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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Procter & Gamble: So what's new

C. HUYGENS - Monday, June 15, 2015
When A.G. Laffley took over Procter & Gamble in June 2000, he engineered a turnaround by focusing his managers on selling the company's major brands such as Tide, Pampers, and Crest. And he strategically moved the firm's focus away from trying ot develop the next big thing, because in the 15 prior years, P&G had develped exactly one successful new brand--the Swiffer dust mop.

In 2003, Bloomberg described the R&D transition this way:

"No bastion has been more challenged than P&G's research and development operations. Lafley has confronted head-on the stubbornly held notion that everything must be invented within P&G, asserting that half of its new products should come from the outside. (P&G now gets about 20% of its ideas externally -- up from about 10% when he took over.) "He's absolutely breaking many well-set molds at P&G," says eBay (EBAY) Inc.'s CEO, Margaret C. "Meg" Whitman, whom Lafley appointed to the board.

Lafley's quest to remake P&G could still come to grief. As any scientist will attest, buying innovation is tricky. Picking the winners from other labs is notoriously difficult and often expensive. And P&G will remain uncomfortably reliant on Wal-Mart (WMT) Stores Inc., which accounts for nearly a fifth of its sales. Lafley is looking to pharmaceuticals and beauty care for growth, where the margins are high but where P&G has considerably less experience than rivals.

The biggest risk, though, is that Lafley will lose the P&Gers themselves. Theirs is a culture famously resistant to new ideas. To call the company insular may not do it justice. Employees aren't kidding when they say they're a family. They often start out there and grow up together at P&G, which only promotes from within. Cincinnati itself is a small town: Employees live near one another, they go to the same health clubs and restaurants. They are today's company men and women -- and proud of it."


When a firm's reputation as a marketing powerhouse is undercut by the firm's departure from the big M of marketing (Product, Price, Promotion and Placemant) to the little m of marketing (Promotion and Placement), what becomes of that reputation? And what value is left in a firm that can promote products in an age where innovation and experiences, as well as innovative experiences enabled by innovative products, top the value-generation charts?

Lafley's been back at the helm for a little over two years (Click on prior blog note). Notwithstanding his personal charm, his prior success, and the fact that sequels are usually the smarter bet, the metrics suggest his slash and burn approach is unlikely to generate sustainable value this time around.

Procter & Gamble: Everyone but the investors

C. HUYGENS - Friday, July 26, 2013
Several weeks ago, Huygens smugly reported that the expectations of Procter & Gamble's equity investors were ahead of the expectations of the other stakeholders, and that a price drop was inevitable. Things are never that simple. Since then, the S&P500 rose, and like a rising tide, raised all ships, including Procter & Gamble. However, the company's equity performance relative to its peers sank.

On the other hand, and more surprisingly, the expectations of other stakeholders is now much higher. As shown in the CRR meaasure, an indicator of reputational premium value, is now at the 93rd percentile up from the 86th percentile; and the current RVM volatility measure, an indicator of consensus trend, is lower from the 75th to the 33rd percentile.

Everyone agrees. It's a great company with a great reputation, and it's stock is not expected to outperform anyone in the near future. In this setting, as documented in Reputation, Stock Price, and You: Why the market rewards some companies and punishes others, a small positive surprise can create significant sustained economic value.



Procter & Gamble: Hope springs eternal

C. HUYGENS - Tuesday, June 25, 2013
A little over one month ago, AG Lafley returned amidst much fanfare to the helm of Procter & Gamble as Chairman, CEO, and President. Equity investors reacted favorably. Other stakeholders, less so. With four weeks and an awful equity week behind us, it's a good time to revisit the Steel City Re Reputational Value Metrics for the company.

As of this moment, 10h30 EDT Tuesday, PG is ahead of the S&P500 by around 1%. The 4% boost equity investors gave the company in the week following Lafley's formal arrival melted away, but the company on both a reputational and economic basis has inched up relative to its peers.

The vital signs (top chart, left) show increased historic and current reputational value volatility relative to peers moving from the 33rd and 73rd percentiles to the 35th and 75th percentiles respectively in a peer group comprising 44 household and personal care products companies. The CRR, a measure of relative reputational ranking (Reputation Premium in the language of Consensiv, the reputation consultancy and publisher of the Consensiv50), is up from the 83rd to the 86th percentile. Return on equity is up much more from the 29th to the 42nd percentile. Last, overall reputational value volatility, Current RVM volatility in the chart top right, (Consensus Trend in the language of Consensiv) is drifting downward to below 4%. The latter metric indicates overall, stakeholders aren't expecting any surprises

In summary, the equity measures are notably ahead of the reputational measures. Experience shows that in a stable market setting, equity is more likely to move down, than reputational value metrics are likely to move up. In a volatile downmarket, a Company like P&G is likely to move up reputationall relative to its peers; that won't keep the equity from sinking.

Huygens suggested P&G puts were in order June 2. With a net drop since then of only 0.34%, the data suggest there is more room to fall.

Procter & Gamble: Its all about reputation

C. HUYGENS - Sunday, June 02, 2013
Huygens was musing why Procter & Gamble invited AG Lafley to assume the helm of a ship he left four years ago. At that time, he turned over command to his hand-picked successor. “I am retiring with confidence in Bob McDonald and his team," said Lafley. "This is the right time to complete our management transition.” Yes, the ship has foundered since then, so there was cause for concern. More than concern, frankly.

But in a Columbo-like moment of angst, Huygens couldn't make the pieces add up. Lafley arguably left P&G in tough shape having gutted much of the organic R&D to the benefit of buying customers and markets. Lafley groomed his successor who leaves as a failure. P&G's management bench is deep and strong. And given the recent uproar over JPMorgan Chase's Dimon holding titles of both CEO and Chairman, one would have thought the board at P&G would have been reticent to offer Lafley not two, and certainly not three, titles.

And what of those who offered the invitation? P&G's board comprises some of the best of the best:  The CEOs include Boeing Co's James McNerney, Hewlett-Packard Co's Meg Whitman, American Express Co CEO Kenneth Chenault, and Macy's Inc CEO Terry Lundgren; Archer Daniels Midland Co CEO Patricia Woertz, Frontier Communications Corp CEO Maggie Wilderotter and former Mexico President Ernesto Zedillo. Now while it is true that some of the board members are struggling with major challenges on their home turf, they are consummate professionals and are not the type to "let matters slip." In fact, they are all A-type personalities unlikely to yield for convenience. Less, so, even, if under stress.

Huygens thinks he gets it. There was no obvious solution to the P&G problem. Some board members thought the problem was McDonald. Others that McDonald was dealt a bad hand. No critical mass could be built around a going-forward strategy. When one thinks about a board's duty -- picking the CEO, approving a strategy, and protecting the firm's assets -- it's tough in the midst of a crisis to pick a new a leader to execute a strategy that doesn't exist.

And this brings us to the crux of the matter. No corporate director ever wants to be accused of failing in his or her duties of care or loyalty by picking a CEO who can not win, a strategy that can not succeed, or in squandering valuable corporate assets -- in this case, Procter & Gambles own once-stellar reputation. For directors, it is a matter of personal reputation. There's no hiding. Think about the three directors at JPMorgan Chase who have been saddled with the London Whale event. Ellen Futter, David Cote and James Crown had only slim majorities of shareholder support at last month's Annual General Meeting. And we all know about it, because transparency is the new watchword. And as far as Huygens knows, P&G does not have Reputational Value Insurance to protect its Directors.

As the joke once went, "no one ever got fired for buying IBM," Huygens hypothesizes there was only one safe choice that a plurality of Directors could agree to back: AG Lafley. The road to Abilene went right past Lafley's front door.

Huygens values his opinion. He values the opinions, and wisdom of the crowds, even more. Turning to the Steel City Re measures of reputational value which capture the wisdom of crowds, the stakeholders are not letting their guard down. Since last week, just before the announcement of changes in command, the company's reputational ranking (Reputational Premium by Consensiv's name), CRR, sank another 2 percentile points relative to the 43 member-peer group to the 81st percentile. Its Current RVM volatility, a measure of overall stakeholder understanding (Consensus Trend, by Consensiv's name) remained elevated at the 73rd percentile, and in excess of 4.5%. In fact, Procter & Gamble, which was ranked #18 in the Consensiv 50 league table of the most valuable reputations among the largest firms in the world in May 2013, fell off the list completely in the June 2013 report.

More complicated measures of reputational value and trend paint an equally disconcerting image. Reputational value velocity is increasingly negative, the reputational value vector is approaching 0 from a negative incline, and both trend measures are negative.

P&G puts, anyone?



Procter & Gamble: The king is dead. Long live the king!

C. HUYGENS - Monday, May 27, 2013
In December 2009, outgoing P&G CEO AG Lafley said, “I am retiring with confidence in Bob McDonald and his team. This is the right time to complete our management transition.” Last friday, wags were reading into communiques the reverse. "This is the right time to restore our former management transition."

There are several ironies about all this. First, after weeks of governance experts piling on to the idea that Jamie Dimon could not be trusted with both the CEO and Chairmanship roles at JPMorgan Chase, nary a negative word could be found suggesting that there was anything wrong with AG Lafley taking on the roles at P&G of Chairman, CEO and President. Second, there was near-universal accolades for Lafley's reputation as a giant in innovation -- a point Huygens disputed previously when he suggested that P&G's current problems are a direct result of Lafley's strategy.

However, as an American Pragmatist, Huygens appreciates that what matters is what the markets expect. It was apparent to all that under McDonald, P&G’s profit margins, market share and stock price lagged relative to peers such as Unilever PLC (UL), Colgate-Palmolive Co. (CL) and Clorox Inc. (CLX). In light of abysmal performance, those expectations, reflected in the Steel City Re reputational value metrics (or the Reputation Premium, Consensus Trend, and Consensus Benchmark as those metrics are explained by Consensiv) are informative.

This snapshot, taken at the close of markets last Thursday only hours before the announced change of leadership, shows evidence of stakeholder unrest peaking nearly three weeks ago when the Current RVM Volatility (or Consensus Trend) peaked at nearly 5% and was at the 73rd percentile of the peer group after nearly a year of hovering in a much lower state of anxiety at the 33rd percentile. Meanwhile, return on equity dropped to the 29th percentile representing a 10-point drop from September of last year and consistent with Huygens' projections.  Over the same period, the Current CRR Rank (Reputational Premium) dropped from the 95th percentile to the 83rd percentile.

The data suggest that McDonald's fate was sealed about one month ago. Owing to the time of sampling, the data do not show what the majority of stakeholders expect from Lafley going forward, although it is fair to say that the 4% equity boost Friday signals that equity investors, at any rate, are optimistic.


RepuStars 2012 September 17

C. HUYGENS - Monday, September 17, 2012

Weekly Reputation Index Metrics


At the close of trading September 14, 2012, REPUVART and REPUVAR stood at 3129.59 and 2695.28 respectively. Over the past four weeks, the former has changed by 8.54%, while the latter has changed by 8.40%. The benchmark S&P500 Composite Index stood at 1276.71 (31 Dec 2001=1000) and has changed over the past four weeks by 3.36%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 21.64% and 19.98% respectively; the S&P500 Composite Index has changed by 20.54%. Since January 2009, the REPUVART and REPUVAR have changed by 150.10% and 134.69% respectively; the S&P 500 Composite Index has changed by 57.31%.

Other interval changes in the magnitude of the indices are shown below.

Analysis

Global markets are rebounding. We suspect inflation is just over the horizon, but the equity returns are bankable today. This week, the spread for REPUVAR calculated by Dow Jones Indexes is up to 9.47% for the price index and 10.75% for the total returns index. Of note is the 14.8% spread between RepuStars-selected S&P500 (RepuSPX) and the S&P500 Composite, a pocket index.

Turning to companies who appear to have been undervalued at the start of this calendar year, the greatest gains in the 2012 RepuStars portfolio are being reported by American Eagle Outfitters (AEO) remaining in the #1 slot with a year-to-date return of 70.96%. Vertex Pharmaceuticals is back to the #2 position with a year-to-date climb of 59.96%. Holding on to third place is eBay Inc. (EBAY) at 56.50% for the year These are three of the 38 firms identified by the RepuStars Variety algorithm at the start of the year as value opportunities.

As for those whose reputational value has not panned out, the greatest disappointments this year remain the energy and mining concerns. To date, the bottom three are are Walter Energy, Inc. (WLT) at -42.2%, Federal-Mogul Corporation (FDML) at -34.05%, and AuRico Gold Inc (AUQ) at -21.04%

Side Note: A description of the 2012 portfolio constituents can be obtained here: click here.

Background

The RepuStars® Variety Corporate Reputation Index calculated by Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re corporate reputation ranking metrics. The metrics comprise non-financial indicators of reputational value. The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here for real time quotes.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to their metrics as measured by Steel City Re’s proprietary Corporate Reputation Rank™, which tracks 7000 companies weekly. In using the RepuStars Index as an investment strategy, investors can take advantage of this price disparity. The principles behind Steel City Re's reputation metrics are discussed in the book, Mission:Intangible (see below).

The RepuStars indices are reconstituted annually in the first week of January and posted by Dow Jones Indexes in the third week. The Indices were last reconstituted 20 Jan 2012.  Click here for additional information on the index.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store, specialty finance sector retailers, or other leading online book retailers
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow.

Notices

STEEL CITY RE and REPUSTARS are registered trademarks of C. Huygens & Co. LLC and are used under license. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes. The RepuStars Variety Corporate Reputation Indexes are calculated by Dow Jones Indexes, the marketing name and the licensed trademark of CME Index Services, LLC. (CME Indexes). Dow Jones Indexes is a service mark of Dow Jones Trademark Holdings LLC. (Dow Jones). Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones or their respective affiliates, and CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s).

Procter and Gamble: Not invented here

C. HUYGENS - Friday, September 14, 2012
There was a time not long ago when Procter & Gamble's reputation for marketing prowess was a reflection of its competencies in both communications and product innovation--old school marketing comprising the 4 p's of product, placement, promotion, and pricing. That reputation translated into pricing power and outsized margins that wound their way down to net income and stock price. No more. Bloomberg reports that Procter and Gamble is now trading at a 22% discount to the 31-company Bloombert Industies Global Household Products Index.

The loss of innovation Mojo traces back to what was then celebrated as a brilliant stroke of open innovation. P&G let go of control of innovation, killed-off the not-invented-here bias, and advanced the mindset of "proudly invented elsewhere." By 2006, more than 35 percent of P&G's new products in market had elements that originated from outside P&G. The Harvard Business Review promoted this turn of events as an evolution to be emulated.

Increasingly, its looking like another case of it-seemed-like-a-good-idea-at-the-time. "There’s been a dearth of pioneering brands emerging from the world’s largest consumer-products company. Spending on research and development in fiscal 2012 ended June 30 was $2.03 billion, or 2.4 percent of sales, the same as the prior year and down from 3 percent of sales in 2006. P&G’s most recent homegrown blockbusters -- Swiffer cleaning devices, Crest Whitestrips, and Febreze odor fresheners -- all went on sale at least a decade ago, reports Bloomberg."

The Steel City Re reputation metrics indicate that P&G is a well regarded powerhouse ranking in the 95th percentile among the 43 members of the Household/Personal Care products sector. But its reputation is shaky. Its most recent reputational volatility is ranked in the 58th percentile of its peer group; for the past year, it was only ranked in the 14th percentile. There is no clear directionality, but our experience suggests that when a stable giant begins to shake, the direction is more likely than not downward.

PG: Red in Cincinnatti

C. HUYGENS - Saturday, July 14, 2012
The rest of the nation is sweltering under a general heat wave but it pales in comparison to the burning platform supporting Bob McDonald in Cincinatti. Activist investor Bill Ackman is wielding the torch.

Writes Slate Magazine (R Cyran, 13 July), “Procter & Gamble is a hulking target for an uppity investor like Bill Ackman… Since Bob McDonald replaced Lafley as CEO in 2009, the shares are up 16 percent. The S&P 500 index, however, has gained more than 40 percent over the same span, and rival Colgate’s stock is up almost 50 percent.” We could go on documenting the case being built agains McDonald. Let’s cut to the chase and turn to the Steel City Re reputation metrics.



Over the past few years, Procter & Gamble morphed itself from an marketing/R&D/product development giant into a marketing/licensing/sales machine. Only problem is, it is paying a premium for innovation and is being squeezed by the big box retailers on the other end of the value chain. What do the reputation metrics show? There are 347 companies in the Consumer Non-Durables sector of which 44 compete in the Household/Personal care Industry where Procter & Gamble is one of 20 firms with market caps of $175 billion +/- 35%. Among this peer group, the company’s reputation rank has slipped to the 91st percentile. All of its directional derivative metrics – both its velocity and vector -- are negative. The vital signs chart shows that its reputation value is very volatile. Historically it ranked in the 7th percentile; now it is in the 68th percentile relative to its peers. Its return on equity is in the 60th percentile having lost 3% over the trailing twelve months (median -4%, S&P500 -0.6%). Forward looking metrics show an above average level of stability, which is not good when the trend is negative. Procter & Gamble is a company whose reputation once stood for innovation. The company monetized that innovation with fabulous marketing. It still has great brands, for sure, but what does that mean today if the value chain leaves little for the brand owner at the end?

Accenture: Tigers, elephants, and frogs; oh my!

Nir Kossovsky - Wednesday, February 10, 2010
“…it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.”

True or false: Finding himself unable to keep his fly in the full, upright, and locked position, Tiger Woods’ ethical downfall precipitated reputation-associated losses on the order of $12 billion by his sponsors?

FALSE. The Steel City Re Corporate Reputation Index shows no evidence of headline risk effects.

On 28 December 2009, Christopher R. Knittel and Victor Stango posted on the web their study, Shareholder Value Destruction following the Tiger Woods Scandal. These economists, associated with both the University of California, Davis, and NBER, reviewed the market behavior of six public sponsors of Mr. Woods—Accenture (NYSE:ACN), AT&T (NYSE:T), Nike (NYSE:NKE), Gillette (NYSE:PG), Electronic Arts (NASDAQ:ERTS) and Gatorade (NYSE:PEP). Using an ‘event study’ method, they concluded that shareholders of companies that Mr. Woods endorsed lost $5-12 billion in wealth between 27 November and 11 December. The authors imply headline risk as the proximate cause.

We disagree. While there were some market cap losses and fewer gains, we see no evidence of consistent decreased reputation metrics among the sponsors. Using tools described briefly at Steel City Re, and in more detail in the forthcoming book, Mission: Intangible. Risk and reputation management to create enterprise value, we see no change in reputation rank trends over the relevant two week window. We share exemplary Steel City Re Corporate Reputation Index metrics for four (4) of the companies alleged to have suffered the consequences of headline risk.

First, AT&T rewarded its shareholders over this period with a positive bump, although it was not as significant of a bump as the median of its 57-member peer group. Its Reputation Index also showed a small positive bump ending the period at the 92nd percentile. The bottom line: better reputation metrics over the critical period.


Second, Accenture and Nike showed no movement in their reputation metrics. In the charts showing the Reputation Index and its exponentially weighted moving average volatility for the past six months, Accenture is flat at the 94th percentile and Nike is flat at the 100th percentile. The bottom line: no change in reputation metrics over the critical period.



Last, in the chart showing both the Reputation Index for Electronic Arts and the both the median and variance of the index measurements for the Software Group sector, three things are apparent. First, Electronic Arts’ Reputation Index ranking continued its downward trend during the critical period. Second, the median reputation ranking for the entire sector slid over the course of the entire year. Third and last, there is much volatility in the variance of the index rankings in this sector. The bottom line: weaker reputation metrics over the critical period reflecting continuation of a year-long trend.


The data suggest that in this instance, the downfall of an iconic spokesperson generated significant press, much speculation, but ultimately nothing untoward with respect to his sponsors. Bottom line: No headline risk seen. Goodbye Tiger. Hello elephant and frog.

P&G looks forward

Nir Kossovsky - Tuesday, October 13, 2009
Procter & Gamble (NYSE:PG) serves four billion of the world's seven billion consumers with products comprising one of the strongest portfolios of trusted, quality, leadership brands. The have consistently scored in the top tenth percentile of the Steel City Re Corporate Reputation Index. The Financial Times’ Newssift sentiment metric reports that of the 218 news stories mentioning P&G’s reputation this past year, favorable stories outweigh unfavorable by a ratio of 8:1.

Brands are material to the Company. According to the 2009 annual report,

P&G is the brand-building leader of our industry. We’ve built the strongest portfolio of brands in the industry with 23 billion-dollar brands and 20 half-billion-dollar brands. These 43 brands account for 85% of sales and more than 90% of profit. Twelve of the billion-dollar brands are the #1 global market share leaders of their categories. The majority of the balance are #2. As a group, P&G’s billion-dollar brands have grown sales at an average rate of 11% per year for the entire decade.

In view of the above, and with a price to book ratio of 2.7, the lion’s share of the Company’s value comprises superiorly managed intangible assets. We felt therefore it would be instructive to see how this Company discloses its financial risks. In this basic analysis, we looked at the boilerplate blue sky Forward Looking Statement that trails any financial announcement in compliance with the Private Securities Litigation Reform Act of 1995. In our analysis, we looked at the 15 enumerated items that represent “certain factors that could cause actual results to differ materially from those anticipated” by the financial announcement, and we analyzed each to determine if the risk involved a physical asset or an intangible asset (business process).

This is what we found. Of the 15 enumerated risks, 14 centered on intangible asset management. The lone physical asset risk was the Company’s IT system. Among the 14 business process risks, we found three references each to the business processes of sales, marketing and supply chain management. We found two references each to innovation, intellectual property, finance processes, and business processes in general. Last, we found one reference each to brand management, human resource management, and geopolitical risk management. Reputation risk is specifically noted. Interestingly, and consistent with our observation that only risk managers look at the world from a risk perspective, is that the descriptive language of the risks comprised neutral-to-positive managerial verbs rather than disastrous end-state nouns.

From the above, it appears that even in risk management, a superior intangible asset manager such as P&G focuses on executing the business processes that are central to its enterprise value. And given their a 170 year history, perhaps this is their intangible secret to longevity?

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