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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Scotland's Reputation: Just watch what they do.

C. HUYGENS - Wednesday, September 24, 2014
Andrew Carnegie, one of Scotland's better known American transplants, famously said, "As I grow older, I pay less attention to what men say, I just watch what they do." So while the opinion polls suggested a close plebiscite, the Scots' vote favored the union by 10%. Scotland's reputation as one of four upstanding united kingdoms was preserved.

Not necessarily so. As Consensiv's Jonathan Salem Baskin points out, the electorate has voted. Now watch what other stakeholders do -- evidenced by the value of foreign direct investment, tax impact of immigration, business start up and expansion rates, risk premium on sovereign debt; and by what concessions the local Scottish government needs to make to optimize the above.

Read more.

Reputation Value: Municipal edition

C. HUYGENS - Thursday, April 24, 2014
The public sector is no less sensitive than the private sector to the economic effects of reputation - boosted when good, and dragged down when bad. Who can forget that day in August 2011 when 'Brand USA' saw $1 trillion wiped off its value after Standard & Poor's cut its bond rating.

Nations, states, school districts and municipalities should rightfully be concerned about their reputation. As should universities and hospitals. Reputation is what draws people to these geographies and to these institutions.  When they arrive to live, work, study or heal, they have expectations that need to be met. Failure to meet those expectations would put their reputational value at risk.  Huygens reviewed earlier this week several recent examples of self-inflicted reputational wounds.

Measuring and reporting the reputational value for public companies, like General Mills earlier this week, is not difficult for third parties such as Consensiv, because the expectations of stakeholders are readily expressed in publicly available economic data. The expectations of at least one group of stakeholders for sovereigns, universities, and hospitals can be gleaned from publicly available debt data, but for the most part, data reporting on the expectations are closely held. For privately held entities, insight into stakeholder expectations can be best elicited through private decision markets.

Private decision markets are not easy to structure; opinion polls, on the other hand, are very easy to administer. Unfortunately, opinion polls are poor substitutes for private decision markets. Like many other marketing tools, the ability of opinion polls that purport to report on "brand" to also predict or impact economic activity is limited, as a municipality seeking to understand and improve its own reputation quickly learned.

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Reputation Value: Sovereign nation edition

C. HUYGENS - Sunday, March 30, 2014
Recently, Huygens has shared stories on reputation value associated with the behavior of sovereign states (Illinois) and local school districts (Texas). Today, completing the Rule of Three, sovereign nations (Brazil).

Reputation is an odd intangible asset. By itself, it is nothing more than an expectation of behavior. Its value depends on the action or inaction it elicits from stakeholders. Capital markets capture some of this forward-looking expectation of stakeholder behavior. Lest this read like the opening paragraph of a PhD dissertation in Behavioral Economics, consider this report from Reuters this past Thursday, 27 March 2014.

Brazil's currency and benchmark stock index skyrocketed on Thursday after a poll showed a decline in President Dilma Rousseff's approval rating, fueling investor optimism that the nation's economic policies could take a market-friendly turn.

Thiago Montenegro, a trader at Quantitas Asset Management in Porto Alegre, Brazil, explained the market behavior to Reuters:

Any change in any percentage point that points to the possibility of the (Rousseff) government not being re-elected helps these shares. The market is starting from the premise that the state firms couldn't possibly be treated any worse.

For followers of Huygens and this blog, the above is crystal. If expectations are for rock bottom behaviors, and stakeholders are favorably surprised with news suggesting their expectations have been excessively pessimistic, the revised expectations will raise values. It is a form of insight not unlike that developed by Mike Milken years ago on bond performance. AAA bonds can only disappoint. BBB bonds have the potential to surprise.

Bond investors hate surprises. Equity investors live for them. When stakeholder expectations signal value, and equity investors have not come around to share that expectation, there is equity value to be discovered. The potential for discovery is the theory behind the design of the reputation index-linked portfolios, RepuStars and RepuSPX.

Reputation Value: School district edition

C. HUYGENS - Thursday, March 20, 2014
In the area of reputation risk arising from a failure in governance, controls and risk management in the public sector, a notable example was the public university in Happy Valley, Pennsylvania -- the Pennsylvania State University. Another notable example, discussed only yesterday, was the State of Illinois. Today, a school district in Texas. The Beaumont Independent School District (“BISD”) in Texas is in crisis.

Common to all: An operational crisis involving ethics, safety, or security; failure in governance and controls, and a long history of signs and symptoms that arguably were willfully ignored.

The Texas Education Agency has issued a 12-page report damning its finances, amidst reports that it paid one electrician $382,940 for materials that only cost $39,490, and that two senior officials may have embezzled $4 million...This is a classic reputation crisis, as the bad press is an outcome of underlying problems of governance and sustainability.

Read more.

Reputation Value: Sovereign state edition

C. HUYGENS - Wednesday, March 19, 2014
"In a market based on trust, reputation has value," noted Alan Greenspan, former chairman of the Federal Reserve, as Wall Street imploded.

Certainly reputation has value in the financial sector. In fact, the US Office of Comptroller of the Currency now recognizes reputation risk as one of eight sources of financial risk that institutions need to manage.

And reputation has value in public companies in general. Around two thirds of public company directors, and an equal number of public companies, disclose the materiality of reputation risk in their SEC filings (10K item 1A).

But what about the public sector? Does reputation impact budget line items in the public sector the same way it impacts line items in a public company’s P&L. Apparently, yes.

As far as state budgets go, Illinois has one of the worst, suffering from underfunded employee pension obligations and an economy that isn’t adding enough top-line cash. Its credit rating is the nation’s lowest, which means it’s considered the worst borrowing risk out of a list of 50 (and therefore pays the most for it).

But beyond this low credit rating, Illinois pays interest rates on its debt that are higher than the actual default risk that these ratings are designed to reflect. Illinois pays a reputation risk premium.

In a recent paper published by the University of Illinois' Institute of Government and Public Affairs, University of South Carolina professors Tima Moldogaziev and Martin Luby studied this reputation risk premium and found that it costs the state plenty. For bond sales between 2005 and 2010, they estimate that this reputation risk premium cost the state more than $80 million. That's $80 million over and above what the state should have been paying based on its worst-in-the-nation credit rating.

Read more.

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