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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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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.

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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.

Accenture: Tigers, elephants, and frogs; oh my!

Nir Kossovsky - Wednesday, February 10, 2010
“…it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.”

True or false: Finding himself unable to keep his fly in the full, upright, and locked position, Tiger Woods’ ethical downfall precipitated reputation-associated losses on the order of $12 billion by his sponsors?

FALSE. The Steel City Re Corporate Reputation Index shows no evidence of headline risk effects.

On 28 December 2009, Christopher R. Knittel and Victor Stango posted on the web their study, Shareholder Value Destruction following the Tiger Woods Scandal. These economists, associated with both the University of California, Davis, and NBER, reviewed the market behavior of six public sponsors of Mr. Woods—Accenture (NYSE:ACN), AT&T (NYSE:T), Nike (NYSE:NKE), Gillette (NYSE:PG), Electronic Arts (NASDAQ:ERTS) and Gatorade (NYSE:PEP). Using an ‘event study’ method, they concluded that shareholders of companies that Mr. Woods endorsed lost $5-12 billion in wealth between 27 November and 11 December. The authors imply headline risk as the proximate cause.

We disagree. While there were some market cap losses and fewer gains, we see no evidence of consistent decreased reputation metrics among the sponsors. Using tools described briefly at Steel City Re, and in more detail in the forthcoming book, Mission: Intangible. Risk and reputation management to create enterprise value, we see no change in reputation rank trends over the relevant two week window. We share exemplary Steel City Re Corporate Reputation Index metrics for four (4) of the companies alleged to have suffered the consequences of headline risk.

First, AT&T rewarded its shareholders over this period with a positive bump, although it was not as significant of a bump as the median of its 57-member peer group. Its Reputation Index also showed a small positive bump ending the period at the 92nd percentile. The bottom line: better reputation metrics over the critical period.

Second, Accenture and Nike showed no movement in their reputation metrics. In the charts showing the Reputation Index and its exponentially weighted moving average volatility for the past six months, Accenture is flat at the 94th percentile and Nike is flat at the 100th percentile. The bottom line: no change in reputation metrics over the critical period.

Last, in the chart showing both the Reputation Index for Electronic Arts and the both the median and variance of the index measurements for the Software Group sector, three things are apparent. First, Electronic Arts’ Reputation Index ranking continued its downward trend during the critical period. Second, the median reputation ranking for the entire sector slid over the course of the entire year. Third and last, there is much volatility in the variance of the index rankings in this sector. The bottom line: weaker reputation metrics over the critical period reflecting continuation of a year-long trend.

The data suggest that in this instance, the downfall of an iconic spokesperson generated significant press, much speculation, but ultimately nothing untoward with respect to his sponsors. Bottom line: No headline risk seen. Goodbye Tiger. Hello elephant and frog.

What Sharon Allen thinks

Nir Kossovsky - Thursday, February 04, 2010
Today’s note is an extract from a recent posting on bigfatfinanceblog that was brought to our attention by Jim Catty, chairman of the board of IACVA which is a new partner of the Society. The blog note was written by Deloitte LLP chairman of the board Sharon Allen and addresses social media and reputation risk. Here is the take home message:
… I believe that our primary focus should be on the powerful role that corporate culture can play in encouraging appropriate social networking. A good place to start may be with business leaders whose personal example promotes the time-tested principles of ethics and values. In fact, in our first “Ethics & Workplace” survey that I commissioned two years ago, 77 percent of those polled cited the behavior of management or a direct supervisor as the top factor influencing their conduct. While creating and maintaining that “tone at the top” is an important first step, the key is to establish a culture that ensures that an appropriate moral compass is in place — in the office or out, online or off…

Thank you, Jim.

Dying of embarrassment

Nir Kossovsky - Tuesday, February 02, 2010
If Google Trends, the website search volume and story volume indicator is to be believed, then the world is currently more interested in reputation than other big issues. Earlier, we noted that reputation was giving the issue of 'cash flow' a run for its money. The chart below shows that relative to terrorism, reputation is now a dominating issue of interest, mirabile dictu.

Financial spreads

Nir Kossovsky - Thursday, January 28, 2010
Reputation is the collective perception held by stakeholders of how a company manages its intangible assets. In the 74-member Capital Markets sector, those intangible assets underlying reputation comprise three types of risk management—operational, market and credit. “In a market system based on trust, reputation has a significant economic value,” noted Alan Greenspan, a former chair of the US Federal Reserve Board. In the absence of trust following the loss of reputation, liquidity is at risk. During the 2007-2009 financial crises, stakeholders perceived failures in one or more of those risk management processes and precipitated the liquidity crisis. We look at some exemplary reputation data.

As described in great detail in the forthcoming book, Mission: Intangible. Managing risk and reputation to create enterprise value, the data show that there is a strong association between reputation and long-term economic returns. The rank order of 3-year returns for BlackRock (NYSE:BLK), Goldman Sachs (NYSE:GS), Deutsche Bank (NYSE:DB), and Morgan Stanley (NYSE:MS) shown in the chart above adapted from bigcharts.com correspond to their rank order Steel City Re Corporate Reputation Index metrics and inversely to the volatility value and vector of that metric.

The data also show, as illustrated in the above chart that also shows Morgan Stanley's acute reputation drop, that the Capital Markets sector as a group experienced a reputation rise this past year, but that the variance within this group also increased.

Last, as described previously, the data show that the short term distortions of extraordinary returns following extraordinary losses do not skew the reputation metrics. Firms that have superior reputations are more resilient, will fall more slowly in periods of upheaval, and therefore have less ground to regain. The bright side of this relative lack of short-term upside is that the lower volatility translates to lower cost of capital.

Leftovers - M:I MB of 10-Jan-8 (Part III)

Nir Kossovsky - Monday, January 25, 2010
Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events, moderated by Mary Adams who chairs our Member News Committee, comprise about 45 minutes of prepared remarks backed up by presentation materials, and 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here is the third and final potion of leftovers.

QUESTION TO JUDY GIORDAN: You talked about capturing the value from open innovation. When companies do this, do they see it in terms of the relationship with IA management? Does the question matter?

ANSWER: The concept behind Open Innovation (a term promoted by Henry Chesbrough, a professor and executive director at the Center for Open Innovation at UC Berkeley) is that companies can and should use external ideas as well as internal ideas and paths to market. As described by Chesborough and others, central to open innovation is that in a world of widely distributed and ever increasing information and knowledge, companies cannot afford to rely entirely on their own internal research, but should instead buy or license processes or inventions (e.g. patents) from other companies as well as find opportunities for internal inventions not being used in a firm's business to be commercialized outside the company (e.g., through licensing, joint ventures, spin-offs).

Explicit to all of this is the IP question – who owns the rights to the IP of the technology – and this is the aspect being focused on by companies. What is implicit and is an opportunity that is not being capitalized upon is for reputation enhancement from the standpoint of IA around open innovation. That is – demonstrating that the ability to creatively and facily interact in the open market for innovations creates a competitive edge for a company –by capturing value through the process of bringing in technology, aligning it well to corporate goals and monetizing as well as process of spinning out unused technology.

Judith Giordan.
Steel City Re

QUESTION TO DAVID HETZEL: You talked about the market for patents maturing. Is this something that will happen organically or can it be speeded up? If so, how?

ANSWER: The re-institutionalization of the public, real-time live auction ala Ocean Tomo would assist. Now that OT auction are under the umbrella of ICAP, we'll have to see what they do. ICAP, as you may know, has tremendous resources. I'm sure standardizations around patent quality and valuation would go a long way to accelerating the market's development.

David Hetzel

Reputation rummage

Nir Kossovsky - Wednesday, January 20, 2010
The Society provides a forum for executives to discover better ways to increase the visibility, transparency, and value of intangible assets. These assets comprise 70% of the average company's value. Coming off a year characterized by liquidity challenges, it is therefore heartening to know that Google searches for "Reputation" occur with a frequency comparable to searches for "Cash Flow." It is also encouraging to note that the volume of news articles on reputation continues to grow. Cutting to the chase, the Google Trends data suggest that stakeholders care. Better yet, res ipsa loquitur.

Johnson x2: Reputation regicide

Nir Kossovsky - Monday, January 18, 2010
Late last year, it was Tiger Woods. For the new year, it is the company that held the top 2009 reputation ranking by both the Harris Interactive Survey and the Steel City Re Corporate Reputation Index – Johnson & Johnson (NYSE:JNJ). What happened this time?

There were early hints with FDA letters in August and September 2009. But the big stories broke last Friday when the U.S. Justice Department announced that it is suing the drug giant for allegedly paying millions of dollars in kickbacks to geriatric pharmacy company Omnicare Inc. (OCR) to induce the company to buy and recommend Johnson & Johnson drugs. That same day, the Company widened its voluntary recall several of the company’s top selling over-the-counter brands across the country. There is a concern that a chemical called 2,4,6-tribromoanisole is causing an unusual odor in select brands. The smell is due to the breakdown of the chemical that is used to build wood pallets that transport and store product packaging materials. The expanded recall was announced after the FDA reprimanded the Company for waiting close to a year to remedy the well-documented problem.

In short, two reputational issues: ethics and quality. We expect repercussions. Turning to the Steel City Re Corporate Reputation Index, we focus on Aug and Sept when JNJ received FDA warning letters. Here we see a slight dip in the reputation index and correspondingly, a lack in equity growth while both the pharmaceutical sector and the S&P were rebounding. See arrows marking Aug/Sept window on both the reputation index (red) and the equity returns (blue diamond/red outline). The full reputational and financial effects are yet to be recognized.

To be fair, JNJ’s overall ROE underperformance of 23% relative to the Pharmaceutical sector can be explained, in part, by JNJ’s resilience during the 2008 crisis. A two-year ROE in the chart below from Bigcharts.com shows that at the low point of the market in December 2008, JNJ had lost only 20%. The sector had lost 30%, while the S&P lost 40%. In march of 2009, JNJ 'caught up' with the industry and has followed the sector mean since. The ‘cost’ of that historic resilience is poorer apparent performance in the short term this past year. The gain is lower volatility and therefore lower cost of credit. Provided that the effects of the latest disclosures do not materially shave reputation value. The year is still young.

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