MISSION INTANGIBLE

M:I Products

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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Sustainable sustainability?

Nir Kossovsky - Monday, July 13, 2009
Amongst our master list of key drivers of reputation recognized by the Society are ethics, innovation, quality, safety, sustainability and security. We gave the top post to ethics and its derivatives, confidence and credibility. We haven’t shared our thoughts on the pecking order for the five remaining intangible asset business processes, although recent events suggest that the market is moving sustainability into a lower ranking.

What is happening? A few weeks ago we noted that United Technologies (NYSE:UTX) had quietly terminated its sustainability-led advertising strategy. Now we read that BP (NYSE:BP) is moving from renewables back to petroleum.

We intend no offense. However, in light of the above, there is a open question: while sustainability is certainly a public good, can it be practiced by individual companies profitably? Or more specifically to the intangible asset aspects, "is a reputation for sustainability valued?" We invite your comments here and on the IAFS Linked-In platform.

Nobody doesn't like Sara Lee

Nir Kossovsky - Wednesday, June 10, 2009
On June 30 2008, Margaret (Peggy) M. Foran was appointed to executive vice president, general counsel and corporate secretary of Sara Lee Corp (NYSE:SLE).  In addition to overseeing the company’s worldwide legal activities, Peggy led Global Business Practices, risk management, internal audit and insurance activities, as well as environmental, safety and sustainability efforts. In our parlance, she was Sara Lee’s risk and reputation officer. She reported to Brenda C. Barnes, chairman and chief executive officer, Sara Lee Corp. On June 9th, after less than one year on the job, she abruptly stepped down “for personal reasons.”

What’s going on in the background? Dogs -- hot dogs, to be exact. There is the May 2009 lawsuit filed by Sara Lee against Kraft Foods (NYSE:KFT) for false advertising – the so called hot dog wars. There is the concurrent recall of 1700 pounds of Sara Lee Ball Park brand hot dogs for mislabeling.  Hardly steamy stuff.

Is there some reputational risk lurking for which an indication or warning might be found in the Steel City Re IA (Corporate Reputation) Index?. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

 

The Steel City Re Index shows that the reputation metric has been hovering in the 40th percentile amond the 48 companies in the Packaged foods & meats sector this past year. Although there is a distinct upward movement from the 40th to the 50th percentile co-incident with Ms. Foran's appointment, the trend has otherwise been downward until a recent recapture of lost ground. Although EWMA volatility has been declining, it is still at 4log orders of magnitude. Economically, over the past twelve months, SLE has underperformed its peers by 16.5%. In short, the mystery is why the dog didn't bark.

By our indications and warnings metrics, this type of economic underperformance in the setting of an already low reputation index increases the risk of business process corner-cutting -- actions that can lead to business process failures and expose a company's reputation to a myriad of perils and headline risk.

Ms Foran joined Sara Lee with a stellar reputation of her own. In CEO Barnes' welcome announcement last year, she said "During her three-decade long career, Peggy has earned the respect of corporate leaders, stakeholders, directors, investors and peers. She is recognized worldwide as a true leader with a reputation for the highest levels of personal integrity." She had tours of duty at Pfizer, ITT, and JP Morgan. 

We'll be following this one closely.

Beverage grandmasters

Nir Kossovsky - Wednesday, May 06, 2009
This note explores whether a proposed transaction by a $75B beverage company, Pepsi Inc. (NYSE:PEP), is motivated by costs savings, brand enhancement, or reputation protection. Seeing no perceptible movement in the reputation index of either the company or its arch rival, we conclude that notwithstanding which of the three was the initial trigger, the greatest value may be in reputation risk management.

On 20 April 2009, Pepsi proposed buying the outstanding shares it does not own in its two largest bottlers, Pepsi Bottling Group (PBG.N) and PepsiAmericas (PAS.N), in a $6 billion cash and stock deal. Many in the financial press suggested it was a cost-cutting initiative. Jon Baskin, a marketing iconoclast, a keynote speaker at the Society’s 2008 annual conference, and the author of the book, “Branding OnlyWorks on Cattle,” opined that the move represented brilliant, strategic branding. In Jon’s words:

Think about it. New packages and formulations, available at new and different locations, priced and supported in novel ways...all thanks to a holistic approach to the brand, vs. some archaic top-down application that sees it only as image and words. It's these actions, and real investments, that will build sustainable, long-term brand growth.

Cost savings and long-term brand growth are both good things, reflect well on management and enhance reputation. So, with two weeks having now elapsed during which the market has had an opportunity to digest the news, and while the deal is still in the negotiation phase (the bottlers rejected it on Monday), we called on the Steel City Re corporate reputation index to see what impact the news has had on the reputations of Pepsi and its arch rival, The Coca Cola Company (NYSE:KO).

As shown in the charts below, the short answer is “not much.” Pepsi tops the fifteen-member Soft drink sector; Coke is in the 92nd percentile. Volatility is nil. In fact, in the midst of the most tumultuous market since the great depression, these two iconic firms emerge with nearly identical profiles comprising exceedingly stable reputation metrics. With Pepsi and Coke’s market caps at $75B and $100B respectively, are they too big to budge?






Big, yes, but not too big to trip and fall. As we see it, both pay exquisite managerial attention to their reputations. Ethics, quality, safety, security and sustainability are all watchwords. Innovation is alive and well. So the competition between these two is analogous to that of two chess grandmasters. They see all, know all, and understand the implications of every move and its derivatives. The game, therefore, is waiting for one or the other to make a mistake. It is a game where risk management is the winning play. And given the relative values of the physical assets and intangible assets at the two companies, reputation loss arising from a business partner where visibility and control are weaker – supply chain headline risk, if you will – is one of the major risks we believe needs to be managed.

So let us put our own spin on Pepsi’s announced acquisition: from an intangible asset finance management perspective, it is a prudent move to manage reputation risk arising from a third party. While it may not increase Pepsi’s brand value or enhance its reputation, it may prevent the sort of reputation loss that destroyed nearly 14% of Coke’s value 10 years ago.

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.

Introducing MISSION:INTANGIBLE

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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