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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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.

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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.

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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: 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.

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