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.

Boeing: Watch what they do

C. HUYGENS - Thursday, January 24, 2013
Shortly after John Morgan (JP, to his American friends) congratulated Andrew Carnegie on becoming the wealthiest man in the world, Carnegie's biographer queried the former steel magnate on his secret. "When I was younger," he replied, "I used to listen to what people say. Now I just watch what they do."

The Steel City Re reputational value metrics, as described in the book, Reputation, Stock Price, and You, comprise indexes of what people who watch people think they are going to do. Boeing's CEO, Jim McNerney, is staring at the same type of operational failure Rolls-Royce's CEO, John Rose, faced just over two years ago. The similarities end there.

At Rolls, there was no public communication until the company, on its own, identified within its supply chain the engineering problem that led to engine failure and a potentially catastrophic outcome. Eight weeks into the crisis, the first major announcement was the purchase by British Airways of 12 additional jumbo jets, all equipped with Rolls-Royce engines.

At Boeing, in the midst of unexplained glitches afflicting the 787 Dreamliner, Tom Downey, the planemaker’s senior vice president of communications, is providing play-by-play commentary on McNerney staff meetings. "Because of his knowledge of planes and electrical systems, 'he asks a lot of very specific questions,' Downey said", according to Bloomberg.

Huygens, ever the American pragmatist, makes no value judgement. Resolution of the problem quickly is the only outcome the markets - Boeing's customers, employees, vendors, investors, creditors, and regulators - really care about. Between now and then, the choice of no-communication or all-communication is a reflection of corporate culture.

What Huygens can share are the reputational metrics reflecting the expectations of stakeholders and the consequences of management's choices. Shown below are Boeing in the midst of an operational crisis that threatens to blossom into a reputational crisis, and Rolls-Royce, that resolved its operational crisis and avoided a reputational crisis.

Rolls' actions exceeded stakeholder expectations and investors rewarded the company (thereby rewarding earlier investors) with a respectable ROE >20% over the trailing twelve months. At this writing, for Boeing, stakeholder expectations are still sinking.



Rolls-Royce: Royal resilience

C. HUYGENS - Thursday, January 06, 2011
The company sure knows how to prioritize. Rolls Royce (LON:RR), which produces mission critical power systems, runs risk management like its nobody’s business. The company’s asset preservation policy reveals transparently the priority of the three greatest things it is protecting: reputation, viability and profitability.

Eight weeks out from the catastrophic failure of a Trent 900 engine keeping a Qantas A380 Supercarrier aloft, Rolls Royce is showing the reputational and economic profile of a company with significant reputation resilience. The media appears to have backed off, and the general public has lost interest. Much of the credit for this display of enterprise value preservation goes to the company’s reputation for engineering excellence and its outstanding intangible asset risk management program.

If there is one criticism that may be levied, it is that the company’s crisis communications efforts have left much to be desired. Many communications pundits have peppered the blogosphere with the central message that CEO Sir John Rose should have been much more visible and forthcoming.

In defence, one need only point to the notice today from British Airways CEO Willie Walsh. According to Bloomberg News, British Airways Plc , Europe’s third-biggest airline, agreed to buy Trent 900s for 12 A380s to be delivered starting 2013.

"I'm not surprised," explains Jonathan Salem Baskin, noted brand marketer and author of the recent Histories of Social Media. "Rolls Royce focused on analyzing and fixing the problem, and was likely having conversations with numerous stakeholder groups involved in that operational reality. The world wanted the business focused on business, some outlier bloggers notwithstanding, and Roll Royce's successes in its efforts were obviously recognized and valued."

Note added 6 February 2011

The Economist newspaper says as much in an article penned 3 February. Click here to link to the article.

Rolls Royce: Wicking oily leaks

C. HUYGENS - Friday, December 10, 2010
Leaked information is rattling executives and politicians globally. But the literal elements of a leak stem from uncontainable fluids, and the adverse consequences can be more immediate. Rolls Royce (LON:RR) is facing just such a problem. Their Trent 900 engine, the power source for a number of airlines such as Quantas that fly the Airbus A380, appears to have a welding flaw in an oil pipe. The pipes are at risk of leaking, and the consequences of an oil leak include catastrophic engine failure. In reputation speak, this is a "safety" issue. In operations speak, this may be another example of a reputation risk arising from the supply chain. A quick word on Rolls Royce and their supply chain. As summarized by then chairman Sir Ralph Robins in 2000, "Seventy per cent of an engine's content is in the supply-chain and only 30% comes from in-house. We get all excited about cost-reduction in-house, but the supply chain is where it really counts."

According the the Financial Times, the current problem may cost the company up to $500m. According the to the Steel City Re Corporate Reputation Index metrics, the reputation cost is just beginning to manifest. The reputation index began the trailing twelve month period in the 63rd percentile and is currently in the 71st percentile relative to the 14 companies in the Aerospace and Defense peer group. However, the Index had been as of late in the low 80th percentile, and several dynamic metrics are providing indications of adverse value change: the exponentially weighted index moving average (EMWA) is up to 17%, and both the vector and velocity over the trailing twelve weeks are negative.

For the present, however, the equity returns over the trailing twelve months are equal to the median of the peer group, while the intangible asset fraction is below that of the peer group but equal to the mean of the S&P500 Index constituent members. Look to IAM magazine issue 46, due in March 2011,  for an extended examination of this Company from an intangible asset, risk, and reputation management perspective.



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