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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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.

Eli Lilly: Supply chain insecurity

Nir Kossovsky - Wednesday, March 17, 2010
Last Sunday at pharmaceutical giant Eli Lilly's (NYSE:LLY) warehouse near Hartford, Connecticut, thieves stole $75 million dollars worth of anti-depressants and other prescription pills -- enough to fill a tractor-trailer --- now headed for the black market. "It was a very brazen, well planned crime. It appears as though the criminals broke in through the roof, rappeled down through the roof, disarmed the alarm and then proceeded to steal several dozen pallets of pharmaceutical products which were loaded onto a truck and taken", said Ed Sagabiel with Eli Lilly and Company.

We make three points. First, this is a physical security breach that does not, on its surface, appear to have any reputation impact. The financial impact will be minimal because the event is one of the perils commonly covered by property and casualty insurance. The second is that this is the type of physical security risk most companies are best prepared to mitigate - physical removal. Most are not in a position to mitigate the reverse security risk of physical introduction--the type of physical security risk that nearly brought Johnson & Johnson (NYSE:JNJ) to its knees a quarter of a century ago.
 
Here's a worst case spin from a reputation perspective. Fact: Lilly has lost control of $75 million (wholesale) of product. These drugs are all branded and marked as authentic Lilly ethical pharmaceuticals which stakeholders expect will be safe and effective. Suppose branded product reentered the market after being adulterated. Suddenly, the Johson & Johnson fiasco seems like child's play.

You ask for a motive? How about the mother of all insider trades? Would criminals who execute a Mission:Impossible-style heist have the financial acumen to short Lilly equity or go long on Lilly credit default swaps as they flood the market with adulterated pharmaceuticals? Could they recognize returns in excess of $75 million in fungible liquid assets? 

And this brings us to the third point. Superior reputation management includes both crisis management and scenario modeling exercises. Because even rumors suggesting the above could be damaging.

Heads Up - Date Change

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.

Apple: What stakeholders want

Nir Kossovsky - Wednesday, March 10, 2010
Stakeholders own a company’s reputation, and their behaviors are outward expressions of their true feelings.

The behaviors that are relevant to this Society are those that create enterprise value. Among them are acceptance of higher price points, extension of superior credit and labor terms, lower operating friction, higher earnings multiples, and lower credit costs. For readers of this blog or the recently published book, Mission: Intangible, this is old news.

More to the point, in Mission: Intangible, we noted that mutual funds comprising companies with reputations for advancing social values tended to underperform their benchmarks. Among the six major intangible assets that underpin reputation (ethics, innovation, quality, safety, sustainability and security), only excellence in sustainability seemed not to correlate with superior economic performance.

So from time to time, we revisit the issue of the value of green. The triggers for our current revisit are three:

First, a blog note from a friend of the Society, author, and marketing consultant Jon Baskin in which he noted that shareholders at Apple (NASDAQ:AAPL)  recently defeated a new corporate social responsibility initiative.

Second, is the growing movement to create a third class of corporate structure – the “beneficial corporation.” Vermont currently leads this movement with legislation that would allow companies to both (a) return gains to investors and (b) provide social good for the community. The law would give “for profit” companies legal cover to pursue societal goals that may yield less profit. The Vermont initiative is driven by the remorse of socially-conscious shareholders who supported Ben & Jerry’s acceptance of Unilever NV’s (NYSE:UN) buyout offer under threat of litigation from financially-motivated shareholders.

Third is an advertisement of comparative derision that caught our eye in the Wall Street Journal. In the ad run by Oracle (NASDAQ:ORCL), they contrast the following under the headline of “IQ Test”: (their) Sun SPARC computer that run 7x faster versus IBM’s (NYSE:IBM) fastest computer that consumes 6x energy. They ask the consumer tongue in cheek to choose: Faster Computers or Smarter Planets.

We believe that the question of being green or being profitable is a false choice. At the same time, it is self evident that the transfer of corporate profits into social benefits both within and outside the company will at some point reduce cash flows available to shareholders. We will continue to observe and share what we see.

Heads Up - Date Change

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.

Goldman Sachs at the wheel

Nir Kossovsky - Thursday, March 04, 2010
Although we intimated recently that new SEC regulations effective 28 February would drive risk and reputation management into the boardroom, we hardly expected 140 year-old Goldman Sachs (NYSE:GS) would be first at the wheel. Nevertheless, reading through this venerable investment bank's latest 10-K filing the next day, there it was--the first formal disclosure of headline risk.

We may be adversely affected by increased governmental and regulatory scrutiny or negative publicity. ...
The financial crisis and the current political and public sentiment regarding financial institutions has resulted in a significant amount of adverse press coverage, as well as adverse statements or charges by regulators or elected officials. Press coverage and other public statements that assert some form of wrongdoing, regardless of the factual basis for the assertions being made, often results in some type of investigation by regulators, legislators and law enforcement officials or in lawsuits. Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceeding, is time consuming and expensive and can divert the time and effort of our senior management from our business ... Adverse publicity, governmental scrutiny and legal and enforcement proceedings can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations.

Translating the above into lingua IAFS, Goldman Sachs is saying that their financial performance will be impacted adversely if their reputation is tarnished. They may lose pricing power, may have higher operating costs, may have higher credit costs, and may reward shareholders with lower equity returns.

As the Wall Street Journal reported the next day, March 2, this is the first known 10-K disclosure of "PR" risk. But it is hardly the first acknowledgement of reputation risk. For example, with respect to ‘PR risk,’ both German financial regulators and a 160 year-old Pittsburgh-based food company with a German-American heritage are well ahead of Goldman.

Last summer, the German financial regulator BaFin formally noted that reputation risk is a trigger of liquidity risk. Years earlier, the H.J. Heinz Company (NYSE:HNZ) created the first office of Risk and Reputation Management under the leadership of James Trout. Cutting to the chase, risk and reputation management is the new new thing. This Society is committed to ongoing thought leadership. Won't you join us?

And now, a tribute: Thank you, Dan Reynolds!

Join Us

If the above intrigues you, frightens 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 innovation.

Innovation: Hot Policy and Practice Issues

Be sure  to register for a complimentary seat at the 5 March Mission:Intangible Monthly Briefing, held by phone at 12h00, EST. It's an innovation smack down. Athena Alliance President and intangible asset policy expert Kenan Jarboe goes head to head with Steel City Re's Judith Giordan, Managing Director of IA Finance and former senior technology executive with Pepsi, Henkel, International Flavors & Fragrances, and Polaroid. Yes, as always, registration is complimentary and slides are already posted on the website events page.

Whistling by the graveyard

Nir Kossovsky - Monday, March 01, 2010
It is significant that there is little public gloating from other auto manufacturers as Toyota Motors’ (NYSE:TM) leadership globally offers mea culpas. Although it is Toyota’s reputation that is melting under the heat of headline risk, competitors are only too aware that the next tolling of the bell could be for them.

This is why. While the damaged intangible assets are three of the big six: ethics, safety, and quality, the underlying problem is the global supply chain. According to Bob Rittereiser, CEO of Zhi Verden, a supply chain systems and information management company, “the stark reality today is that the global supply chain is a business operating system with global reach, thousands of participants, established practices, government requirements, blazed paths, known bottlenecks and many known risks, yet no one is in charge!” Or, said differently by John Hurrell, Chief Executive, Association of Insurance and Risk Managers, “The complexity of supply chains puts your reputation in the hands of the lowest common denominator.”

Reputation drives intangible asset value. As reported in Mission: Intangible -- Managing Risk and Reputation to Create Enterprise Value (IAFS with Trafford Press, March 2010), research shows that superior reputations pay off with (i) pricing power , (ii) lower operating costs, (iii) greater earnings multiples, (iv) lower beta (i.e., stock price volatility) and (v) lower credit costs. And when reputation is damaged, these benefits are lost. All told, we estimate the reputational impact, so far, to be a $2 billion cost to Toyota's earnings and a $25 billion cost to its market capitalization.

Previously we shared Toyota's reputation metrics from the Steel City Re Corporate Reputation Index. We take time out from our membership drive to offer this financial breakdown shown at left.

Legend. Income Statement Impact (values in $‘000). Lost sales and a 3% loss in pricing power will reduce Toyota’s gross profit by around $900 million. Costs associated with the worldwide recalls, litigation, insurance subrogation, and regulatory compliance will cost at least another $500 million. The lower credit ratings will increase borrowing costs by at least another $71 million, and non-cash depreciation expenses associated with a 3% write down of Toyota’s automobile asset base will reduce earnings by another $540 million. Data source: Steel City Re.

Join Us

If the above intrigues you, frightens 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 to further your executive career.

Innovation: Hot Policy and Practice Issues

Be sure, by the way, to register for a complimentary seat at the 5 March Mission:Intangible Monthly Briefing, held by phone at 12h00, EST. It's an innovation smack down. Athena Alliance President and intangible asset policy expert Kenan Jarboe goes head to head with Steel City Re's Judith Giordan, Managing Director of IA Finance and former senior technology executive with Pepsi, Henkel, International Flavors & Fragrances, and Polaroid. Yes, as always, registration is complimentary and slides are already posted on the website events page.

IAFS Membership Drive

Nir Kossovsky - Wednesday, February 24, 2010
The IAFS launched its 2010 membership drive this past week. This is why. On February 28, new US SEC regulations will drive into the boardrooms risk, reputation and intangible asset management. 

You have a decision. Will you be at the table or on the menu?

These regs mean that every board member, in fact every top executive, can expect major new challenges. Members of the Intangible Asset Finance Society (IAFS) will be prepared. Here’s how:

1. Thought Leadership. The IAFS is the only interdisciplinary Society of professionals committed to the financial exploitation of intangible assets. That translates into enhanced pricing power; lower operating and credit costs; and higher net incomes and earnings multiples.

2. Risk Management. A lost reputation can destroy a firm overnight. IAFS can keep you up to date with risk management strategies for ethics, innovation, quality, safety, environmental sustainability, and security.

3. Preferential Pricing. Society members receive preferential rates for IAFS products at our new store and discounted registration to various professional meetings. Discounted registrations for the March ICAP Ocean Tomo meeting in San Francisco and the June IP Business Congress in Munich, for example, are now offered.

4. Incentive Premium. Sign on for your academic or corporate membership including payment by March 15 and receive a complementary copy of the IAFS’s latest book, Mission: Intangible. Managing risk and reputation to create enterprise value (a $29.95 value).

Click here to learn how our strengths in Thought Leaders and Risk Management, financial benefits such preferential pricing, and premiums such as the book shown at right make joining the Society today an offer you can't refuse.

You got it, Toyota

Nir Kossovsky - Wednesday, February 17, 2010
Headaches. In case you've been unplugged this past year, Toyota Motors Corp (NYSE:TM) is experiencing an intangible asset value meltdown. Highly valued behaviors that became watchwords for Japanese manufacturers—ethics, quality, safety—appear to have recently fallen out of favor at this iconic firm.

It's been a few weeks since we looked at the automobile sector, and we will give this topical sector a robust treatment in our regular corporate reputation series in IAM Magazine issue 41. For now, a teaser.

At the of end of Q1 2009, the Steel City Re Corporate Reputation Index showed a precipitous decline in Toyota’s reputation relative to a sample of large publicly traded firms on the US exchanges. Honda Motors (NYSE:HMC), a Japanese-headquartered competitor, is one of the reputational beneficiaries. Its all relative. Shown in the charts below, the Reputation Index metric for TM drops from the 80th percentile to the single digits and generally holds there for the balance of 2009. HMC, on the upswing from early 2009, peaks at the 90th percentile before ending the year 30 percentage points net up at around the 50th percentile.

As for economic returns over this same period, TM rewarded its shareholders with a 45% ROE (S&P was up ~21%). HMC rewarded its shareholders with an 80% ROE.



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