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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C. HUYGENS - Saturday, January 28, 2012
In introductory remarks for the release of the 2012 Edelman Trust Barometer results, Richard Edelman provided background for the pan-institutional deterioration of trust. “In 2008-2009, in the wake of a recession that saw large, global companies such as Lehman Brothers and AIG collapse, trust in business imploded. Government stepped in with bailouts and new regulations. But in 2011, government became paralyzed by the politics of extremism and endless haggling – and the public lost confidence.”

Gideon Rachman, writing for the Financial Times, calls it the age of indignation. “This was a year of global indignation, from the Occupy Wall Street movement to the Moscow election protests and China’s village revolts. It was popular protests on either side of the Mediterranean – in Tahrir Square in Cairo and Syntagma Square in Athens – that set the tone for 2011.” Social networks linked by social media are now the sources of trust and media of choice.

Ever alert, the Willy Suttons of the world are  working these trusted environments. This week’s Economist () introduces the notion of ‘affinity fraud.’ “The term refers to scams in which the perpetrator uses personal contacts to swindle a specific group, such as a church congregation, a rotary club, a professional circle or an ethnic community. Once the scammer gains their trust, his scam spreads like smallpox. Most affinity frauds are Ponzi schemes, in which money from new investors is used to repay old ones, or is siphoned off by the promoters.’ Here’s the rub. According to the Economist, “Mistrust of mainstream finance helps the scammers. The big guys on Wall Street have shown they can’t be trusted, they say; better to go with someone you know.”

Out of the pan and into the fire?

Penn State University: Not so happy valley

C. HUYGENS - Saturday, November 12, 2011
The Financial Times (November 11, Bullock) focused on it right away: "'Higher education is first and foremost a business that is driven by reputation,' said John Nelson, head of higher education research at Moody’s. 'Student demand, the attraction of faculty and the ability to draw donations are all based on reputation.' Moody’s said it will evaluate 'the potential scope of the reputational and financial risk' arising from the allegations, including potential lawsuits and settlements, weaker student demand or philanthropic support, changes in the university’s relationship with the state and significant management or governance changes."

The Washington Post's (November 12, AP Wire) headline was blunt: "Moody’s warns Penn State’s bond rating could be downgraded because of sex abuse scandal."

Reputation is an epiphenomenon. It is a product of how an entity executes one or more of six core functions: ethics, quality, innovation, safety, sustainability, and security. Three of these have been called into question by the Penn State University sexual abuse scandal. The Pennsylvania attorney-general has filed criminal charges involving child sexual abuse against Jerry Sandusky, a former assistant football coach, as well as perjury and failure to report charges against two senior university officials, including the chief financial officer.

In our current culture, the path to reputation restoration includes rolling heads. Swift retribution is demanded, and and innocent blood may be part of the cost to save the many. The reign of terror had its merits, but it was not necessarily the best path towards a just and democratic system. We can only hope that the lessons taken from this latest reputational crisis are that better preventative processes are preferable to the guillotine.

Meanwhile, in Happy Valley Pennsylvania, a normalcy is already returning.

Ethics: Hedging

C. HUYGENS - Thursday, August 04, 2011
According to the National Association of Corporate Directors' NACD Daily (4 Aug), companies are counterbalancing perceived social wrongs with an alternative set of socially responsible actions.

One of the propositions behind socially responsible investing is that companies do "well" by doing "good." But according to the Wall Street Journal (Aug. 1, Lahart), economists Matt Kotchen of Yale University and Jon Jungbien Moon of Korea University suggest that an important reason companies do good is to paper over their errors. The two economists measured Corporate Social Irresponsibility (CSI) and Corporate Social Responsibility (CSR) using a database that monitors companies on about 80 measures of social responsibility, and they found that companies offset their bad behavior by engaging in CSR.


There may be PR benefits to hedging bad with good; but to the extent that the "bad" acts set the stage for a reputational crisis, ethical hedging may prove itself as effective in a moral liquidity crisis as financial hedging turned out to be during the great financial liquidity crisis.

St Joe: Bedeviled

C. HUYGENS - Thursday, July 07, 2011
Advisen, the insurance industry newsletter, headlined the story this way. St. Joe Getting Killed As Company Reveals SEC Is Probing Financial Reports. According to Advisen, the SEC has started a formal investigation of St. Joe and Fairholme Capital, the company's largest shareholder. Bruce Berkowitz, the founder of Fairholme, is also the Chairman of St. Joe (NYSE:JOE) which is the largest landowner in the state of Florida.

The Financial Times (July 6, McCrum) observes that that St. Joe was a pulp and paper company formed in the 1930s that became a property investor and then housebuilder. St Joe was forced to halt most of its property development in the wake of the housing bust. However the Watersound-based company has largely refused to write down the value of its real estate, on the basis that last year’s opening of the Northwest Florida Beaches International Airport in the centre of St Joe’s forest land will spur commercial development.

St. Joe is no stranger to litigation and intrigue. Huygen's noted earlier this year that St. Joe distinguished itself by achieving the rare reputation ranking of zero among its peer group. The Securities and Exchange Commission is investigating how St Joe, a US property investor, accounts for the value of its almost 600,000 acres of land in north-west Florida.

Turning to current metrics, St. Joe is demonstrating ongoing depressed reputation metrics according to the Steel City Re Corporate Reputation Index. Over the trailing twelve months, the company's ranking rose from the 1st to the 5th percentile rank among the 139 firms comprising the Real Estate Development sector. To be clear, only 132 firms outranked it reputationally which may explain why it has been underperforming its peer group by 45%. Uncertainty is in the air. The reputation vector has been up and down quite a bit lately measuring in this past week at 44%.





Its market value is in excess of 50% intangible while the mean of its peer group is less than 10%. It is therefore curious that shortseller David Einhorn feels that the shares are overvalued owing to the excessive book value of the real estate assets. Undervalued intangibles vs. overvalued tangibles; a classic question of ethics and innovation vs. accounting. Or optimist vs. short seller: a curious battle indeed.

Walmart: Not out of the woods yet

C. HUYGENS - Friday, June 24, 2011
Earlier this week, the Supreme Court of the United States (SCOTUS) addressed an issue that has been a persistent thorn in Walmart's reputation - allegations of gender bias. The firm, which has reportedly shed up to 10% of its market capitalization over the years due to stakeholder unease with a range of labor practices, breathed a sigh of relief. According to the newsletter of the National Association of Corporate Directors (21 June):

"The Supreme Court threw out a sweeping sex-discrimination lawsuit against Wal-Mart Stores Inc.," the Wall Street Journal (June 21, Bravin, Zimmerman) confirms, "ruling Monday that the 1.6 million women allegedly victimized had too little in common to form a single class of plaintiffs." The court ruled 5-4 along its ideological divide, concluding the allegations against the retailer were too vague and the evidence too weak to establish the common injury essential to encompass all females employed since 1998 in the nearly 3,400 U.S. Wal-Mart stores. "The decision is sure to reverberate in other employment class actions," the Journal states. Attorney John Fox says the impact of the ruling on other cases will depend in part on companies' personnel policies.

With this decision, the New York Times (June 21, Greenhouse) reasons, the Supreme Court has significantly tightened the rules for how a large group of individuals can join together to sue a corporation for alleged harm done to them. "The court's decision will not just make it harder to bring big, ambitious employment class-action cases asserting discrimination based on sex, race or other factors," the Times reasons. "The court set higher barriers for bringing several types of nationwide class actions against a large company with many branches." Robin S. Conrad, executive vice president of the U.S. Chamber of Commerce's National Chamber Litigation Center, applauded the high court for affirming that mega-class actions are inconsistent with federal law. He added, "Too often the class-action device is twisted and abused to force businesses to choose between settling meritless lawsuits or potentially facing financial ruin."

The Montgomery Advertiser (June 21, D'Innocenzio) concludes that despite the legal victory, Wal-Mart has taken steps to address the issues raised in the suit. "Since the sex-bias lawsuit was given class action status in 2004 on behalf of 1.6 million women," the newspaper points out, "Wal-Mart Stores Inc. has set up a women's council that represents each of the overseas markets and focused training and other efforts on advancing women into management roles. As a result, Wal-Mart says the percentage of entry and midlevel women managers has increased over the past five years from 38.8 percent to 41.2 percent." Gisel Ruiz, executive vice president of people at Wal-Mart's U.S. stores, confirms that she has definitely seen the advancement opportunities grow for women. Specifically, she noted that Wal-Mart has created a series of training and mentoring programs to help prepare women for opportunities at all levels of the company.


Turning to the reputation metrics, the Steel City Re Corporate Reputation Index shows that Walmart's reputation has been unusually volatile over the trailing 12 months. Of the fourteen companies comprising the Discount Store sector, the company's metrics currently rank it in the 61st percentile thus matching its ranking at the beginning of this period. Walmart did exhibit a small uptick this week thanks to the court ruling. Over the trailing twelve weeks, however, its reputational volatility velocity has been negative at -15% and its vector has been negative at -11% as its exponentially weighted moving average volatility has climbed to 100%. These reputational challenges are associated with an overall economic under performance that is 15.9% below the median of its peer group.

The sector, too, has experienced significant volatility as of late in what is a rather volatile period for the equity markets (risk assets). The variance in reputation ranking metrics among the peer group has been extreme ranging from a low of 10% to a high of 25%. The VIX (S&P 500 Volatility Index) closed June 23 at 19.29 having bounced over the trailing twelve months between 14.27 and 37.58.  None of this is good for Walmart, whose fractional intangible asset value has now slightly dipped below the median of its peer group.

Avon: Ethical calling

C. HUYGENS - Wednesday, May 25, 2011
Several months ago, in the ongoing post-mortem of the BP disaster, John Kay noted in the Financial Times that, “today’s willingness to cut corners is tomorrow’s headline risk.” Were this observation to be appreciated more widely, many reputations might have been saved.

Which brings Huygens to the happy story of Avon Products, Inc. (NYSE:AVP). Under financial pressure, the rumor mills last fall suggested the Company was in the cross hairs of L’Oreal S.A. In early October, the call volume on Avon surged relative to puts giving holders a whopping 18% 3-month return. L’Oreal didn’t take the bait, and Avon moved quickly to cut costs. In mid-October, it announced plans to cut about 400 jobs and to shut down an Ohio manufacturing facility. On early November, it announced that it had agreed to tender its 75% ownership interest in its Avon Japan business to an affiliate of TPG Capital, the global private investment firm. There were a number of intellectual property licenses associated with the deal. The stock priced tumbled.

Yet when faced with a major ethical issue whose resolution could have further impaired cash flows, the Company avoided the temptation to cut corners. In mid April 2011, Avon suspended the president, chief financial officer and top government affairs executive at its China unit and a senior executive in New York who was the company's head of internal audit until the middle of last year. According to Business Ethics (13 April, Connor), in its most recent SEC 10-K filing, Avon said it had voluntarily disclosed to the SEC and the Department of Justice internal investigations and compliance reviews which had “started in China” and focused on “certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees” Avon said in its 10-K filing that the investigation had grown to include “additional countries.”
The Wall Street Journal cited a source as saying those countries were in Latin America, a major source of revenue and earnings for Avon.

With the benefit of a month’s hindsight, we can see how the financial and reputation markets have reacted. Over the trailing twelve months, the Company has underperformed the median of its 41 peers in the Household/Personal Care sector by 19.44%. The big fall off from parity traces back to the actions in the fall of 2010.


The reputational metrics, however, suggest that the Company is on a value-creating path. According to Steel City Re, the Company’s reputation index metrics are unchanged over the trailing twelve months with a most recent ranking at the 70th percentile. The Index’s exponentially weighted moving average volatility has been drifting downward consistently since the fourth quarter and is now at 66% -- a high value for sure, but a trend that is value-creating. The twelve-week reputation index velocity and vector values show recent upward movement s of 19% and 5% respectively suggesting a positive response to the corporate actions and disclosures.


Looking last at enterprise value, the intangible asset fraction of the company is now greater than it was a year ago, affirming that all other things being equal – as Alan Greenspan noted several years ago – “in a market based on trust, reputation has value.”

Berkshire Hathaway: Halo slipping?

C. HUYGENS - Tuesday, April 05, 2011
In late February, Alice Schroder writing for the Financial Times  challenged Warren Buffett to show his sage side on succession. Call it a governance thing. But the fact is that both last year, and again this year, Mr. Buffett failed to clarify how roles will be allocated when he inevitably steps down. According to Ms. Schroeder, “the market is fed up with the ‘trust me’ approach and is no longer giving Mr. Buffett the benefit of the doubt."

Fast forward to late March when the market is shocked to learn, according the Gainesvill Sun, "David Sokol has abruptly resigned from Berkshire Hathaway, the company run by the billionaire Warren E. Buffett, raising major questions about the future stewardship of the conglomerate." The 54-year-old was considered to be the top candidate to succeed the 80-year-old Buffett -- a major concern to Berkshire's investors." Furthermore, his departure occurs under a cloud of questionable trading.

According to the Economist,  “this is toe-curling stuff for the great investor, who prides himself on fair-dealing and likes to stake out the moral high ground. Think derivatives, which he has damned as dangerous. Or his tut-tutting over Wall Street’s book-cooking. (In both cases there is a whiff of hypocrisy: Berkshire dabbles in derivatives and it was recently forced to write down holdings that regulators deemed overvalued.) The affair will fuel talk that Mr Buffett’s halo is slipping."

What do the numbers say? The Steel City Re Corporate Reputation Index shows a tinge of negative reputational activity at Berkshire Hathaway -- and a rather droll economic performance over the trailing twelve months.

The Index ranking for Berkshire Hathaway (NYSE:BRK) has dropped from the 100th percentile to the 98th percentile,  the exponentially weighted moving average volatility has inched ever so slightly to 0.1%, and the reputation vector and velocity have been negative for a full month. These are insignificant movements -- perhaps, like the dog that didn't bark, they are notable because the economic performance of Berkshire Hathaway, a conglomerate, is trailing the median of its peers by 13%.

The halo may not yet be slipping, but it is increasingly vulnerable.

UBS: Truth in Libor

C. HUYGENS - Thursday, March 17, 2011
“We are committed to retaining the reputation and integrity of BBA Libor, which continues to be the authoritative benchmark of the wholesale money market,” said a spokesman for the British Bankers’ Association, according to the Financial Times. 

That there should even be a question about the  London interbank offered rate's -- Libor’s -- integrity is problematic. As the Financial Times explains, Libor is used as a reference rate for about $350,000bn in financial products.

Regulators in the US, Japan and UK are investigating whether some of the biggest banks conspired to “manipulate” this benchmark interest rate. The investigation centres on the panel of 16 banks that help the British Bankers’ Association set  Libor – the estimated cost of borrowing for banks between each other.

The probe came to light on Tuesday when the Swiss bank UBS (NYSE:UBS) disclosed in its annual report that it had received subpoenas from three US agencies and an information demand from the Japanese Financial Supervisory Agency. The other banks on the panel are: Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Lloyds, Rabobank, Royal Bank of Canada, Bank of Tokyo-Mitsubishi, Norinchukin Bank, Royal Bank of Scotland and West LB.

As to the Libor calculation algorithm, “…it is fully transparent – all of the data inputted by the contributor banks is publicly available, as is our methodology,” said the BBA.

McKinsey & Co.: Help wanted

C. HUYGENS - Thursday, March 10, 2011
Seconds after Rajat K. Gupta, then a director of Goldman Sachs, finished up a board call during which he learned that Warren E. Buffett had agreed to invest $5 billion in the firm, he picked up the phone and called his friend Raj Rajaratnam, regulators contend. Minutes later, Mr. Rajaratnam placed bets on shares of Goldman Sachs that netted his firm, the Galleon Group, $900,000. As Andrew Ross Sorkin’s Dealbook observes, “The fact pattern looks bad, very bad."

Gupta has resigned from the boards of Harman International Industries Inc. in the wake of the SEC's accusations. He has also resigned from the boards of AMR Corp., Genpact Ltd., and Procter & Gamble. It is a rapid fall from grace. In October, Alan Lafley, the former chief executive of Procter & Gamble, described Mr. Gupta thusly. “I think of him like Thomas Aquinas,” the philosopher and priest.

This is why. Gupta has a far longer and more important connection to the world’s most prestigious consulting firm, McKinsey. He worked at the firm for 34 years, eventually rising to become its managing director—the McKinsey equivalent of chief executive. He was elected to the top job at McKinsey by his fellow partners at the firm for three consecutive terms—the maximum allowed by the firm’s rules. NetNet's John Carney worries that Rajat Gupta may destroy McKinsey.  Or at least generate bad publicity for the Firm.

McKinsey, which has watched this story grow over time, is also worried. On 4 March, the day Lloyd Blankfein, CEO of Goldman Sachs, agreed to testify for the U.S. government at the coming trial of Rajaratnam, McKinsey posted a job opening for a reputation risk specialist whose major responsibilities are described thusly:

1. Monitor globally public references to McKinsey, select clients or specific issues appearing in media and consumer generated media (CGM)/ social technologies, which are potential or actual reputation risks for the Firm
2. Collaborate with the Director of Reputation Risk Management to help report key reputation risks
3. Collaborate with the Reputation Risk Management team to help research and prepare for potential and actual situations:

This job may be based in Brussels, Belgium, London, UK or New York, NY

Learn More

If the above moves you to action, but you are not sure what that action should be, consider joining the conversation at the Society's Mission Intangible Monthly Briefings. Our 1 April program is titled, How reputation drives principled performance ; our 6 May program is titled: Economic value of trust.

HP: Ethics takes a holiday?

C. HUYGENS - Thursday, January 27, 2011
There's never a dull moment in the HP (NYSE:HPQ) boardroom. At the firm that just released its last CEO for ethical issues, the National Association of Corporate Directors newsletter this morning cites a story from the Denver Business Journal raising concerns about the close business ties between the ostensibly independent directors and the new CEO.

The Journal (Jan. 26, Schubarth) cites the concerns of several corporate governance experts that Hewlett-Packard Co. recently recruited executives to its board of directors who all have business ties to CEO Leo Apotheker. Consequently, they will need to prove they can act independently.

Dominique Senequier, for instance, manages an investment buyout arm of French insurer AXA SA, where Apotheker is on an advisory board. Three other new directors -- former General Electric Co. Chief Information Officer Gary Reiner, former Alcatel-Lucent CEO Patricia Russo, and ex-eBay Inc. CEO Meg Whitman -- all did business with SAP AG while Apotheker was on staff.

Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, comments, "If directors have significant relationships with the CEO or other directors of a company on whose board they sit, it's harder for them to be objective. Directors are supposed to be representing shareholders, not the CEO or one another, and that's why companies typically try to recruit directors who are independent of one another and management."

It  is an interesting problem, and one that will confront any CEO who's business (or prior business) has a large global footprint. After all, it could be argued that anyone coming from a firm that did not work with, or use, SAP products is coming from a business still operating in the dark ages. And that appears to be the reaction of the majority of stakeholders, as reflected in the Steel City Re Corporate Reputation Index metrics. In a word, no impact. No change in the relative ranking among 18 peers in the Computer Processing Hardware sector, no change in reputation volatility, and no change in reputation vector or velocity.


Yet given the governance challenges HP has faced over the past few years, the concerns in this instance merit deeper consideration.

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