers, however, just let these brands sit unused and often do so deliberately so that consumers are forced to choose one brand over another.

Once the economy returns to full strength in the coming years there should be many examples of brands that have been revived and grow with a strong economy. These brands will not be zombies but the realization of potential identified by savvy business managers. The commentators that deride these revived brands as zombies would rather that the brands they considered dead would just stay dead. These commentators do not understand brand value.


Intrigued? On behalf of the Society, David invites you to help his committee develop best practice standards for trademark asset management. For more information on membership, click here.

Massey: Mining mess

Nir Kossovsky - Wednesday, April 14, 2010
On 5 April 2010, an explosion in a West Virginia coal mine owned by Massey Energy (NYSE:MEE) killed 29 miners and propelled the incident into the worst US mine disaster since 1970. USA Today reports that since 2008, the mine operator was cited more than 700 times by the Mine Safety and Health Administration for dangerous conditions arising from inadequate air, faulty fire extinguishers, exposed wiring, malfunctioning communication systems, inaccurate gas monitors, and deep pools of standing water. Massey counsel Shane Harvey conceded that the Upper Big Branch River "mine's record was not as good as Massey's record as a whole."

Without in anyway wishing to diminish the seriousness of the tragedy, and in keeping with the Society's goal of advancing superior intangible asset management, we asked if there were financially relevant reputation metrics that might help build the business case for fostering better safety practices. The subtext of the question, which was overtly asked of both Jon Low of Predictiv and Paul Liebman of Dell at the Mission Intangible Monthly Briefing Friday 9 April is this: in an industry with a sullied reputation, can a tragedy like this diminish reputation any further?

Turning to the numbers, we see from the 12 trailing month's graph of the return on equity from bigcharts.com that Massey Energy has rewarded shareholders handsomely since the low point of the market collapse in the spring of 2009. While return on equity as of early April was nearly 300%, the event did trigger a substantial sell off and knocked about 18% off the market capitalization. (Shown in brown is the 45 day exponentially weighted moving average.) 



Now turning to the Steel City Re Corporate Reputation Index spanning the period from 8 Dec 2008, we see the values for 7 April 2010 (shown in red) represent a significant change in the trend for the prior 16 months. The chart below suggests that stakeholders do care when matters rise to the level where they create headline risks. So it seems that headline risk avoidance may be one means of fostering better conformance with safety practices.

Hyundai: Court says defend me!

Nir Kossovsky - Monday, April 12, 2010
The Intangible Asset Finance Society is absorbed with issues at the interface of finance, risk, and the six major business processes that drive reputation: ethics, innovation, quality, safety, sustainability, and security. Today's note, courtesy of Society member Bruce Berman, CEO of Brody Berman Associates, Inc., a specialized management consulting and communications firm, is exemplary of core Society interests. Bruce writes,

In a story that received surprisingly scant media coverage, an appeals court has decided that two insurance companies must provide defense coverage to Hyundai against patent infringement claims by a non-practicing entity (NPE), also known as a patent troll, because the company’s policy covers advertising injury. As reported by the Courthouse News Service and IP Law 360 on April 7, the federal appeals court reversed a lower court decision when it ruled that Hyundai Motor America (SEO:011760) is entitled to defense coverage by National Union Fire Insurance Co. of Pittsburgh, Pa.,  a unit of AIG.

The case involved a patent infringement suit over an advertising method that ended with a $34 million verdict against the automaker. The U.S. Court of Appeals for the Ninth Circuit ruled Monday that Judge James Selna of the U.S. District Court for the Central District of California erred when he granted summary judgment to National Union and American Home Assurance Co. on the grounds that patent infringement does not constitute “advertising injury” for the purposes of an insurance policy.

As reported in IPL360 “
Gene Schaerr, a partner at Winston & Strawn LLP who represented Hyundai, called the ruling a ‘tremendous victory.’ Schaerr stated that the ruling is significant not only for Hyundai, but for a large number of other companies with similar policies that cover advertising injury. "The insurance industry has been taking the position that such policies don’t apply to patent infringement and other alleged wrongs involving Web sites,” he noted. The case began in 2005, when Hyundai was one of 20 automakers sued by patent-holding company Orion IP LLC, now known as Clear with Computers LLC, in the Eastern District of Texas over a patent for a method of generating customized product proposals.

Bruce adds, "I wonder how many companies are aware that some of their existing insurance coverages may fund IP defense if not liability?"

Pennies from heaven: Monetizing intellectual capital

Nir Kossovsky - Saturday, April 10, 2010
Ken Jarboe, President of Society partner Athena Alliance and Chair of the Society's Public Policy Committee has given us permission to share the following post from the blog, Intangible Economy.

As the U.S. economy evolves, intangible asset investments are becoming vital to economic growth and sustainability. But, as our new paper "Intangible Assets: Innovative Financing for Innovation" outlines, intangible assets can also be the source of financial capital. As industry has invested capital in research and development (R&D) to create new technology and advance other creative activities, a niche market of firms specializing in intangibles-based financing is springing up. Some intangible assets--traditional IP consisting of patents, trademarks, and copyrights--have been used in sale, leasing, equity, equity-debt, debt, and sale-leaseback transactions to finance the next round of innovation.

The paper outlines a number of public policy actions that can be taken to foster the use of intangible asset financing. These include streamlining the technology transfer process, developing underwriting standards to cover the use of intangible assets as collateral and making financial statements more transparent with respect to intangible assets.

The deals that have been done demonstrate that IP and other intangibles are viable assets to secure capital. Unlike other "exotic" financing vehicles, however, intangible-asset financial products are built on some of the most basic financing mechanisms. Far from exotic, they use traditional techniques in new ways to help companies innovate and grow. As the paper shows, there is plenty of opportunity to harness the power of intangibles.

The paper is a summary of our two reports:
Intangible Asset Monetization: The Promise and the Reality and Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance. Published in the Winter issue of Issues in Science and Technology, the paper is also available on the Issues website.

Ford: Rocketing reputation

Nir Kossovsky - Thursday, April 08, 2010
The results are in and jaws are agape. Heroes are tarnished, the low are elevated, and we have a new crop of villains to talk about. Of course, were referring to the Harris Reputation Quotient.

The Harris organization released their 2009 rankings earlier this week. Based on interviews and other processes in the first weeks of 2010, this is one of the most widely watched reputation metrics.

One surprise is that Berkshire Hathaway (NYSE:BRK.A) took the top spot from frequent top scorer Johnson & Johnson (NYSE:JNJ). Of course, the latter had a reputation run in with both FDA and the US Justice Department earlier this year that appears to have cost them reputationally.

A true bright spot in the study belongs to Ford (NYSE:F), whose RQ score increased by 11.28 points from 2008, the largest single year improvement in the past nine years. Readers of the Mission:Intangible blog saw this coming with our post in April 2009. The major turning point for Ford was 30 October 2009. Below we paste the Steel City Re Corporate Reputation Index rankings for Ford relative to its 9 automotive peers. Compared with the fortunes of GM, Chrysler and Toyota (NYSE:TM), Ford is flying. Its rankings climbed from the 33rd to the 87th percentile.



But even compared with the reputation metrics of the largest public companies with values $50B and greater shown in the chart below, Ford is clearly rocketing. Among these 85 peers, Ford climbed from the 2nd percentile to the 29th percentile. Not to take a shine off its product, but corporate reputation in this instance clearly benefitted from a period ROE of some 230%. Alas, this is all so 2009.



Which leads us to assert, with restrained hubris, that the Harris Reputation Quotient is a lagging indicator of reputation relative to the Steel City Re Corporate Reputation Index. Really.

Moody’s: Lynn Turner calls for guns and badges

Nir Kossovsky - Monday, April 05, 2010
Can shareholders rely on corporate boards to protect their interests? By Delaware law, certainly. The Duty of Care holds Directors responsible for oversight, and personally liable in the absence of oversight when it should have been there. Ask Society IA Corporate Governance Committee Chair Cathy Reese, an authority on board civil liabilities.

But guns and badges? Apparently, according to Advisen Front Page News,  which quotes last week Lynn Turner, a former chief accountant of the Securities and Exchange Commission who's criticized the failure of ratings agencies to see the risks in the failed Houston energy giant Enron Corp., which collapsed in late 2001. "I personally think until law enforcement agencies start holding these boards accountable, the point you're raising is probably right on target, and you're probably not going to get a lot of change."

Since the quote was in the context of an article on Moody’s Corporation (NYSE:MCO) and allegations of inadequate board oversight and risk management, we look at Moody’s reputation as captured by the Steel City Re Corporate Reputation Index.



The graph shows volatility, for sure, but over the course of the year among its 23 peers in the Diversified Financial Services sector, Moody’s reputation index climbed slightly from the 65th percentile to the 72nd percentile. There was a brief depression in September when Moody’s provided a somber earnings guidance, but both its reputation and economic returns bounced back to their mean trend for the year by year’s end. Moody’s ROE finished only 0.25% below the median of its peers and approximately equal to the period’s return for the S&P500.

Where does that leave us with respect to the value of the intangible asset of effective corporate governance? While sympathetic to the concept that criminal risk may foster compliance better than civil risk, we are still of the opinion that there is value to be discovered simply through superior governance as it manifests in ethics, quality, innovation, safety, sustainability and security. A riff on that concept is the subject of our Mission Intangible Monthly Briefing this Friday, 9 April, featuring Society Committee Chairs Paul Liebman from Dell, Inc. and Jon Low from Predictiv.

Art assurance: Monetizing murals

Nir Kossovsky - Tuesday, March 30, 2010
In the Roman arch of intangible assets, safety is a central driver of reputation value in the transportation sector. Hence the air travel aphorism, “any landing you walk away from is a safe landing.” Which does little to aid the prospective buyer of transportation services.

Fortunately, in western countries, we have government agencies that provide certificates affirming minimum safety requirements. We have insurers demanding affirmation of safety practices.

Pity the buyer of transportation in less developed nations. Like Haiti. In a market lacking regulatory standards, a reputation for safety makes or breaks a transportation business.

Now appreciate the ingenuity of free markets. In Haiti, bus operators use intangible assets – murals -- to signal the value of the vital intangible asset – safety. In a story today on National Public Radio, Adam Davidson explains that a bus painted with bright colorful murals – a material investment – signals to potential patrons that the owner expects the vehicle to be viable for some time. The inference is that the owner’s considerable investment in art is matched by a considerable investment in protecting that art through superior vehicular maintenance.

Fine bus art is merely a means of establishing a reputation for safety, and one more extra-financial strategy for signaling value.

Ethics and anthropology

Nir Kossovsky - Monday, March 29, 2010
Because this week two of the major monotheistic religions celebrate holidays, and because on 9 April our Mission Intangible Monthly Briefing  explores the value of ethical behavior, today we take a break from headline risk to look at ethics.

Ethics comprise prescriptions for fairness. As we discuss in the Society’s latest book, Mission: Intangible, ethics are the moral principles by which a company operates; integrity is the act of adhering to those moral principles. For executives in a perpetual search for competitive advantage, the existence of fairness in the general population may be a puzzle. In a dog-eat-dog world, what possible biological advantage could accrue to those who behave in a trusting and cooperative manner with unrelated individuals?

There are two answers: financial and anthroplogical. From a financial perspective, our data show that companies with superior reputations for ethical behavior outperform their peers. And while that should be sufficient and compelling for any senior executive or board member, anthropological data suggest that fairness is an adaptive social construct.

The Economist reports in the 20 March issue that research from the University of British Columbia indicates that the variance of fairness found in difference societies has a cultural explanation -- a response to the development of trade. According to work by Joseph Henrich and colleagues,

…those societies that most resemble the anthropological consensus of what Paleolothic life would have been like (hunting, gathering with only a modicum of trade) were the ones where fairness seemed to count least. People living in communities that lack market integration display relatively little concern with fairness or with punishing unfairness in transactions. Notions of fairness increase steadily as societies achieve greater market integration. People from better integrated society are also more likely to punish those who do not play fair, even when this is costly to themselves.

Which explains the wisdom of the 1998 observation by Alan Greenspan that “in a market system based on trust, reputation has a significant economic value.

Heads Up - Date Change

As noted above, the Mission: Intangible Monthly Briefing for April 2010 will be held one week later than usual in deference to those who celebrate Good Friday. On 9 April 2010 at 12h00 EDT, the second Friday of the month, we will host a conversation featuring incoming Integrity and Corporate Responsibility Committee Chairman Paul Liebman from Dell (NASDAQ:DELL) and IA Value Signaling Committee Chairman Jon Low from Predictiv. The title for the one hour moderated discussion is: Ethics - A valuable intangible asset? Mary Adams from Intellectual Capital Advisors hosts.

As always, registration for this popular series is complimentary and slides will be available for download in advance of the event. To register now, click here.

Join Us

If the above intrigues 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, including a new book, to further your executive career, and exciting monthly conferences such as the upcoming one on ethics mentioned above.

Lehman: Headline risk and Repo 105

Nir Kossovsky - Friday, March 19, 2010
It is water under the bridge, of course, but it is worth noting that insiders at Lehman (NYSE:LEH) thought that Repo 105 reeked of “headline risk.” And headline risk, as we have observed before, can snowball.

According to Jennifer Hughes writing in today’s Financial Times, Martin Kelly, global financial controller, warned his bosses about the “headline risk” to Lehman’s reputation if the deals were to become public. And now that the issue is public, it is snowballing.

Ms. Hughes further writes, “Lehman’s Repo 105s have attracted attention because attempts to hide assets by shifting them off the balance sheet are associated with dodgy accounting and best known for the interminable tangle of vehicles created by Enron, the failed US energy group, to hide its debts. But the reason this issue keeps rearing its head in so many guises is that the question lies at the very heart of accounting, which was originally intended to give a company’s owners a fair report of its business activities. Therefore, what goes on, and what stays off, the books is a permanent area of debate.”

Perhaps. But there is also a reputation angle to this story. In our opinion, the reason this issue is rearing its head and snowballing with the inevitable pile on of ‘litigators, regulators and Mommy bloggers’ is that it speaks to a central driver of market liquidity—trust. As former Fed Chairman Greenspan noted in October 2008, in a market system based upon trust, reputation has significant value. Linking ‘trust’ to ‘reputation’ is the ephemeral intangible asset of ‘ethics,’ for which accountants have yet to find a home.

Which is not to say that ‘ethics’ does not impact financial statements. As reported in the Intangible Asset Finance Society’s latest book, Mission: Intangible, companies with superior reputations deliver superior long-term shareholder returns by enabling (i) stronger pricing power, (ii) lower operating costs, (iii) greater earnings multiples, (iv) lower beta and (v) lower credit costs. And as for companies that do not foster conformance with ethical best practices, there are always alternatives to being a going concern. Just ask Lehman.

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