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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BP vs. GS: WSJ seeks the biggest loser

C. HUYGENS - Wednesday, June 09, 2010
On 8 June, the Wall Street Journal ran a pair of blog stories titled, Who Has It Worse? BP or Goldman Sachs? Michael Corkery argues that BP (NYSE:BP) is the biggest loser. The top two reasons are regulatory risk consequences and costs arising from the headline risk crisis. Reduced pricing power also gets a notable mention. Stephen Grocer votes for Goldman Sachs (NYSE:GS) on the basis of three factors: Goldman has more reputation value to lose; reputation is central to Goldman Sachs’ business, and the disparagement of Goldman Sachs is part of a class war that will have long-lasting consequences.
 
Let’s look at the reputation metrics. The Steel City Re Corporate Reputation Index shows that over the past year, BP’s ranking among the 51 companies in the Oil Refiners & Distribution Sector has dropped from the 92nd percentile to the 26th percentile and is still trending downward. As of 3 June, it was under performing the median of its peer group by 28%. Its exponentially weighted moving average reputation index volatility is rapidly approaching five orders of magnitude.

Further, the median reputation ranking of the entire sector has dropped on a percentile basis from the high 70’s to the low 50’s relative to the standing of all firms traded on the major western markets.

Turning to Goldman Sachs, the Steel City Re Corporate Reputation Index shows that over the past year, Goldman’s ranking among the 38 companies in the Securities Brokerage Sector has dropped from the 97th percentile to the 75th percentile having bottomed out at below the 50th percentile. It is now trending upward. As of 3 June, it was under performing the median of its peer group by 20%. Its exponentially weighted moving average reputation index volatility appears to have peaked at 5 orders of magnitude.

Further, the median reputation ranking of the entire sector has hovered around the 40th percentile, although the variance within the sector has grown from .15 to .25.

Compared and contrasted, these data lead to two very different conclusions regarding the futures of BP and Goldman. Goldman is coming back. Goldman Sachs is exhibiting reputation resilience—a highly desired state following a headline risk event whereby it is able to hold on to some of its pricing power, continue to operate with lower costs, benefit from greater investor expectations, and appears to have resolved many of the uncertainties surrounding its enterprise value. In contrast, BP is still sliding reputationally, has surrendered pricing power, is facing unimaginable costs, and is the subject of takeover speculation.

BP is unquestionably the biggest loser at this point, and the indicators suggest that it will handily ‘win’ this competition in the long run, too.

Reputation Index Results 2010 Jun 7

Nir Kossovsky - Monday, June 07, 2010

Weekly Reputation Index Metrics


At the close of trading 3 June 2010, the Steel City Re RepuStars™ Composite Index of 38-40 equity securities selected on the basis of their reputation ranking stood at 1384.16. Over the past 4 weeks, the RepuStars Index has lost 1.65%; the S&P500™ Composite Index has lost 2.24%. Other periodic data are shown below.
   

The RepuStars Composite Index comprises the two firms in each of 20 major sectors with the greatest periodic rise in their Steel City Re Corporate Reputation Index ranking sampled from the large cap segment of the U.S. equities market. Eligibility requirements are market capitalization >$3.5B, share price >$5.0, and reputation ranking between the 25th and 85th percentile. The benchmark metric is the S&P500 composite index.

Satisfy your intellectual curiosity!

If the above 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 9 July at 12h00 EDT. The conversation titled Building corporate reputation in the post-BP marketplace will feature Jonathan Salem Baskin, global brand strategist, speaker, and author of Branding only Works on Cattle and Bright Lights Dim Bulbs; in dialogue with Nir Kossovsky, CEO, Steel City Re a risk and reputation management consultancy, author of Mission: Intangible. Managing risk and reputation to create enterprise value, and Executive Secretary of the Society
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.

BP vs. TM: A tale of two reputations

Nir Kossovsky - Tuesday, June 01, 2010
When it comes to headline risk, loss of value surprises no one. But this Society has long advocated that among the benefits arising from superior intangible asset financial management is reputation resilience. In fact, it is one of the central themes in the Society’s recent book, Mission:Intangible. Managing risk and reputation to create enterprise value.

Reputation resilience is the benefit arising from having a company pre-position stores of goodwill on which it can draw when the headline crisis strikes. It means stakeholders will tend to feel a company’s pain and empathize rather than holding a company culpable.

Consider the remarkable reputational comeback of Toyota Motors (NYSE:TM). As shown in the first of two charts of the Steel City Re Corporate Reputation Index, Toyota’s ranking has zoomed back to the top of the automotive (motor vehicles) sector globally among its 35 peers from a start one year ago of 0.62. While it is currently underperforming the median of its 18peers in the automotive sector by 23% due to costs associated with its recent issues (and the subsequent pile on of litigators, regulators and mommy bloggers), its future prospects are good. Stakeholders are giving the company the benefit of the doubt in terms of pricing power, labor costs, credit costs and earnings multiples. Toyota built the capacity for reputational resilience over years of generally doing the right thing on six key fronts: ethics, innovation, quality, safety, sustainability, and security.



Now contrast Toyota with what we expect will be a long a steady reputation loss at BP (NYSE:BP). BP’s ranking has been sliding for the past year having started at the 87th percentile and finishing most recently at the 56th. BP, a firm that is no stranger to reputation issues, is currently underperforming its 51 peers in the integrated oil sector by 14% and, notwithstanding the bright colors of the chart, the future is not rosy.


Heads Up

1. Risk, governance, and compliance are the topics for this Friday’s Mission Intangible Monthly Briefing at 12h00 EDT. The program, titled Driving risk and reputation into the C-suite, is complimentary, and a sample download of a recent program is available to further pique your interest. For more information and registration, click here.

2. The book, Mission: Intangible is available from the Society and from other major online book retailers. The book is available in hardcover, softback and e-book versions. Society members benefit from a material discount if purchasing the book from the Society.

3. The Society will release next week regular data on the first-ever reputation composite index. Provided by Steel City Re, the data reportedly show that firms actively engaged in the process of reputation enhancement tend to outperform their peers. Spoiler alert: Since January 2005, the Steel City Re Corporate Reputation Composite Index of reputation rising stars has returned 18% while the S&P500 has lost 3%.

And of course, we extend to you an open invitation to join the Society as a full member; and to Link-In to the Society's regular chatter availabe conveniently through the Linked-In website and IAFS group membership. Join us.

Walmart: Laboring to protect its reputation

C. HUYGENS - Wednesday, May 12, 2010
As April came to a close, Walmart Stores Inc. (NYSE:WMT) received bad news. The United States Court of Appeals for the Ninth Circuit, in San Francisco, ruled that the plaintiffs alleging unfair labor practices against female employees (read, unethical practices) can head to court as a class action. This decision transforms a nine year old matter into the largest class-action employment lawsuit in U.S. history.

Besides being a welcome break from the headline risk crises on safety, quality and ethics facing BP (NYSE:BP), Toyota (NYSE:TM), and Goldman Sachs (NYSE:GS), the issue provides an opportunity to test a central hypothesis held by the Society and described in detail in the book, Mission Intangible. This is it.

Reputation value is the sum of the value contributed by six key intangible assets (business processes) governing ethics, quality, innovation, safety, sustainability, and security. The assets create value cooperatively like the stones in a Roman arch; loss of any one key stone can destroy significant value.

Let’s also recap what is value. Market capitalization is the obvious one. More to the point, companies with superior reputations have enhanced pricing power, lower operating costs, lower credit costs, and higher earnings multiples. It's that simple.

Walmart has invested significant time and effort into building authentic credentials and a reputation for excellence in sustainability practices. Is its reputation for sustainability sufficient to compensate for its less-than-stellar reputation in labor (ethics)? The hypothesis would suggest that they are independent, and that failure in either could erase the reputation value created by the other. Let’s look at the numbers.



The Steel City Re Corporate Reputation Index, also described in greater detail in the book, Mission Intangible, shows that Walmart’s reputation ranking has slipped from the coveted #1 slot of the 100th percentile among 39 peers in the multiline retail sector. Over the past 16 months, Walmart has moved from the top ranking to the 94th percentile. Economically, its return on equity has underperformed both the median return of its peers (by 42%) and the S&P500 benchmark index.



In contrast, Target Inc. (NYSE:TGT), a rival whose charting in this Mission Intangible blog back in June 2009 has been the most popular post ever, raised its reputation ranking among this peer group from the 46th percentile to the 94th percentile. At the same time, it outperformed the median of its peers (by 27%) and the S&P500 index.



Also for contrast look at Walgreen Co. (NYSE:WAG). During this period, their reputation ranking rose from the 69th percentile to the 81st percentile, and it outperformed its peer group by a narrow 2%, but comfortably beat the S&P500 Index.



Last, note that the multiline retail sector, as a group, slipped in its median reputation ranking relative to the broad market. Furthermore, the variance among the individual companies comprising this sector narrowed. The sector's median reputation ranking drop stands out dramatically in contrast against Target's reputation ranking rise.

Overall, these data affirm the increasing importance of reputation management in increasing, protecting and restoring enterprise value; and that reputation management involves addressing core business processes whose perceptions by stakeholders comprise reputation. These data also affirm the Roman Arch model, which plainly says, if you don't pay attention to all of your key business processes, then, when a headline crisis strikes, your stakeholders may turn on you in a heartbeat.

Love: A four-letter intangible

Nir Kossovsky - Thursday, May 06, 2010
This Sunday is Mother’s Day in many parts of the world. Mother’s Day honors mothers and motherhood, and the unique feature of the mother-child relationship - unconditional love.

While there are many ways to commemorate the day festively, wouldn't your mother be happier knowing her child understood the intangible value of love? And what better way to signal unambiguously that you have internalized this lesson than to have your mother autograph your own personal copy of Mission: Intangible. Managing risk and reputation to create enterprise value

Buy your copy today at the Intangible Asset Finance Society bookstore. And throw in a membership, too. And while you are at it, buy your mother her own personal copy.  At the very least, she can gift it to some deserving child – your sibling -- whom she never really loved as much as you.

Happy Mother’s Day to all.

BP: Oh no, not again

Nir Kossovsky - Monday, May 03, 2010
In Douglas Adams’ The Hitchhiker's Guide to the Galaxy, “the only thing that went through the mind of the bowl of petunias as it fell was 'Oh no, not again.' Many people have speculated that if we knew exactly why the bowl of petunias had thought that we would know a lot more about the nature of the Universe than we do now.”



We can reasonably assume that similar thoughts raced through the minds of BP (NYSE:BP) executives on 20 April as the Deepwater Horizon drilling rig exploded, caught fire, and sank. And while we are probably equally clueless about the nature of the Company, as are stakeholders who own its reputation, of this we can be certain: it is sinking.

As illustrated in the series of Steel City Re Corporate Reputation Index charts below, BP and the other firms associated with this safety and environmental disaster are experiencing an acceleration of a steady reputational decline. And as noted in the book, Mission Intangible and more recently in an article in CFO magazine, these declines are indications and warnings of an increased risk of a reputational event.

Not that BP is unaware. The New York Times quotes BP CEO Tony Hayward on Friday as saying, “Reputationally, and in every other way, we will be judged by the quality, intensity, speed and efficacy of our response.”

BP has blamed the rig’s owner and operator, Transocean (NYSE:RIG), for the accident. Further investigation is now suggesting that a drilling subcontractor, Halliburton (NYSE:HAL), may have failed to execute a critical task that prevents gas and oil from escaping from the well.

The process is called ‘cementing’ and it is challenging. A 2007 study by the U.S. Minerals Management Service found that cementing was the single most-important factor in 18 of 39 well blowouts in the Gulf of Mexico over a 14-year period. More recently, Halliburton (NYSE:HAL) has been accused of performing a poor cement job in the case of a major blowout in the Timor Sea off Australia last August. An investigation is under way.

As a case study of risk and reputation management, this has almost all the main elements. Consider the following:

1. Iconic brand, BP, working through subcontractors - a key source of risk (we explore this topic further this Friday, see below)
2. History of failures in managing the processes of assuring safety - a reputation lacking resilience 
3. Marketing campaign built around sustainability laid to waste by a massive oil spill - lack of authenticity

The LA Times notes in a story on 1 May that experts were cautious about attributing blame, pending what are expected to be lengthy investigations by Congress and the Department of Homeland Security, which oversees the Coast Guard.

Satisfy your intellectual curiosity!

If the above issues pique 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 at 12h00 EDT. 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.

Disney: Holistic supply chain management

Nir Kossovsky - Thursday, April 29, 2010
Next Friday, May 7, the Society's monthly Mission Intangible Monthly Briefing will feature Scott Childers from the Walt Disney Company (NYSE:DIS) who is calling for holistic supply chain vendor management, and Bob Rittereiser from Zhi Verden whose Global Trademaster™ product provides total supply chain visibility. A note this past Monday in the Wall Street Journal explains why this is so important.

On Monday U.S. Federal, state and local law enforcement officials, part of the National Intellectual Property Rights Coordination Center said they made their biggest-ever seizures of counterfeit goods this month in two operations that netted more than $240 million in a sweep of more than 30 U.S. cities. Immigration and Customs Enforcement announced the double-barreled operation on Monday to coincide with World Intellectual Property Day.

Commemorating a day to heighten awareness of intellectual property with arrests may not be festive, but it is appropriate. Fake goods do more than rob intellectual property owners of revenue. Fake goods raise the specter of a full range of reputation-linked issues that go beyond cash flow to create risk in areas as  diverse as ethics (international labor standards), quality, safety, security, and sustainability. The article further notes that next week, the Naval Criminal Investigative Service and the Defense Criminal Investigative Service will begin targeting counterfeit goods that could get into the military supply chain. The U.S. General Services Administration will target fake goods in the federal civilian supply chain.

To target effectively, one needs intelligence. According to Mr. Rittereiser, Zhi Verden’s Global Trademaster™ provides that intelligence; according to Mr. Childers, having that intelligence is a necessary component for world class supply chain management.

Act on your intellectual curiosity!

If the above issues pique 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 at 12h00 EDT. 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.

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.

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