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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VW’s Reputation Crisis Likely to End Badly

C. HUYGENS - Monday, December 14, 2015
Generally, stakeholders will ultimately forgive point failures like an errant supplier for Toyota, or even a London Whale for JPMorgan Chase. They will be less forgiving if the failure appears to be evidence of a systemic failure engineered by directors and officers. Until culpability is assessed, however, directors and officers by default will be pummeled in the court of public opinion.

To put hard numbers around the volatility associated with presumed culpability and ultimate assignment, read more at Risk & Insurance and see the chart below. To understand how directors who are unjustly being accused of ineptitude can protect themselves, click here.

Personal Reputation Risk Worth 32% Premium

C. HUYGENS - Friday, July 17, 2015
Personal risk to corporate directors is assumed to be covered by D&O liability insurance. Except that personal reputation isn't covered by D&O at all. Which is why Kathy Grant's story is so interesting.

Ms. Grant heads a cash-strapped Health Board in New Zealand. As its Commissioner, she is facing the need to make "extreme cuts" in benefits that will not be popular among the constituency. How extreme you may ask? So much so, explained a government spokesperson, that Ms. Grant's personal reputation is at risk.

Risk is not an impediment to progress if priced correctly. That's the logic, after all, in hazard duty pay. To bear personal reputation risk, the Health Board is paying Ms Grant a healthy 31.8% premium over the maximum customary rate of $1062 per day.

Read more.

D&O's Weakened DNA

C. HUYGENS - Wednesday, June 17, 2015
That ol' liability insurance just ain't what it used to be. Gone is the roar of certain protection. "D&O insurance today merely whispers relative to the noise of 21st century threats — especially from social media, regulatory scrutiny, and investor activism — to directors’ 'personal capital or their reputations.'”

And while these threats are at least discussed in corporate filings, disclosures do not have great signaling gravitas or impact, nor are they as robust and convincing as talking money.

Read More at Risk & Insurance.

Ruthless Blame Game: From 2x4s to nuclear weapons

C. HUYGENS - Sunday, May 31, 2015
It's the CEO's fault, of course, reports Fortune Magazine. According to a survey of 200 Directors conducted by the New York Stock Exchange, more than 2 in 5 respondents said the CEOs should face the brunt of…breach-related backlash. The same seems to be true for any enterprise-level risk.

Damage the firm's reputation, and Directors can get very aggressive. It's no different than in the 1990's when Warren Buffet warned employees at Solomon that if they damaged "a shred" of the firm's reputation, he would be ruthless. Except it is different.

Today, investors are getting very aggressive. They are using enterprise-level disasters to indict the Board of Directors, and build the case that Proxy Access--the right to nominate directors without approval of the Board--is an essential strategic "weapon" to help focus the board's attention. Apparently, we've come a long way from needing merely a 2x4.

Read more (Fortune)

Activists Play the Nuclear Option

C. HUYGENS - Wednesday, May 27, 2015
The existence of the shareholder right to nominate directors "should obviate the need for its use" against rational board members, explained Zach Oleksiuk, head of the corporate governance team for BlackRock America. The activists' bold strategy would have won approval from none other than the fictional presidential adviser in the cold war cult classic film, Dr. Strangelove.

In the war for the hearts and minds of institutional and retail investors, what makes proxy access so effective is that it is a gut-wrenchingly simple message for board members to understand. And right now, Directors have strategic countermeasures that send an equally compelling message to the activists, that they too have a strategic means of securing the hearts and minds of institutional investor. They allocate dividends, and buy back shares.

Read more and see an amusing film clip at Consensiv.

Target: It's Director season!

C. HUYGENS - Monday, June 02, 2014
Last week, activist investors called for the resignation of 7 of Target's 10 Directors for having failed in executing their duties of oversight as evidenced by the security breach in November. Its Director Season! Demands for their heads follows only weeks after these same Directors demanded the head of Target's Chairman and CEO. It's CEO Season!

(To Warner Brothers aficionados, it's both Duck and Rabbit Season.)



For four years, directors and officers have appreciated that adverse corporate reputational events -- cybersecurity in Target's case; ethics, innovation, safety, sustainability and quality events more generally -- will both impair most lines of their companies' income statements and also stain their personal reputations. This is because stakeholders are directing their grievances more and more at board members and corporate officers in increasingly more personal ways. D&O liability insurance may cover the litigation costs of stakeholder frustrations, but as these matters move from the legal system to the court of public opinion, the personal reputations of Directors and Officers are left to bear the full brunt of stakeholder activism – often blemishing decades of career success with disparaging innuendos. That is why they continue to declare through surveys and corporate 10K item 1’s that reputation risk is among their top concerns.

As of June 1, 461 CEO’s stepped down this calendar year, a removal rate that is up 17 percent from the same period last year. “CEOs are not only under increased scrutiny from shareholders, employees, government regulators and consumers, but these groups have more tools with which to amplify their complaints. Twitter, LinkedIn, Facebook, etc., make it far easier to rile up the masses,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas. Lead time is short. Activist investors started encouraging four directors of Duke Energy to step down only 12 weeks after the company’s February coal ash disaster.

It may be the 21st century, but in governance circles, human sacrifice has become the "new norm."

Reign of Terror: Reputation crisis in personal terms

C. HUYGENS - Tuesday, May 13, 2014
Crisis management now seems to involve the disposal of competent executives. "Last week, Target’s Gregg Steinhafel become one of the more than 461 CEOs to step down this calendar year, adding to a body count that is up 17 percent from the same period last year. This statistic from the global outplacement consultancy Challenger, Gray & Christmas, Inc. may be “interesting.” Unless you’re a CEO, in which case it is gut-wrenching." Read more.

Target: Risks when stakeholders expect more, and the board is blind

C. HUYGENS - Monday, May 05, 2014
Reputation risk is when stakeholders expect behaviors from a company that it can't deliver. It is an enterprise-level event. Target, one of the largest American retailing companies, founded in 1902 and headquartered in Minneapolis, Minnesota, encourages its customers to "expect more." Around twenty weeks ago, Target failed to meet expectations twice: through a breach in IT security and then through poor follow up management of the consequences.

When a company such as Target has a superior reputation and then fails to meet expectations, stakeholders may give the company the benefit of the doubt. However, failing twice without an adverse reaction is asking much from stakeholders today. The board of directors at Target, as we learned today, was not about to take chances. Adverse reactions include what the Financial Times defined some time ago as "the pile on of litigators, regulators and mommy bloggers." The Germans call it a "shitstorm." And unless immunized prior to the crisis, the primary beneficiaries of the opprobrium from the masses are the company's directors and officers.

Neither the Directors nor Officers of at Target was immunized. This morning, Target announced that Chairman, President and CEO Gregg Steinhafel is out. Steinhafel, a 35-year veteran of the company and CEO since 2008,  agreed to step down, effective immediately. He also resigned from the board of directors. The modern day Jonah was thrown into the sea by his directors to appease the mobs evidencing a reputation crisis. Or perhaps the board over-reacted.

Calling for the heads of directors and officers is not new. D&O liability insurance was introduced years ago in recognition of the fact that a disenchanted stakeholder group needed to vent, and it was unreasonable to ask directors and officers to bear the personal costs. Alas, absent immunization, they are bearing the personal costs to their reputation. "They" include the risk committee board members of JPMorgan Chase, the four senior-most directors at Duke Energy, and now the Chairman and CEO of Target.

Favoring the argument that the board overreacted, shares in Target fell nearly two percent in pre-market trading Monday. Ninety minutes into the trading day, shares were down nearly 3% while the S&P500 was flat. Equity investors, it seems were  disappointed with the removal of Steinhafel who has reinforced Target's reputation for stellar customer-oriented service. Of course, there is the alternative explanation that investors are both delighted Steinhafel is gone and are expecting more bad news which is not yet public but, which known to the board, Other sources of intelligence, specifically, the Steel City Re reputation metrics, favor the first explanation - the Board of Directors unnecessarily tossed Steinhafel overboard to appease the crisis management gods.

Twenty weeks out from the breach, Target's reputational value is staging a comeback from the initial depression. The substantial drop in the company's Reputation Premium from the high 80's to below the 50th percentile is stabilizing around the 64th percentile relative to the 15 companies in the Discount Stores peer group. In fact, last May around this time, Target's Reputation Premium was lower. Further, looking at the measures of reputational volatility, the Consensus Trend, there was never a major shock among key stakeholder groups. Overall, Reputational Health is good.



How good is a good reputational health? In the case of Target, its reputational value peaked near June 2013 as shown in the 3-year chart below. The decline in reputational value since then is nearly linear, with the immediate effects of the data breach being nothing more than a short-term shift in the overall trend.  In other words, the data breach was not the long-term cause of Target's loss of Reputation Premium nor the long-term cause of Target's loss in Reputational Value. Rather, the entire industry - discount retailing -- is losing its value proposition. The data breach at Target helped temporarily mask the real cause of decline: the business strategy is failing.

It can be argued that a CEO is obliged to fall on his sword for advocating and implementing a failing strategy. And with this in mind, it might be argued that the equity price fall Monday morning represented equity investor recognition of the real reason for termination. But frankly, absent quantitative metrics to inform the board, management, and the communications arms of Target, it is hard to know what they know or why they think they acted the way they did. Worst, if Steinhafel was aware of the overall industry decline and was working on a plan to save Target, then it is a particularly bad time to be making changes at the top. Remember how well that worked out for JCPenny (JCP).

Managing an operational failure with one eye towards the media is prudent, but the tail should not wag the dog. If the real problem is a sector decline, it would be best to focus attention on that problem and not the irrelevant noise generated by those who make a living generating noise. Sir John Rose, former CEO of Rolls-Royce (LON:RR), set the standard to putting mind to what mattered when he ignored the media for weeks after a Rolls-Royce engine exploded on a Quantas super jumbo in November 2010. Instead, he identified the source of the problem and fixed it to the satisfaction of regulators, and more importantly, a key customer. Less than 10 weeks after what was viewed as a reputational crisis, British Airways announced that it was equipping its latest super jumbo acquisitions with...the same Rolls-Royce engine. And as Rolls-Royce spent ample cash indemnifying customers for downtime, and as the sales book was booming and stock price rocketing, less than 20 weeks after the affair, Sir John stepped down, sat on his motorcycle, and rode into the sunset.

Twenty weeks from the breach and the Chairman/CEO has been sacrificed. Quantitative reputation metrics, including the Loss Gates charts for Target's objectively measured crisis trigger points, do not show a crisis. It is one more example of a needless loss of executive life.

Management and boards require metrics to do their work properly, and Directors and Officers deserve protections for their personal reputations in shitstorms. Absent measures of reputational value, rash decision informed only by PR and media activity may be made with awful consequences. Absent protections for corporate leadership, good people may be thrown overboard to no avail. There are many lessons to be learned here.

Covering D's & O's Where D&O Liability Protections Don't Work

C. HUYGENS - Saturday, April 26, 2014
The Board is liable for everything that happens in a company. This includes unforeseen adverse events precipitated by third parties, supply chain partners, rogue employees and others that result in significant economic, political, and reputational consequences.

When greed and fear trigger mob shareholder behavior and the principle of presumed innocence is quickly trampled, the D's & O's are easy targets. Hence the logic of providing D&O liability cover. When directors are upholding their duties with superior governance, controls and risk management practices, it would be unfair expose them to the financial costs of (irrational) shareholder opprobrium.

It would seem equally unfair to expose them to the personal reputational costs of that opprobrium - the biting sarcasm of late night talk show hosts, the kabuki of hearings before regulators, and the angry chatter of the blogging classes. All this noise has personal consequences on both their health and future board-level opportunities. From the origins of the modern reputation crisis -- James Burke who was lambasted as a steered his firm through two Tylenol poisonings to Sir John Rose who protected Rolls-Royce's reputation despite the howling of the media -- there is an effort to crush corporate leadership through a "pile on of litigators, regulators and mommy bloggers." Hence the logic of providing D&O personal reputation cover.

The need for personal protection has never been greater. Just this month, less than 90 days after of the nation's worst coal ash spills, the California Public Employees' Retirement System and New York City Pension Funds wrote to shareholders of Duke Energy Corp, urging them to vote against the re-election of four directors. "The financial, legal, regulatory and reputational risks for Duke Energy are serious and mounting," Calpers corporate governance director Anne Simpson and New York City comptroller Scott Stringer wrote in their open letter.

Most Directors are unaware that such protections exist. Most Risk Managers, overwhelmed with the day-to-day tactical aspects of their jobs, are similarly unaware of the existence of new strategic solutions to address corporate reputation risks - solutions to transfer reputation risk and solutions to manage reputation risk. Fortunately, professional organizations such as the Risk and Insurance Management Society are raising the profile of reputation risk for the benefit of their members -- risk managers who have an absolute duty to protect their Boards.

This month's issue of the Society's Risk Management magazine, and next week's annual meeting in Denver provide opportunities for Risk Managers to anticipate the inevitable demand that will come from their Boarda. This is one risk that no Risk Manager should dare leave behind.

Magazine Link: How to Manage Reputation Risk, April 2014

Meeting Link: Reputation: Your Company Is Worried About It-Is It Part of Your ERM Strategy?

Periodic Short Notes Twitter Link: #ReputationRisk

Duke Energy: Directors personally responsible for coal ash disaster

C. HUYGENS - Tuesday, April 15, 2014
Less than 90 days after of the nation's worst coal ash spills, four Duke Energy (DUK) directors are being held personally responsible for the disaster by two large activist pension funds. An operational failure led to failure in one of the six key processes that govern reputational value: sustainabilty. More interesting than merely affirming, yet again, that a corporate reputational crisis is always personal to a corporate director, the concerted action by these two pension funds represents an entirely new strategy. It appears these two funds are trying to preserve enterprise value and mitigate a reputational crisis by naming and removing individual directors promptly.

Reuters reports today that "The California Public Employees' Retirement System and New York City Pension Funds have written to shareholders of Duke Energy Corp, urging them to vote against the re-election of four directors. "The financial, legal, regulatory and reputational risks for Duke Energy are serious and mounting," Calpers corporate governance director Anne Simpson and New York City comptroller Scott Stringer wrote in their open letter. according to the Financial Times. The funds blamed Duke Energy directors Alex Bernhardt, James Hyler, James Rhodes and Carlos Saladrigas for the 39,000 ton coal ash spill in North Carolina's Dan river in February, after a stormwater pipe broke under a 27-acre ash pond at the company's coal plant."

The February 2 spill, according to the activist organization, Southeast Coal Ash, began when "a stormwater pipe burst beneath a coal ash impoundment at Duke Energy’s retired Dan River Power Station near Eden, North Carolina." Duke Energy estimates 30,000-39,000 tons and 24 million gallons of wastewater, or about 140,000 tons of toxic waste, entered the Dan River.



The reputational value metrics profile of Duke Energy is instructive. The company is, and has been a top performer in its peer group of 131 electric utilities, coming in this week with a Reputation Premium at the 98th percentile. Befitting a company with a superior reputation (read, high expectations among stakeholders), Duke Energy struck a conciliatory tone, admitting the spill at its Dan River plant shouldn't have happened. "Duke Energy takes full responsibility for this accident. We'll be taking a fresh look at all of our ash basins and how we handle that after we fix this pipe," Duke Energy spokesman Tom Williams told WSOC TV.

The Consensus Trend, an indicator of stakeholder uncertainty, started rising after the spill taking Duke Energy up from below the first quartile to the median. By any objective measure of reputational value, this is discomfort, but certainly not a crisis.

In what should be viewed as a possible sea change, activist investors are now getting ahead of the "usual pile on of litigators, regulators and mommy bloggers. " They are going directly after the board -- not to extract monetary compensation -- but to preserve enterprise the company's reputational health and top drawer reputational value by shaking up what the funds believe constitutes a failure in governance, control and risk management. The are demanding individual board members be held culpable -- very personal, indeed.


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