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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Headline risk reprieve

Nir Kossovsky - Thursday, December 03, 2009
Six weeks have passed since the Chairman of the Galleon Group, the hedge fund at the center of a suspected insider trading ring, and several executives, have been charged. Three of the companies caught in this scandal are going concerns. Their executives are accused of divulging confidential non-public information. Those companies are McKinsey & Company, IBM (NYSE:IBM), and Intel Corporation (NASDAQ:INTC).

Of the three, McKinsey & Company has a widely held reputation for discretion – an intangible asset that is essential to their operational effectiveness. Last month, we hypothesized that this reputation would help mitigate McKinsey’s headline risk. Evidence of this mitigation would be fewer articles in the business and legal press relative to the other two firms.

Once again, Society member Jim Singer of the Pepper Hamilton law firm and author of the blog IP Spotlight, helped us with the analysis. Lexis Nexis searches were conducted combining 2 comprehensive databases - Business News Publications and Legal News Publications for the dates 9/3/2009-11/22/2009. The first search was for the pairing of “Galleon OR Rajaratnam.” Jim then searched the resulting articles for the additional terms of McKinsey, IBM, or Intel. 

There were no citations meeting the search criteria prior to the government announcement of allegations. Following the announcement, the data show that McKinsey’s name is less frequently associated than the other two firms with the disgraced hedge fund. This observation is statistically significant for the first three weeks of the alleged scandal.



While the findings are not conclusive—McKinsey is privately-held whereas the other two are public—these data are consistent with our general observation that companies with strong reputations based on rigorous business processes make for sympathetic actors that are treated as victims rather than culpable agents when adverse events occur. In short, reputations arising from superior intangible asset stewardship help mitigate headline risk.

NB: Statistical analysis using the Chi Square test for the five weeks of data yields a p<.03, p<.001, p<.01, for the first three weeks, respectively, and then not statistically significant differences thereafter.

Exacting reputation

Nir Kossovsky - Tuesday, December 01, 2009
Intangible asset financial management is a serious matter affecting what is once again the source of 70% of the average public company's value. There is also a lighter side.

We entered the American Thanksgiving holiday with story about food (beer, actually) and reputation. We bookend the holiday by sharing a view of the inside flap from a carton of eggs. Not any egg carton, mind you, but one of the many that played an important role in the holiday meal supply chain.



Parva sub ingenti.

Reputation quaffing

Nir Kossovsky - Tuesday, November 24, 2009
The American Thanksgiving holiday to be celebrated later this week features an excess of food, televised football and beer. Beer is an important American cultural element. The American patriot and founding father, Benjamin Franklin, once quipped that “Beer is proof God loves us and wants us to be happy.” There is a reputation angle to this. Read on. 

During the 2009 broadcast of the NFC Championship football game Jan 18, Heineken USA launched a new campaign for its new marketing platform -- "Give Yourself a Good Name." The campaign showcases subtle ways in which consumers decide to "give themselves a good name" through their actions, their words and their choices. Let’s focus on actions as they are the embodiment of something the Society cares about very much – processes.

By drinking Heineken, the campaign suggests, consumers will be building a good reputation for themselves. This is the process hook. There's an admonition to drink responsibly, or not to throw your name away in drunken excess. An ethical call for socially responsible behavior.

There you have it. Increasing intangible asset value (ethics) through risk and reputation management at a most personal level.



Tastes great, even if it doesn’t beat the 2-year returns of the S&P500. Above, the S&P500 in sepia, AB Inbev (BE:ABI) in blue, and Heineken (NL:HEIO) in red. Data source: BigCharts.com

We wish all an enjoyable holiday. We'll return next week.

Recovering from the breach

Nir Kossovsky - Thursday, November 19, 2009
Today’s MISSION:INTANGIBLE note was prompted by my colleague Robert Liscouski, COO with Steel City Re and a former Assistant Secretary in the Department of Homeland Security. Bob is yielding his IAFS position to the incoming Chair of the Security Committee, Scott Childers from The Walt Disney Company.

To my query of what is hot in security business processes and reputation that will interest our IAFS members, Bob said this: data security. This is why. The new poster child for data security is Heartland Payment Systems, (NYSE:HPY). Heartland, the sixth-largest payments processor of credit and debit card transactions in the U.S., announced in January that its records were hacked. A recently apprehended cyber-gang, according to the Justice Department, compromised 130 million Heartland accounts.

What are the lessons of interest for IAFS members? There are two lessons covering, respectively, the costs of reputation loss and the potential for reputation restoration.

The first lesson is that this was an expensive breach with growing costs. Heartland reported in May that the breach had cost it $12. 6 million so far, which included legal costs and fines from Visa and MasterCard, who said the company was not compliant with payment-card–industry rules. Then, In filings for the Securities and Exchange Commission, Heartland said the 2008 data security breach cost it $32 million as of June 30. Most recently, as of 30 Sept in the 10-Q filing, the Company recorded pre-tax expenses of $105.3 million or about $1.74 per share, associated with the security breach, aka, the Processing System Intrusion.

The majority of these charges, or approximately $90.8 million, related to: (i) assessments imposed in April 2009 by MasterCard and VISA against us and our sponsor banks, (ii) settlement offers we made to certain card brands in an attempt to resolve certain of the claims asserted against our sponsor banks (who have asserted rights to indemnification from us pursuant to our agreements with them), and (iii) expected costs of settling with certain claimants with whom settlement discussions are underway.

There is more. The Heartland breach – which has so far resulted in 28 class-action lawsuits filed against the company precipitated a near-immediate 50 percent drop in Heartland's share price (shown in red). Total equity value lost, rebased against the S&P500 Index (shown in blue) as of today, is about $300 million. Data source: Big Charts.com.



The second lesson is that following its near-death experience, Heartland is now committed to building reputation resilience by establishing the new standard for data security processes. Heartland is raising the bar in retail payments security by bringing end-to-end encryption to its network. It will be expensive and a big logistical challenge to execute. However, as long as it's accompanied by good policy and process, Heartland's encryption initiative will plug a definite security gap in the payments system.

In turning to processes to cure the defects that led to the reputation loss, and by creating a new standard for best practices, Heartland is following the model established by Johnson and Johnson with their product security issue, and El-Al Israel Airlines with their hijacking-related security issues. It is a best practice that examplifies the values of the IAFS and its members. Won't you consider joining us?

Heads up: IAM magazine, the official publication partner of the Society, will feature a reputation-focused case study on Johnnson & Johnson (NYSE:JNJ) in the January 2010 issue, #40.

Ethical lubricant

Nir Kossovsky - Tuesday, November 17, 2009
Operating costs such as internal frictional costs are the bane of any executive accountable for the bottom line. True, they can be cut – usually through workforce reductions – but the long-term effects on surviving employees may include net losses in productivity and even greater internal frictional costs.

Here is good news, executives. There is a proven strategy for lowering internal frictional costs. This is it. Be ethical. Be sustainable. Be safe. And be known for it.

In other words, all you need to do is apply the best practices found in other companies that are superior stewards of their intangible assets – the business processes that lead to reputations for ethics, safety, quality, innovation, security, and sustainability. Companies that follow these practices tend to out perform their peers and better reward their shareholders.

The relationship between these business processes, reputation, internal frictional costs, and value creation are illustrated on a webpage of one of our members, Steel City Re, a leader in risk and reputation management. The latest data affirming these principles comes from Kelly Services, Inc. (NASDAQ: KELYA, KELYB), a world leader in workforce management services and human resources solutions.

According to the Kelly study announced late last month,

Major public issues such as a company’s reputation for strong ethical practices have become critical factors in choosing where to work, even to the point where many employees are prepared to sacrifice pay or promotion in order to work for organizations that are actively engaged in good social responsibility practices. More specifically, concerns about ethical behavior outweigh concerns about the environment by all generations, when making employment choices.

Here are some other key findings:

  • Almost 90 percent of respondents say they are more likely to work for an organization that is considered ethically and socially responsible, something that is consistent across all age generations.
  • 80 percent are more likely to work for an organization that is considered environmentally responsible, a figure that is considerably higher among older age groups.
  • In deciding where to work, an organization’s reputation for ethical conduct is considered ‘very important’ by 65 percent of Gen Y, 72 percent of Gen X, and 77 percent of baby boomers.
  • 46 percent of Gen Y would be prepared to forego pay or promotion to work for an organization with a good reputation, rising to 48 percent for Gen X and 53 percent for baby boomers.
  • In deciding where to work, policies to address global warming are considered ‘very important’ by 31 percent of Gen Y, rising to 35 percent among Gen X and 36 percent for baby boomers.
Here's the action part. Want to cut operating costs? Ramp up your company’s reputation for ethics, sustainability, safety, etc. Become a superior risk and reputation manager.

Want to know how to do it? Join the Intangible Asset Finance Society. We provide a forum for executives to discover better ways to increase the visibility, transparency, and value of intangible assets. These assets comprise 50% of the average company's value. Click here for information on membership and affiliate with us on LinkedIn.

Pram lessons

Nir Kossovsky - Thursday, November 12, 2009
The headline risk de jour is being realized by Maclaren, a premier British parenting lifestyle company “that produces the world’s most safe, durable, and innovative and styling baby buggies…” You get the drift from their website lead-in.

On Monday, U.S. Consumer Product Safety Commission (CPSC) announced the recall of some 1 million Maclaren strollers that were released nationwide from 1999 through November of this year. This is why. Maclaren received reports that 12 children had their fingertips amputated after they placed their fingers in the hinge where the stroller folds.

The blogosphere is active. Some parents are outraged, as would be expected. But the story is getting significant mainstream news uptake and that means a greater range of stakeholders will be impacted. This morning, for example, the Financial Times had a banner ad above the fold and below the masthead leading to an op-ed piece on page nine, “How not to take care of a brand.”



Safety is one of the six key intangible assets that support the Roman Arch of corporate reputation. Safety is the state of being certain that a set of conditions will not accidentally cause adverse effects on the well-being of people or the environment. The safety issue has grown into a reputation-driven existential issue at Maclaren. There are several reasons.

      1. There was a design problem. The product design did not anticipate certain forms of use. Children walking alongside and using the strollers for support may hold on to the product at the amputating hinge.
      2. The design problem could have been addressed at any point in time post-market release with a simple engineering fix: a hinge cover.
      3. There was a surveillance problem. Safety is a core asset for a company that serves children and their parents. The company was not monitoring for indications and warnings of safety problems.
      4. There was a preparedness failure. The company had no crisis management system in place.
      5. There was a failure of execution. The company’s response to the crisis failed to conform to well established crisis management best practices:
        1. Instead of empathy, the company offered statistics
        2. Instead of contrition, the company suggested that parents were at fault for using the strollers as walkers rather than push carts
        3. Instead of reaching out to all stakeholders with the engineering fix (see #2), the company focused their attention on the US market (even though they are UK-based and sell worldwide)
      There is a take home message. Even in private companies, reputation management may be one of the best investments an executive team can make. Join the Society and learn more about increasing, protecting, and restoring intangible asset value.

Leftovers - M:I MB of 09-Nov-6

Nir Kossovsky - Monday, November 09, 2009
Among the educational services offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events comprise about 45 minutes of prepared remarks backed up by presentation materials, and about 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover. With this month’s M:I briefing, we begin serving answers to those leftovers on the first Monday after the event.

On Friday 6 November, Judith Giordan, Managing Director with Steel City Re, a Senior Advisor to the National Collegiate Inventors and Innovators Alliance and formerly, a Vice President with International Flavors and Fragrances, Pepsi Co, and Henkel, presented evidence that there is significant intangible asset value in diversity. She also addressed strategies for asset monetization. Last, she answered questions from the many listeners. The presentation and audio recordings of the session can be downloaded from the Society's events page. Here are the leftovers.
 
QUESTION: What would you say from the data are the top three concepts executives should repeat as a mantra for creating enterprise value from diversity?
 
  1. There is a valid and documented BUSINESS CASE for the value of diversity and its linkage to building corporate value and reputation – tangibles and intangibles. There is no more need to validate this case. There is a need to take action.
  2. To benefit from the value of diversity, PROCESSES that foster conformance and not programs for compliance must be built, nurtured, measured and improved – and leaders at all levels should have fostering diversity as a part of their performance goals linked to and not separate from business performance goals.
  3. Follow the PLATINUM RULE: Do unto others (in this case women) as they would be done unto not as senior leadership believes is good for them. Use the conformance process as a means for defining the nexus of success requirements of women to move into leadership positions and the business and use this nexus as the basis to build and measure opportunities for mutual growth.
QUESTION: Are there data on the composition of the boards of companies with the more spectacular failures; e.g., Enron, Lehman, etc, and do these data support your model of the magic of 3 women?
 
First and foremost I want to be sure no one thinks I am trying to “take credit” for a model of 3 of any kind. I’m simply reporting data developed in surveys by organizations such as McKinsey, Catalyst and Pepperdine University – to name a few. My role in this is to summarize the data and attempt to draw constructs from which we can all learn and benefit going forward for enhancing corporate reputation and building a solid business case for the value of diversity – in this case gender diversity.

That said, IF my ability to surf the Internet is correct, the data below speak for themselves as to the question. Neither Enron, Lehman Brothers nor AIG had three women on their Board. 2 at max – for AIG; 1 each for Enron and Lehman. Indeed it would appear that: Lehman had no women in Senior Management positions either. Those who can surf better than I, please correct if I have this wrong.

Enron Board -17 members with 1 woman

Lehman Brothers Senior Management: no women
o Richard S. Fuld, Jr. - Chairman and Chief Executive Officer
o Riccardo Banchetti - Co-Chief Executive Officer, Europe and the Middle East
o Jasjit S. Bhattal - Chief Executive Officer, Asia-Pacific
o Gerald A. Donini - Global Head of Equities
o Eric Felder - Global Co-Head of Fixed Income
o Scott J. Freidheim - Co-Chief Administrative Officer
o Michael Gelband - Global Head of Capital Markets
o David Goldfarb - Chief Strategy Officer
o Alex Kirk - Global Head of Principal Investing
o Hyung S. Lee - Global Co-Head of Fixed Income
o Stephen M. Lessing - Head of Client Relationship Management
o Ian T. Lowitt - Chief Financial Officer and Co-Chief Administrative Officer
o Herbert H. McDade III - President and Chief Operating Officer
o Hugh E. McGee III - Global Head of Investment Banking
o Christian Meissner - Co-Chief Executive Officer, Europe and the Middle East
o Thomas A. Russo - Vice Chairman/Chief Legal Officer
o George H. Walker - Global Head of Investment Management

Lehman Brothers Board of Directors: 1 woman
o Richard S. Fuld, Jr.
o Michael L. Ainslie
o John F. Akers
o Roger S. Berlind
o Thomas H. Cruikshank
o Marsha Johnson Evans
o Sir Christopher Gent
o Jerry A. Grundhofer
o Roland A. Hernandez
o Henry Kaufman
o John D. Macomber

2007 Board of AIG: http://www.ezodproxy.com/AIG/2008/AR2007/HTML2/aig_ar2007_0052.htm
• 2 women 

ADDITIONAL INFORMATION
Packages comprising the audio recordings of all Mission:Intangible Monthly Briefings and their associated slides, including the 6 Nov 2009 program described above, can be purchased from the Society. Please visit the events page to obtain more information on a specific program, or contact the Executive Secretary.

Diversity for dollars - change at Chrysler

Nir Kossovsky - Friday, November 06, 2009
Earlier today, the Society’s Mission:Intangible® Monthly Briefing by Dr. Judy Giordan of Steel City Re spoke to the demonstrated link between managerial and directorial diversity and corporate enterprise value. Thanks to her data-rich presentation, we better appreciate that diversity under critical conditions can create value through the wisdom of crowds. Apparently, so does Chrysler.

Earlier this week, Chrysler Group LLC Chief Executive Sergio Marchionne laid out plans to revive the struggling Auburn Hills automaker. His plans -- replenishing its lineup with high-quality and attractive models to more than double sales within five years and start generating profit in 2011 – were derided as generic by many analysts.

But not dismissed. This is why. Marchionne and his management team, a mix of executives brought over from Italy and promising managers at Chrysler whom he promoted, have been working in secret on the plan since Chrysler emerged from bankruptcy in June. This team of diverse individuals is differentiating itself from generic auto strategy teams in other ways. David Cole, chairman of the Center for Automotive Research in Ann Arbor, notes "the youth of the team kind of brings energy and enthusiasm to the process."

Score one for subtly signaling the intangible asset value of diversity.

There’s more. Chrysler is working hard to improve quality. "We're not in denial in relation to the public perception of quality at Chrysler," said quality chief Doug Betts, who worked previously at Toyota Motor Corp. and Nissan Motor Co. Chrysler now has 1,500 people addressing its poor quality, focusing on manufacturing.

There are skeptics. "Their quality reputation is dismal right now, and you don't change that in a couple of years," said Jack Nerad of Kelley Blue Book.

Well, maybe not usually. But reputation can be restored quickly if stakeholders find compelling reasons to expect change. After all, reputation is an expectation of future behavior.  This is why. Reputation grows out of the totality of information stakeholders receive about a company — information that creates the cumulative impression of how the company manages all its business processes. These are the business processes that create an ethical work environment, drive innovation, assure quality, uphold safety, promote sustainability, and provide security. Along with their embodiment in brands, trademarks, and patents, these processes are the intangible assets which have become the primary determinants of corporate success or failure today.

Industry experts were impressed by Chrysler’s forthright emphasis on the quality issue, just as they were impressed by the composition of the management team. The Company is signaling unambiguously a commitment to new and improved processes – commitments that are evidently reshaping reputation at this very moment.

Lighter shade of green

Nir Kossovsky - Wednesday, November 04, 2009
In the Society’s pantheon of intangible assets that create enterprise value, one has defied efforts to build for it a universally compelling business case. Sustainability, unlike ethics, innovation, quality, safety and security, is not a practice that in our experience reliably has created enterprise value for its practitioners. Further, if one subscribes to the theory that there is wisdom in crowds, than the murkiness surrounding the value of sustainability persists. This is why. According to a recent survey of 1,400 CFOs from a stratified random sample of U.S. companies with 20 or more employees, two-thirds of CFOs don't expect to boost sustainability efforts in next 12 months.

When asked whether they expect their companies’ emphasis on green initiatives to increase, decrease or remain the same in the next 12 months, 68 percent of chief financial officers (CFOs) interviewed said they anticipate no changes. More than a quarter (28 percent), however, said they expect an increased focus on the issue.

When we first saw this report, we assumed that those expecting to increase their focus would be companies that distributed product through Wal-Mart (NYSE:WMT). More generally, we expected retailers and and their supply chains would be investing in green to conform with Wal-Mart’s sustainability requirements – or at least remain competitive.

We were not wrong. Looking horizontally at the data, while overall 28% expected to increase investments, 33% of the CFOs from companies in the retail sector expected to do so. Furthermore, while overall 5.15% expected to increase investments significantly, 6.3% of the CFOs from the retail sector were gearing up for bigger green initiatives.

However, we were surprised by some of the findings. First, the sector from which a plurality of CFOs expected to increase investments the most was finance – nearly 36%. At the other end of the spectrum was transportation – only 19%. However, nearly half of those in the transportation sector expected to make significant increases.

Growth and/or maintaining the status quo were not on everyone’s agenda. Sectors planning to cutback, according to the CFOs surveyed, include business services, construction and – ready for this – retail at 5.2, 4.8, and 3.8% respectively.

The survey was developed by Robert Half Management Resources.

Case studies in IA Finance

Nir Kossovsky - Monday, November 02, 2009
The Society's mission is to increase the visibility, transparency, and positive impact of intangible asset finance through education, the promulgation of standards, and advocacy. The Athena Alliance, a friend of the Society, specializes in advocacy. Its President, Ken Jarboe, provided us with the following:

As innovative companies struggle to raise funds, intellectual property and intangible assets are providing alternative ways of financing innovation. But greater awareness of them as an asset class is needed. Raising that awareness is the focus of a new report from Athena Alliance, Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance by Ian Ellis, a former U.S. Department of Commerce official specializing in intellectual property and international trade.

The report outlines increasing, but still nascent, means of financing innovation based on these assets in public, private and venture capital markets. As industry has invested capital in research and development to develop new technology and advance other creative activities, intellectual capital has become a valuable asset class, according to the paper. In response, firms specializing in intangible-based financing are springing up, using them to raise capital for the next round of innovation.

The paper details equity, equity-debt, debt, and sale-leaseback transactions, both private and public, that have helped companies raise capital, based on careful, rigorous analysis and conservative underwriting standards. For example, the author notes that in 2000, there were two public deals using royalty securitization, raising $145 million. In 2007-08, $3.3 billion was raised in 19 deals.

Unlike some of the exotic financial vehicles, however, the financial products discussed in this paper are some of the most basic financing mechanisms in business. The innovation is in recognizing the value of intangible assets for corporate finance. These new financial firms are using traditional financial techniques in new ways to help innovative companies.

But more should be done.

One important step would be developing sound, industry-wide, underwriting standards, according to the report. For example, Small Business Administration (SBA) rules permit its loans to be used for acquisition of intangible assets when buying on-going businesses. Rules are unclear on whether those assets can be used as collateral. The paper recommends that SBA work with commercial lenders to develop standards for using intangible assets as collateral.

The report builds on earlier Athena Alliance papers, notably Intangible Asset Monetization: The Promise and the Reality.

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