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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Silicon Valley Reputation At Risk Over Trust

C. HUYGENS - Monday, May 08, 2017
Talk about emotionally-charged disappointment: “From terrorist content, sexism claims and trolls to mind-reading privacy invasion, unpaid tax and robots taking jobs, the charge sheet is growing rapidly. Technology executives risk attracting an opprobrium that is traditionally reserved for bankers.”

From terrorist content, sexism claims and trolls to mind-reading privacy invasion, unpaid tax and robots taking jobs, the charge sheet is growing rapidly. Technology executives risk attracting an opprobrium that is traditionally reserved for bankers. Stories have emerged of tech billionaires building bunkers in New Zealand to hedge against a revolt by the 99 per cent.

Until recently, the technology sector has been more trusted than any other. In the latest Edelman annual survey, 76 per cent of people trust technology companies, compared with about 60 per cent for most industries and 54 per cent for finance.

That trust underpins Silicon Valley’s economic miracle almost as much as the technology. The halo of pioneering innovation for the advancement of humankind — embodied by Apple’s “think different” slogan and Google’s “don’t be evil” motto (now abandoned) — makes consumers feel good.


Read more in the Financial Times.

Yahoo: Reputation by the numbers

C. HUYGENS - Thursday, March 06, 2014
Ken Goldman, CFO of Yahoo, was answering a question about the company's nagging human resource problem. ”When we came to the company, and we talked about acquisitions…frankly, companies did not want to be acquired by Yahoo…and for us to even acquire them we would have to pay a ‘Yahoo premium’ because they didn’t want to come here. That’s not the case any more.”

According to Yahoo's chief numbers guy, Marissa Mayer fixed Yahoo's #1 problem. Unfortunately, the actual numbers suggest otherwise. For while the annual report indicates Yahoo received in 2013 more than double the number of job applications it received in 2012, the applicants appear to be following the money. According to the career site Glassdoor, Yahoo was the third-highest-paying company in Silicon Valley for engineers last year, behind Juniper Networks and LinkedIn.

There's a reputation value link to this, and just like a recent note on Warren Buffett, it tracks back to costs. The thing about being a company with a great reputation is that this intangible asset usually provides savings on human resources costs. If a company has to pay an objectively measured premium to recruit employees, then the company's reputation (among labor) is not great.

CFO's should know better than to speak against their numbers. They're supposed to trust numbers - the same numbers trusted by the capital markets. Numbers are spin-free objective measures. It's the point Theodore Porter makes in his book, Trust in Numbers. Numbers are most trusted in environments where elites are weak, where private negotiation is suspect, and where trust is in short supply.

Let's look at some more Yahoo numbers. Yahoo is trading at 31 times earnings, just behind Google's 34x and way ahead of Microsofts' 14x. Those numbers are trustworthy, and they say investors have very high expectations -- arguably, frothy.

The expectations of other stakeholders are reflected in reputation metrics. Like other trusted numbers, they're based on objective quantitative criteria. The good news for Yahoo's stakeholders is that the 85th percentile ranking for the Reputation Premium among 137 peers indicates plenty of upside. It also may indicate that the reputation is not as strong as it could be for a company this prominent, and may explain the salary premium the company has to pay. (Paying top dollar and not making the 50 best places to work says all that another way).  The 4.0% value for the Consensus Trend, CT, suggests that stakeholders are fairly confident that Yahoo's reputation is properly valued.

The upside, therefore, is less likely to be realized, and that will disappoint the equity investors.



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).

Google: More reputation business

C. HUYGENS - Tuesday, February 18, 2014
Google and reputation -- not as catchy as soup and sandwich or horse and carriage, but you get the drift. At  the start of the year, Google's reputation took a dive from controversial behavior. Read more here. Now the shoe is on the other hoof. Some German fellow's reputation allegedly took a dive from controversial behavior readily rehashed by Google's algorithms.

So which is it, Marshall McLuhan? Is the medium the message that shapes reputation, as the German courts have ruled, or is the behavior the message that the medium highlights? Read more on the medium, the message and reputation according to the German courts, here.

Google: Reputation is a Drag

C. HUYGENS - Thursday, January 02, 2014
Earlier today, two articles appeared at Ad Age and CFO commenting on the widening impact of stakeholder attention to data privacy. The general message is that stakeholders are becoming resistant to releasing data for free. The specific message is that companies once trusted to "do the right thing" with those data, or at least not do evil, are experiencing reputation "issues" that are creating a drag on value.

From Ad Age: ...there's a growing body of thought and tools to protect, or at least impede, the collection of personal data. You can run plug-ins on your browser to throw random data at collectors; extensions that reveal who's tracking the sites you visit (and block them); and mobile apps to jam location identifiers. Expect more innovation on this front next year, along with more vocal advocacy in support of it. There's even big money somewhat inadvertently behind the issue: Microsoft has elected to make privacy a differentiator in its marketing against Google, at least for now.

From CFO.com: In its third quarter 2013 financial results, Google reported its eighth consecutive decline in price per click, the money it can charge advertisers. But what’s worrisome is that this eight percent year-over-year loss in pricing power for its core business, a symptom of reputational value loss, is associated with other signs of stakeholder disaffection.

Huygens commented on Google in March, months ago, suggesting a looming drag on value when the stock was soaring; do the reputation metrics bear out these predictions at this time?

The Consensiv reputation metrics, powered by Steel City Re's measures of reputational value, reflect stakeholder expectations and their economic effects. Of the 136 firms in its sector, Internet Software and Services, Google has held on to the highest value of the metric, Reputation Premium. But as of late, there has been a bit of volatility. This appears a subtle dip of the Reputation Premium. More obvious is the corresponding indicator that Its stakeholders are slightly less confident that this premium evidenced by an onging rise in the Consensus Trend metric to 1.3%.  The Consensus Benchmark,which is based on a one-year average standard deviation of the Reputation Premium, even at 9.1% indicates a less volatile course than most of its peers. This is what early cracks in the reputation veneer look like, and it helps explain why Google completely dropped off the December Consensiv 50 reputation value league table.



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).

Apple v Google: Great expectations chapter 3

C. HUYGENS - Wednesday, September 18, 2013
What can Huygens add to the conversation that has not already been said? With no further ado, the reputation statistics from Steel City Re for Apple (AAPL) and Google (GOOG). Looking at the vital signs, the two giants weighing in at $429 billion and $245 billion respectively, are surprisingly similar if one is willing to ignore ROE.



The funny thing is that investors are unlikely to ignore that metric, and Apple's is rock bottom for its peer group of 17 companies in the computer processing hardware sector.  Google, on the other hand, is just below average among the 130 members of its peer group.

The key metric in this mix is the current RVM volatility (Consensus Trend). For both, this measure is also at rock bottom among peers with absolute measurements near 1%. These data suggest that stakeholders are getting comfortable with their expectations of both firms and, as a group, are generally in agreement (hence, consensus). Google is the newly crowned prince; Apple's halo is now tarnished and reputational value has been surrendered. Lots of it. Prices for both should now stabilize provided that Apple doesn't end up surprising everyone with a new new thing based on the M7 chip that is being tested in the iPhone 5S.

Google: Trying not to be evil

C. HUYGENS - Thursday, March 28, 2013
Ezra Klein, the editor of Wonkblog, a columnist at the Washington Post, and a contributor to both MSNBC and Bloomberg, has a problem with Google. He's not sure he can trust it.

Mr. Klein's an early technology adopter and at the vanguard of the horde that seizes opportunities afforded by new applications and then creates the buzz. Google needs people like Ezra to draw attention to their applications and drive consumption. The problem is that Google has built up a track record of creating free web services, drawing traffic, and then killing the products. It's their right, of course, but 'free' is a misnomer. Users invest considerable time and effort, and then rely on the service. When the benefits of the service are taken away, users feel cheated. In reputational parlance, there's an expectation mismatch that is now generating a new set of expectations: that Google will take away that which it first giveth. That's a reputational problem.

As Mr. Klein wrote recently in the Washington Post, "...the Gmail experience, the death of Google Reader, and the closure of Picnik all have me questioning whether I want to keep investing time and energy in “free” Google products or whether I need to start looking for paid services that are explicitly making money off the thing I am paying them to do."

The reputational metrics from Steel City Re show increasing RVM volatility -- the sort of pattern you'd expect from activity generated by a stakeholder community that is beginning to question its relationship with a company. RVM, as followers of this blog and as readers of Reputation, Stock Price and You know, is a non-financial measure of reputational value reported in Gerken units. It's current volatility, a 90-day exponentially weighted moving average of RVM volatility, recently spiked at 7% -- the threshhold value above which the relative risk of a market value loss of greater than 7.5% in the near future exceeds 1.0, according to the reputational consultants at Consensiv. Is it time to short Google? 

RR Donnelley: Google it

C. HUYGENS - Wednesday, October 31, 2012
As the saying goes, there are only two types of companies: those that have had operational failures, and those that will. On 18 October, RR Donnelley & Sons, the printing-services firm, released the 8K quarterly earnings report for Google, the internet services company, 4 hours earlier than expected. The markets closed with the S&P500 down 0.24%, RR Donnelley down 0.88%, and Google down 8.00%.

This is how the Wall Street Journal’s MarketBeat blog reported the story, excerpted. First, Google’s take on the matter:

Earlier this morning RR Donnelley, the financial printer, informed us that they had filed our draft 8K earnings statement without authorization. We have ceased trading on Nasdaq while we work to finalize the document. Once it’s finalized we will release our earnings, resume trading on NASDAQ and hold our earnings call as normal at 1:30 PM PT.

Now, Donnelly’s take:

We are fully engaged in an investigation to determine how this event took place and are pursuing our first obligation – which is to serve our valued customer.

The value of that service is now being questioned. As reported in the New York Times blog, Dealbook:

An executive at Webfilings, a company based in Ames, Iowa, that sells an application that allows companies to self-file, used last week’s events as a marketing opportunity, reminding customers that “this unnecessary mistake reinforces the need for public companies to completely control the release of their financial data,” as Mike Sellberg wrote on the Webfilings blog.

The reputational risk for Donnelley is security--one of the six pillars of reputational value. As Chuck Malloy from Intel told Dealbook, “We own the liability and the risk, and this allows us to maintain the integrity of the reporting process. If there’s a problem, it’s our problem.”

The reputational value metrics from Steel City Re do not indicate that the operational failure has matured into a reputational crisis (7% drop in market cap, massive media attention, regulatory approbrium, etc.), but the event is nevertheless impacting Donnelley's reputation adversely. Looking first at the Vital Signs, (Column 2 Row 2 below), the current RVM volatility is only slightly higher than the historic volatility, both below the median at the 17th to 19th percentile. The company’s reputational rank is the 33rd percentile, ROE at the 13th percentile, and forecast stability is below the median. Basically, the quick view is that baseline expectations among stakeholders are low.

Indications that stakeholders as a group do not expect the incident to be critical, but recognize that no good will come out of it, are reflected in the three volatility measures (Column 1 Rows 2-4, and Column 2 Row 4). All show low levels of volatility for both CRR, a measure of reputation rank, and RVM, a non-financial measure of reputational value. The volatility, which is indifferent to overall market risk (VIX), is leading to a further loss in  both reputational value and reputation ranking relative to peers. Add to that the company's drop in  equity value, and you have near-universal concurrence among stakeholders: thumbs down.

Google: A Kodak moment?

C. HUYGENS - Tuesday, April 17, 2012
Google (NASD:GOOG), as everyone knows, is a company with unlimited resources, vision, and technological prowess. By establishing a relationship with every human being on the planet inclined to inquire through its Search engine, Google will eventually capture every last heart, mind and wallet.

If there are grounds to doubt the above, they may lie in the words of Ira Goldman, an executive formerly with Kodak since 1969. Writing to the editor of the Financial Times (13 April),  Mr. Goldman shares what he believes led to the downfall of one of the most innovative firms of the prior century. “…it was a history of being able to afford multiple investments in new technologies without fully understanding the market needs, and then failing to make careful choices about which investments the company could afford.”

Google invests lavishly, to be sure. And based on recent controversial governance-related changes in the way Google allows its shareholders to influence management, it appears Google wishes to shield itself from the outside and continue to do what most investors agree they do best. Not that everyone agrees.

Nevertheless, right now, the reputational metrics support management. Google's metrics could hardly be better. The firm ranks #1 among the 133 peers in the Internet Software Services sector. The Vital Signs report a historical reputational volatility that is below the median and dropping; a return on equity for the trailing twelve months that is 43% higher than the median return (88th percentile), and a near certain future of reputational stability.


So why worry? Because, to paraphrase Herbert (Pug) Winoker who spoke this past Friday 13 April at the Mission Intangible Monthly Briefing, a firm’s success breeds its next crisis. Investor expectations outgrow a company’s ability to meet them. The data show that expectations could not be much higher.

Back to Kodak, whose obituary Huygens scribed earlier this year. “If the current management team and board of directors had managed the investments to match the cash flow available under realistic business conditions, they would not have proceeded with three large investments simultaneously (in digital printing, only one of which turned profitable after 10 years) and then accepted high cost overruns and failure to meet schedule,” added Mr. Goldman. One can only hope that having isolated its decision-making bodies from outside opinions, Google will nevertheless heed this excellent advice.

Google: Intellectual adventures

C. HUYGENS - Wednesday, August 17, 2011
Here is an intangible asset paradox: How is it that Google, whose core business is connecting people to information, has to buy the manufacturer of physical products (telephone handset) to obtain intellectual property? Monday morning, Google (NASD:GOOG) announced that it was acquiring Motorola Mobility Holdings for $40 a share in cash or $12.5 billion.

The Financial Times (16 Aug, Taylor, Waters) reports that “the deal also gives Google direct access to Motorola Mobility’s portfolio of more than 17,000 patents and 7,500 pending patents, ammunition Google believes it needs to repel a patent assault by Apple, Microsoft, Oracle and others on its Android mobile phone operating system.
 
According to the Los Angeles Times (Aug. 16, Sarno, Li), experts say the Google purchase is aimed squarely at defending itself and its partner firms that use its Android technology -- including HTC Corp. and Samsung Electronics Co. -- against patent infringement lawsuits filed by such competitors as Apple Inc. and Microsoft Corp. Ken Dulaney, vice president of mobility at the Gartner information technology research and advisory company, remarks, "They are getting hammered by everyone suing them, and they didn't have much of a defense." Among the most recent patent actions are Apple's suits against Android makers HTC and Samsung, Oracle Corp.'s suit against Google itself, and Microsoft's suit against Barnes & Noble Inc. over its Android-powered Nook reader.

But acquiring a handset manufacturer will put Google into direct competition with many of the companies that rely on Android to power their own smartphones, including Samsung and HTC. National Public Radio (Aug 15, Peralta) notes that this business risk compounds existing regulatory risk. “The Federal Trade Commission is already scrutinizing Google. As the Wall Street Journal reported earlier this month, one thing the FTC is looking at is whether Google prevents smartphone manufacturers that use Google's operating system from using competitors' services.”

Shares in Motorola Mobility, advised by Qatalyst and Centerview, closed up 56 per cent. Google, advised by Lazard, saw its stock fall 1.2 per cent. Google's reputation index rankings, as reported by Steel City Re, were at the 99th percentile among 105 peers in the IT services sector days before the deal was announced. The reputational volatility metrics have been rising for the past three months, but at 2%, they would not appear to be material. Yet, with Google, any volatility translates into a slip from the #1 rank, and that is almost always associated with a slight decrease in value. Over the trailing twelve months to 11 Aug, Google has underperformed the median of its peers by 2% reflecting the premium associated with being stably situated as the top ranked firm.

S&P500 Composite Index: Reputation metrics

Nir Kossovsky - Thursday, June 24, 2010
Intangible assets are the primary source of enterprise value, and the Society’s mission is to advance best practices in their financial management through education, advocacy, and the promulgation of standards. The Society engages in several educational activities including a regular series of articles in Intellectual Asset Management magazine, regular call-in Mission Intangible Monthly Briefing, the recently published book, Mission: Intangible. Managing risk and reputation the create enterprise value, and of course, this blog. Click here to view the full menu of Mission: Intangible-branded educational opportunities.

One of the hallmarks of financial management is process monitoring through financial metrics and the collective measure of intangible asset value, reputation. Today we illustrate the value of intangible asset management with anecdotal metrics for constituents of the S&P500 Composite Index.

To recap and update, intangible assets comprise approximately 66% of the value of the median material publicly traded company. The chart below shows how the intangible asset fraction of companies over the past few years sampled from about 7000 publicly traded firms has dropped from its peak in 2007 of 78% and is now around 65% which, coincidentally, is the period median.


Using the Steel City Re Corporate Reputation Index as the reputation metric, only 61 constituents of the 10 June 2010 S&P500 Composite Index over the past 128 weeks has ranked in the top 1 percentile relative to approximately 7000 companies traded on the major western exchanges. The other 436 constituents of the current Composite Index have not held that reputation rank during this recent period. Of the 61 companies, the frequency at which they held rank in the top 1 percentile over the 128 week period is reflected in the order in which they appear in the table below, and is shown graphically on the chart. These are the reputation titans of the post-bubble period.




Berkshire Hathaway (NYSE:BRK.A) holds the distinction and lonely outpost at the far right of the graph having ranked in the top 1 percentile of all companies 97% of the time. To its left, the next three highest ranking firms comprising Colgate Palmolive (NYSE:CL), Google (NASDAQ:GOOG), and CR. Bard (NYSE:BCR)  each appeared 88.3%, 86.7%, and 85.2% of the time, respectively. 

Turning to corresponding economic performance, the 61 most highly ranked constituent members of the S&P500 Composite Index that had ranked at least once in the top 1% of the Steel City Re Corporate Reputation Index over the past 128 weeks -- Reputation Titans -- returned, as a group, -7.3% over the period compared with a negative 12.6% return for the portfolio as a whole (reflecting survivor bias) and a -23% return to the actual S&P 500 Composite Index. The remaining 436 (balance), of course, underperformed the portfolio. These data show that the Reputation Titans exhibited relative reputation resilience, a behavior fully consistent with a superior reputation and described in greater detail in the Society's book, Mission: Intangible.


Looking at the S&P500 Composite Index constituents from another perspective and dividing the group into top 15%, Mid Range Rankings, and Bottom Quartile as measured by the Steel City Re Corporate Reputation Index rankings, the top 50 most highly ranked firms over the entire period returned -8.7%, the 50 top-ranked companies that dominated the mid-range rankings returned -20.9%, and the 30 companies that essentially owned the bottom quartile for the period returned -28%. These compare, as expected, with the S&P500 Composite Index returns of -23%.


Summarizing, as shown repeatedly since 2005, there is a positive correlation between reputation ranking and economic return. Because superior reputations favorably impact pricing power, market share, vendor terms, operating costs, credit, costs, equity value, and price stability, executives seeking to maximize enterprise value would do well to concentrate on managing the intangible assets underlying reputation value.

One way to learn how to manage those assets is to become active in the Society. Why not sign up to our group on Linked-In to tap into a wealth of fresh content daily on intangible asset finance, management, policy, marketing and security? Or better still, become a member. We look forward to welcoming you.

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