M:I Products

MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

Read future M:I posts via RSS RSS

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.

Recent Comments