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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Target: Risks when stakeholders expect more, and the board is blind

C. HUYGENS - Monday, May 05, 2014
Reputation risk is when stakeholders expect behaviors from a company that it can't deliver. It is an enterprise-level event. Target, one of the largest American retailing companies, founded in 1902 and headquartered in Minneapolis, Minnesota, encourages its customers to "expect more." Around twenty weeks ago, Target failed to meet expectations twice: through a breach in IT security and then through poor follow up management of the consequences.

When a company such as Target has a superior reputation and then fails to meet expectations, stakeholders may give the company the benefit of the doubt. However, failing twice without an adverse reaction is asking much from stakeholders today. The board of directors at Target, as we learned today, was not about to take chances. Adverse reactions include what the Financial Times defined some time ago as "the pile on of litigators, regulators and mommy bloggers." The Germans call it a "shitstorm." And unless immunized prior to the crisis, the primary beneficiaries of the opprobrium from the masses are the company's directors and officers.

Neither the Directors nor Officers of at Target was immunized. This morning, Target announced that Chairman, President and CEO Gregg Steinhafel is out. Steinhafel, a 35-year veteran of the company and CEO since 2008,  agreed to step down, effective immediately. He also resigned from the board of directors. The modern day Jonah was thrown into the sea by his directors to appease the mobs evidencing a reputation crisis. Or perhaps the board over-reacted.

Calling for the heads of directors and officers is not new. D&O liability insurance was introduced years ago in recognition of the fact that a disenchanted stakeholder group needed to vent, and it was unreasonable to ask directors and officers to bear the personal costs. Alas, absent immunization, they are bearing the personal costs to their reputation. "They" include the risk committee board members of JPMorgan Chase, the four senior-most directors at Duke Energy, and now the Chairman and CEO of Target.

Favoring the argument that the board overreacted, shares in Target fell nearly two percent in pre-market trading Monday. Ninety minutes into the trading day, shares were down nearly 3% while the S&P500 was flat. Equity investors, it seems were  disappointed with the removal of Steinhafel who has reinforced Target's reputation for stellar customer-oriented service. Of course, there is the alternative explanation that investors are both delighted Steinhafel is gone and are expecting more bad news which is not yet public but, which known to the board, Other sources of intelligence, specifically, the Steel City Re reputation metrics, favor the first explanation - the Board of Directors unnecessarily tossed Steinhafel overboard to appease the crisis management gods.

Twenty weeks out from the breach, Target's reputational value is staging a comeback from the initial depression. The substantial drop in the company's Reputation Premium from the high 80's to below the 50th percentile is stabilizing around the 64th percentile relative to the 15 companies in the Discount Stores peer group. In fact, last May around this time, Target's Reputation Premium was lower. Further, looking at the measures of reputational volatility, the Consensus Trend, there was never a major shock among key stakeholder groups. Overall, Reputational Health is good.



How good is a good reputational health? In the case of Target, its reputational value peaked near June 2013 as shown in the 3-year chart below. The decline in reputational value since then is nearly linear, with the immediate effects of the data breach being nothing more than a short-term shift in the overall trend.  In other words, the data breach was not the long-term cause of Target's loss of Reputation Premium nor the long-term cause of Target's loss in Reputational Value. Rather, the entire industry - discount retailing -- is losing its value proposition. The data breach at Target helped temporarily mask the real cause of decline: the business strategy is failing.

It can be argued that a CEO is obliged to fall on his sword for advocating and implementing a failing strategy. And with this in mind, it might be argued that the equity price fall Monday morning represented equity investor recognition of the real reason for termination. But frankly, absent quantitative metrics to inform the board, management, and the communications arms of Target, it is hard to know what they know or why they think they acted the way they did. Worst, if Steinhafel was aware of the overall industry decline and was working on a plan to save Target, then it is a particularly bad time to be making changes at the top. Remember how well that worked out for JCPenny (JCP).

Managing an operational failure with one eye towards the media is prudent, but the tail should not wag the dog. If the real problem is a sector decline, it would be best to focus attention on that problem and not the irrelevant noise generated by those who make a living generating noise. Sir John Rose, former CEO of Rolls-Royce (LON:RR), set the standard to putting mind to what mattered when he ignored the media for weeks after a Rolls-Royce engine exploded on a Quantas super jumbo in November 2010. Instead, he identified the source of the problem and fixed it to the satisfaction of regulators, and more importantly, a key customer. Less than 10 weeks after what was viewed as a reputational crisis, British Airways announced that it was equipping its latest super jumbo acquisitions with...the same Rolls-Royce engine. And as Rolls-Royce spent ample cash indemnifying customers for downtime, and as the sales book was booming and stock price rocketing, less than 20 weeks after the affair, Sir John stepped down, sat on his motorcycle, and rode into the sunset.

Twenty weeks from the breach and the Chairman/CEO has been sacrificed. Quantitative reputation metrics, including the Loss Gates charts for Target's objectively measured crisis trigger points, do not show a crisis. It is one more example of a needless loss of executive life.

Management and boards require metrics to do their work properly, and Directors and Officers deserve protections for their personal reputations in shitstorms. Absent measures of reputational value, rash decision informed only by PR and media activity may be made with awful consequences. Absent protections for corporate leadership, good people may be thrown overboard to no avail. There are many lessons to be learned here.

JC Penny: Pining for Hitler's teapot

C. HUYGENS - Thursday, October 03, 2013
There's bad PR, and then there is reputation-crushing reality that gets publicized. The former is noise.

This past spring, JC Penney (JCP) put a designer teapot on a billboard in Culver City, CA, and at least one viewer thought the thing looked like Adolf Hitler. The social media world lit up. The media covered the buzz. The attention didn't hurt.

The reputation-crushing news, on the other hand, is material. For JC Penny, Hitler's teapot was the good news. As far as the majority of stakeholders are concerned, it's not clear if there is any future. The reputation metrics from Steel City Re suggest that no one is expecting any change from what is a dismal reality. The Vital Signs are abysmal. Current CRR Rank (Reputation Premium) of 0.05 (percentile) among 22 companies in the Department Stores sector; current return on equity at rock bottom; and no expectation of major changes (forecast stability 100th percentile) after a flurry of hope and rise in the Current RVM Volatility (Consensus Trend) a few weeks ago, now sinking at 2.7%.

'Nuff said.



JCPenny: Into the valley of death

C. HUYGENS - Tuesday, April 09, 2013
Ron Johnson's semi-suicidal charge ended badly for him. Unlike most of the troops of Alfred, Lordy Tennyson's poem, however Johnson will get to leave the JCPenny (JCP) field of combat alive with only the remnants of his 2012 compensation package, about $1.9 million or a cut of nearly 97 percent, and no sizeable stock award and no bonuses. As if this wasn't in the cards a few weeks ago? Hopefully, he is getting a better return on his 2011 signing bonus of $53.3 million than did his Board of Directors.

JC Penny: Basement, no bargain

C. HUYGENS - Friday, March 15, 2013
If the owning the news cycle is the goal of public relations, JC Penny (JCP) needs a new shop. As Business Insider reports, "The retailer  has been on a terrible run. The last few weeks have been disastrous: it reported horrific Q4 earnings, went to court to fight Macy's over Martha Stewart, and had a board member dump a chunk of his stake." Caribou coffee opted not to open cafes in the stores.

Tally the butcher's bill: unnecessary litigation, abandonment by equity investor insiders, abandonment by partners, and no shortage of negative media chatter. It's a classical reputational value crisis.  Here's a link to how the Society's Mission Intangible Monthly Briefing moderator, Jonathan Salem Baskin, described the situation qualitatively to CNBC today: Baskin on CNBC.

Here's how the Steel City Re Reputational Value Metrics describe the situation quantitatively. Relative to 24 companies in the Retail Trade/Department Store sector, JCP has had the most volatile reputational value this year (Historic RVM Vol) indicating no consensus of expectations at one point in time. JCP now has the least volatile reputational value (Current RVM Vol) indicating that stakeholders are now in the tightest concensus about prospects. Unfortuanately, those prospects are awful with a CRR rank in the 9th percentile and the worst performing equity with an ROE of -60%. Worst, there is still room to fall and the metrics all indicate a further downward trend and low expectations for stability.

In his interview, Baskin suggested JCP should focus on its reputation. Expectations were very high when Ron Johnson, formerly of Apple, came aboard as CEO. They were at levels that could not possibly be met, and that is why the market is now punishing JCP (and for that matter, Apple). As Baskin said, "It breaks my heart."


JCPenny: For your thoughts

C. HUYGENS - Monday, November 12, 2012
Last Friday, J.C. Penny Co. Inc (JCP) reported a $123 million loss for the most recent quarter. CEO Ron Johnson describes the company as “the fastest-growing startup in retail history,” language that unfortunately brings to mind Kodak’s characterization of its innovation-led transformation over the past decade. It is a great mindset but spending, too, has to conform to an environment where the business model is still being perfected.

The company sees itself in transition: the boutique, jcp, emerging from the tired jcpenney. The new jcp is boasting higher productivity of $269 per square foot compared to $180 per square foot at jcpenny. Combined, however, the stores reported a 26.1% drop in same-store sales on reduced traffic of 12%. Internet sales fell by almost 40 per cent in the third quarter reported last week. At best, customers are not sure what to expect. At worst, they've stopped looking. Employees, and other stakeholders are confused, perhaps too, and that, by definition, is impacting the firm’s reputation.

Looking at Steel City Re’s Reputational Value Metrics, its been a wild ride for JCP's RVM. The metrics at left show that both the RVM and CRR measures are holding at nearly rock bottom, but that future stability is unlikely with a ranking among its 22 peers at 0.0 percentile. The volatility metrics, shown at right, report extreme movements with negative directionality. The only conclusion to draw is that stakeholders as a group are confused -- and that can't sit well with equity markets.

Big Box Retailers: Price, quality, and location

Nir Kossovsky - Wednesday, July 14, 2010
A big box retailer’s reputation is driven by the price and quality of its products, but not by its propinquity. Such are the data from an analysis prompted by the July 2010 issue of Consumer Reports magazine whose headline reads, “Best stores for practically anything.”

The 2 June press release provides highlights of a survey of 30,000 readers of the consumer-oriented magazine on their big-store shopping preferences. The companies are Costco (NASDAQ:COST), Dillard's Inc. (NYSE:DDS), Kohl's Corporation (NYSE:KSS), JCPenny (NYSE:JCP), Target Corporation (NYSE:TGT), Sam's Club (NYSE:WMT), Sears (NASDAQ:SHLD), Macy's Inc. (NYSE:M), Meijer (private), Walmart Stores (NYSE:WMT), and Kmart (NYSE:SHLD). The results of the survey may surprise you. If you are a follower of this blog, the correlation of the results of the survey with the metrics of the Steel City Re Corporate Reputation Index should not.

According to the magazine, the Consumer Reports ratings are based on the experiences of 30,666 readers who characterized 56,922 trips to 11 retailers between April 2008 to April 2009. The Reader Score represents overall satisfaction. A score of 100 would mean all respondents were completely satisfied; 80 means they were very satisfied on average; 60, fairly well. The results are summarized in the table at left.

In the two charts below, we show the correlation of the consumer survey data with the Corporate Reputation Index metrics. Blog readers are generally familiar with the underpinnings of the rankings. For this analysis, we created a derivative metric, the Reputation Vector. The reputation vector takes three factors into account: the average Corporate Reputation Index ranking over the trailing twelve months; the trend, and the variance. The first graph shows the correlation of the Reader Score for all of the companies with the corresponding Reputation Vector value. The slope is positive, but the explanatory power of the trend line only accounts for about 20% of the variance.

According to the survey, for each of the stores, readers cited their primary reasons for shopping at that venue. The three reasons were low price, high quality products, and location. When the data are analyzed separately, a slightly more interesting pattern emerges. All three trend lines are still positive, but the explanatory powers are radically different. 77% of the variance in Reader Score is explained by variance in the Reputation Vector when shoppers were motivated by price; 100% of the variance is explained by the Reputation Vector when shoppers were motivated by quality (not that meaningful with only two data points); but only 4% of the variance is explained when shoppers were motivated by location.

The data suggest that the overall consumer experience as indicated by the Reader Score correlates well with the financially-relevant derivative metric of Reputation Vector – which captures the behavioral expectations of stakeholders -- when price or quality are the primary drivers of behavior. The moral: “Location, location, location” may still be important, but with so much now accessible through the internet, price and quality are by far more important drivers of reputation and the economic benefits and costs thereon.

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