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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Boeing: Rough landing

C. HUYGENS - Monday, October 14, 2013
"Any landing you can walk away from," wrote U.S. Army Air Forces photographer Gerald Massie after crash-landing his B17, " is a good one!" What was true in 1944 is true today: the good news is Boeing is walking.

However, the BP-like serial doling of Dreamliner-associated issues has taken its toll, and Boeing has been winged. For the first time in modern history, Japanese national air carriers are opting for the competition.

Mission Intangible Monthly Briefing moderator Jonathan Salem Baskin published this thoughtful essay on innovation risk and its management in Forbes this past Friday. Read more.

The Steel City Re reputation metrics for Boeing show slow progressive value loss in its CRR Rank (Reputation Premium) from the 95th to the 89th percentile over the trailing 12 months. Notwithstanding daily meetings at Boeing hosted by CEO Jim McNerney, and his April 2013 declaration that "the original promise of the 787 is fully intact," the engineering issues have not abated -- the reputational volatility, termed Current RVM Volatility below (or Consensus Trend) evidence this persistent uncertainty. Stakeholders are no longer as confident (see Historic RVM Vol below) that Boeing is (or was) in complete control of its innovation processes.

Boeing: Face of reputation risk

C. HUYGENS - Tuesday, October 08, 2013
Huygens has been obsessing with Boeing's (BA) reputation. Remember, reputation is not a measure of likability; it is a measure of stakeholder confidence in a company's ability to fulfill expectations. That confidence, as the metrics have suggested, is falling. But to really appreciate the relationship between reputation and financials, look no further than today's headline from the New York Times:

Airbus announced a $9.5 billion order from Japan Airlines on Monday, the European aircraft builder's biggest breakthrough in Japan, which is one of the last redoubts of dominance by Boeing.


This is a big number. It will leave a material mark on the P&L's of many companies. It is sufficiently big to be useful in underscoring what reputation is NOT -- it is not something measured in opinion polls. Read more here.

Boeing: Please don't anger the Vikings

C. HUYGENS - Monday, September 30, 2013
After a series of issues with the 787 Dreamliner left the Japanese air carriers bruised, Boeing's (BA) travails are making an impact in Viking country, and they're mad. According to Bloomberg, "The Norwegian company said Sept. 23 it planned to confront Boeing Co. about the technical difficulties and that 'something must happen, fast.'"

The pithy Bloomberg summary notes that Norwegian Air, which has only two Dreamliners in service, is dealing with technical glitches from cockpit oxygen supply issues that delayed a flight to New York from Oslo on Sept. 22, to brake difficulties that affected the second 787 in Sweden this month. The Japanese carriers faced battery fires earlier this year that ended up grounding the global fleet. There were a couple of other fires involving a diversity of plane components in July. And over this past weekend, a Boeing 787 operated by LOT Polish Airlines SA had an unscheduled landing in Iceland after the failure of a system that identifies planes to air-traffic controllers.

Boeing patiently explained that glitches are typical of a new product roll out. That narrative mollified critics this past spring. Its now the fall, and the Norwegians are hardly sanguine. The Japanese expressed their displeasure more subtly referencing "delay risk." But aside from the PR issues, are these delays impacting Boeing's reputation, or are these issues, typically "expected?"

Turning to the Steel City Re reputational value metrics, Boeing Co. is a $90 billion aerospace and defense sector company numbering 83 peers. The company continues to exhibit high reputational value quality that is largely independent of short-term equity market volatility. Its CRR ranking, or Reputation Premium, is a the 95th percentile of this peer group, its current RVM volatility, or Consensus Trend, are at the 50th percentile, and return on equity is at the 81st percentile. Such metrics suggest that the company's stakeholders are generally comfortable with the story -- it's business as usual. In fact, the only indicator that would suggest otherwise is the fact that the RVM volatility,  now at the 51st percentile, is markedly higher than in the past (11th percentile), and that the current spike of that metric is on a four-week streak that is not apparently linked to the VIX.

Contrary to lore, reputation is rarely created or lost in an instant. But when customers turn to the competitor to provide backup aircraft -- as every baseball pitcher who has been relieved knows -- there is a risk that the "understudy" may be rewarded with the starring role. Huygens believes the movement in current RVM volatility upwards indicates others may be thinking the same thing about Boeing and EADS.

Boeing: When customers expect delay

C. HUYGENS - Friday, September 13, 2013
The financial benefits of a superior reputation among customers, Huygens has explained, arise from one or more of these three factors: customers will grant the firm pricing power, will purchase greater volume, or will shorten the sales cycle time. Raise the price, and the volume will fall. Lower the price and the sales cycle time will shorten. A superior reputation provide a company the opportunity to optimize the three for maximum enterprise value.

For those familiar with Cajun cooking, these three factors are like the trinity of onion, celery and green peppers. The ratio in which they appear in a particular meal depends on the chef's tastes, but irrespective of ratio, they provide a constant mix of water, solids and salt. Boeing, as reported by Reuters and discussed in the Consensiv blog today, is fighting a lengthening sales cycle time with aggressive pricing. The problem is that the Japanese airlines that have had the pleasure of sharing Boeing's growing pains are concerned about delay risk. And are therefore delaying their own decision making.

"...little concerning the 787 program has been business as usual at Boeing. It is a wildly innovative plane, from its design and manufacturing, to its performance and experiential capabilities. So it was never credible that its stakeholders should have been told (or allowed) to expect it to resemble past projects. Innovation comes with risks, but there was never an overt or clear effort to value and control it, leaving a delivery schedule as the only proof that made sense to everyone: No matter how different, the ultimate outcome of building and selling a new airplane would be the same. Only it wasn’t and isn’t, as evidenced by the reputational risk now being charged to Boeing.

The Reuters reference to the company countering with “a sales offensive” likely means reduced prices and higher costs on its planes. There are probably borrowing and insurance implications commensurate with this new reality. Perhaps the suppliers it relies upon for parts for the 777X will expect more liberal terms and protections, which will also hit the company’s bottom-line."
Read more here.

The Steel City Re reputation value metrics show that over the year, Boeing's reputation premium has been deteriorating. Over the summer, all vectors have been negative. Moreover, over the past four weeks, current RVM volatility has begun rising.

The metrics have a cyclic pattern reminiscent of the water torture BP went through, albeit to a much lesser degree. Still, the bad news is progressive, and as suggested in July, Boeing has reason to fear a BP moment -- when it becomes clear that stakeholder's worst fears are coming true.

Boeing: In Fear of a BP Moment

C. HUYGENS - Sunday, July 14, 2013
On Friday, January 13, fire on an Ethiopian Airlines Boeing 787 at Heathrow Airport in London and a separate technical problem on a second 787 owned by Britain's Thomson Airways raised new questions about an aircraft seen as crucial to Boeing's future. Boeing said it had people on the ground working to understand the causes of the fire.

Have we seen this movie before? In the early days after the Deepwater Horizon explosion in the spring of 2010, then-BP CEO Tony Hayward provided this assurance. "I think the environmental impact of this disaster is likely to have been very, very modest." Trust us, he said, to get this under control.

For weeks, BP benefited from the doubt, and its image of environmental concern built up through a major investment in marketing and communications. Surely, a firm that is beyond petroleum will successfully protect the environment.

Of course, talking about protecting the environment while allegedly cutting back on investments in processes that actually protect the environment is a recipe for a modern-day reputational crisis. And so it came to pass that stakeholder disappointment in the eventual outcome, forced by reality trumping hope, was expensive for BP, its CEO, the board, and investors. (See detailed case study in Reputation, Stock Price and You.)

Enter Boeing, a highly reputable aerospace and defense manufacturer that has had a string of significant problems with the 787 Dreamliner, most recently being fires associated with the aircraft’s batteries. It is also a firm whose cost-saving strategy for 787 production produced a three-year delay, the ire of its unions, and allegations of cutting corners.

At the 20 May resumption of flights by United Airlines after the FAA-ordered stand-down, and nearly three years to the day after Hayward’s comments, Boeing CEO James McNerney said, “We are very sorry about the delay that was caused by some of the technology work-arounds that we had to implement. But,” he added, “the promise of this airplane remains unchanged. We are confident of that. More importantly, we are confident in the safety of this aircraft. Safety means everything to us. It’s in our DNA.” Trust us, he said.

“I trust Boeing that they know what they are doing,” said a Flight 1 passenger to Bloomberg. And the reputational value metrics, shown below as of Thursday, 11 July, affirm the return in trust. CRR, a measure of reputational value premium, is up. Current RVM volatility, a measure of consensus trend or stakeholder concurrence, is more favorable (down). So on Friday, 12 July, when another Boeing 787 caught fire, stakeholders were surprised. Equity investors registered their surprise by shaving 5% off the stock price. On Sunday, Bloomberg reports, In the early stages of the investigation, airlines said they would continue to fly their Dreamliners, while others confirmed they would stick to their plans to buy the aircraft. Jonathan Salem Baskin, Mission Intangible Monthly Briefing moderator, explains on CNBC how other stakeholders may respond to this latest surprise. Click here.

Boeing: Boing

C. HUYGENS - Thursday, May 16, 2013
Sir Bedevere: What makes you think she's a witch?
Peasant 3: Well, she turned me into a newt!
Sir Bedevere: A newt?
Peasant 3: [meekly after a long pause] ... I got better.

Witch burning circa 500 AD and battery burning circa 2013 are arguably unrelated, and yet here is Boeing, getting better. Not that its marketing and communications efforts can claim credit for making anyone feel better. Nor that the engineers necessarily figured out why the batteries burned. It's just that regulators have opined that the plane is safe, and having an independent third party's endorsement, like an insurance policy, signals much more reputational value than any marketing campaign ever could in this circumstance.

The Steel City Re reputational value metrics show that Boeing has bounced back to its prior levels. Relative to the 82-member Aerospace and Defense peer group, Boeing's reputation ranks in the 91st percentile, return on equity ranks in the 66th percentile, and its current reputational value metric volatility, what Consensiv terms the Consensus Trend, is down to the 34th percentile at only 1.2%.

Boeing: Doubts lingering

C. HUYGENS - Tuesday, March 05, 2013
One of the hallmarks of a reputational value crisis arising from an operational failure is that the latter is appreciated by stakeholders as a systemic problem. While Boeing has not yet received approval by the US FAA to fly, and international airlines are watching closely, the investigations suggest that the series of problems each represented unique idiosyncratic events. As Boeing's engineers explained, "things happen."

The Huntington Post reported last week that "a probe into the overheating of a lithium ion battery in an All Nippon Airways Boeing 787 that made an emergency landing found it was improperly wired," according to Japan's Transport Ministry. Boeing reports that it has developed a "fix" for the batteries and that once the FAA approves the 22 February plan, the company is ready to execute. Details of the fix are not being widely circulated. Meanwhile, the Europeans are hedging their bets and moving to the older battery class for the Airbus.

James Surowiecki, writing for the New Yorker, sides with the Europeans. In a culture were the expectation for safety is now paramount, it is not clear how the FAA is going to be able to give Boeing clearance. "Boeing is in a business where the margin of error is small. It shouldn’t have chosen a business model where the chance of making a serious mistake was so large." The author of the Wisdom of Crowds suggests it was a mistake to "give other companies responsibility for the Dreamliner."

Turning the the measures of expectation, the Steel City Re Reputational Value Metrics, Boeing (BA) is one of 80 in the aerospace and defense sector and currently ranks in the 77th percentile. The chart of vital signs shows a rising Current RVM volatility. RVM is a non-financial measure of reputational value, and its volatility is the quantitative expression of the uncertainty reflected in the narrative above.  That being said, the current RVM volatility is still in the 1-2% range which is very low. Of note, should things go badly for Boeing, the odds of a material market cap fall are much greater than for the average company because its stakeholders, as evidenced by the low RVM volatility, are not used to being surprised. Ironically, a gently rising RVM volatility may help reduce the shock.

The indications are for little or very gradual change in the near future with a forecast for ongoing downward slope from the 77th percentile for the CRR, a measure of relative reputational ranking. ROE can be expected to lag. Background on the metrics can be found in the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others.

Finmeccanica: Ethical contradictions

C. HUYGENS - Tuesday, February 12, 2013
At least two of the 80 companies comprising the Aerospace and Defense sector are facing reputational issues. In the US, Boeing is wrestling with smoking batteries, allegations of conflicted safety review processes, and suggestions of supply chain management failures. Aircraft safety is the reputational value issue that nucleates the above. In Europe, Finmeccanica SpA is facing the more common issue in this sector: ethics and corruption. Here is how a trading blog summarized the problem:

Finmeccanica Chief Executive and Chairman Giuseppe Orsi was arrested over bribes allegedly paid to secure the sale of 12 helicopters to India, when he was head of the group's AgustaWestland unit, a judicial source with direct knowledge of the situation told Reuters... An Indian defense ministry source said kickbacks worth 40 million rupees allegedly paid to Indian officials to grease contracts for Finmeccanica were being probed and that Delhi was considering the deferral of the Finmeccanica helicopter deal, worth 560 million euros ($749.2 million)...Prime Minister Mario Monti said the Italian government would deal with management issues at the company... "There is a problem with the governance of Finmeccanica at the moment and we will face up to it," Monti told RAI state television.

The reputational value metrics provided by Steel City Re illustrate incongruities that should be unsettling, if not alerting. The company's reputational ranking, CRR, a measure of its reputational value premium, is only in the first decile relative to its peers, yet its return on equity is in the 90th percentile, peaking briefly at 50% ROE for the year. The company's RVM volatility, a measure of volatility of a non-financial measure of reputational value, is in the top decile yet the projected change for CRR is flat. While such an odd mix of leading indicators is not diagnostic of a pending reputational value problem, as discussed in Reputation, Stock Price, and You, it isn't a sustainable cocktail of measures in the usual course of business.


Boeing: A reputation problem

C. HUYGENS - Friday, January 25, 2013
Innovation is the process by which products and services are made better, faster and cheaper. Outcomes are uncertain, which means the process is inherently risky where risk is a threat to an outcome that is desired. Because innovation is also one of the six major drivers of reputational value, innovation risk presents reputational value risk.

On CNBC's Kudlow Report last night, Jonathan Salem Baskin, a member of the Society's Reputation Leadership Council and moderator of the Mission Intangible Monthly Briefings, explained this to Bob Crandall, former Chairman and CEO of American Airlines' holding company, AMR. Click here to link to the CNBC clip.

Boeing: Watch what they do

C. HUYGENS - Thursday, January 24, 2013
Shortly after John Morgan (JP, to his American friends) congratulated Andrew Carnegie on becoming the wealthiest man in the world, Carnegie's biographer queried the former steel magnate on his secret. "When I was younger," he replied, "I used to listen to what people say. Now I just watch what they do."

The Steel City Re reputational value metrics, as described in the book, Reputation, Stock Price, and You, comprise indexes of what people who watch people think they are going to do. Boeing's CEO, Jim McNerney, is staring at the same type of operational failure Rolls-Royce's CEO, John Rose, faced just over two years ago. The similarities end there.

At Rolls, there was no public communication until the company, on its own, identified within its supply chain the engineering problem that led to engine failure and a potentially catastrophic outcome. Eight weeks into the crisis, the first major announcement was the purchase by British Airways of 12 additional jumbo jets, all equipped with Rolls-Royce engines.

At Boeing, in the midst of unexplained glitches afflicting the 787 Dreamliner, Tom Downey, the planemaker’s senior vice president of communications, is providing play-by-play commentary on McNerney staff meetings. "Because of his knowledge of planes and electrical systems, 'he asks a lot of very specific questions,' Downey said", according to Bloomberg.

Huygens, ever the American pragmatist, makes no value judgement. Resolution of the problem quickly is the only outcome the markets - Boeing's customers, employees, vendors, investors, creditors, and regulators - really care about. Between now and then, the choice of no-communication or all-communication is a reflection of corporate culture.

What Huygens can share are the reputational metrics reflecting the expectations of stakeholders and the consequences of management's choices. Shown below are Boeing in the midst of an operational crisis that threatens to blossom into a reputational crisis, and Rolls-Royce, that resolved its operational crisis and avoided a reputational crisis.

Rolls' actions exceeded stakeholder expectations and investors rewarded the company (thereby rewarding earlier investors) with a respectable ROE >20% over the trailing twelve months. At this writing, for Boeing, stakeholder expectations are still sinking.




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