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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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Ethical pharmaceuticals

Nir Kossovsky - Friday, May 01, 2009
Earlier this month, Novartis was named one of the three most ethical pharma and biotech companies in the world by Ethisphere Magazine, following an in-depth analysis over a six-month period by several non-governmental organizations and the publication's editors. Ethisphere claims that firms found to be more ethical outperform their peers. We're inclined to agree in principal, because it is our observation that superior stewards of intangible assets build resilient reputations and outperform their peers, and "ethics" is a major intangible asset. On the other hand, league tables are often disparaged as "rank and spank."

It seemed ironic that we should question an organization with a name such as "Ethisphere." Ok, we trust them. But we are obliged to verify. And what better tool to use than the Steel City Re Intangible Asset Finance (corporate reputation) Index, a quantitative tool that measures the financial impact of stakeholder behaviors that are reasonable indicators of corporate reputation.

As shown in the chart below, Novartis (NYSE:NVS) IA index ranking has fluctuated around 0.93 this past year. The EWMA IA volatility was generally very low with a log magnitude of 2. Overall, good IA index values suggesting a strong reputation and creating expectations for an above average return. And indeed, financially, it is outperforming its 84 peers in the Pharmaceuticals sector with an ROE this past year of 13.14% above the median.

As points of comparison, let's look at Pfizer (NYSE:PFE) and Eli Lilly (NYSE:LLY), two strong US-based pharmaceutical companies. Over this same time period, Pfizer's IA index decreased from 0.79 to .72 which is a worrying sign of reputation loss. On the other hand, IA volatility has been dropping slightly suggesting a tightening of the variance on reputation -- a feature we attribute to management's improving command, control and communications. Financially, it is marginally outperforming its peers with an excess ROE of less than 1%.

Last, take a look at Eli Lilly, a firm that has had ethical issues lately relating to criminal and civil charges, now settled, that it illegally marketed its schizophrenia drug Zyprexa. Over the past year, Eli Lilly's IA index decreased from a lofty 0.94 to .85. IA volatility has been fluctuating at levels much higher than either Novartis or Pfizer. Financially, it is underperforming its peers by 3%.

That Lilly's IA index dropped to below 0.8 and then rebounded is testimony to the firm's reputation resilience and is a feature we tend to see in companies with overall high IA index values. Still, there appears to be a rank order in these quantitative market-driven metrics measuring reputation that appear to substantiate, at least in part, the designation conferred by Ethisphere. And yes, the one other pharmaceutical firm that was recognized for its ethics, and that we cover for corporate reputation metrics with the IA index, also scored well. Astra Zeneca (NYSE:AZN). During this period, Astra Zeneca's IA index increased from 0.77 to .88 while its IA volatility has been dropping. Financially, it is outperforming its peers with an excess return of 23%.

The highly regulated ethical pharmaceutical industry (prescription drugs) emerged from the chaos, misbranding, and adulterated products world of the late 19th century. The public benefits derive from the confidence stakeholders have in the safety and effectiveness of the products when used as directed. Knowing how important the distinction between ethical and other products is to market confidence and price point, it should not be too surprising that both the regulatory hammer and the reputation impact can be significant.

Valuation truth vs truthiness

Nir Kossovsky - Friday, April 24, 2009
The past week, Intellectual Asset Management magazine, the official publication partner of the Society, has been hosting a debate on intangible asset valuation. As Joff Wild, editor of IAM magazine describes it,

One subject area that always seems to generate a large number of reader comments is valuation. Witness, for example, the fantastic thread tha developed following a post I wrote back in January entitled Intangible values collapse - the old 70% to 80% claim is now officially dead and buried. Among those taking part in that conversation - indeed the man who indirectly inspired it - was Nir Kossovsky, executive secretary of the Intangible Asset Finance Society and CEO of Steel City Re. Now Nir has written in to question some of the points made by Pat Sullivan and Alexander Wurzer in their IAM article on IP/intangible valuation myths, which I recently previewed on the blog.

The Intangible Asset Finance Society has weighed in on the debate along with our colleagues at the Athena Alliance, with classic language and arguments from the school of American Pragmatism that reflect the financial market principles we support. To follow the debate on the IAM site, click here. To read the comments of Ken Jarboe, President of the Athena Alliance on the Alliance blog, Intangible Economy, click here.

Tsk tsk, Liska

Nir Kossovsky - Monday, April 20, 2009
You may have heard about the spat between Motorola Inc. (NYSE:MOT) and its former CFO, Paul Liska. Briefly, Liska believes he was dismissed for blowing the whistle on inaccurate financial forecasts; Motorola's version is that he was dismissed for "serious misconduct and incompetence."

Our interest was piqued by a recent JP Morgan analysis that reported "this entire soap opera likely ends with little or no impact to Motorola." We are less sanguine for we see evidence of significant , albeit restorable, reputation impairment.

Liska was dismissed 29 January. He was officially fired 19 February according to an SEC filing. As shown below, between 2 and 9 February, Motorola's reputation as measured by the Steel City Re Intangible Asset Finance (corporate reputation) Index dropped precipitously from the 82nd percentile to the 23rd percentile among 93 companies in the Communications Equipment sector.

The data indicate a decreasing IA index, an increasing EWMA IA index volatility with an average log magnitude of 4, and a not unexpected economic underperformance of 3% below peers. In contrast, Qualcomm Inc. (NASDAQ:QCOM) the #1 ranked firm in this sector, shows a decreasing EWMA IA index volatility with an average log magnitude of 3, and an economic return that exceeds its peers by 41%

We believe Motorola's reputation issues are significant and now center about the core issue of ethics. This additional concern exacerbates pre-existing concerns about innovation which have dogged the company for some time. To stakeholders facing ambiguous facts as they now stand, ethical concerns place all executive pronouncements under a cloud. The discounting effect on share price, in our opinion, is similar to the discounting we saw years ago when Research in Motion was laboring under the uncertainty of intellectual property litigation.

It doesn't have to be this way. Operational transparency and some fine footwork by corporate communications should be able to undo the damage if indeed, as JP Morgan suggests, Motorola's case is the stronger of the two. The reward for success by our estimation, if you want to put a number to it, is up to $11B in restored market capitalization (F-test 10E-30, adj. R2 0.79). But as most companies are learning in these challenging times, in reality, reputation is priceless.

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.


Nir Kossovsky - Monday, April 06, 2009
Dear Reader,

Beginning this week and with surprising regularity, the Society will post a quantitative and qualitative analysis of the intangible asset management implications of a current news story involving a publicly traded company. These analyses will draw on IA index data published by Steel City Re. Periodically, the Society will also post announcements to supplement the monthly news alerts, the quarterly newsletter, and the bimonthly publication in IAM magazine.

As always, the Society welcomes your comments and feedback.

Nir Kossovsky
Executive Secretary

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