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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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Defending Reputation from a Weak Position Costs PG&E 19% of Market Cap

C. HUYGENS - Thursday, November 02, 2017
Disadvantaged in the court of public opinion from prior reputation impairment arising from the 2010 San Bruno gas explosion, PG&E is not receiving any benefit of the doubt. Its trailing 1 month returns are 19% below the S&P500.

“The cause of the California wine country fires is still under investigation, but a California power utility is emerging as a possible culprit…On Thursday (Oct. 12), California’s Public Utilities Commission ordered PG&E to preserve all evidence related to the fires, according to the Daily Beast.”

Read more in Quartz.

Read more reputation impairment.

Hyundai Hat Trick

C. HUYGENS - Tuesday, May 30, 2017
Quality, safety and innovation at heart of Hyundai #reputation #risk…own goal x3.

Hyundai and Kia last month recalled 1.5m vehicles in the US, Canada and South Korea over engine defects, at a cost of Won360bn ($322.4m); this month the carmakers were ordered by South Korean authorities to recall a further 240,000 vehicles. US safety regulators are now looking into whether Hyundai’s recalls over engine defects were timely and whether enough vehicles were covered…

…“They have been lagging in innovation . . . Hyundai needs to aggressively ramp up its R&D efforts as well as exploring new mobility models to prepare for a very different automotive future,” said Dominique Bonte, analyst at ABI Research. “If not, it will be left behind by other [global players], which are all aggressively moving forward.”

Read more in the Financial Times.

McDonald's - Curb Your Enthusiasm

C. HUYGENS - Sunday, May 24, 2015
McDonald's is objectively in difficult straights. Economic news for Q1 reported in mid April was dismal with global sales down by 2.3%, revenues down 11%, and income down 28%. Strategically, the company mollified investors by returning $1.4 billion to shareholders through dividends and share repurchases.

But there is reason for guarded optimism. The company is beginning to understand what drives its reputation, if its public reporting is a valid indicator. Mentions of reputation are up 300% in item 1A Risks.

For the first time in the company's K's and Q's, it acknowledged in 2015Q1 that quality impacts the firm's reputation. "Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe food products…In 2014, food quality issues were discovered at a supplier to McDonald’s and other food companies in China. As a consequence of this issue, results in China, Japan and certain other markets were negatively impacted due to lost sales and profitability, including expenses associated with rebuilding customer trust. Any future instances of food tampering, food contamination or food-borne illness could adversely affect our brand and reputation as well as our revenues and profits."

"With new U.S. leadership, the U.S. is focused on a strategic roadmap that includes a revamped marketing approach…" Might quality by part of the turnaround? Hard to say. There is no indication that it is part of the increased investment into marketing. "Selling, general and administrative expenses as a percent of revenues increased to 9.8% for the quarter 2015 compared with 9.3% for 2014, and as a percent of Systemwide sales increased to 3.0% for the quarter 2015 compared with 2.9% for 2014, as weaker foreign currencies are having a bigger impact on revenues and sales."

Exuberance should be tempered by the sobering fact that the term quality only makes one other appearance in the filing. Quality is mentioned in a string of attributes on which the company competes, "We compete on the basis of product choice, quality, affordability, service and location"-- issues that are relevant to marketing. Quality is not discussed in the context of operations or controls.

Turning to the reputation value metrics, which can be viewed as either controls on the process that affect reputation or a window into stakeholder assessment of governance, and there are again reasons for guarded optimism. McDonald's Reputation Value Metric is still in the 99th percentile among the 76 firms in the restaurant peer group with a very low Consensus Trend. On the other hand, the sobering news is that its reputation value metric has been declining for nearly a year.

The data suggest that the enterprise's reputation for a reliable, repeatable quality experience, currently at 80% of its potential, may be restored. First, McDonald's should recognize that the aforementioned list are the core values that underpin the expectations of the stakeholders who consumer McDonald's products. That would tackle the quality challenge.

The Company also faces significant pressures on the labor front. The Company should appreciate that employees who are engaged with a Company that is well respected will find intangible benefits of employment  will offset some fraction of wage costs.

These benefits become transparent on the P&L, and in enterprise value, but they come only to those whose governance organization understands the rules of doing business in the 21st century.

NFL: Reputation sacked again

C. HUYGENS - Tuesday, September 23, 2014
In the entertainment business Disney knows so well, managing reputation is a business imperative. The NFL has been sacked three times in as many years for reputation losses. Blame the Internet, if you will.

Warnings dating back to 2009 predicted that “hyper-transparency” enabled by the Internet would change the boundaries used to assess a company’s scope of control, and its degree of accountability and responsibility. Since then, stakeholder pass rushes have sacked the NFL thrice: for poor quality and greed, poor safety and greed, and now poor ethics and...greed?

Read more.

McDonald's and Yum: Deserving a break today

C. HUYGENS - Thursday, August 14, 2014
On Sunday, 20 July, Dragon TV of Shanghai, China, precipitated a reputation crisis at two global companies. The TV station reported that food supplier Husi, owned by OSI Group of Aurora, Ill., repackaged stale beef and chicken, updated the expiration dates, and sold the adulterated meat to McDonald's, KFC and Pizza Hut restaurants.

A reputation crisis begins when a company fails properly to set expectations or fails to meet them, and then stakeholders turn on a company and lower their expectations. The going-forward economic consequences result from how customers thereafter respond to prices, how effectively employees work, creditors set borrowing rates, suppliers set terms, and how severely regulators impose penalties.

For Yum Brands and McDonald’s, the changes in stakeholder expectations are  reflected in customers’ reduced demand--or at least some analysts expectations of  future customer behavior. Royal Bank of Canada analysts projected that Yum’s China sales at KFC and Pizza Hut could drop off 10-15% for at least 6-8 weeks after the July event. An executive at McDonald’s Japan reported a 15-20% drop-off in daily sales. Forward-looking equity investors are seeing more sustained losses. Between July 15 and August 14, Yum! Brands equity lost 15% of its value; McDonald’s shed around 7%, and the benchmark S&P500 composite equity index lost about 1.2%.

[Added Saturday 16 Aug] A more encompassing view of expected stakeholder behavior shown below, according to analysis published by Consensiv, the reputation controls company, based on reputation value metrics we use at Steel City Re, affirms that all-things-reputationally at McDonald's are not as bleak as equity investors might be signaling. The company's reputation premium is near the top (and heading upward), and its value risk is in the lowest quartile of its peer group.

This Week at Lake Reputation-be-gone

C. HUYGENS - Friday, July 25, 2014
"It was hardly a quiet week at Lake Reputation-be-gone," Garrison Keeler might have said. "Walgreen, McDonald's & Yum!, and current poster-child GM had their respective moments in the sun...again."

Walgreen's issue is an ethical one. The company whose motto proclaims it to be "the pharmacy that America trusts" would just as soon not pay America $4 billion in taxes over the next five years. The company is now deciding whether to take advantage of the US tax law loophole that would reward it substantially with a lower tax base were it to acquire controlling interest in a Swiss-based company and nominally relocate its headquarters overseas.

McDonald's and Yum! were apologizing for supply chain issues that again raised questions of food quality and safety in the Chinese operations. Earlier this week, Chinese regulators closed the Chinese division of an Illinois-based good supplier (OSI) after a TV report showed workers picking up meat from a factory floor and mixing expired lots with fresh lots of meat. Upton Sinclair would have been proud.

GM announced six additional automobile recalls this week bringing its total for the year to 60 announcements covering 29 million cars worldwide. Quality and safety issues are at the forefront, but they are not all associated with supply chain failures. Some, in fact, are due to assembly and integration issues in GM's wholly-owned operations.

As is the case after every major operational issue, the press is making much ado about the damaged reputations of these firms. The events are certainly news-worthy and embarrassing. Whether they cause stakeholder to reassess their respective relationships with the companies, however, is the central issue in a reputation crisis.

Walgreen's issue is unlikely to have any effect on most stakeholders. Equity investors will be thrilled, and creditors equally so. Legislators are unhappy, but it is not clear their opinion matters much since they have proven their inability to do much of anything.

This is Yum!'s second bout of China-related supply chain safety and quality. The toxic chickens of 2012/2013 gave them quite a reputation scare, which is why they may have dumped OSI like a hot pan. McDonald's is new to this type of crisis and is sticking with OSI. Also, McDonald's maintains qualitatively different types of relationships than Yum! with its suppliers. By forgiving OSI, McDonald's is demonstrating the benefit of OSI's historically stellar reputation…to OSI.

GM is now in a league of its own. Credit the company with fabulous spin control by declaring that Wednesday's additional recalls signified how the company had enhanced its approach to safety.

Ethics: Report slams US tobacco child labour

C. HUYGENS - Wednesday, May 14, 2014
Companies producing tobacco products have come to terms with society; in exchange for contributing to the tax bases of the reigning authority and relative transparency into the health effects of their products, they are accepted as commercial members in good standing. Alas, beyond safety, there are five other key issues that matter. One of them is ethics - child labor to be exact.

According to the Financial Times, a Human Rights Watch report on the US and the world’s biggest tobacco companies discloses young children are working 12 hour shifts in dangerous conditions. "The report highlights an area of reputational risk for an industry that is already spending billions of dollars a year complying with a patchwork of national and international regulations."

For companies now investing $millions into compliance solutions, the Human Rights Watch compliance standard should be disconcerting. Mere documentation of compliance standards is not good enough. Fostering conformance with compliance standards is, well, the new standard. “The burden falls on [the companies] to say that this isn’t happening on their farms.”

The report is not pure opprobrium, and credit is given for good effort. According to the Financial Times, "Human Rights Watch cited Philip Morris International, which sells Marlboro, L & M and Parliament outside the US, with creating 'the most detailed and protective set of policies and procedures' on child labour."

The credit given by HRW appears to mirror credit given by Philip Morris' other stakeholders. As shown in the reputation metrics below, the firm's Reputation Premium relative to its peers is top of the heap with the firm ranking #1 out of 13 companies in the Tobacco peer group. Not that PM should be complacent. The relatively high Consensus Trend indicates not all stakeholders are sure they know the company or agree on its reputation value. Some, perhaps not being used to compliments from HRW, may fear the news is too good to be true.

Read more

GM: Barra is owning it

C. HUYGENS - Tuesday, March 25, 2014
GM's got issues. Ten years of sweeping safety problems under the rug has come back to haunt it, just as it haunted Ford for its Pinto. Haunt is not the best word. The German's call it a "shitstorm," or what the UK's Financial Times called "the pile on of litigators, regulators and mommy bloggers." Huygens prefers the term "reputation crisis."

Now here's the funny thing. Typically, in a reputation crisis, the marketing types describe a Kabuki-like ritual of how the CEO needs to apologize, demonstrate contrition, and all will be forgotten. The New York Times quotes a prominent PR executive saying "She's owning it," which sounds good until the the rest of quote kicks in, "'She will not be able to distance herself from it. It's now hers,' said the P.R. man, Daniel G. Hill, in what sounded a bit like a threat." Barra has pundits scratching their heads. "It was puzzling, then, if not downright ill advised, for GM's CEO, Mary Barra to last week personally lay claim to the biggest crisis at her company since the financial crisis."

Barra's actions, however, are textbook reputation crisis management if you come from the school that a PR crisis is no more than a window into an operational crisis. To effectively manage stakeholder expectations going forward (the entire value proposition in reputation risk management), you have to promise to to the right thing...and have stakeholders believe you.

It takes only three steps: (1) Admit there is a problem; (2) Apologize for allowing the problem to arise, affirming that the problem violates everything you and the firm stand for; and (3) promise it will never happen again. Here's Barra last week from the New York Times: “'Our goal is to make sure that something like this never happens again,' she said." Extra points go to the firm that promises that something of this sort will never happen to any other firm in the industry.

If stakeholders find Barra credible, they may set high expectations going forward. The benefit is that GM may demonstrate reputational resilience. The risk, as Arthur C. Liebler, who was Chrysler’s top communications executive during Mr. Iacocca’s heyday told the New York Times, is "Ms. Barra and her team will be watched very closely now and will have to prove that they mean what they say. If they don’t deliver, there won’t be a second chance.”

The quantitative reputational value profile of GM, according to Consensiv and based on Steel City Re's reputational value metrics, is shown below. Not surprisingly, the Reputation Premium has been sinking, but interesting, not acutely. Its been on a bumpy ride down to 0.35 percentile for a while, suggesting stakeholders were increasingly discounting GM for some time. The Consensus Trend, CT, is much more interesting. It leaped from a very low level relative to the other 39 companies in the Motor Vehicles peer group to an absolute level of 5.2%. This indicates stakeholders have moved from a more or less uniform set of expectations of GM to a much more diverse mix.

It is a risky time for GM with its reputational heath approach the danger zone. Barra has stakeholders' attention. Early indications were promising, but the most recent additional drop these past two weeks in the Reputation Premium does not bode well. Stay tuned.

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).

GM: In German, the word is "shitstorm"

C. HUYGENS - Wednesday, March 12, 2014
In the UK's Financial Times, the escalating events following public disclosure of an adverse situation have been described as "the pile on of litigators, regulators and mommy bloggers." The Germans invented a new word, "shitstorm." Whatever you call it, GM's failure to learn from Ford's Pinto is providing another generation with an object lesson in reputation risk - failing to meet the expectations a company has set among stakeholders.

Federal prosecutors are examining whether General Motors is criminally liable for failing to properly disclose problems with some of its vehicles that were linked to 13 deaths and led to a recall last month…The federal probe by the U.S. attorney in Manhattan adds to a growing list of U.S. authorities examining the recall, which GM announced in February. The National Highway Traffic Safety Administration (NHTSA) previously opened an investigation into whether GM reacted swiftly enough in its recall….a U.S. Senate committee chairman is seeking a hearing on the issue. The U.S. House Energy and Commerce Committee also ordered GM and NHTSA to turn over information about GM's ignition switch problems.

GM declined to comment on yesterday as shares of GM closed down 5 percent to $35.18 on the New York Stock Exchange. "The immediate financial impact is insignificant; however, there could be some reputational risk which could impact share," RBC Capital markets analyst Joseph Spak said.

Here's another object lesson. For those who are still confusing brand with reputation (Brand v reputation, GM Impala edition), consider this from Steel City Re, a provider of reputation assurance solutions.

A 21st century reputation is testament to how stakeholders expect a company to behave. It includes responsible behaviors such as supply chain integrity; manufacturing or production quality; ethical standards; innovation and intellectual property management; environmental sensitivity; and security management. It specifically includes C-suite and Board-level behaviors including governance, controls and risk management policies. Reputation risk arises when a company fails to properly set expectations or fails to meet them. Stakeholder disappointment at such shortfalls can have significant personal consequences for the company’s Directors and Officers; and it can result in potentially unlimited costs of damaged stakeholder relationships going-forward.

Reputation Risk is a strategic risk.

Read more from Reuters.

GM: Lessons lost from Ford's Pinto

C. HUYGENS - Friday, March 07, 2014
Just the other day, Huygens was explaining how short-term investments in safety can avert long-term reputation damage. The reasoning is simple: if stakeholders understand and appreciate that you value safety by actually doing something about it, then they'll give you the benefit of the doubt if and as when an adverse event occurs. Being a beneficiary of doubt is especially valuable to corporate officers and board members who are the first to be blamed when things go bad. It's the time when grown men and women wish they could get their lives back.

The poster child for excellence in reputation management through operational risk mitigation was…Warren Buffett's Berkshire Hathaway, which had invested $600m in new, safer rolling stock to transport volatile petrochemical products. The current rolling stock catches fire too easily.

To underscore the value of Buffett's investment, the poster child for wrong thinking was presented in contrast. The logic behind the acceptable losses for Ford's Pinto and its exploding gas tank was enabled by bad math. Sure, the costs in lives lost, after insurance, was less than the costs of recall. Nobody thought to factor in the cost of lost reputation -- the costs when stakeholders don't want to buy any of your cars, employees don't want to work for you, suppliers are thrilled being associated with you, the capital markets look at you funny, and the regulators come down hard.

Alas, lesson lost. It appears malfunctioning ignition switches have flummoxed GM engineers for over a decade, even as they resulted in 31 fatalities in Chevy Cobalts. Only last week did the company expand its recall of impacted cars to almost 1.5 million units. The government has initiated a probe into how GM has handled its investigation. GM North America President Alan Batey said in a statement. ‘The chronology shows that the process employed to examine this phenomenon was not as robust as it should have been.’”

Read more.

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