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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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Seeking Exculpation in the Court of Public Opinion

C. HUYGENS - Friday, January 05, 2018
Japan Inc.’s halo effect tarnished. For exculpation in the court of pubic opinion, ethical companies need to tell stakeholders a simple to understand and completely credible story.

Quality control scandals at companies such as Nissan Motor and Kobe Steel have shaken trust in Japan's hard earned reputation for high manufacturing quality.

Read more in Financial Times.

Read more on ethics and reputation risk.

Reputation Risk of Association

C. HUYGENS - Wednesday, October 04, 2017
Details of the network of relationships that has ensared both McKinsey and KPMG, and fostered the demise of Bell Pottinger show signs of risk management but insufficient risk mitigation.

"I view Eskom’s lying about its relationship with McKinsey and Trillian as an assault on our democracy," Public Enterprises Minister Lynne Brown said in Cape Town on Wednesday. "If the truth had been told first, then the investigation into the contracts could have been far advanced at this stage."

Read more in Bloomberg

Click here for more on McKinsey

Brexit and Sovereign Reputation Risk

C. HUYGENS - Friday, August 11, 2017
BDO, the global consultancy, tracked the valuation of businesses in the aftermath of BREXIT, when just over a year ago, on 23 June 2016, the UK decided 51.9% to 48.1% to leave the EU.

“Future performance may be significantly different given an environment of low exchange rates, growing inflation, and the possibility of continuing low GDP growth and falling consumer confidence.”

Read more in the BDO Blog.

Venezuela's Reputation Risk

C. HUYGENS - Thursday, August 03, 2017
“Venezuela’s reputational risk isn’t going to get better. On the contrary, it’s only going to get worse….Western investors, already wary of ploughing money into one of the world’s most volatile countries, will be more reluctant to do so given the government’s increasing illegitimacy.”

Read more in the Financial Times.

Reputation Risk: Sovereign Edition

C. HUYGENS - Thursday, July 13, 2017
National-level reputation risk:

“Angry and confused countries often take refuge in political extremism or aggressive nationalism…The resulting public anger is likely to cause a further polarisation in domestic politics.”

Read more in the Financial Times.

France: Combating sovereign risk with fighting words

C. HUYGENS - Tuesday, December 02, 2014
France’s reputation for being inhospitable to business and the engine of free market economics is being challenged by two of its leading politicians, who argue that the Anglo-Saxon press, the opinion formers in Europe, are feeding the worst fears of commercial Francophobes. We've been down this road of sovereign risk before with both Hong Kong and Brazil. And it boils down to Andrew Carnegie's thoughtful, "Watch what people do. (Not what they say.)"

Reflecting, Jonathan Salem Baskin writes, "But we know that reputational value is the outcome of financially relevant behaviors, not simply perceptions or biases. France can do little to change its reputation without, well, actually changing things, and that would likely center on finding ways for its government to step OUT of the conversation, not into it. It would also help to have specific private sector examples of business success, to serve both as illustrative of the potential for other businesses and the overall health of its marketplace."

Read more from Consensiv.

Hong Kong's Reputation Risk: Cause v. symptoms

C. HUYGENS - Monday, October 06, 2014
In the early days of spring 2014, debt markets celebrated as the prospects of Brazil's business-unfriendly government not being re-elected seemed possible. Such is the power of expectations to move markets.

What about expectations in Hong Kong? The protesters say the communist government is reneging on a promise of "universal suffrage."

John Tsang, Hong Kong's Finance Secretary, reveals that his “biggest fear” over the urban unrest is reputational risk. Jonathan Salem Baskin, an authority on reputation insights and controls, takes Mr. Tsang, to task. He's got it all wrong. The protests are a symptom. The protests are the expression of stakeholders' disappointment -- reputation risk being realized.

The source of reputation risk -- the cause -- was the government's action and its implications for the continued independence of Hong Kong. The amplifier of that risk is the unrest and the media coverage arising…but as Mr. Baskin has said many times before…the media are ONLY amplifiers. The same  holds for protesters, too. They're amplifiers. But that's the whole point of protesting, isn't it?

Read more.

Brazil: The cost of a bad reputation

C. HUYGENS - Friday, April 04, 2014
The central bank, which does not enjoy formal independence in Brazil, has increased the interest rate by 375 basis points since April 2013. The most recent increase this past Wednesday, ranks Brazil at the top of the league table for the most rate rises globally over the past year, according to Bloomberg data.

Reputation is a reflection of governance, controls and risk management. Weak governance comes at a cost. The Financial Times reports that "Brazil has been under pressure to regain the trust of the market. In March, Standard & Poor’s downgraded the country’s credit rating to BBB-, one notch above junk status, blaming several factors including the economic team’s lack of credibility."

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.

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