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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Exposing Reputation Value 2016

C. HUYGENS - Friday, March 04, 2016

RepuSPX and its bigger-tent cousin, RepuStars Variety, were designed to capture latent reputation value not evidenced by stock price. According to Technology Option Capital, the portfolio manager, reputational value is created through the actions of all stakeholders. If this value is not recognized by investors, then the equity should yield above average returns upon its discovery.

This is a quarterly update of an ongoing test of the equity portfolio corollary to the basic Theory of Reputational Value.

Since 2002, weekly trailing 12-month returns of a simple reputation-based composite equity portfolio reconstituted algorithmically once a year from constituent members of the S&P500 composite equity index outperformed the S&P500 index 83.9% of the time. In 680 serial samples of trailing twelve month returns, RepuSPX generally outperformed SPX returning an excess of 8.9% on average (median 4.5%). In 92% of the cases of outperformance, the excess trailing 12-month returns were greater than 2%.

A time series plot shown below further demonstrates that there is useful information on latent (reputation-sourced) enterprise value in  Steel City Re's Reputational Value Metrics. The cumulative price returns through 4 March 2016 are 324.5% for RepuSPX and 74.2% for the S&P500.

VW's Reputation Hinges on Quality of Governance

C. HUYGENS - Monday, September 28, 2015
The event the BBC’s Russel Hotten reports as being dubbed the “diesel dupe” is not a recent discovery. Notwithstanding the extraordinary attention it’s been receiving these past two weeks, as with most operational issues that blossom into full blown reputational value crises, there were risk signatures going back 15 months that something was amiss.

In 2014, the West Virginia University Center for Alternative Fuels, Engines and Emissions was contracted by by nonprofit pollution control advocate International Council on Clean Transportation to measure emissions on three cars: a 2012 VW Jetta, a 2013 VW Passat and a BMW X5 SUV.

As reported by FOX, the “BMW passed, but the university found significantly higher emissions from the Volkswagens, according to the U.S. Environmental Protection Agency. The university and the council reported their findings to the EPA and the California Air Resources Board in May 2014, but VW blamed the problem on technical issues and unexpected conditions.”

As we now understand, VW installed software that was supposed to adjust engine output to meet environmental standards when it detected the presence of an external monitoring device typically found in garage and in-door environments. The software did not recognize the monitoring tool used by the WVU lab which is designed to be used in road tests. The engine output was at variance with expected values.

Leading the project for the International Council on Clean Transportation that exposed the shenanigans at VW is an engineer with the improbable name of John German. As reported in the Guardian, German said of his research, “We really didn’t expect to find anything.”

Here’s how the BBC summarizes VW’s position.

The case against VW appears cast-iron. "We've totally screwed up," said VW America boss Michael Horn, while group chief executive Martin Winterkorn said his company had "broken the trust of our customers and the public". An internal inquiry has been launched.

With VW recalling almost 500,000 cars in the US alone, it has set aside €6.5bn (£4.7bn) to cover costs. But that's unlikely to be the end of the financial impact. The EPA has the power to fine a company up to $37,500 for each vehicle that breaches standards - a maximum fine of about $18bn.

Legal action from consumers and shareholders may follow, and there is speculation that the US Justice Department will launch a criminal probe.


Turning to the Reputational Value Metrics as reported by Consensiv based on data from Steel City Re, the indicators of reputational value, volatility, and loss indicate VW is NOT topping the charts in measures of reputational value impairment among the full range of stakeholders. Equity investors, of course, are the first to panic: they've shaved about 30% off the company’s market cap.

But is this a reputational crisis? No, or at least, not yet.  Right now, the indicators of reputational value suggest the Company is benefiting from its historic reputation of automotive engineering excellence reinforced by decisive crisis management action (not merely communications). That legacy of operational excellence, which has been understood and appreciated by myriad stakeholders for years, is providing reputational value resilience.

As for the future, as well appreciated by readers of Reputation, Stock Price and You, and as headlined in the Philadelphia Inquirer, the “financial, reputation hits to Volkswagen hinge on top execs' culpability.”

Personal Reputation Risk Worth 32% Premium

C. HUYGENS - Friday, July 17, 2015
Personal risk to corporate directors is assumed to be covered by D&O liability insurance. Except that personal reputation isn't covered by D&O at all. Which is why Kathy Grant's story is so interesting.

Ms. Grant heads a cash-strapped Health Board in New Zealand. As its Commissioner, she is facing the need to make "extreme cuts" in benefits that will not be popular among the constituency. How extreme you may ask? So much so, explained a government spokesperson, that Ms. Grant's personal reputation is at risk.

Risk is not an impediment to progress if priced correctly. That's the logic, after all, in hazard duty pay. To bear personal reputation risk, the Health Board is paying Ms Grant a healthy 31.8% premium over the maximum customary rate of $1062 per day.

Read more.

Big oil executive: “I don’t want to work for the tobacco industry”

C. HUYGENS - Tuesday, April 07, 2015
There are four reasons the major oil and gas companies are undertaking a substantial review of their policies on climate change, writes Nick Butler, who is formerly BP's Group Vice President for Policy and Strategy Development. Reading Butler's comments in Monday's Financial Times, I think the 4 reasons really reduce to 2: they're not happy with the status quo, and they are grappling with reputation risk.

1. Companies are unhappy with their current policies. Cap and trade won't work.
2. A critical mass of stakeholders within the industry really takes climate change seriously, public discussions will again be lively with the Paris conference this December, and companies realize "reputation does matter, not least for morale within the company."

Recounts Butler: "As one rising executive in one of the companies said to me last week – 'I don’t want to work for the tobacco industry.'”

Read more (paywall)

Stop the Silliness

C. HUYGENS - Thursday, February 19, 2015
Let's stop confusing reputation risk management with mere likability, please. Read more in Risk & Insurance.

Practical Reputation Risk Management

C. HUYGENS - Thursday, February 12, 2015
In almost every type of business, pressure is on line functions to cut costs, on management to sustain operations at a profit, and on governance to ensure compliance and protect reputation. At times, over-zealousness at the line or management level places governance at risk.

CFO.com today describes one practical tool to protect Directors and Officers. Read more.

Capturing Latent Reputation Value

C. HUYGENS - Monday, January 19, 2015

RepuSPX and its bigger-tent cousin, RepuStars Variety, were designed to capture latent reputation value not evidenced by stock price. According to Technology Option Capital, the portfolio manager, there were two objectives. The first was to demonstrate that the indicators of value, the Reputational Value Metrics calculated by Steel City Re, provide useful information on enterprise value. The second was to obtain an indication of the magnitude of latent reputational value that could be realized when it becomes sufficiently transparent for investors to appreciate.

Weekly trailing 12-month returns of a simple reputation-based composite equity portfolio reconstituted algorithmically once a year from constituent members of the S&P500 composite equity index outperformed the S&P500 index 86.1% of the time. In 629 serial samples of trailing twelve month returns, RepuSPX generally outperformed SPX returning an excess of 9.5% on average (median 4.7%). In 91% of the cases of outperformance, the excess trailing 12-month returns were greater than 2%.

A time series plot shown below further demonstrates that there is useful information on latent (reputation-sourced) enterprise value in the Steel City Re Reputational Value Metrics. The cumulative price returns through 15 January 2015 are 362.5% for RepuSPX and 69.9% for the S&P500.

Reputation's ROE Was An Added 3.7% in 2014

C. HUYGENS - Sunday, January 04, 2015
Managing reputation adds value that can be quantified. In 2014, RepuSPX, an equity portfolio comprising 35 companies distilled from among the constituents of the S&P500 that showed promise of favorably surprising their equity investors on the basis of their reputation metrics, outperformed the S&P500's 12% return by an additional 3.7% for an annual return of 15.7%.

Over the twelve years Technology Option Capital has been designing reputation-linked equity portfolios from Steel City Re's  indications of reputational value, the annual equity portfolios distilled from the S&P500 have returned an annual excess of 9.5% on average (4.3% median). That's why RepuSPX, with a 367.12% return since inception, is handily beating the S&P500's 12-year return of 79.27%

See RepuSPX chart here.

Below, annual returns of select equity indices showing the returns of RepuSPX (arrow) at 15.7% and the other reputation-linked composite equity index, RepuStars (REPUVAR) that provides global exposure through US market listings of non US-based companies and ADRs.

Walmart: Bentonville, we have a problem

C. HUYGENS - Thursday, November 13, 2014
Price, variety, and convenience are what have defined Wal-Mart, and what customers expect when they shop. Volume is what suppliers expect, and what creditors assume when assessing risk. Failing to meet these expectations, and surprising stakeholders with recurring labor and ethics issues, is a formula for reputation value loss.

The chart below shows dismal numbers for the world’s largest discount retailer and the effects of disappearing customers, disengaged employees, disappointed equity investors, worried creditors, and unhappy regulators -- in other words, the cardinal signs of a reputation crisis.

Reputation Risk: Oh, baby tell it to me once again

C. HUYGENS - Thursday, October 30, 2014
Channeling songwriter Toni Tenille’s 1980’s classic, Deloitte is telling executives one more time that 88% of their peer group now explicitly focus on reputation risk as a key business challenge. The most recent global survey by the accountancy, reported 28 October, affirms yet again that reputation risk is a C-suite issue and that the most important stakeholders are customers, regulators, other senior executives, employees and remarkably last, investors.

Read more.

Say those words again that you just did
Oh, baby tell it to me once again


Sing more.


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