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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Speaking Volumes When D&O Defenses are Muted

C. HUYGENS - Monday, May 22, 2017
A 3rd party’s signal is what really great CEOs need to protect their #reputation … when all other strategies fall silent.

There is a range of alternative defensive strategies — none of which are particularly promising. The status quo, silence, is a path to disaster today.

Read more in Risk & Insurance

Reputational Value Rarely Enhanced by Crises

C. HUYGENS - Sunday, May 21, 2017
Avoid #reputational #risk: manage stakeholder expectations, execute to expectations, and pre-position goodwill through 3rd-party validation of governance, risk and compliance excellence.

The half-life of corporate crises has undeniably shortened, helped by social media. Just ask Oscar Munoz, United Continental’s chief executive, how much time he had to react to an online video of a passenger being dragged off one of his airline’s flights in April. At the same time, crisis management specialists have an interest in fostering a nervous sense of constant uncertainty.

Such uncertainty cross-pollinates with the contagious concept of “never-ending disruption” and the alluring idea that all challenges are opportunities. Soon, managers assume they must foment a sense of crisis to get anything done. They are almost always wrong.


Read more from the Financial Times:

Activist Investors Have a New Bloodlust: CEOs

C. HUYGENS - Wednesday, May 17, 2017
Emotionally charged disappointed activist investors existential threat to CEOs as #reputation #risk roars through the boardroom and into the corner office. Culpability insurance is in limited supply and demand is growing.

Activist investors, a perennial nuisance for chief executives, are becoming an existential threat. Since January, they have helped push out the leaders of three high-profile S&P 500 companies: insurance giant American International Group Inc., railroad CSX Corp. and aerospace-parts maker Arconic Inc. They are gunning for the CEOs at other companies including Buffalo Wild Wings Inc. and Avon Products Inc.


Read more in the Wall Street Journal.

For Personal Protection, CEOs Need Reputation Assurance

C. HUYGENS - Wednesday, May 17, 2017
Why the expressive power of #Reputation Assurance is imperative: When activists attack, “you don’t ever hear the management or board side because they’re the defence, and the defence doesn’t talk.”

Jeff Ubben, chief executive of ValueAct, an activist fund that keeps its pressure behind the scenes, said the recent ouster of Mr Kleinfeld was an example of companies being “bullied” by Elliott. Mr Kleinfeld was forced out not because of Elliott’s criticisms of his record at Arconic but because of what his board called “poor judgment” in sending a letter to an official at Elliott that the hedge fund said “read as a threat to intimidate or extort”.

“It’s prosecutorial in nature,” said Mr Ubben, speaking on a panel at the Milken Conference in Los Angeles earlier this month. “You hear the Elliott side, but you don’t ever hear the management or board side because they’re the defence, and the defence doesn’t talk . . . And then when you do strike back, you’re fired.”


Read more in the Financial Times.

Expectations for the Short Haul

C. HUYGENS - Friday, May 12, 2017
#reputation #risk. CEOs in UK can expect a short run; are long-term incentives less valuable?

Average time heading a company can seem short, but CEOs may be cheered to know that their staying power compares favourably with UK football managers, whose average tenure is 1.23 years.

Read more in the Financial Times.

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.

Ruthless Blame Game: From 2x4s to nuclear weapons

C. HUYGENS - Sunday, May 31, 2015
It's the CEO's fault, of course, reports Fortune Magazine. According to a survey of 200 Directors conducted by the New York Stock Exchange, more than 2 in 5 respondents said the CEOs should face the brunt of…breach-related backlash. The same seems to be true for any enterprise-level risk.

Damage the firm's reputation, and Directors can get very aggressive. It's no different than in the 1990's when Warren Buffet warned employees at Solomon that if they damaged "a shred" of the firm's reputation, he would be ruthless. Except it is different.

Today, investors are getting very aggressive. They are using enterprise-level disasters to indict the Board of Directors, and build the case that Proxy Access--the right to nominate directors without approval of the Board--is an essential strategic "weapon" to help focus the board's attention. Apparently, we've come a long way from needing merely a 2x4.

Read more (Fortune)

Reign of Terror: Reputation crisis in personal terms

C. HUYGENS - Tuesday, May 13, 2014
Crisis management now seems to involve the disposal of competent executives. "Last week, Target’s Gregg Steinhafel become one of the more than 461 CEOs to step down this calendar year, adding to a body count that is up 17 percent from the same period last year. This statistic from the global outplacement consultancy Challenger, Gray & Christmas, Inc. may be “interesting.” Unless you’re a CEO, in which case it is gut-wrenching." Read more.

Target: Risks when stakeholders expect more, and the board is blind

C. HUYGENS - Monday, May 05, 2014
Reputation risk is when stakeholders expect behaviors from a company that it can't deliver. It is an enterprise-level event. Target, one of the largest American retailing companies, founded in 1902 and headquartered in Minneapolis, Minnesota, encourages its customers to "expect more." Around twenty weeks ago, Target failed to meet expectations twice: through a breach in IT security and then through poor follow up management of the consequences.

When a company such as Target has a superior reputation and then fails to meet expectations, stakeholders may give the company the benefit of the doubt. However, failing twice without an adverse reaction is asking much from stakeholders today. The board of directors at Target, as we learned today, was not about to take chances. Adverse reactions include what the Financial Times defined some time ago as "the pile on of litigators, regulators and mommy bloggers." The Germans call it a "shitstorm." And unless immunized prior to the crisis, the primary beneficiaries of the opprobrium from the masses are the company's directors and officers.

Neither the Directors nor Officers of at Target was immunized. This morning, Target announced that Chairman, President and CEO Gregg Steinhafel is out. Steinhafel, a 35-year veteran of the company and CEO since 2008,  agreed to step down, effective immediately. He also resigned from the board of directors. The modern day Jonah was thrown into the sea by his directors to appease the mobs evidencing a reputation crisis. Or perhaps the board over-reacted.

Calling for the heads of directors and officers is not new. D&O liability insurance was introduced years ago in recognition of the fact that a disenchanted stakeholder group needed to vent, and it was unreasonable to ask directors and officers to bear the personal costs. Alas, absent immunization, they are bearing the personal costs to their reputation. "They" include the risk committee board members of JPMorgan Chase, the four senior-most directors at Duke Energy, and now the Chairman and CEO of Target.

Favoring the argument that the board overreacted, shares in Target fell nearly two percent in pre-market trading Monday. Ninety minutes into the trading day, shares were down nearly 3% while the S&P500 was flat. Equity investors, it seems were  disappointed with the removal of Steinhafel who has reinforced Target's reputation for stellar customer-oriented service. Of course, there is the alternative explanation that investors are both delighted Steinhafel is gone and are expecting more bad news which is not yet public but, which known to the board, Other sources of intelligence, specifically, the Steel City Re reputation metrics, favor the first explanation - the Board of Directors unnecessarily tossed Steinhafel overboard to appease the crisis management gods.

Twenty weeks out from the breach, Target's reputational value is staging a comeback from the initial depression. The substantial drop in the company's Reputation Premium from the high 80's to below the 50th percentile is stabilizing around the 64th percentile relative to the 15 companies in the Discount Stores peer group. In fact, last May around this time, Target's Reputation Premium was lower. Further, looking at the measures of reputational volatility, the Consensus Trend, there was never a major shock among key stakeholder groups. Overall, Reputational Health is good.



How good is a good reputational health? In the case of Target, its reputational value peaked near June 2013 as shown in the 3-year chart below. The decline in reputational value since then is nearly linear, with the immediate effects of the data breach being nothing more than a short-term shift in the overall trend.  In other words, the data breach was not the long-term cause of Target's loss of Reputation Premium nor the long-term cause of Target's loss in Reputational Value. Rather, the entire industry - discount retailing -- is losing its value proposition. The data breach at Target helped temporarily mask the real cause of decline: the business strategy is failing.

It can be argued that a CEO is obliged to fall on his sword for advocating and implementing a failing strategy. And with this in mind, it might be argued that the equity price fall Monday morning represented equity investor recognition of the real reason for termination. But frankly, absent quantitative metrics to inform the board, management, and the communications arms of Target, it is hard to know what they know or why they think they acted the way they did. Worst, if Steinhafel was aware of the overall industry decline and was working on a plan to save Target, then it is a particularly bad time to be making changes at the top. Remember how well that worked out for JCPenny (JCP).

Managing an operational failure with one eye towards the media is prudent, but the tail should not wag the dog. If the real problem is a sector decline, it would be best to focus attention on that problem and not the irrelevant noise generated by those who make a living generating noise. Sir John Rose, former CEO of Rolls-Royce (LON:RR), set the standard to putting mind to what mattered when he ignored the media for weeks after a Rolls-Royce engine exploded on a Quantas super jumbo in November 2010. Instead, he identified the source of the problem and fixed it to the satisfaction of regulators, and more importantly, a key customer. Less than 10 weeks after what was viewed as a reputational crisis, British Airways announced that it was equipping its latest super jumbo acquisitions with...the same Rolls-Royce engine. And as Rolls-Royce spent ample cash indemnifying customers for downtime, and as the sales book was booming and stock price rocketing, less than 20 weeks after the affair, Sir John stepped down, sat on his motorcycle, and rode into the sunset.

Twenty weeks from the breach and the Chairman/CEO has been sacrificed. Quantitative reputation metrics, including the Loss Gates charts for Target's objectively measured crisis trigger points, do not show a crisis. It is one more example of a needless loss of executive life.

Management and boards require metrics to do their work properly, and Directors and Officers deserve protections for their personal reputations in shitstorms. Absent measures of reputational value, rash decision informed only by PR and media activity may be made with awful consequences. Absent protections for corporate leadership, good people may be thrown overboard to no avail. There are many lessons to be learned here.


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