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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Tesco: Reputation cleanup in aisle 7

C. HUYGENS - Tuesday, November 04, 2014
The business case for cooking the books to increase volatility is tough to make. It is certainly hard on Tesco's reputation value.

Depressing the company's earnings purposefully to create a managerial crisis was noted earlier. It hurt investors, reflected terribly on management and the board and The Daily Mail was correctly most worried about "…the reputational damage, which could linger for years."

Two weeks ago, it was discovered that irregularities in cost and revenue recognition inflated the company's earnings by about $400 million over the past 3 years. Fraud, it has been shown time and again, is no way to enhance corporate reputation.

Horse meat posing as beef, in hindsight (so to speak), was a window into an underlying core problem at Tesco: bull posing as controls. What all this says for Tesco's governance and lack of reputational awareness is not repeatable in polite circles, so we'll let the absolutely awful reputational value metrics speak for themselves.

Supply Chain Needs More Than Hamburger Helper

C. HUYGENS - Monday, September 08, 2014
We've all seen the movie. Somewhere in the supply chain a lurking risk manifests in a very public way. Business unit profits are wiped out, corporate risk management costs skyrocket, and corporate directors are pilloried by activist investors. The insurers of the world, without whom supply chains would ground to a halt, are demanding thoughtful action.

Read more.

Screw Up, Cough Up

C. HUYGENS - Monday, April 07, 2014
When the big banks screwed up, taxpayers felt the pain. Much was made of the observation that those who could, or should, have seen the disaster coming were financially rewarded in the interregnum. There is no monopoly of socializing risk. The New York Times observed over the weekend that "While shareholders of G.M. will shoulder the costs of fines, settlements and the loss of trust arising from the mess, the executives responsible for monitoring internal risks like these are unlikely to be held to account by returning past pay."

The word is clawback. Two years ago, as the crisis of the London Whale was engulfing JPMorgan Chase, Bloomberg reported "that “New York City Comptroller John Liu said that JPMorgan should tell shareholders it will ‘aggressively claw back every single dollar possible from the executives responsible for the $2 billion loss.’” Huygens observed that employees subject to the clawback would probably have other opinions.

Fast forward, and it is deja vu all over again-but different. In additional to financial shenannigans, Scott M. Stringer, the current New York City comptroller, who oversees five municipal employee pension funds with assets of $140 billion, has successfully negotiated expanded thresholds for clawbacks at five companies this year including both banks and non-banks: Allergan, Halliburton, Northrop Grumman, PNC Financial and United Technologies.

According to the New York Times, "Under the agreements, pay can be retrieved from a wider array of senior executives than is typical. And recoveries can be sought not only for intentional misconduct and gross negligence, but also for violations of law or company policies that cause significant financial or reputational harm to the institution." Failures in governance, controls, and risk management are actionable causes.

Huygens has often suggested that reputational value metrics, such as those published by Consensiv,  could be useful tools for managing reputation. The New York City comptrollers have identified another application: measuring loss to trigger punishment.

Read more.

Brazil: The cost of a bad reputation

C. HUYGENS - Friday, April 04, 2014
The central bank, which does not enjoy formal independence in Brazil, has increased the interest rate by 375 basis points since April 2013. The most recent increase this past Wednesday, ranks Brazil at the top of the league table for the most rate rises globally over the past year, according to Bloomberg data.

Reputation is a reflection of governance, controls and risk management. Weak governance comes at a cost. The Financial Times reports that "Brazil has been under pressure to regain the trust of the market. In March, Standard & Poor’s downgraded the country’s credit rating to BBB-, one notch above junk status, blaming several factors including the economic team’s lack of credibility."

Ebay: Icahn is cranky

C. HUYGENS - Monday, March 10, 2014
Last week, activist investor Carl Icahn opined that Ebay was the worst governed company, ever. A small discussion broke out on the LinkedIn Board and Advisers site.

Icahn is entitled to his opinions. What do the reputational value metrics show emprically?

The reputational value profile of Ebay (EBAY), 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 98th percentile currently among 66 companies in the peer group. The Consensus Trend, CT, is at a respectable level of 3.2% and compared to peers, is below average. When the reputation premium is high, a low CT is good. Ebay's reputational value shows an average correlation with the broad market;  overall, it is rather healthy.

The data suggest that as far as most stakeholders are concerned, Icahn being a noisy exception, Ebay is doing just fine at setting and meeting expectations. Its stakeholders clearly appreciate and value the performance.



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).

JP Morgan Chase: Authentic

C. HUYGENS - Monday, April 08, 2013
A meat-product snack called Slim Jim took pride in its two classes of followers: haters and lovers. The haters could be dismissed as long as there were enough lovers finding value in the product.

JPMorgan Chase (JPM) may be the banking equivalent. There is no shortage of governance executives and proxy advisors who have strong concerns about the fact that Jamie Dimon holds titles as both CEO and his own boss, Chairman of the Board. They're pushing for a split. Others see a Karmic injustice in the ability of Mr. Dimon to weather the consequences of the London Whale event and its multi-billion dollar loss without nary a scratch.

Other stakeholders have spoken through more economically compelling actions. Creditors are offering superior terms, equity value is high, and customers may have pushed the bank past Goldman Sachs on the M&A Value league table. Employees have love, too, and while the effects are transparent on the P&L, it's nice to know why.

Consider the bank's response to Super Storrm Sandy. CFO's Caroline McDonald writes, "Unlike many companies, faced with closed branch banks when people needed access, Chase chose not to passively wait for employees to get back to work whenever they could. The company provided transportation to pick up employees and take them to work, according to the employee I spoke to. The company also provided them with food, and those who had no home to go back to were put up in hotels, she said. This was all corroborated by a Chase spokesperson. The list went on and on, including taking care of children whose schools were closed through its backup childcare program, and helping employees find automobiles when theirs were destroyed."

What about the objective measures of reputational value from Steel City Re, and how is the growing horde calling for changes in Mr. Dimon's status affecting reputational value volatility? The short answer is not much. Relative to its 50 peers, JPM's ranking is in the 90th percentile. Its RVM volatility, a measure of uncertainty, is at the 15th percentile with an absolute measurement of around 1.5%. All indicators of reputational value stability are at top levels, suggesting that change is not expected. Which is not necessarily good if the proxy advisors get their way on principle - expect a major loss of equity value in the uncertainty that would follow.

Hewlett-Packard: Manifest destiny.

C. HUYGENS - Wednesday, November 21, 2012
It's hard to believe that more than a year has passed since Huygens last visited HPQ and opined that, based on the metrics, the board appeared dysfunctional. Yet in under thirteen months, HPQ has fulfilled expectations of underperformance and driven a once-fabulous company to the lowest rankings among 22 peers in the computer hardware processing sector. Tim Travis, writing for Seeking Alpha, put it this way:

The noise in the quarter was the result of a non-cash charge for the impairment of goodwill and intangible assets primarily relating from the Autonomy acquisition, which in my estimation can be firmly placed in the Mount Rushmore of disastrous acquisitions. The write down was no surprise to us as the day it was announced we were in disbelief that a CEO and Board of Directors could be so naïve about destroying shareholder value.

As to the metrics, the RVM measure of Steel City Re's reputational value metrics showed a consistently low level of volatility for the entire past year -- in English, all stakeholders were in agreement that the reputation was appropriately slowly drifting downward (just as Travis said). The metrics were scraping rock bottom. RVM vol was as low as they go among peers; current RVM vol was at the 10th percentile foretelling increasing uncertainty. CRR rank at the 33rd percentile (and sinking), ROE at rock bottom among peers, and forecast stability at the highest levels (it is hard to fall when you are near the bottom.) Collectively, all of these suggest that for the past year, all stakeholders have been anticipating the additional bad news finally announced end-of-day Monday 19 Nov.

Google: A Kodak moment?

C. HUYGENS - Tuesday, April 17, 2012
Google (NASD:GOOG), as everyone knows, is a company with unlimited resources, vision, and technological prowess. By establishing a relationship with every human being on the planet inclined to inquire through its Search engine, Google will eventually capture every last heart, mind and wallet.

If there are grounds to doubt the above, they may lie in the words of Ira Goldman, an executive formerly with Kodak since 1969. Writing to the editor of the Financial Times (13 April),  Mr. Goldman shares what he believes led to the downfall of one of the most innovative firms of the prior century. “…it was a history of being able to afford multiple investments in new technologies without fully understanding the market needs, and then failing to make careful choices about which investments the company could afford.”

Google invests lavishly, to be sure. And based on recent controversial governance-related changes in the way Google allows its shareholders to influence management, it appears Google wishes to shield itself from the outside and continue to do what most investors agree they do best. Not that everyone agrees.

Nevertheless, right now, the reputational metrics support management. Google's metrics could hardly be better. The firm ranks #1 among the 133 peers in the Internet Software Services sector. The Vital Signs report a historical reputational volatility that is below the median and dropping; a return on equity for the trailing twelve months that is 43% higher than the median return (88th percentile), and a near certain future of reputational stability.


So why worry? Because, to paraphrase Herbert (Pug) Winoker who spoke this past Friday 13 April at the Mission Intangible Monthly Briefing, a firm’s success breeds its next crisis. Investor expectations outgrow a company’s ability to meet them. The data show that expectations could not be much higher.

Back to Kodak, whose obituary Huygens scribed earlier this year. “If the current management team and board of directors had managed the investments to match the cash flow available under realistic business conditions, they would not have proceeded with three large investments simultaneously (in digital printing, only one of which turned profitable after 10 years) and then accepted high cost overruns and failure to meet schedule,” added Mr. Goldman. One can only hope that having isolated its decision-making bodies from outside opinions, Google will nevertheless heed this excellent advice.

NetFlix: In flux

C. HUYGENS - Saturday, December 24, 2011
Frankly, Netflix (NASDAQ:NFLX) looks rudderless lately. Its strategic decision process is in disarray. That reflects poorly on the CEO and the company's board of directors. The CEO developed a strategy and then executed poorly; the board's oversight roles of governance and risk management were fails.

As summarized succinctly by The Wrap.com (23 Dec, Shaw), Netflix announced a controversial new pricing plan in July that enraged customers. Hastings then admitted the company erred in a blog post while announcing a new DVD-by-mail service, Qwikster. How was it different from the original Netflix service? It wasn't really, just a new name. Netflix then canceled Qwikster and brought all its services back under one roof. Throw in a few lost deals with the likes of Starz, and it's been a rough few months for the company.

Huygens rarely examines business strategy which is, after all, a business processes linking resources to objectives.  Strategy is not one of the six intangible operational pillars (ethics, innovation, quality, safety, sustainability, and security). Nor is it corporate brand (how a company wishes others to view it) or reputation (how others view it).

Rather, it links the conventional business resources of finance, product development, marketing, etc. to corporate objectives. To the extent that the strategy development process is an intangible asset, it falls somewhere between and among corporate culture and governance. The goofiness of the strategy Netflix developed and executed becomes a red flag of cultural insensitivity and lax board oversight. These, in turn, have become reputational issues that all stakeholders can appreciate and value negatively. As they rightly should.

Turning then to the Steel City Re Corporate Reputation Index metrics, as of 23 December, the company has dropped over the trailing twelve months from the 73rd to the 54th percentile among the 485 companies in the Service Organization sector. This 19 percentile drop is associated with an exponentially weighted moving average reputational volatility of 135% and a return on equity that is underperforming its peer group by 46.43%.

The trailing twelve week reputational velocity is -15% and the trailing twelve week reputational vector is -15.4%. And while the company's balance sheet is bare with a long-standing book value of 1% of market cap, that too has increased recently as the intangible asset fraction has been slightly eroded.

Some years back, Warren Buffet famously said, "If you lose money for the firm, I will be understanding. But if you lose our reputation, I will be ruthless." According to the company's filing with the Securities and Exchange Commission on Thursday, CEO Hastings' stock option compensation will be halved from $3 million this year to $1.5 million next year. Hopefully, investors will demand something from the Board as well.

Yahoo: Doofuses in the house?

C. HUYGENS - Friday, September 09, 2011
Earlier this week, Yahoo’s (NASDAQ:YHOO) board fired CEO Carol Bartz and appointed CFO Tim Morse as interim CEO. That makes 4 CEOs in 4 years and casts a shadow on the board of directors, among whose duties are the selection and oversight of the CEO.

According to the Associated Press (8 Sept, Liedtke), “Carol Bartz's firing as Yahoo Inc.'s CEO isn't going to be enough to placate a loudening chorus of shareholders who believe Chairman Roy Bostock and his fellow board members also should be ousted after years of questionable choices that raised doubts about their competence."

Turning to the numbers, the Steel City Re Corporate Reputation Index shows a steady decline in Yahoo’s reputation ranking over the trailing twelve months relative to its 104 peers in the Internet Services and Software sector. On 3 September 2010, Yahoo ranked in the 89th percentile; yesterday they ranked in the 70th percentile. The 19 point decrease has been associated with an increase in Yahoo’s reputational volatility. Over the trailing six months, the exponentially weighted moving average reputational ranking volatility has climbed from around 10% to 49.4%. The trailing twelve week reputational vector and velocities are reading in at -9.4% and -7% respectively. It is therefore not surprising that the company is underperforming the median its peers over the trailing twelve months by 6.64%.
More globally, the entire sector appears to be rising ever so slightly reputationally relative to the broad market. The sector's median ranking has been edging up from the 40th percentile over the trailing 12 months. Within the sector, however, variance is relatively high reading in at 28% on 8 Sept. Last, looking specifically at Yahoo’s intangible asset fraction, it has dropped recently from around 60% to the low to mid 50%; the median fraction among the peer group is in excess of 80%.

Activist investors are taking note. So are long time stakeholders. The AP story quotes Darren Chervitz, co-manager of the Jacob Internet Fund, a longtime Yahoo shareholder, this way: "This board has presided over some of the worst decisions made by any company in recent history." Bartz frames it more colorfully in a profanity laced interview with Fortune magazine. "The board was so spooked by being cast as the worst board in the country. Now they're trying to show that they're not the doofuses that they are."

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