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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Kraft: Is tax minimization ethically virtuous?

C. HUYGENS - Friday, June 21, 2013
Cadbury, the company will have you know, emphasizes responsibility both environmentally and ethically. Examples include "Purple Goes Green," the branded sustainability initiative at Cadbury to reduce carbon emissions and packaging; joining Singapore's Sustainable Manufacturing Center, cooperating with the United Nations Development Program and governments of Ghana to invest funds in support of sustainable cocoa production; and supporting core labor rights and dignity-at-work initiatives, health and safety initiatives and fair remuneration standards.

With such outstanding core values, it was natural that the UK press was outraged when it was discovered that the 2010 acquisition by Kraft, the American food conglomerate, was being secretly restructured to reduce UK taxes. Legal, sure. But blatantly unethical in that the actions of the American company would deprive the UK, and it citizens, of reasonable revenue. As reported by the Guardian in December 2010, "Kraft is reorganising the Bournville-based manufacturer's UK business to allow much of the profit to be booked in Switzerland. The switch means the Dairy Milk manufacturer will pay a much lower rate of corporation tax and is likely to deprive the exchequer of millions of pounds in tax revenue."

Surprise, surprise. The Financial Times reported yesterday that the company established in 1824 and known for its philanthropic ethos, had been for years prior to the takeover "devising schemes to engineer interest charges that could be deducted from its gross profits and reduce UK tax…Other schemes eschewed complicated debt and accountancy structures and instead relied on old-fashioned tax havens."

A former Cadbury executive familiar with the scheme told the FT it was just one of “a lot of things” the group did “to create an interest deduction out of nothing”, adding that certain executives in the company “found that intellectually quite stimulating”.


Could it be that from an ethical perspective, tax minimization is virtuous?

PetroChina: Reputation of a different color

C. HUYGENS - Monday, May 06, 2013
Corporate reputation is an expectation of corporate behavior. Reputation value is the product of that expectation. This is the natural course of things according to Huygens. And according to the book, Reputation Stock Price and You: Why the market rewards some companies and punishes others. And according to Jonathan Salem Baskin, Managing Director of Consensiv, who wrote today for Forbes about PetroChina.

"The last two months of PR have not been kind to PetroChina . The company’s former chairman has been implicated in a murder and money laundering. A key team of execs resigned en masse. A giant facility has stayed shut-down by an earthquake and safety concerns, while the environmental risks of a new investment have prompted riots in the streets. Earnings are down. It’s a textbook case for a corporate reputation crisis. Only not the way you think, since the company’s reputation has stayed all but unaffected. The reasons why suggest that marketers at public companies should look at corporate reputation less as an idea, and instead measure it as a series of behaviors." The full article is a good read.

Here are the corresponding Steel City Re reputation metrics underpinning Mr. Baskin's quantitative observations. Note the following:

Top left, the historic RVM volatility, a measure of the volatility of PTR's reputational value, was very low. Mr. Baskin explains why. Now it is in the 98th percentile among the 52 peers in the integrated oil sector. The reputational value is at the median, notwithstanding all the bad press.

Top right, the current RVM volatility is approaching 5% suggesting that an increasing number of stakeholders are expecting that the status quo is unsustainable.

Barclays: Committed

C. HUYGENS - Sunday, March 17, 2013
Cynics insist that the big banks have only an interest in reputation -- an interest that distributes risk inequitably on others. As the old fable goes:

A Pig and a Chicken are walking down the road. The Chicken says: "Hey Pig, I was thinking we should open a restaurant!" Pig replies: "Hm, maybe, what would we call it?" The Chicken responds: "How about 'ham-n-eggs'?" The Pig thinks for a moment and says: "No thanks. I'd be committed, but you'd only be involved!"

Last year, UBS tied the CEO's bonus to measures of reputation. Now, a second bank is no longer chicken. In a bigger and bolder display of commitment, the 2012 Barclays Bank Annual Report describes robust board and operational level controls designed to drive reputation risk management throughout the enterprise.

In order to strengthen the governance relating to reputation matters, we have recategorised reputation risk as a new Principal Risk and have created a Board Conduct, Reputation and Operational Risk Committee in 2013. The Barclays Reputation Council created a Bank wide Reputation Risk Control Framework and Reputation Risk Impact/Control Policy, both of which were approved by the Board. The Council has also delivered training on reputation risk to senior executives across the bank to ensure the knowledge and culture is embedded.

The Steel City Re Reputational Value Metrics suggest Barclays is realizing some of the rewards associated with transparently reporting its commitment. RVM is a non-financial indicator of reputational value. The current RVM volatility, an indicator of homogeneity of expectations of reputational value, has been dropping steadily over the past 4 weeks since Huygens last reported the metrics.  Meanwhile, the CRR, a measure of relative reputational value in rank order, shows that BCS has climbed from the 21st to 24th percentile since mid-Feb. ROE is holding steady at just above the median for the sector comprising 49 banking firms.

The data show that BCS's emphasis on reputation, backed by authentic controls, is creating value. The controls have not been tested, so those that have been converted appreciate the qualitative effort. The data also show that while the number of sceptics is dropping, BCS current RVM volatility is still above the median at the 54th percentile. To extract more value from the investment, BCS needs to turn around this very large block of sceptics with a quantitative story -- something made possible by a product like reputational value insurance, perhaps?



Barclays: Stirring the pot

C. HUYGENS - Wednesday, February 20, 2013
The path to providence for a prodigal bank was never expected to be easy. Human nature delights in the fall of the mighty; more so the meek who once suffered at their hands. We are speaking, of course, of the hands of the masters of the Universe.

William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. He scoffs as Antony Jenkins, the chief executive officer of Barclays Plc., seeks to shred the banks old culture and restore ethics, integrity, and other critical values. Cohan wrote on Monday,

It’s tempting to trust this sweet-talking British banking executive, still in the flush of his new appointment to run the scandal-ridden institution. He is understandably anxious to distance himself and his bank from the atrocious behavior rampant at Barclays during the absolute monarchy of his predecessor, Robert Diamond.

Scoffing, as it is now abundantly clear, is a mainstream financial media concern. Last Thursday, the NYSE announced the start of a metric-based publication service tracking sentiment - a social media data analysis service. Call it a scoff meter. Barbara Gray, an analyst with Brady Capital, explains the demand in the financial sector for sentiment data this way.

Social media is creating a new form of appreciating equity called social capital and we are now starting to see an explosion in growth of the number and sophistication of social analytics tools. As these new tools turn more and more qualitative data on companies (previously ignored by investors that just focused on the numbers) into quantitative data, I believe social capital will become even more of a predictive variable for determining stock price performance.

Indeed, the scoff meter is a 17 year old idea whose time has come. As described in Reputation, Stock Price and You, as far back as 1996, Cap Gemini Ernst & Young, a global accountancy, established that non-financial performance plays a critical role in how public companies are valued, accounting for as much as 35% of institutional investors’ valuation. In 2005, PwC, another global accountancy, reported controlled experiments showing that extra-financial data and intangible asset value calculations swayed 40% of analysts to change their target valuations of public companies. That same year, Thomson Extel, the publishing group, reported that 6% of buy-side brokerages devoted material resources to extra-financial data to determine intangible asset value. A year later, that figure was updated to 32% of buy-side brokerages.

The Society, in cooperation with Steel City Re, has been publishing reputational value metrics for several years. S&P/DowJones Indexes publishes an equity index (Ticker: REPUVAR)  informed by the same measures. These measures capture the expected economic consequences of stakeholder actions influenced by, among other things, the same data streams tracked by the scoff meters. In fact, the volatility of the RVM metric, a non-financial measure of reputational value, is a measure of stakeholder expectation alignment -- truly, a scoff meter. And CRR, a measure of reputational value premium, is an indicator of the relative value of those expectations among all stakeholders in terms of expected economic impact. When RVM volatilty is high, CRR naturally suffers.

Below, Barclays' most recent data from Steel City Re in both Investor Relations-friendly and traditional Risk Manager-centered actuarial formats. Looking first at the IR-friendly form of reputational value reporting, the data show that the measures of expectation alignment - the degree to which stakeholders believe what is being said about Barclays and plan to act accordingly, is around the 8th percentile relative to the other 49 firms in the financial services sector. The measure captures the expected economic impact of Cohan's scoffing, as shown on the same Peer Standing chart where the reputational value premium is around the 21st percentile. Two measures, both in the black box, indicating (optimistically) great upside potential.

Below, in the bottom left, a comparison of current alignment versus historic alignment. The measure appears to be decreasing, which could be interpreted to mean stakeholders are trusting the messaging less, or more aptly here, with the new messaging, stakeholders aren't accepting it...reference Cohan again.

Turning to more traditional economic measures, the Beta charts at right show that Barclays' economic returns have a Beta of 1.5 x both the group median and the S&P500; Barclays' reputational value metrics, on the other hand, have a Beta of 0.0 relative to the group median and the market measure of uncertainty -- the VIX. Barclays, from a reputational value perspective, is now in a league of its own.



The story is no different looking at the actuarial data below although time series data provide more nuanced insight. Barclays wild ride goes back to September 2012 and a steady rise in economic value not yet matched by a rise in CRR suggesting equity investors have a feeling for something others, like Cohan, are fighting tooth, nail, and blog.

Finmeccanica: Ethical contradictions

C. HUYGENS - Tuesday, February 12, 2013
At least two of the 80 companies comprising the Aerospace and Defense sector are facing reputational issues. In the US, Boeing is wrestling with smoking batteries, allegations of conflicted safety review processes, and suggestions of supply chain management failures. Aircraft safety is the reputational value issue that nucleates the above. In Europe, Finmeccanica SpA is facing the more common issue in this sector: ethics and corruption. Here is how a trading blog summarized the problem:

Finmeccanica Chief Executive and Chairman Giuseppe Orsi was arrested over bribes allegedly paid to secure the sale of 12 helicopters to India, when he was head of the group's AgustaWestland unit, a judicial source with direct knowledge of the situation told Reuters... An Indian defense ministry source said kickbacks worth 40 million rupees allegedly paid to Indian officials to grease contracts for Finmeccanica were being probed and that Delhi was considering the deferral of the Finmeccanica helicopter deal, worth 560 million euros ($749.2 million)...Prime Minister Mario Monti said the Italian government would deal with management issues at the company... "There is a problem with the governance of Finmeccanica at the moment and we will face up to it," Monti told RAI state television.

The reputational value metrics provided by Steel City Re illustrate incongruities that should be unsettling, if not alerting. The company's reputational ranking, CRR, a measure of its reputational value premium, is only in the first decile relative to its peers, yet its return on equity is in the 90th percentile, peaking briefly at 50% ROE for the year. The company's RVM volatility, a measure of volatility of a non-financial measure of reputational value, is in the top decile yet the projected change for CRR is flat. While such an odd mix of leading indicators is not diagnostic of a pending reputational value problem, as discussed in Reputation, Stock Price, and You, it isn't a sustainable cocktail of measures in the usual course of business.


Barclays: CEO’s ethics talk creates value

C. HUYGENS - Sunday, February 10, 2013
There are three types of companies that can benefit from tinkering with the business bits that underpin reputation. Iconic firms can build in reputational resilience to help them in their ongoing battle with NGOs. Good firms in commodity businesses can signal points of value-added differentiation. The last group, of which Barclays is an unhappy member, can signal material efforts at repairing that which has caused them in the recent past reputational value loss.

The good news for Barclays and similarly situated firms is that evidence shows that reputation restoration works and, all things being equal, can create an additional 6.5% in market capitalization. The other good news for Barclays Plc is that Chief Executive Officer Antony Jenkins’s pledge to shred the legacy of his predecessor and fix the lender’s culture, as reported by Bloomberg,  appears to be creating value as stakeholder expectations are realligning.

The reputational value metrics, calculated by Steel City Re, show two important shifts. The volatility of RVM, a non-financial measure of reputational value, is high and rising. The value and direction of change of CRR, a measure of relative reputational ranking (the reputational value premium), is now above the median level for the 49 peers, and is rising rapidly. Profits and the commensurate equity bump, are sure to follow.



Governance: Costs of failure rise

C. HUYGENS - Friday, January 04, 2013
Reputation is all about meeting stakeholder expectations. Regulators are the often forgotten stakeholder. Other stakeholders, such as customers, employees, suppliers and creditors express their satisfaction with expectation management on well recognized lines of a company's profit and loss statement. Regulators, however, get a special line: extraordinary expenses. As explained in Reputation Stock Price and You: Why the market rewards some companies and punishes others (2012, Apress), a company's reputational value is reflected in these lines and thus ultimately, stock price.

From the Conflict of Interest blog, we share the updated list of the top ten greatest extraordinary expenses arising from a failure of meeting regulators' expectations (read, failure of governance.)

- BP – $1.256 billion (environmental and related offenses) (2012)
- Pfizer – $1.2 billion (marketing offenses) (2009)
- GlaxoSmithKline – $956 million (marketing offenses) (2012)
- Eli Lilly – $515 million (marketing offenses) (2009)
- AU Optronics – $500 million (antitrust) (2012)
- Abbott Laboratories – $500 million (marketing offenses) (2012)
- Hoffman-LaRoche – $500 million (antitrust) (1999)
- Yakazi – $470 million (antitrust) (2012)
- Siemens – $450 million (FCPA) (2009)
- Halliburton/KBR – $402 million (FCPA) (2008).

As the blog's author, Jeff Kaplan, a partner with Kaplan & Walker LLP, notes, "What is striking here is that fully half of the ten largest federal corporate criminal fines in history were imposed or agreed to in 2012. I cannot recall another year with so many new cases on the list."

In yesterday's Mission Intangible blog note, guest contributor Dr. Michael Greenberg articulated principles for better governance. Today's note punctuates that note with a reminder of the cost of failure.

Governance: Resolved to do better

C. HUYGENS - Thursday, January 03, 2013
Guest comment by Dr. Michael Greenberg.

We're once again heading into a new year. It’s the season of resolutions, of reflecting and taking stock, of setting new goals and getting back into shape. Most of us tend to think of this kind of New Year’s activity as a personal process, but it applies just as readily to corporations and their executives. Most avenues of human endeavor can benefit from periodic self-assessment, re-evaluation, and course correction. This is no less true of corporations, and of our collective economic behavior, than it is of individuals in their personal lives. For corporations, of course, the process of making New Year’s resolutions will tend to focus less on dieting, physical fitness, and personal improvement. Rather, the focus for corporate self-assessment typically starts with a few basic questions. Does our strategy and mission continue to make sense in the current operating environment? Are we doing what we need to do, in order to meet our performance goals and achieve success? And what can we do better as an organization, to improve our performance on key metrics?

A related issue that frequently comes up when I talk with executives involves governance. One striking thing I’ve noticed is that even though lots of senior executives express concerns about governance, they often use the word “governance” in very different ways, such that two people superficially using the same language are often actually talking about very different things.

Sometimes governance comes up in the context of a very pragmatic, corporate plumbing-type question: How do we set ourselves up in order to be more effective in accomplishing whatever it is that we’re trying to do? The embedded assumption is that governance is tied to management structure and control, power sharing, and information feedback within the organization. Good governance, in this sense, is synonymous with effective management – where an organization is optimized to carry out its function, then its governance is superior.

A very different view of governance comes up when you talk to corporate lawyers and directors. These folks often think of “governance” as being defined by “all the stuff that boards do.” Put another way, this is the kind of governance that involves board oversight of senior management, exercised on behalf of shareholders. For directors, this perspective on governance invites a bunch of performance assessment questions pertaining to management. And for shareholders, it invites a bunch of performance assessment questions pertaining to the board itself. The lawyers, meanwhile, often focus on the mechanics of how boards carry out their responsibility, and what the law requires them to do. Frequently overlooked by all is the fact that a board is ultimately just a group of people, who may be more or less interpersonally and technically competent, in working together to carry out a common purpose. Again, governance can be more or less capable and effective, on any of these dimensions.

Still another perspective on governance emphasizes the strategic and operational element. When a large group of people come together to execute a common purpose, who contributes to deciding what that purpose is going to be, and what the best way is to achieve it? How often are those basic decisions reviewed and revisited? How does senior management reach out to the rest of the organization, in order to mobilize everyone around a common vision? These are questions that go to the heart of what the organization actually does, and whether its form and function make sense over time.
And then, of course, there is a cynical perspective on governance, which I sometimes hear expressed by top executives. This is the view that “governance” reduces to a set of administrative hurdles that are set up to impede efficient management. A variation of this view is expressed by the CEO who says that the appropriate role of the board is “to hire the CEO, and then to stay out of my way.” Without commenting on the merits of this perspective, it both captures the way that some executives feel about governance, and also the reality that formal corporate controls and oversight are frequently set up to serve ends other than maximizing efficiency or corporate productivity.

All of which takes us back to the new year, and to New Year’s resolutions. Governance within a corporation most fundamentally is about the asking of critical questions, and periodically looking into a mirror, in order to make sure that what you’re doing still makes sense, and that where you’re going is where you really want to go. The act of asking and seeking answers helps to refine the organization and its course, and drives outward into operations, downward into organizational structure, as well as forward into mission and strategy. To engage in organizational self-assessment is to engage in an act of good governance, regardless of the fact that different people think about this exercise in widely varied ways. For corporations as well as people, the fact that the new year prompts us to look in the mirror is surely a good thing.

Michael Greenberg is a member of the Society’s Reputation Leadership Council and holds the Governance Portfolio. The views expressed here are solely those of the author.

Questcor: Pile on!

C. HUYGENS - Tuesday, October 02, 2012
From time to time, we quote a line we found in the Financial Times some years ago describing the sequence of events following an adverse event that heralds the onset of a reputational value crisis. When you are Questcor Pharmaceuticals and have been accused of unethical marketing practices, "the pile on of litigators, regulators and mommy bloggers" over a ten day window looks like this:

  • Law Firm of Wohl & Fruchter LLP Announces Investigation of Questcor Pharmaceuticals Inc 
  • Harwood Feffer LLP Announces Investigation of Questcor Pharmaceuticals Inc
  • Bronstein, Gewirtz & Grossman, LLC Announces Investigation Of Questcor Pharmaceuticals Inc
  • Holzer Holzer & Fistel, LLC Announces Investigation Into Questcor Pharmaceuticals, Inc.
  • Robbins Umeda LLP Announces Investigation Of Questcor Pharmaceuticals Inc
  • Goldfarb LLP Investigation Against Questcor Pharmaceuticals Inc
  • Robbins Geller Rudman & Dowd LLP Files Class Action Suit Against Questcor Pharmaceuticals Inc
  • Glancy Binkow & Goldberg LLP Announces Investigation Of Questcor Pharmaceuticals Inc
  • Federman & Sherwood Announces Securities Class Action Lawsuit Has Been Filed Against Questcor Pharmaceuticals, Inc.
  • Ryan & Maniskas, LLP Announces Class Action Lawsuit Against Questcor Pharmaceuticals Inc
  • Faruqi & Faruqi, LLP Encourages Investors Who Suffered Substantial Losses in Excess of $100,000 Investing In Questcor Pharmaceuticals, Inc. to Contact the Firm
And yet the reputational value metrics from Steel City Re show a drop of less than a 0.5 standard deviation of the two year historic mean. Are equity investors over-reacting?

National Football League: Crisis resolved

C. HUYGENS - Thursday, September 27, 2012
When a labor dispute escalates into a reputational crisis, the calculus changes. Instead of owners making money with substitute labor while labor starves through attrition, owners face the risk of reputational value loss. For the NFL and its owners, measurable losses would include fans buying fewer tickets, and branded products; fans watching less broadcast programming; lost pricing premiums on tickets, branded products, and broadcast slot advertising; greater employee costs (turnover, litigation); greater supplier/vendor costs; greater credit costs; and possible loss of anti-trust immunity. The incentives to settle the matter quickly were transparent to all, and so they did. Did we mention that reputation has significant value?

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