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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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Reputation Assurance is a Nobel Idea

C. HUYGENS - Monday, October 09, 2017
Reputation-sparing “governance warranty” can nudge stakeholders to forgive Board failure, according to the Nobel-prize winning behavioral economic model of Richard Thaler.

Thaler brought to prominence the idea of "nudge" economics, where individuals are subtly guided toward beneficial behaviors without heavy-handed compulsion.

Read more in New York Times

More on nudging through signaling and storytelling: http://www.iafinance.org/mission-intangible/tag/signaling/.

Reputation Now Key at Consumer Level

C. HUYGENS - Thursday, August 24, 2017
Reputation risk is a material threat to value especially in financial services, automotive and healthcare.

"CorpSumers feel so strongly about brand reputation, that over half (51%) will continue buying a product that has disappointed them because they believe in the company or share its values."

Read more in Holmes Report.

Reputational Benefits of Exceeding Expectations

C. HUYGENS - Tuesday, August 01, 2017
Exceeding low expectations out of the box (stock dropped 1% the day he was appointed), now

"the board and investors are betting he can work...magic in resuscitating the reputation of the entire company..."

Read more in the Financial Times.

Reputational Impact of Responsible Behavior

C. HUYGENS - Thursday, July 27, 2017
What regulatory reputational resilience looks like according to SEC Chairman Jay Clayton in the context of cyber security:

“If a company is being responsible . . . I don’t think we should then be punishing them for being a victim..."

Read more in the Financial Times.

Goldman Sachs: Reputation is just fine, thank you.

C. HUYGENS - Thursday, October 31, 2013
Last week, an article in the New York Times' Dealbook declared that Lloyd C. Blankfein presided over the implosion of Goldman Sachs’s brand and reputation. Really?

Written by Jesse Eisinger who is a top-notch investigative financial journalist working for ProPublica, the charge against the company's Chairman and CEO should stick. No slouch, he and colleague Jake Bernstein were awarded in 2011 the Pulitzer Prize for National Reporting for a series of stories on questionable Wall Street practices that helped make the financial crisis the worst since the Great Depression. He and Bernstein were also finalists for the 2011 Goldsmith Prize for Investigative Reporting for the series.

Here's the funny part. Eisinger documents all the operational successes Goldman Sachs appears to be realizing and the remarkably light touch regulatory opprobrium it navigated -- all empirical proof points that stakeholders are valuing Goldman Sachs' reputation. He concludes that reputation must be irrelevant, quoting Yale legal scholar Jonathan R. Macey. “Reputation is no longer an asset in which it is rational to invest,” writes Macey in his recent book, “The Death of Corporate Reputation” (FT Press).

The problem and source of Eisinger's congnitive dissonance, as followers of the blog picked up from the opening paragraph, is lack of clarity over the meaning of reputation. It is not brand, and it can not be understood the way brand is understood -- through opinions and sentiment surveys.

Andrew Carnegie, one of Pittsburgh's most famous capitalists, explained, "As I grow older, I pay less attention to what men say, I just watch what they do." Sentiment and opinion surveys only capture what 'men' say. To appreciate a company's reputation, you need to watch what its stakeholders do. Everything else is just marketing.

Turning to what stakeholders do as evidenced by the Consensiv metrics, Goldman Sachs' Reputation Premium is at the 86th percentile having bounced near the peak these past few months. Its Consensus Trend, the uniformity with which stakeholders agree on its Reputation Premium, is high with a scatter of only 1.2%. Both values stand out as extraordinary when compared to the 80 peers in the Investment Banks/Brokers sector. The Consensus Benchmark is at a generous 10.5% indicating that the normal variance of reputational value and the associated ability of the company to exhibit resilience in the setting of bad news, is at an optimum.

Notwithstanding all the stories over the past few years, none of which present a more sinister image of Goldman Sachs than Matt Taibi's "giant vampire squid," the customers flock to its doors, employees love working for the firm, its costs of capital are reasonable, and the greatest cost of all -- regulatory burden -- somehow seems lighter.

Yes, the overall reputational health, as Eisinger points out in detail, is quite good.

For more background on the Consensiv reputation controls, click here. To view the October 2013 reputational value league table at CFO.com, click here.

JPMorgan Chase: The limits of reputation resilience

C. HUYGENS - Tuesday, October 15, 2013
A strong reputation among a diversity of stakeholders can sustain a firm for years through thick and thin. Witness the 25-year run enjoyed by Johnson & Johnson (JNJ) after the famed 1982 Tylenol poisoning, and the less famed but much more important 1986 Tylenol poisoning II. Alas, resilience has its limits as Johnson & Johnson discovered in recent years.

Enter JPMorgan Chase (JPM), an integrated bank led by Jamie Dimon, a CEO with rock star-like cult status as a risk manager extraordinaire, who guided his firm through the ugliness of 2008 unscathed. Since the London Whale event hit the news 18 months ago, sturm und drang have played out amongst stakeholders, especially those at the periphery comprising regulators, litigators and mommy bloggers, who have piled on the opprobrium -- and the fines. The New York Times' pithy summary comprises the headline: The Bloodlust of Pundits Swirls Around Jamie Dimon. See cartoon clip starting at 0:56/2:31 - http://www.youtube.com/watch?v=KNCz0-CYj8M

The damage has been incremental, but measurable; the largest U.S. bank by assets, on Friday reported a $380 million loss, or 17 cents per share, in the third quarter on lower revenue and massive legal bills. That compares with net income of $5.7 billion, or $1.40 per share, a year earlier. Excluding litigation expense, the New York financial giant posted a profit of $5.82 billion, or $1.42 per share.

The Steel City Re reputational value metrics reflect the lowered reputation (CRR) ranking (reputation premium) driven by the volatility of stakeholder (RVM Vol) expectations (consensus trend). Wells Fargo (WFC) now enjoys a greater premium and greater return on equity, and lower current volatility. The projections are for Wells Fargo to continue gaining premium value, and for JP Morgan Chase to continue losing.

Herbalife: Resilience even a hedge fund could love

C. HUYGENS - Thursday, May 23, 2013
If the nameless and faceless blather of business reporting leaves you hungry for drama, you'd get more than a full plate at Herbalife. The core issue is captured by Bloomberg's story title this week, "Herbalife: Pyramid Scheme or Juggernaut?" The drama behind the story is the battle of hedge fund managers with egos equal to the task. The current score, headlined by Forbes this week, "Carl Icahn And Herbalife Are Crushing Bill Ackman."

The Steel City Re reputational value metrics, having correctly anticipated the JPMorgan Chase vote this past Tuesday through an analysis of the consensus trend, as Consensiv describes the process, affirm the expectations of stakeholders for a brighter future. Looking first at the underpinnings of the consensus trend, the Current RVM Volatility, the value has decreased from a worrisome 7% to the peer median (technically, 60th percentile) of around 2% relative to the 11 companies in the food distributors sector. The CRR, a measure of the reputational premium value, is also at the 60th percentile which is impressive given the events of the past few months. Return on equity, reflecting reasonable reticence by equity investors, is lagging at the 10th percentile suggesting by the logic underpinning the RepuStars Variety Corporate Reputation Composite Equity Index (Ticker: REPUVAR) that there is significant upside opportunity.

Additional background on these measures of reputational value can be found in the 2102 book, Reputation, Stock Price, and You.

Goldman Sachs: Reputational luster

C. HUYGENS - Wednesday, March 07, 2012
Mathew Philips, writing for Bloomberg Businessweek (March 7), is perplexed. After recounting recent history including the Securities and Exchange Commission's $550 million fine for misleading clients on securities that were "built to fail," the swaps engineered for the Greek treasury that went bad and exacerbated the nation's financial distress, and the apparent conflict of interest in the sale of El Paso to Kinder Morgan, he is faced with a troubling fact. "Goldman’s sullied reputation doesn’t appear to be negatively impacting its business. In fact, Goldman is outpacing its Wall Street competition recently in key areas of business. In 2011, Goldman was the top adviser for both global M&A and equity IPOs. A Bloomberg survey of traders, investors, and analysts last May showed that while 54 percent of respondents had an unfavorable opinion of Goldman, 78 percent believed that allegations it duped clients and misled Congress would have no material effect on its business."

Two quick charts on reputational value and reputational rankings based on Steel City Re data reinforce his observations: the reputational rank and reputational stability of Goldman Sachs are both in the top quartile of all 267 firms in the banking and financial services sector.

By five of the key "vital sign" reputational metrics shown at left, Goldman Sachs is looking good. Yet its return on equity -- reward to its long suffering investors -- is the the 17th percentile within this peer group. Contrast Goldman Sach's reputational standing with another full-service investment bank, UBS. UBS with a market cap of $50B compared to Goldman's $57B, has a corporate reputational ranking in the mid 40th percentile even though its return on equity is slightly less negative. Goldman's PE is excess of 26 while UBS's is around 11.

We call this reputational resilience, and having tracked and measured Goldman Sach's reputation for the past three years, we are not surprised. Notes Philips, "There’s a reason why firms keep doing business with Goldman, and it’s not because of its sterling ethical reputation."

Indeed, it is not. The six key business processes that underpin reputational value are ethics, innovation, quality, safety, sustainability, and security. In the investment banking sector, it is hard to argue that one firm is more or less ethical than the other. That makes other drivers of reputation more valuable, and the evidence suggests the most important of them is innovation.

Opines William Cohan who studied Goldman Sachs and their culture and was interviewed by Philips: “This gets back to the advantages that Goldman has had for years over its competition. They attract the best and brightest people. They consistently have the best risk-taking culture on Wall Street. No one understands the markets as well as Goldman.”

Concludes Philips, "In short, if you want the smartest bankers, there’s a price to pay." The reputational value metrics and corporate reputation ranking data concur.

Reputation Year In Review

C. HUYGENS - Saturday, December 31, 2011
Let's not get carried away. Huygens can not possibly do justice to a review on reputation in a year which almost $6.3tn (12.1%) was erased from global stock markets as the eurozone financial called into question the future of the world’s largest currency bloc, according to the Financial Times (Dec 30, Wigglesworth). Instead, Huygens offers a tale of two intellectual property strategies, and an example of reputational resilience.

TIVO and Rambus are two firms that have been fighting IP infringement battles for many years. At the end of 2011, TIVO finds itself experiencing one of the greatest reputational jumps over the trailing twelve months while Rambus story has a less than happy ending, so far.

Among the 28 companies in the Electronics/Appliances sector, Tivo's reputation metrics, according to the Steel City Re Corporate Reputation Index, rose from the 3rd to the 84th percentile. Its most recent EWMA reputational volatility was 74% after a very volatile year, and while its volatility continues to trend downwards, its trailing twelve week reputational velocity and vector are at 8 and 11 percent, respectively. All good signs consistent with the fact that it has outperformed the median of its peer group by 37%.

Among the 98 companies in the Semiconductor sector, Rambus dropped from the 89th percentile to the 4th percentile. After a volatile year, its exponentially weighted moving average volatility is down most recently to 30% while its vector and velocity continue to trend negative at -36 and -9% respectively. Not surprisingly, Rambus is underperforming the median of its peer group by 39%.

Last, the Coca Cola Company distinguished itself this year by exhibiting among the lowest levels of reputational metric volatility. Among its 14 peers in the Soft Drink Producers & Bottlers group, it showed no change on any metric. It outperformed the median of its peer group by 7.67%.

The first lesson among many this past year comes from the last case: in a highly volatile market, reputational stability has value. Things do go better with Coke.

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.

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