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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Wallmart: Gently rolling head in aisle 4

C. HUYGENS - Tuesday, November 26, 2013
At a session with analysts after the 2012 Walmart (WMT) annual meeting, Bud Bugatch with Raymond James asked what effect company executives thought allegations of corruption in its Mexican operations would have on the company's reputation (Read More). As described in Reputation, Stock Price and You, Mike Duke, CEO of Walmart replied, "We will be a better company because of this."

Bloomberg reports this week that "the U.S. Department of Justice and the U.S. Securities and Exchange Commission are investigating allegations that Wal-Mart systematically bribed Mexican officials so it could more quickly open stores in the country. Federal and local government agencies in Mexico also are involved in investigations. Wal-Mart has said that it also has started inquiries into potential violations of the FCPA at operations in Brazil, India and China."

Earlier this week, Walmart announced that Mr. Duke would be stepping down after 4 years at the helm and nearly 20 months since he explained how the experience would make the company better. Wal-Mart’s shares gained 69 percent from Jan. 30, 2009, the last trading day before Duke became CEO, through Nov. 22 this year. The Standard & Poor’s 500 Index more than doubled in that time.

If better is not more valuable, is there another metric? Has Walmart used the experience to improve its standing with its stakeholders -- its reputation?

The Consensiv reputation metrics, powered by Steel City Re's measures of reputational value, reflect stakeholder expectations and their economic effects. Of the 15 firms in its sector, Discount Stores, Walmart has drifted from trending above the third quartile to trending below the third quartile of the metric, Reputation Premium. This indicates lost value. Its stakeholders are confident that this premium is appropriate as evidence by an extremely low Consensus Trend metric. The Consensus Benchmark,which is based on a one-year average standard deviation of the Reputation Premium, indicates at 5.2% a surprisingly volatile ride down for such a large company.

Yes, reputational health is still top quartile, but in a field that includes JCPenny and Sears, that's not so great. There are profound operational issues that are eroding Walmart's reputational value. Complacency, evidenced by Mr. Duke's tenure, is possible only because a slow leak takes years to sink a large ship.



For more background on the Consensiv reputation controls, click here. To view the November 2013 reputational value league table, based on Consensiv's metrics, and available exclusively at CFO.com, click here.

International Speedway Corp: Talladega daze

C. HUYGENS - Tuesday, October 29, 2013
In an article on the cheating scandal at Richmond International Raceway that rocked NASCAR more than a month ago, Viv Bernstein of the New York Times wrote that the impact "continues to be felt in a sport whose credibility has been questioned by fans, the news media and even its drivers."

For spectators, aka customers, sporting events are for entertainment. For the sponsors, they are bait for spectators. For suppliers, they themselves are customers and for creditors, they are debt servicers. All is well as long as spectators are entertained. As was noted in an article in CFO.com last year with respect to the NFL, much of the entertainment value revolves around notions of fairness - ethical behavior by competitors and quality performances by officials responsible for enforcing ethics.

At Richmond, the race was to set the field for the Sprint Cup playoff. However, the race was manipulated by drivers at Michael Waltrip Racing to try to help Truex qualify at the expense of others. Last week, reports Bernstein, "Michael Waltrip Racing announced it was eliminating 15 percent of its staff, including the No. 56 race team and Martin Truex Jr., a driver at the center of the scandal, who has paid the highest price even though it appears he did nothing wrong."

The reputational value metrics from reputation insurer Steel City Re are sensitive to the aggregate expections of stakeholders. Those expectations comprise NASCAR's current reputation; the behaviors stakeholders take in light of those expectations have economic consequences that comprise NASCAR's reputational value. Seen through the management prism of Consensiv LLC, a licensee of Steel City Re's big data and a provider of reputation value controls whose monthly league table is now published by CFO.com, Bernstein's premise is substantiated.

As one of 52 constituent companies of the Movies/Entertainment sector, International Speedway Corp (a subsidiary of NASCAR) is a reasonable proxy for its parent. The data show that its Reputation Premium has been deteriorating for a few weeks and now stands at the 59th percentile. Over the past few weeks, that deterioration as been accelerating as confusion has slowly been creeping into the expectations of stakeholders, evidenced by a rise in the Consensus Trend to 1.9%.

While the impact is still being felt, however, it is only just beginning to push ISCA's reputational health out of the healthy zone into the less certain zone of caution. The data suggest that while not sanguine, stakeholders expect NASCAR to clean up the mess and will forgive past iniquities. Forgiven and forgotten, as they say, provided events going forward don't expose new scandals. Reputation resilience has its limits.



For more background on the Consensiv reputation controls, click here.

Truth in Advertising

C. HUYGENS - Tuesday, October 01, 2013
Advertising can be a powerful contributor to better and more lasting relationships with consumers and other constituent groups, but it requires a new, creative approach to how it addresses truth. Jonathan Salem Baskin, moderator of the Mission Intangible Monthly Briefings, enumerates them:

(1) Get back to communicating functional benefits
(2) Stop pretending you’re talking in a vacuum
(3) Reaffirm the goal of getting people to like your product, not your ads
(4) Set expectations, not make promises

Reputation is a product of how expectations are set, and how they are met. Read more.

Kanebo: It looks bad

C. HUYGENS - Thursday, September 19, 2013
Charles Haskell Revson, founder of Revlon, liked to remind people that while his company manufactured cosmetics, it sold hope. Kanebo, a division of Kao Corporation (TYO:4452), ranking hope higher than safety or "confusion," continued selling defective skin whitening products more than a week after it was discovered that the product caused blotching.

Skin whitening products are popular among women all over east Asia, with users seeking lighter tones. The recall, involving almost 4.75 million products on retail shelves, was announced July 4, almost a week after Kanebo first decided to take them off the shelves.

News of the delay emerged in early September with pundits concluding that this will probably damage Kanebo's (and therefore Kao's) reputation. Perhaps, writes reputation controls expert Jonathan Salem Baskin. "Reputation, however, isn’t the purview of marketing or the outcome of good or bad publicity, but rather the result of financially-relevant stakeholder behaviors...Kanebo’s sourcing, manufacturing, and distribution operations are the drivers of its reputational value, and it will be interesting to see how it addresses any failures or shortcomings its investigation uncovers in areas such as sustainability, quality, and reliability. And only then will it see how deep its problems may go."  Read more.

The ethical issues associated with the recall delay raise another concern. It is possible that stakeholders' expectation of prompt action will conform to a standard that arguably was set by Johnson & Johnson in 1982. Or not. Much depends on the degree of goodwill Kanebo had established with its customers prior to this process failure, and the degree with which those customers concur with Kanebo's decision to delay notification "...(not to cause) confusion among customers... Concerns among customers could get worse if we were not properly prepared to answer their questions."

According to the news source Happi, "as of August 25 a total of 8,678 consumers in Japan had been confirmed to have blotches after using creams such as "Blanchir Superior", with 65 people reported as having the trouble overseas, according to Kanebo. The value of shares in the parent company Kao has fallen more than 15 percent since the recall was announced." Read more. 

Walmart v Target: Great expectations chapter 2

C. HUYGENS - Tuesday, September 17, 2013
Among the giant retailers battling for customers' attention and wallets, ethics has emerged as a point of differentiation. This issue manifests in two forms: ethical treatment of retail employees, which includes matters of pay and attitude towards sexual orientation; and ethical treatment of suppliers, which includes a much larger range of work environment and labor standards issues. Walmart Stores (WMT) and Target (TGT) are two stalwarts of this battle who've been favorites of Huygens and the Mission Intangible blog readers for many years. Walmart is famous for its domestic labor issues; also, its supplers were party to both the Tazreen factory fire and the Rana Plaza building collapse tragedies in Bangladesh over the past year. Target, famous for its pro-gay policies, was not implicated in either of those events that consumed so many garment workers' lives.



The Steel City Re reputational value metrics reveal that stakeholder expectations were impacted by the events described above with RVM volatility (Consensus Trend) being the earliest measure and Reputation Rank deterioration (Reputation Premium) being the casualty, with the advantage going to Target.  Yet if stakeholders are giving Target a range of economic benefits as the result of its superior reputation, what caused Target to report a severe drop in profitability in late August which then triggered its stock price to plunge from a +10% ROE to a -6% ROE over the past few weeks? Stay tuned.

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?

PetroChina: Reputation of a different color

C. HUYGENS - Monday, May 06, 2013
Corporate reputation is an expectation of corporate behavior. Reputation value is the product of that expectation. This is the natural course of things according to Huygens. And according to the book, Reputation Stock Price and You: Why the market rewards some companies and punishes others. And according to Jonathan Salem Baskin, Managing Director of Consensiv, who wrote today for Forbes about PetroChina.

"The last two months of PR have not been kind to PetroChina . The company’s former chairman has been implicated in a murder and money laundering. A key team of execs resigned en masse. A giant facility has stayed shut-down by an earthquake and safety concerns, while the environmental risks of a new investment have prompted riots in the streets. Earnings are down. It’s a textbook case for a corporate reputation crisis. Only not the way you think, since the company’s reputation has stayed all but unaffected. The reasons why suggest that marketers at public companies should look at corporate reputation less as an idea, and instead measure it as a series of behaviors." The full article is a good read.

Here are the corresponding Steel City Re reputation metrics underpinning Mr. Baskin's quantitative observations. Note the following:

Top left, the historic RVM volatility, a measure of the volatility of PTR's reputational value, was very low. Mr. Baskin explains why. Now it is in the 98th percentile among the 52 peers in the integrated oil sector. The reputational value is at the median, notwithstanding all the bad press.

Top right, the current RVM volatility is approaching 5% suggesting that an increasing number of stakeholders are expecting that the status quo is unsustainable.

Barclays: Committed

C. HUYGENS - Sunday, March 17, 2013
Cynics insist that the big banks have only an interest in reputation -- an interest that distributes risk inequitably on others. As the old fable goes:

A Pig and a Chicken are walking down the road. The Chicken says: "Hey Pig, I was thinking we should open a restaurant!" Pig replies: "Hm, maybe, what would we call it?" The Chicken responds: "How about 'ham-n-eggs'?" The Pig thinks for a moment and says: "No thanks. I'd be committed, but you'd only be involved!"

Last year, UBS tied the CEO's bonus to measures of reputation. Now, a second bank is no longer chicken. In a bigger and bolder display of commitment, the 2012 Barclays Bank Annual Report describes robust board and operational level controls designed to drive reputation risk management throughout the enterprise.

In order to strengthen the governance relating to reputation matters, we have recategorised reputation risk as a new Principal Risk and have created a Board Conduct, Reputation and Operational Risk Committee in 2013. The Barclays Reputation Council created a Bank wide Reputation Risk Control Framework and Reputation Risk Impact/Control Policy, both of which were approved by the Board. The Council has also delivered training on reputation risk to senior executives across the bank to ensure the knowledge and culture is embedded.

The Steel City Re Reputational Value Metrics suggest Barclays is realizing some of the rewards associated with transparently reporting its commitment. RVM is a non-financial indicator of reputational value. The current RVM volatility, an indicator of homogeneity of expectations of reputational value, has been dropping steadily over the past 4 weeks since Huygens last reported the metrics.  Meanwhile, the CRR, a measure of relative reputational value in rank order, shows that BCS has climbed from the 21st to 24th percentile since mid-Feb. ROE is holding steady at just above the median for the sector comprising 49 banking firms.

The data show that BCS's emphasis on reputation, backed by authentic controls, is creating value. The controls have not been tested, so those that have been converted appreciate the qualitative effort. The data also show that while the number of sceptics is dropping, BCS current RVM volatility is still above the median at the 54th percentile. To extract more value from the investment, BCS needs to turn around this very large block of sceptics with a quantitative story -- something made possible by a product like reputational value insurance, perhaps?



Barclays: Stirring the pot

C. HUYGENS - Wednesday, February 20, 2013
The path to providence for a prodigal bank was never expected to be easy. Human nature delights in the fall of the mighty; more so the meek who once suffered at their hands. We are speaking, of course, of the hands of the masters of the Universe.

William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. He scoffs as Antony Jenkins, the chief executive officer of Barclays Plc., seeks to shred the banks old culture and restore ethics, integrity, and other critical values. Cohan wrote on Monday,

It’s tempting to trust this sweet-talking British banking executive, still in the flush of his new appointment to run the scandal-ridden institution. He is understandably anxious to distance himself and his bank from the atrocious behavior rampant at Barclays during the absolute monarchy of his predecessor, Robert Diamond.

Scoffing, as it is now abundantly clear, is a mainstream financial media concern. Last Thursday, the NYSE announced the start of a metric-based publication service tracking sentiment - a social media data analysis service. Call it a scoff meter. Barbara Gray, an analyst with Brady Capital, explains the demand in the financial sector for sentiment data this way.

Social media is creating a new form of appreciating equity called social capital and we are now starting to see an explosion in growth of the number and sophistication of social analytics tools. As these new tools turn more and more qualitative data on companies (previously ignored by investors that just focused on the numbers) into quantitative data, I believe social capital will become even more of a predictive variable for determining stock price performance.

Indeed, the scoff meter is a 17 year old idea whose time has come. As described in Reputation, Stock Price and You, as far back as 1996, Cap Gemini Ernst & Young, a global accountancy, established that non-financial performance plays a critical role in how public companies are valued, accounting for as much as 35% of institutional investors’ valuation. In 2005, PwC, another global accountancy, reported controlled experiments showing that extra-financial data and intangible asset value calculations swayed 40% of analysts to change their target valuations of public companies. That same year, Thomson Extel, the publishing group, reported that 6% of buy-side brokerages devoted material resources to extra-financial data to determine intangible asset value. A year later, that figure was updated to 32% of buy-side brokerages.

The Society, in cooperation with Steel City Re, has been publishing reputational value metrics for several years. S&P/DowJones Indexes publishes an equity index (Ticker: REPUVAR)  informed by the same measures. These measures capture the expected economic consequences of stakeholder actions influenced by, among other things, the same data streams tracked by the scoff meters. In fact, the volatility of the RVM metric, a non-financial measure of reputational value, is a measure of stakeholder expectation alignment -- truly, a scoff meter. And CRR, a measure of reputational value premium, is an indicator of the relative value of those expectations among all stakeholders in terms of expected economic impact. When RVM volatilty is high, CRR naturally suffers.

Below, Barclays' most recent data from Steel City Re in both Investor Relations-friendly and traditional Risk Manager-centered actuarial formats. Looking first at the IR-friendly form of reputational value reporting, the data show that the measures of expectation alignment - the degree to which stakeholders believe what is being said about Barclays and plan to act accordingly, is around the 8th percentile relative to the other 49 firms in the financial services sector. The measure captures the expected economic impact of Cohan's scoffing, as shown on the same Peer Standing chart where the reputational value premium is around the 21st percentile. Two measures, both in the black box, indicating (optimistically) great upside potential.

Below, in the bottom left, a comparison of current alignment versus historic alignment. The measure appears to be decreasing, which could be interpreted to mean stakeholders are trusting the messaging less, or more aptly here, with the new messaging, stakeholders aren't accepting it...reference Cohan again.

Turning to more traditional economic measures, the Beta charts at right show that Barclays' economic returns have a Beta of 1.5 x both the group median and the S&P500; Barclays' reputational value metrics, on the other hand, have a Beta of 0.0 relative to the group median and the market measure of uncertainty -- the VIX. Barclays, from a reputational value perspective, is now in a league of its own.



The story is no different looking at the actuarial data below although time series data provide more nuanced insight. Barclays wild ride goes back to September 2012 and a steady rise in economic value not yet matched by a rise in CRR suggesting equity investors have a feeling for something others, like Cohan, are fighting tooth, nail, and blog.

Finmeccanica: Ethical contradictions

C. HUYGENS - Tuesday, February 12, 2013
At least two of the 80 companies comprising the Aerospace and Defense sector are facing reputational issues. In the US, Boeing is wrestling with smoking batteries, allegations of conflicted safety review processes, and suggestions of supply chain management failures. Aircraft safety is the reputational value issue that nucleates the above. In Europe, Finmeccanica SpA is facing the more common issue in this sector: ethics and corruption. Here is how a trading blog summarized the problem:

Finmeccanica Chief Executive and Chairman Giuseppe Orsi was arrested over bribes allegedly paid to secure the sale of 12 helicopters to India, when he was head of the group's AgustaWestland unit, a judicial source with direct knowledge of the situation told Reuters... An Indian defense ministry source said kickbacks worth 40 million rupees allegedly paid to Indian officials to grease contracts for Finmeccanica were being probed and that Delhi was considering the deferral of the Finmeccanica helicopter deal, worth 560 million euros ($749.2 million)...Prime Minister Mario Monti said the Italian government would deal with management issues at the company... "There is a problem with the governance of Finmeccanica at the moment and we will face up to it," Monti told RAI state television.

The reputational value metrics provided by Steel City Re illustrate incongruities that should be unsettling, if not alerting. The company's reputational ranking, CRR, a measure of its reputational value premium, is only in the first decile relative to its peers, yet its return on equity is in the 90th percentile, peaking briefly at 50% ROE for the year. The company's RVM volatility, a measure of volatility of a non-financial measure of reputational value, is in the top decile yet the projected change for CRR is flat. While such an odd mix of leading indicators is not diagnostic of a pending reputational value problem, as discussed in Reputation, Stock Price, and You, it isn't a sustainable cocktail of measures in the usual course of business.



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