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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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CVS Caremark: Cares more?

C. HUYGENS - Thursday, February 06, 2014
Yesterday morning, CVS Caremark (CVS), the pharmacy healthcare provider, announced that it would no longer sell cigarettes effective October. The loss in revenue was projected at $2 billion which pundits quickly dismissed as an insignificant loss relative to the reputational value gain. It was an ethical move, clearly signaled so that the market could appreciate and value it.

By removing tobacco products from our retail shelves, we will better serve our patients, clients and health care providers while positioning CVS Caremark for future growth as a health care company. Cigarettes and tobacco products have no place in a setting where health care is delivered. This is the right thing to do. Link to CVS where President and CEO Larry Merlo explains further.

While the value to the company's image is hard to measure, there's little doubt that it's big. "They'll end up getting more than $2 billion in reputational capital and kudos," Dartmouth professor Paul Argenti tells Shots. "How often is the president of the U.S. going to come out and say your company is great?" says Argenti, referring to President Obama's praise of CVS Wednesday morning. Read more from NPR.

Actually, it is not hard to measure and it may or may not be big depending on what stakeholders were expecting, or what they value. Equity investors were not overjoyed. Over the day, CVS lost 1% while its closest rivals by market cap were flat or rose. See chart from Google.

Steel City Re's reputational value metrics, which reflect the expectations of all stakeholders including investors, are run weekly and will be added to this breaking story when they become available.

GSK: Ethical pharmaceuticals discover ethics

C. HUYGENS - Thursday, December 19, 2013
In a comment on Glaxo Smith Kline (GSK) on the Society's Linked-In page, reputation consultant Andrea Bonime-Blanc wrote, "Sometimes it takes scandal to make progress: after serious fines and scandals, GSK's CEO has just announced potentially groundbreaking steps connecting the most important dots of good corporate citizenship: desired employee behaviors to performance incentives such that overly aggressive sales targets and bonuses no longer lead to unethical or illegal behavior. Time will tell but this is extremely promising." Do the metrics bear her out?

The Consensiv reputation metrics, powered by Steel City Re's measures of reputational value, reflect stakeholder expectations and their economic effects. Of the 30 firms in its sector, Major Pharmaceuticals, Glaxo Smith Kline has generally hovered above the third quartile of the metric, Reputation Premium. Its most recent value was the 76th percentile. Its stakeholders are confident that this premium is appropriate as evidence by an extremely low Consensus Trend metric of 1.4%.  The Consensus Benchmark,which is based on a one-year average standard deviation of the Reputation Premium, indicates at 3.4% a progressively more stable course.

The data suggest that the "don't be unethical" strategy is being believed by stakeholders; it is not clear if that leaves them assured that the company's ethics are yet worth valuing at a greater premium.

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.

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?

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