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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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Barclays: CEO’s ethics talk creates value

C. HUYGENS - Sunday, February 10, 2013
There are three types of companies that can benefit from tinkering with the business bits that underpin reputation. Iconic firms can build in reputational resilience to help them in their ongoing battle with NGOs. Good firms in commodity businesses can signal points of value-added differentiation. The last group, of which Barclays is an unhappy member, can signal material efforts at repairing that which has caused them in the recent past reputational value loss.

The good news for Barclays and similarly situated firms is that evidence shows that reputation restoration works and, all things being equal, can create an additional 6.5% in market capitalization. The other good news for Barclays Plc is that Chief Executive Officer Antony Jenkins’s pledge to shred the legacy of his predecessor and fix the lender’s culture, as reported by Bloomberg,  appears to be creating value as stakeholder expectations are realligning.

The reputational value metrics, calculated by Steel City Re, show two important shifts. The volatility of RVM, a non-financial measure of reputational value, is high and rising. The value and direction of change of CRR, a measure of relative reputational ranking (the reputational value premium), is now above the median level for the 49 peers, and is rising rapidly. Profits and the commensurate equity bump, are sure to follow.

Governance: Costs of failure rise

C. HUYGENS - Friday, January 04, 2013
Reputation is all about meeting stakeholder expectations. Regulators are the often forgotten stakeholder. Other stakeholders, such as customers, employees, suppliers and creditors express their satisfaction with expectation management on well recognized lines of a company's profit and loss statement. Regulators, however, get a special line: extraordinary expenses. As explained in Reputation Stock Price and You: Why the market rewards some companies and punishes others (2012, Apress), a company's reputational value is reflected in these lines and thus ultimately, stock price.

From the Conflict of Interest blog, we share the updated list of the top ten greatest extraordinary expenses arising from a failure of meeting regulators' expectations (read, failure of governance.)

- BP – $1.256 billion (environmental and related offenses) (2012)
- Pfizer – $1.2 billion (marketing offenses) (2009)
- GlaxoSmithKline – $956 million (marketing offenses) (2012)
- Eli Lilly – $515 million (marketing offenses) (2009)
- AU Optronics – $500 million (antitrust) (2012)
- Abbott Laboratories – $500 million (marketing offenses) (2012)
- Hoffman-LaRoche – $500 million (antitrust) (1999)
- Yakazi – $470 million (antitrust) (2012)
- Siemens – $450 million (FCPA) (2009)
- Halliburton/KBR – $402 million (FCPA) (2008).

As the blog's author, Jeff Kaplan, a partner with Kaplan & Walker LLP, notes, "What is striking here is that fully half of the ten largest federal corporate criminal fines in history were imposed or agreed to in 2012. I cannot recall another year with so many new cases on the list."

In yesterday's Mission Intangible blog note, guest contributor Dr. Michael Greenberg articulated principles for better governance. Today's note punctuates that note with a reminder of the cost of failure.

Governance: Resolved to do better

C. HUYGENS - Thursday, January 03, 2013
Guest comment by Dr. Michael Greenberg.

We're once again heading into a new year. It’s the season of resolutions, of reflecting and taking stock, of setting new goals and getting back into shape. Most of us tend to think of this kind of New Year’s activity as a personal process, but it applies just as readily to corporations and their executives. Most avenues of human endeavor can benefit from periodic self-assessment, re-evaluation, and course correction. This is no less true of corporations, and of our collective economic behavior, than it is of individuals in their personal lives. For corporations, of course, the process of making New Year’s resolutions will tend to focus less on dieting, physical fitness, and personal improvement. Rather, the focus for corporate self-assessment typically starts with a few basic questions. Does our strategy and mission continue to make sense in the current operating environment? Are we doing what we need to do, in order to meet our performance goals and achieve success? And what can we do better as an organization, to improve our performance on key metrics?

A related issue that frequently comes up when I talk with executives involves governance. One striking thing I’ve noticed is that even though lots of senior executives express concerns about governance, they often use the word “governance” in very different ways, such that two people superficially using the same language are often actually talking about very different things.

Sometimes governance comes up in the context of a very pragmatic, corporate plumbing-type question: How do we set ourselves up in order to be more effective in accomplishing whatever it is that we’re trying to do? The embedded assumption is that governance is tied to management structure and control, power sharing, and information feedback within the organization. Good governance, in this sense, is synonymous with effective management – where an organization is optimized to carry out its function, then its governance is superior.

A very different view of governance comes up when you talk to corporate lawyers and directors. These folks often think of “governance” as being defined by “all the stuff that boards do.” Put another way, this is the kind of governance that involves board oversight of senior management, exercised on behalf of shareholders. For directors, this perspective on governance invites a bunch of performance assessment questions pertaining to management. And for shareholders, it invites a bunch of performance assessment questions pertaining to the board itself. The lawyers, meanwhile, often focus on the mechanics of how boards carry out their responsibility, and what the law requires them to do. Frequently overlooked by all is the fact that a board is ultimately just a group of people, who may be more or less interpersonally and technically competent, in working together to carry out a common purpose. Again, governance can be more or less capable and effective, on any of these dimensions.

Still another perspective on governance emphasizes the strategic and operational element. When a large group of people come together to execute a common purpose, who contributes to deciding what that purpose is going to be, and what the best way is to achieve it? How often are those basic decisions reviewed and revisited? How does senior management reach out to the rest of the organization, in order to mobilize everyone around a common vision? These are questions that go to the heart of what the organization actually does, and whether its form and function make sense over time.
And then, of course, there is a cynical perspective on governance, which I sometimes hear expressed by top executives. This is the view that “governance” reduces to a set of administrative hurdles that are set up to impede efficient management. A variation of this view is expressed by the CEO who says that the appropriate role of the board is “to hire the CEO, and then to stay out of my way.” Without commenting on the merits of this perspective, it both captures the way that some executives feel about governance, and also the reality that formal corporate controls and oversight are frequently set up to serve ends other than maximizing efficiency or corporate productivity.

All of which takes us back to the new year, and to New Year’s resolutions. Governance within a corporation most fundamentally is about the asking of critical questions, and periodically looking into a mirror, in order to make sure that what you’re doing still makes sense, and that where you’re going is where you really want to go. The act of asking and seeking answers helps to refine the organization and its course, and drives outward into operations, downward into organizational structure, as well as forward into mission and strategy. To engage in organizational self-assessment is to engage in an act of good governance, regardless of the fact that different people think about this exercise in widely varied ways. For corporations as well as people, the fact that the new year prompts us to look in the mirror is surely a good thing.

Michael Greenberg is a member of the Society’s Reputation Leadership Council and holds the Governance Portfolio. The views expressed here are solely those of the author.

Questcor: Pile on!

C. HUYGENS - Tuesday, October 02, 2012
From time to time, we quote a line we found in the Financial Times some years ago describing the sequence of events following an adverse event that heralds the onset of a reputational value crisis. When you are Questcor Pharmaceuticals and have been accused of unethical marketing practices, "the pile on of litigators, regulators and mommy bloggers" over a ten day window looks like this:

  • Law Firm of Wohl & Fruchter LLP Announces Investigation of Questcor Pharmaceuticals Inc 
  • Harwood Feffer LLP Announces Investigation of Questcor Pharmaceuticals Inc
  • Bronstein, Gewirtz & Grossman, LLC Announces Investigation Of Questcor Pharmaceuticals Inc
  • Holzer Holzer & Fistel, LLC Announces Investigation Into Questcor Pharmaceuticals, Inc.
  • Robbins Umeda LLP Announces Investigation Of Questcor Pharmaceuticals Inc
  • Goldfarb LLP Investigation Against Questcor Pharmaceuticals Inc
  • Robbins Geller Rudman & Dowd LLP Files Class Action Suit Against Questcor Pharmaceuticals Inc
  • Glancy Binkow & Goldberg LLP Announces Investigation Of Questcor Pharmaceuticals Inc
  • Federman & Sherwood Announces Securities Class Action Lawsuit Has Been Filed Against Questcor Pharmaceuticals, Inc.
  • Ryan & Maniskas, LLP Announces Class Action Lawsuit Against Questcor Pharmaceuticals Inc
  • Faruqi & Faruqi, LLP Encourages Investors Who Suffered Substantial Losses in Excess of $100,000 Investing In Questcor Pharmaceuticals, Inc. to Contact the Firm
And yet the reputational value metrics from Steel City Re show a drop of less than a 0.5 standard deviation of the two year historic mean. Are equity investors over-reacting?

National Football League: Crisis resolved

C. HUYGENS - Thursday, September 27, 2012
When a labor dispute escalates into a reputational crisis, the calculus changes. Instead of owners making money with substitute labor while labor starves through attrition, owners face the risk of reputational value loss. For the NFL and its owners, measurable losses would include fans buying fewer tickets, and branded products; fans watching less broadcast programming; lost pricing premiums on tickets, branded products, and broadcast slot advertising; greater employee costs (turnover, litigation); greater supplier/vendor costs; greater credit costs; and possible loss of anti-trust immunity. The incentives to settle the matter quickly were transparent to all, and so they did. Did we mention that reputation has significant value?

National Football League: Reputation crisis?

C. HUYGENS - Wednesday, September 26, 2012
Professional football is an entertainment business. Its customers and employees both expect fairness which means, in part, a just application and interpretation of the rules of the game. Referees are critical to that process. With professional referees locked out of the games in a pay dispute with the National Football League, much rests on the capabilities of the substitute referees.

The game Monday night where referees unjustly awarded a goal to the Seattle Seahawks allowing them to defeat the Green Bay Packers has the market up in arms. In a blog post on Slate entitled, "I'm A Minnesota Viking, and I think Green Bay got screwed," Vikings punter Kluwe writes that the NFL's reputation "is tarnishing faster than a sailor's virtue in a two-dollar whorehouse." The quality of the substitute referees is not meeting market expectations. "Players see it; coaches see it; fans see it," says Kluwe in an open letter to NFL Commissioner Goodell. "These refs are not fit to stand in for the men you've locked out for what is increasingly looking like nothing more than simple greed—attempting to squeeze blood from a stone simply because you can."

We've seen this movie before. The market's uproar should come as a wake up call for Goodell whose mission of not letting anything tarnish the brand of the NFL is at risk of failure.

Questcor: Wait, there's more!

C. HUYGENS - Tuesday, September 25, 2012
Last week, Questcor Pharmaceuticals (QCOR) appeared to be the victim of the shorts. Monday, analysts at Leerink Swann downgraded Questcor to "market perform" after the company revealed that is it under investigation by the U.S. government regarding its promotional practices. Last week's surprise shaved less than one standard deviation from Questcor's reputational value. Bloomberg reports that "Questcor said it intends to cooperate with the investigation and that the company doesn’t plan further comment except for regulatory-compliant disclosures." The reputational value effects of yesterday's news -- a failure in ethical controls -- will be revealed at week's end when we receive the next installment of Steel City Re reputational value metrics. Below are the effects from last week's news supplementing the charts posted Saturday.   Loss Gate markers below Questcor's Reputational Value metric (GU) are set at 0.5, 1.0, 1.5, 2.0 and 2.5 standard deviations of the two year historic average value, adjusted for elevated ratios of the CBOE VIX.

Sovereign risk: City culture edition

C. HUYGENS - Friday, July 06, 2012
Sodom and Gomorrah had a reputation. Las Vegas is its heir apparent, lite. But London?

Bloomberg reports today (Kevin Crowley and Ambereen Choudhury - Jul 6, 2012) that “London risks losing its status as the world’s top financial center as the $360 trillion interest-rate fixing probe follows a series of market abuses by banks that eroded trust in a city already shrinking faster than rivals.”

AIG, Lehman Brothers and Bear Stearns & Co. all traded swaps in London that led to their bankruptcies or bailouts. JP Morgan Chase’s whale traded from London.

Said Bank of England Governor Mervyn King last month, “Everyone now understands that something went very wrong with the U.K. banking industry. From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates, we can see that we need a real change in the culture of the industry.”

Culture drives the business processes that underpin the impressions stakeholders understand as reputation. Of the six major business processes underpinning reputation, those that foster an ethical environment appear to have been tested and found wanting.

Reputation: Top BOD concern

C. HUYGENS - Tuesday, May 08, 2012
The accounting firm Eisner Amper published their third annual survey, Concerns About Risks Confronting Boards. Based on the opinion of 193 corporate directors, the data show that excluding financial risk, 66% believe that reputational risks are the most concerning currently. The top three reputational risks of 2012 were quality (30%), ethics/integrity (24%), and “public perception” (16%). Security was #4 at 12%. These three named risks, along with innovation, safety, and sustainability (8%), comprise the six major sources of reputational risk according to research published by the Society in the 2010 book, Mission: Intangible.

Walmart: By the numbers

C. HUYGENS - Saturday, April 28, 2012
For those who spent the past week off the grid, among the reputation-linked news stories was this one involving Walmart best summarized in the explosive Forbes magazine headline (26 April, Hartung) "WalMart's Mexican Bribery Scandal Will Sink It Like an Iceberg Sank the Titanic."

We've looked at Walmart (NYSE:WMT) quantitatively before, usually in the context of the age-old rivalry with Target (NYSE:TGT), and with less sophisticated metrics. We turn to the improved Steel City Re corporate reputation ranking metrics and benchmarking tools today in search of quantitative evidence of reputational damage.

The peer group comprises 127 companies in the retail trade, and they are sampled from the 7447 companies ranked according to their reputation metrics as of 26 April 2012. Relative to this peer group, Walmart's reputation ranking was at the 72nd percentile. Other vital signs indicate this is an unstable value as the current reputational value volatility is at the 48th percentile relative to a historic volatility in the 26th percentile, and the forecast stability of the firm's reputation is now just below the median at the 49th percentile. Looking at the time series of data, the most recent reputational ranking drop which occurred this past week moving Walmart from the 85th to the 72 percentile is the second this calendar year. The first major drop occurred the week of 16 February when Walmart's reputation slipped from the 92nd to the 82nd percentile relative to this peer group. Other time series metrics show a steady negative reputational ranking velocity, recently accelerated, a steadily negative reputational vector, and what appears to be a second spike in volatility.

Looking at a snapshot of Walmart relative to its peers as of Thursday, all four indicators show negative trends which tend to be leading indicators of losses in enterprise value. Walmart's current return on equity is in the 70th percentile relative to its peer group. We expect this metric to drop in the weeks to come as the inevitable pile on of regulators, litigators and mommy bloggers affirms the deterioration of reputational value.

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