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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Scotland's Reputation: Just watch what they do.

C. HUYGENS - Wednesday, September 24, 2014
Andrew Carnegie, one of Scotland's better known American transplants, famously said, "As I grow older, I pay less attention to what men say, I just watch what they do." So while the opinion polls suggested a close plebiscite, the Scots' vote favored the union by 10%. Scotland's reputation as one of four upstanding united kingdoms was preserved.

Not necessarily so. As Consensiv's Jonathan Salem Baskin points out, the electorate has voted. Now watch what other stakeholders do -- evidenced by the value of foreign direct investment, tax impact of immigration, business start up and expansion rates, risk premium on sovereign debt; and by what concessions the local Scottish government needs to make to optimize the above.

Read more.

What Does Happiness Have to Do With Reputation?

C. HUYGENS - Thursday, August 07, 2014
OK, class. Together, please: Reputation comes from expectations, and value comes from stakeholder behaviors. Now the long form: Corporate reputation is the sum of stakeholder expectations of corporate performance, which leads stakeholders to behave in financially-relevant ways, such as how creditors set borrowing rates, suppliers set terms, customers respond to prices, how effectively employees work, and how severely regulators impose penalties. To better understand how expectations lead to behavior, it is helpful to know that according to researchers, our emotional states are tied to our expectations.

This may not come as a shocker, but "disappointment squelches happiness." Look no farther than the violent reaction to BP four years ago to understand what over promising and under delivering can look like in the extreme. But this other observation may not be as intuitive: "expectations affect happiness long before the reward." In casino parlance, people "act on the come." And what helps establish expectations? That's right. Reputation.

There's more for those in the communications field. It appears that expectations are reset moment to moment based on immediate experiences; happiness follows. This observation suggests that annual surveys of stakeholder sentiment are as useful in day to day management of reputation as are balance sheets in day to day management of cash flows. As one colleague quipped, "How do your account reconciliations fall behind by twelve months? One day at a time."  

(Updated on 8 Aug from the original posting .)

Read more from NPR.

GM: Beating the odds at 1 in 6000

C. HUYGENS - Wednesday, July 09, 2014
In a game of heads you win, tails I lose, the only strategy is land a coin on its edge. According to Daniel Murray and Scott Teare writing in Physical Review E, the probability of an American nickel landing on edge is approximately 1 in 6000 tosses.

In a game of bet-the-company, those aren't great odds. Caught between customers and victims who wanted open ended compensation, and creditors and investors who wanted to protect GM's assets from open compensation, CEO Mary Barra was bound to anger at least one key stakeholder group -- and therefore lose. As the metrics below report, she beat the odds and successfully delighted both.

According to the reputation analysis published by Consensiv, the reputation controls company, based on reputation value metrics from Steel City Re, the reputation insurer, GM's reputation benefitted from the appointment of Kenneth Feinberg to oversee GM's compensation fund.

The bump to observe on the graph begins around June 15th, the week Google Trends shows a significant and steady uptake in Google search interest in Kenneth Feinberg. That same week witnessed the beginning of an uptick in the reputation metrics. GM’s reputation premium, a measure of additional value arising from favorable stakeholder expectations, rose to the 46th percentile within the 37-member automotive peer group, while the consensus trend, a measure of stakeholder surprise, showed a reasonable increase up to 1.2%.

Of course, the company’s overall reputation health is still middling.

The strategy Barra used has a name. Read all about it at Risk & Insurance or at Business Insurance.

Double Secret Probation Warning to the Fed

C. HUYGENS - Wednesday, June 18, 2014
Signaling financial markets with extra-financial information creates value because it helps balance the asymmetry in information between insiders and outside investors. When the signal conveys lower risk, the result is an expectation of increased value. Consider this quote from the Financial Times for June 16, 2014 discussing how signaling can help reduce risk.

Note that the problem appears to be a belief in certainty by the markets and a belief in uncertainty by the IMF chief, and a request for the Fed chairwoman to increase the level of uncertainty in the markets through more frequent communications.

Ms. Lagarde…, the IMF chief(,) said the path for Fed policy remains highly uncertain, “while at the same time there seems to be a large amount of certainty in markets about where policy rates are going to go”…this “‘sets up the risk, even with a successful and well-communicated increase in interest rates, for significant swings in market flows and prices in the months ahead. If such volatility were to unfold, it would have implications that would reach far beyond US borders.” Ms Lagarde called for Fed chairwoman Janet Yellen to hold more frequent press conferences, up from the current four a year, to reduce the chances of a miscommunication.

Brand v. Reputation: CSI edition

C. HUYGENS - Wednesday, April 02, 2014
A buyer of illicit drugs with a reputation for toughness meets stakeholder expectations by stabbing repeatedly a dealer who failed to honor his commitment to sell. Not to do so would create reputation risk and in certain markets, reputation risk can be costly, indeed.

Read more.


Planning to attend RIMS 2014 Denver 29 April? Come learn more on enterprise reputation risk.

Reputation Value: Sovereign nation edition

C. HUYGENS - Sunday, March 30, 2014
Recently, Huygens has shared stories on reputation value associated with the behavior of sovereign states (Illinois) and local school districts (Texas). Today, completing the Rule of Three, sovereign nations (Brazil).

Reputation is an odd intangible asset. By itself, it is nothing more than an expectation of behavior. Its value depends on the action or inaction it elicits from stakeholders. Capital markets capture some of this forward-looking expectation of stakeholder behavior. Lest this read like the opening paragraph of a PhD dissertation in Behavioral Economics, consider this report from Reuters this past Thursday, 27 March 2014.

Brazil's currency and benchmark stock index skyrocketed on Thursday after a poll showed a decline in President Dilma Rousseff's approval rating, fueling investor optimism that the nation's economic policies could take a market-friendly turn.

Thiago Montenegro, a trader at Quantitas Asset Management in Porto Alegre, Brazil, explained the market behavior to Reuters:

Any change in any percentage point that points to the possibility of the (Rousseff) government not being re-elected helps these shares. The market is starting from the premise that the state firms couldn't possibly be treated any worse.

For followers of Huygens and this blog, the above is crystal. If expectations are for rock bottom behaviors, and stakeholders are favorably surprised with news suggesting their expectations have been excessively pessimistic, the revised expectations will raise values. It is a form of insight not unlike that developed by Mike Milken years ago on bond performance. AAA bonds can only disappoint. BBB bonds have the potential to surprise.

Bond investors hate surprises. Equity investors live for them. When stakeholder expectations signal value, and equity investors have not come around to share that expectation, there is equity value to be discovered. The potential for discovery is the theory behind the design of the reputation index-linked portfolios, RepuStars and RepuSPX.

ExxonMobil: Much better than Paula Deen

C. HUYGENS - Tuesday, March 11, 2014
"Reputations are created and sustained by ongoing activities," explained Jonathan Salem Baskin, managing director of the reputation controls firm, Consensiv, in Forbes.com this past weekend. "Crises are simply the exposure of those behaviors." To illustrate the point, on parade were Paula Deen and ExxonMobil (XOM).

Deen took it in the chin for revelations of social improprieties, and according to Baskin, was sunk by her own PR-driven crisis communications efforts. "The premise that PR can “manage” those revelations is evidence of a misunderstanding and governing weakness [of PR]. Corporate reputation doesn’t belong to PR any more than the pixels on my computer screen belong to electricity."

ExxonMobil coated a good part of Arkansas in ooze last spring. The company managed the potential reputational impact through ongoing communications before the event -- the communications being largely an explanation of what they were actually doing operationally to minimize the risk of coating Arkansas and many other dry and wet places with black slime. "Successful reputation management requires ongoing communications, not a plan to “manage” crises."

Manage expectations, perform to those expectations, and reputation will be affirmed. So goes the theory. What do the reputational value metrics show emprically?

The reputational value profile of ExxonMobil, according to Consensiv and based on Steel City Re's reputational value metrics, is shown below. The Reputation Premium is near the top of the heap at the 94th percentile currently among 50 companies in the peer group. That's down a bit from the 100th percentile last spring, but from the chart it appears that the #1 slot changes hands regularly. The Consensus Trend, CT, is at a respectable level of below 3% and compared to peers, is about average. Its reputational health is strongly independent of the overall equities market and, while there is room for improvement, it's looking much better than Deen.



For more background on the Consensiv reputation controls, click here. To view the December 2013 reputational value league table, based on Consensiv's metrics, and available exclusively at CFO.com, click here. Last, to read more about how reputational value is linked to stakeholder expectations and enterprise value, read, Reputation Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012) (click here).

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.

What Did Ya Expect?

C. HUYGENS - Friday, January 17, 2014
In the rough and tumble world of regional politics, what happens in New Jersey with its physically imposing Republican Governor and a Democratic legislature is pretty much what you would expect. Bare knuckles retribution is (or perhaps should be) as shocking as the religious practices of the Pope or the bodily functions of a bear in the woods.

As the crisis over politically-motivated lane closures on the George Washington Bridge connecting New Jersey to New York City continues to suggest that New Jersey Governor Chris Christie may have set the tone for such actions, without having directly authorized them, the bigger story is, well, the bigger story: It’s not the first time Christie has been associated with such “tough guy” tactics and, in fact, they’ve been a constructive component of his national reputation for being a no-nonsense, get the job done kind of guy. Read more.

Ironically, those most surprised by the Governor's tough-guy act appear to be conservatives who had written him off as a liberal, a RINO -- Republican in Name Only for a litany of ideologically heretical acts. Suddenly, they like what they see.

Bali: Those negative waves

C. HUYGENS - Wednesday, December 04, 2013
Like negative waves, a negative reputation creates a perverse death spiral. This is as true for would-be war booty hunters (Kelly's heroes) as it is for capital markets and for non-governmental bodies.



Reputation is an expectation of behavior. Capital markets have a reputation for seizing when liquidity ebbs. As in musical chairs, being last to call debt has significant consequences, so at the first signs of real trouble, individual constituents of the market act on the markets reputation, call their loans, and precipitate the very thing they fear: illiquidity.

Then there's the World Trade Organization. Twelve years since the Doha round began, the institution is trying to overcome impenetrable roadblocks. No one really expects the negotiations now taking place in Bali to succeed, so no one is really motivated to yield on a sensitive point that will only create a future liability -- ensuring that the negotiations will not succeed.

Read more on the Consensiv blog.

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