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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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General Mills: Briefly overrun by ronin

C. HUYGENS - Tuesday, April 22, 2014
As modern day knights, lawyers are expected to to fight and so serve their liege Lord according to the Code of Law. But they are also expected to exercise discretion. A reputation for a willingness to strike at any foe, real or perceived, will likely leave the liege Lord isolated, and in due course, destitute. Even if the liege Lord is a $32B manufacturer and marketer of branded consumer foods named General Mills.

And so it came to pass that only four days after posting on its website terms, that according to the New York Times, required "consumers downloading coupons, “joining its online communities,” participating in sweepstakes and other promotions, and interacting with General Mills in a variety of other ways to agree to arbitration in lieu of suing the company in the event of a dispute," the company reversed itself.

It was an own goal scored by a narrowly focused group in the legal department that failed to read the memo about corporate reputation protection - the one about not unpleasantly surprising customers and other stakeholders. "Those terms – and our intentions – were widely misread, causing concern among consumers. So we’ve listened – and we’re changing them back to what they were before," General Mills explained.

The reputationally-blind act, and the rapid retreat, were reminiscent of a similar cycle by AIG's legal department in January 2013. After being bailed out by the US Government to the tune of tens of billions, and running a major advertising campaign thanking the American people, AIG announced that it was considering joining a suit by former CEO Hank Greenberg against the US Government.

According to the Wall Street Journal,  Superintendent Benjamin Lawsky at the New York Department of Financial Services, a key regulator of AIG's insurance businesses,  advised AIG CEO Robert Benmosche not join the suit, because he believed it would cause reputational harm to AIG that could affect the business and preclude it from getting federal aid again. The board expeditiously snuffed the suit.

Offended stakeholders may take a diversity of actions that can have significant adverse economic consequences. In the case of General Mills, customers opting not to engage the brand would be a material harm. "On behalf of our company and our brands, we would also like to apologize. We’re sorry we even started down this path. And we do hope you’ll accept our apology. We also hope that you’ll continue to download product coupons, talk to us on social media, or look for recipes on our websites."

General Mills could have done without the self-inflicted embarrassment. More important, the incident suggests that General Mills may not appreciate that reputation is an enterprise-wide asset, that reputation risk is created by failures in governance, controls and enterprise risk management (including internal controls), and that critically, reputation management has very little to do with brand.  In the company's most recent 10K from 2013, the only reputational risk cited in item 1A deals with food safety: "A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence." General Mills is learning the hard way that there are many paths to reputation damage.

The reputation metrics from Steel City Re, as interpreted by Consensiv, do not show any sudden major adverse reactions to the major error in judgement. Rather, they indicate a gradual progressive deterioration in General Mills' historically high reputation premium relative to the other 29 companies in its industry sector. Over the trailing twelve months, it has slipped from the top-ranked position to the 86th percentile. Similarly, the consensus trend, which is an indicator of stakeholder uncertainty, shows no major recent increase. Collectively, theses data suggest no short-term reaction to the legal silliness.

The fact that legal could come up with such a bad idea and deploy it, however is a worrisome indicator of culture. In this regard, the reputational health of General Mills, both by action and by metrics, is no longer in the top quartile.

Kraft: Is tax minimization ethically virtuous?

C. HUYGENS - Friday, June 21, 2013
Cadbury, the company will have you know, emphasizes responsibility both environmentally and ethically. Examples include "Purple Goes Green," the branded sustainability initiative at Cadbury to reduce carbon emissions and packaging; joining Singapore's Sustainable Manufacturing Center, cooperating with the United Nations Development Program and governments of Ghana to invest funds in support of sustainable cocoa production; and supporting core labor rights and dignity-at-work initiatives, health and safety initiatives and fair remuneration standards.

With such outstanding core values, it was natural that the UK press was outraged when it was discovered that the 2010 acquisition by Kraft, the American food conglomerate, was being secretly restructured to reduce UK taxes. Legal, sure. But blatantly unethical in that the actions of the American company would deprive the UK, and it citizens, of reasonable revenue. As reported by the Guardian in December 2010, "Kraft is reorganising the Bournville-based manufacturer's UK business to allow much of the profit to be booked in Switzerland. The switch means the Dairy Milk manufacturer will pay a much lower rate of corporation tax and is likely to deprive the exchequer of millions of pounds in tax revenue."

Surprise, surprise. The Financial Times reported yesterday that the company established in 1824 and known for its philanthropic ethos, had been for years prior to the takeover "devising schemes to engineer interest charges that could be deducted from its gross profits and reduce UK tax…Other schemes eschewed complicated debt and accountancy structures and instead relied on old-fashioned tax havens."

A former Cadbury executive familiar with the scheme told the FT it was just one of “a lot of things” the group did “to create an interest deduction out of nothing”, adding that certain executives in the company “found that intellectually quite stimulating”.

Could it be that from an ethical perspective, tax minimization is virtuous?

General Mills: With less relish than its peers

C. HUYGENS - Friday, February 22, 2013
Lest shareholders of other food sector businesses get overly excited, Berkshire's proposed acquisition of Heinz at a 20% premium to market value does not appear to be juicing up other staid enterprises. While equity investors at General Mills (GIS) did react favorably to the Heinz (HNZ) deal announcement, the reputational value metrics from Steel City Re reflect  different outcomes to companies with similar stories but different antecedent metrics. The key indicator is current RVM volatility.

RVM, a non-financial indicator of reputational value, indicates among other things a company's sensitivity to macroeconomic uncertainty. The Current RVM Volatility for General Mills shows a modest correlation with the volatility of VIX, the Chicago Board of Option Exchanges S&P500 Futures Volatility Index or Fear Index. The Current RVM for Heinz does not. If one expects an economic downturn, Heinz is the safer place to be. And if one has a senior claim on cash flows, one is can be less sensitive to an equity price premium.

The details on RVM and the other reputational value metrics are available at Reputation, Stock Price, and You (Apress, 2012).

Heinz: Meal deal

C. HUYGENS - Thursday, February 14, 2013
Early Thursday morning, The Wall Street Journal and the Pittsburgh Post Gazette, among many others, reported that H.J. Heinz Co. said it agreed to be acquired by Berkshire Hathaway Inc. and private-equity firm 3G Capital for more than $23 billion. Under the terms of the deal, which has been unanimously approved by Heinz's board, shareholders will receive $72.50 in cash for each share, a 20% premium to Wednesday's close. As expected, Heinz Chief Executive William Johnson affirmed, "The Heinz brand is one of the most respected brands in the global food industry and this historic transaction provides tremendous value to Heinz shareholders."

Deconstructing the deal from a reputational value perspective, Berkshire Hathaway is paying a 20% equity price premium to acquire a company with the highest reputational value premium in its sector, as shown in the reputational value metrics charts from Steel City Re. As discussed in Reputation, Stock Price, and You (Apress, 2012), the potential equity value implied by the reputational value premium was there for the taking;  equity investors -- Warren Buffet, excluded -- just weren't seeing it. That value arbitrage, to give a name to Buffet's investment strategy, is what the RepuStars Algorithm attempts to expose through the RepuStars Variety Corporate Reputation Composite Equity Index (Ticker: REPUVAR).

Side Bar: Berkshire Hathaway and 3G Capital have pledged to maintain Pittsburgh as Heinz's global headquarters. The word "Variety" in the full name of the RepuStars Index comes from Heinz's tag line, 57 Varieties, for the reason that RepuStars comprises a portfolio of up to 57 names. RepuStars Variety returns are reported each week on this blog. Steel City Re, which calculates the measures of reputational value and volatility, is also headquartered in Pittsburgh.

Returning to the measures, as of last Thursday when these were last calculated, Heinz's CRR, a measure of relative reputational ranking, was in the 96th percentile. Return on equity was in the 56th percentile, and RVM volatility, a non-financial measure of reputational value volatility, was in the lowest decile for most of the year spiking only recently to the 68th percentile. Return on equity has been keeping with the median for the sector. Last, prospects for future change, as reflected in the CRR vector and the related indication of stability at the 86th percentile, suggested little expectation of change. In other words, each of the various stakeholder groups, holding expectations appropriate to their experiences with the company, thought that they were valuing the company properly. Those views were not aligned -- but which group was off the mark?

Buffet's actions today, affirming the logic of RepuStars, suggest that equity investors were missing the boat.

Unilever: Seeking success through sustainability

C. HUYGENS - Wednesday, November 17, 2010
On Monday, 15 November, Unilever (NYSE:UL) unveiled a business model overhaul that was 12 months in the planning. The core strategy is sustainability.

Here is how the Guardian describes it:

The initiative will cover not just Unilever's greenhouse gas emissions, waste and water use – but the impact caused by its suppliers and consumers, from agricultural growers to the packaging and waste water produced by consumers of Unilever brands. The Anglo-Dutch group also intends to improve the nutritional quality of its food products – with cuts in salt, saturated fats, sugar and calories – and link more than 500,000 smallholder farmers and small scale distributors in developing countries to its supply chain.

Looking at the reputation metrics, there is no indication that the market has been anticipating a major announcement of a strategic shift designed to increase enterprise value along with corporate reputation. Over the trailing twelve months, the Steel City Re Corporate Reputation Index rank has slipped progressively from the 58th percentile to the 34th percentile relative to the 25 peers in the Food: Major/Diversified sector. (The top ranked firms are currently HJ Heinz (NYSE:HNZ); Kellog Co. (NYSE:K) and TreeHouse Foods (NYSE:THS)). During this period, the company's return on equity has underperformed the median of its peer group by 2.75%. As of 11 November, the exponentially weighted moving average volatility of its Index ranking has dropped to 7.6%, but the Index velocity and vector are overall negative at -3% and -6% respectively.

The sector as a whole as shown a decrease in its median reputation ranking as well as a progressive decrease in the variance within the group. Last, the entire sector is heavily leveraged with the median intangible asset value fraction in excess of 100%. Unilver's intangible asset fraction of 118% is marginally greater than the median of 114%.

We'll be following Unilever to see how its sustainability strategy pans out.

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.

Table or menu

Nir Kossovsky - Thursday, September 10, 2009
Financial players are salivating over opportunities in the Food Products sector following Kraft Foods’ (NYSE:KFT) unsolicited $16 billion for Cadbury PLC (NYSE:CBY). According to Kraft’s CEO, Irene Rosenfeld, "We are eager to build upon Cadbury's iconic brands and strong British heritage through increased investment and innovation." Sounds to us like a reputation (brand) and intangible asset (innovation) opportunity.

So now that the sector is in play, we thought we’d look back over the past year and see how our predictions for value creation panned out. After all, when mergers and acquisitions are all the rage, if you are not at the table, you are on the menu.

Our last look at the Food Products sector was April 14 and was motivated by the sudden decline in the reputation standing of the HJ Heinz Company (NYSE:HNZ) as measured by the Steel City Re IA (Corporate Reputation) Index. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

Six months ago, the top dozen ranked companies in the Food Products sector, according to the Index, included Heinz and Cadbury. Kraft was number 17. Here is our recap of the baker’s dozen with market value as of the close of the markets Friday 4 September before Kraft's announcement.

Heinz, a company that was highly ranked in March 2009 but caught our attention because of a sudden drop in its reputation standing, underperformed the balance of the baker's dozen over the full year with a disappointing -24.5% ROE. Kraft, which lost only 11% over the year, outperformed Cadbury which lost 16.5%.  Firms that had a higher reputation ranking in March 09 slightly outperformed their peers. The correlation between rank and six month return was 16%. The top 12 firms, in a demonstration of reputation resilience, outperformed both the S&P Index and the Food Sector index with a loss, as a group, of less than 1%.

One other reputation note. Kellogg and Cadbury, both firms with strong reputation rankings and exceedingly strong brands, reported quality issues related to melamine and salmonella. We know that the impairment of reputation-linked assets such as quality have brought down companies from all sectors. We wonder, for the record, if business process challenges were responsible for making Cadbury an appealing target?

Note added after original posting:

Comments received after posting from readers of MISSION:INTANGIBLE focused on the relatively short window in which we reported economic results. The readers rightly pointed out that the Food Products sector is a long-term business. Tastes may evolve over time, but the business processes associated with delivering tens of millions of safe, quality meals reliably and repeatedly demand eternal vigilance. Consistency is the watchword, and therefore long-term financial results should be included in any discussion of reputation.

We agree. Below, the ten-year returns of the Baker’s Dozen listed above less Campbell’s soup (CPB) due to space limitations. Highest returns: JJSF; lowest returns shown KFT. The only major Food Products sector firm from our top 12 (sector rankings for reputation as of April, ’09) to underperform the S&P500 (10 yr equity return -20%) was CPB (not shown). Prices not adjusted for dividends.

Toll House cookie crumbles

Nir Kossovsky - Monday, June 22, 2009

A few weeks ago, we commented on the-then topical food safety issue of Salmonella and peanut butter. In that note, we lauded Nestle SA (VTX:NESN), the food conglomberate that seemed to have steered clear of the mess that left Kellogg mired.

Now it appears that Nestle has its own food safety mystery. According to the Washington Post, the Nestle plant in Danville, VA, that makes their refrigerated Toll House cookie dough is the suspected source of an outbreak that has sickened at least 65 people in 29 states with with E. coli 0157.

In supermarkets this past Saturday, Nestlé products had been pulled from the refrigerated section, and consumers were once again left to ponder the safety of the U.S. food system.

Nestle is proud of its risk and reputation management processes. We will watch closely to see how Nestle manages the operational and headline risks from this latest Food products sector peril.

Serving reputation for dinner

Nir Kossovsky - Tuesday, April 14, 2009
Tweens and adolescents often playfully disparage their meals with monikers such as "mystery meat" or "tuna surprise." While this is good fun, it is something quite different when the CEO of a major food products company similarly characterizes his company's products. David McKay of Kellogg Company (NYSE: K) raised a few eyebrows when he testified last month before the House Committeee on Energy and Commerce that Kellogg relied on third parties to assure food safety. We wonder what thoughts ran through the minds of financial analysts who knew at that time that competitors, such as Nestle, conducted their own supplier inspections thereby signalling to their stakeholders that food safety is a core business process and critical intangible/reputation asset.

And while it has been a rough time as of late with Salmonella in peanuts and pistachios, the industry as a whole is settling down to a steady state of intangible asset volatilty. So it piques our interest when H. J. Heinz Company (NYSE: HNZ), a company that has made reputation enhancement a key business strategy, experiences a sudden drop in the Steel City Re Intangible Asset Finance (Corporate Reputation) Index.

The chart below shows Heinz. As seen in the upper chart, among the 56 companies comprising the Food Products Group, Heinz has ranked in the top 95th percentile earlier this year but has been declining and is now at the 83rd percentile. In terms of return on equity, this past year it has outperformed the median of its peers by 2.6% - the peer group having lost a median of about 27% over the past 12 months. As seen in the lower chart, Heinz's exponentially weighted moving average IA index volatility began this last six month period at under two orders of magnitude and is now approaching three orders.

Yet while Heinz is showing a reputation decline and increasing volatilty, the industry as a whole is showing increasing stability. In the upper half of the chart below, the variance amond different companies in the peer group is leveling off at about 0.25. Furthermore, among all 5000 companies tracked by the IA index, the median IA index value of the peer group is rising to about the 72nd percentile. Last, the lower half of the chart below shows that the % of value at the Heinz Company ascribable to intangible assets has been increasing and now stands at about 120% while the median fraction in the peer group has been decling slightly to about 60%.

How is all this to be interpreted: decreasing IA index, increasing EMWA IA index volatilty, increasing IA fraction?

We believe its all about reputation. We believe that the extraordinarily high level of intangible asset value comprising some 120% of the company's market value (implying a negative book value) means stakeholders are relying greatly on extra-financial information to set a fair market price. Stakeholders are going with their gut, and gut is driven by reputation -- the impression stakeholders form on management's stewardship of a firm's intangible assets. The increasing volatilty associated with a decline in the IA index suggests to us that the impression stakeholders are receiving from these extra-fiancial channels is increasingly less uniform. Higher stock price volatility and increasing cost of both equity and debt will be among the earliest pains Heinz may experience.

Not convinced? Google search the stock ticker for Heinz, Kellogg, General Mills (NYSE:GIS), and Ralcorp (NYSE:RAH) - food product companies whose IA index values as of 6 April were .83, .90, .94 and .96 respectively - and the term "reputation." The hit counts are 504, 484, 543, and 1950. Did we mention that Ralcorp also had a peanut recall issue, yet their EWMA IA index volatility is decreasing and their ROE for the year is 23% above the peer-group median?

Imposing behavior

Nir Kossovsky - Tuesday, April 07, 2009
Cadbury plc (NYSE:CBY), Kellogg (NYSE:K), Mattel (NYSE:MAT) are iconic firms whose products, cash flows, and reputations have been sullied by their business partners through ethical breaches including melamine in milk, salmonella in peanut butter, and lead paint. These three are but a sample of firms afflicted by an epidemic of trading partner (third party) risk who have placed their corporate reputation at financial peril.

Risk & Insurance magazine's senior editor, Dan Reynolds, reviews the Society's conference call from 3 April with the leading question, "Imposing best practices on trading partners today is considered vital, but how does one secure an increasingly global trading community?"  He then brilliantly summarizes Robert Rittereiser's hour-long presentation in a short, entertaining and accessible article.

Rittereiser knows risk. As Reynolds summarizes, "In Rittereiser's deep past, he was a chief financial officer and chief administrative officer of Merrill Lynch & Co. and a president and CEO of E.F. Hutton. On Wall Street, according to press coverage from his glory days, he had a reputation as a guy people hired to solve problems. These days, he is on the board or serving as an officer with several risk management companies, including the Pittsburgh, Pa.-based companies
Zhi Verden and Steel City Re."
To link to the the Risk & Insurance article,
click here. To acess the original slides from the Intangible Asset Finance Society call or inquire about purchasing a recording, click here.

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