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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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HSBC v UBS: Brother, where 'art thou?

C. HUYGENS - Thursday, December 20, 2012
Corruption. Rogue trading. Libor. Foreign corrupt practices. Billion dollar penalties and fines. Just another day on Wall Street. Compare and contrast, if you will, HSBC and UBS. Pictures comprising select images reporting Steel City Re Reputational Value Metrics speak louder than mere words. RVM is a non-financial measure of reputational value; CRR is a measure of relative reputational ranking. Peer group comprises 251 financial/banking institutions. (For more background, read: Reputation, Stock Price and You: Why the market rewards some companies and punishes others (2012, Apress).

BP: 45x reputation

C. HUYGENS - Thursday, May 10, 2012
The chairman’s letter in the annual report, signed 6 March 2012, is clear. “The board set three priorities for BP,” wrote Carl-Henric Svanberg. “Safety must be enhanced and embedded. Trust must be regained. Value must be created through a clear strategic plan”

Safety, now a factor in the executive bonus plan, is tangible evidence of the company’s strategic priorities of reinforcing safety and risk management, rebuilding trust and reinforcing value creation of its intangibles. At group level, the safety and risk management component includes targets for recordable injury frequency, loss of primary containment and implementation of change programmes. Rebuilding trust is focused on external reputation as measured by external surveys and internal morale as measured by surveys.

BP’s board considers reputation from two perspectives – the reputational risks to the group and the processes the company has in place to manage these risks. In 2011, the board reviewed external reputation data which looked at BP’s reputation in the UK and US. It also discussed the group’s communications strategy and its reputation management plan.

To assure that stakeholders know that BP is serious about reputation and its risk management, the annual report offers up the term 20 times in the 10k section 1A-Risks. The term also appears liberally throughout the balance of the document for a total of 45 mentions over twenty different pages in the 300 page document.

In what appears to be a growing trend first announced formally at UBS, but clearly preceded by BP, both reputation measurement and reputational risk are major issues at the Board level. This is why: as reported here earlier, firms that have superior reputations newly discovered can pickup an average of 6% of market cap, while firms that experience a reputational crisis can lose an average of 7%. Anything that can precipitate a 13% swing in value is bound to get the attention of a corproate board.

The Steel City Re reputation metrics for BP this week show the following trends: BP’s reputational value metric, a non-financial indicator of reputational value, is stabilizing with a near median volatility relative to its peers, and a long term forecast of stability. The company’s corporate reputation ranking, an indicator of relative standing, places the firm in the 81st percentile. Since the volatility indicators are neutral, the data do not yet indicate a near term boost in equity returns above the median for the peer group. After years of reputational volatility, it appears at this point that equity investors are waiting for further evidence of material risk reduction in RepRisk -- reputation risk. Nevertheless, considering where things were two years ago, BP has come "a long way baby."

UBS: Reputation to set CEO pay

C. HUYGENS - Tuesday, April 24, 2012
We’ve discussed reputation in many forms, but all roads lead to value creation and protection against value destruction. It appears that the Chairman of UBS (NYSE:UBS) concurs and has taken steps to align management’s interests in this regard.

According to Bloomberg (Groendahl and Logutenkova, 23 April), UBS Chairman Kaspar Villiger said, “The idea behind this is that you try to evaluate the CEO according to what’s necessary for executing the company’s strategy in the long term. There are nine criteria in total, of which some shall be qualitative. Reputation is one of them. It will count more than one ninth.”

The Steel City Re reputation metrics suggest UBS CEO Sergio Ermotti, who assumed the title in November 2011, is on the right course. Relative to the 262 companies in the Bank, Holding Company, and Security Brokerages sector, the company currently ranks in the 34th percentile, up from the 31st in November 2011. Its reputational volatility is down from historic levels and all reputational vectors indicate improvement and greater stability. Relative to its peers, the charts show UBS is within the pack at this point rather than being an outlier on all key indicators.

The firm’s return on equity is only in the 21st percentile relative to peers, but the reputational metrics in this instance appear to be leading indicators of a coming trend and we anticipate improving economic returns.

We wish Mr. Ermotti the best of luck. We’ll be watching. With reputation accounting for more than 11% of Mr. Ermotti's compensation, we are confident many others will be watching too.

Goldman Sachs: Reputational luster

C. HUYGENS - Wednesday, March 07, 2012
Mathew Philips, writing for Bloomberg Businessweek (March 7), is perplexed. After recounting recent history including the Securities and Exchange Commission's $550 million fine for misleading clients on securities that were "built to fail," the swaps engineered for the Greek treasury that went bad and exacerbated the nation's financial distress, and the apparent conflict of interest in the sale of El Paso to Kinder Morgan, he is faced with a troubling fact. "Goldman’s sullied reputation doesn’t appear to be negatively impacting its business. In fact, Goldman is outpacing its Wall Street competition recently in key areas of business. In 2011, Goldman was the top adviser for both global M&A and equity IPOs. A Bloomberg survey of traders, investors, and analysts last May showed that while 54 percent of respondents had an unfavorable opinion of Goldman, 78 percent believed that allegations it duped clients and misled Congress would have no material effect on its business."

Two quick charts on reputational value and reputational rankings based on Steel City Re data reinforce his observations: the reputational rank and reputational stability of Goldman Sachs are both in the top quartile of all 267 firms in the banking and financial services sector.

By five of the key "vital sign" reputational metrics shown at left, Goldman Sachs is looking good. Yet its return on equity -- reward to its long suffering investors -- is the the 17th percentile within this peer group. Contrast Goldman Sach's reputational standing with another full-service investment bank, UBS. UBS with a market cap of $50B compared to Goldman's $57B, has a corporate reputational ranking in the mid 40th percentile even though its return on equity is slightly less negative. Goldman's PE is excess of 26 while UBS's is around 11.

We call this reputational resilience, and having tracked and measured Goldman Sach's reputation for the past three years, we are not surprised. Notes Philips, "There’s a reason why firms keep doing business with Goldman, and it’s not because of its sterling ethical reputation."

Indeed, it is not. The six key business processes that underpin reputational value are ethics, innovation, quality, safety, sustainability, and security. In the investment banking sector, it is hard to argue that one firm is more or less ethical than the other. That makes other drivers of reputation more valuable, and the evidence suggests the most important of them is innovation.

Opines William Cohan who studied Goldman Sachs and their culture and was interviewed by Philips: “This gets back to the advantages that Goldman has had for years over its competition. They attract the best and brightest people. They consistently have the best risk-taking culture on Wall Street. No one understands the markets as well as Goldman.”

Concludes Philips, "In short, if you want the smartest bankers, there’s a price to pay." The reputational value metrics and corporate reputation ranking data concur.

UBS: The 7% solution, please

C. HUYGENS - Friday, September 16, 2011
Conventional wisdom suggests that 7% of market capitalization is the median cost of an adverse reputational event. UBS only wishes its losses would be no worse. On Thursday, according to Reuters (Howley and Thomasson, 16 Sept), Swiss bank UBS said it had lost around $2 billion due to rogue dealing by a London-based trader at the Swiss bank. UBS stock ended the day down 10.8 percent, its lowest close since March 2009, after the bank said it might post a third-quarter loss due to the trading , a huge blow as it struggles to rebuild credibility after years of crises.

Bloomberg reports (Buhayar, 15 Sept) that UBS AG  had its credit ratings put under review for possible downgrade by Standard & Poor’s and Moody’s Investors Service. The examination “will center on ongoing weaknesses in the group’s risk management and controls that have become evident again,” Moody’s analysts led by Robert Thomas said yesterday in a statement. S&P said in a statement today it will make a decision on the ratings “once further details emerge on the scale of the loss and the risk management lapses that enabled it to occur.”

Turning to the Steel City Re Corporate Reputation Index, among the 45 companies in the Financial Conglomerates sector, over the trailing twelve months UBS's ranking has slid from the 64th to the 34th percentile. Its most recent exponential weighted moving average reputation index volatility is at 60%, and the 12 week reputation velocity and vector are both negative at -23% and -5.3%.

Over the past few weeks, the median reputational index ranking of the sector dropped below 50% and the intra-sector volatility has been climbing. Returning to UBS, its intangible asset fraction has be deteriorating and is approaching the median of its peer group which today is about zero (0%) percent.


There is a lesson. Reputation risk management means entails the management of different types of risks in different commercial sectors. In financial services, the business processes that need risk management for the purposes of protecting reputation are ethics, quality, and innovation. In this instance, the quality of the trading processes was subverted by an unethical trader.

Reputation is an expectation held by stakeholders. Those expectations can vary over time, but at the end of the day, they are what drive commercially relevant behaviors among the stakeholders that create value -- 9% rise in enterprise value on the occasion of an investment in Bank of America by Warren Buffet -- or or destroy value, as in the present case of rogue trading at UBS.

UBS: Truth in Libor

C. HUYGENS - Thursday, March 17, 2011
“We are committed to retaining the reputation and integrity of BBA Libor, which continues to be the authoritative benchmark of the wholesale money market,” said a spokesman for the British Bankers’ Association, according to the Financial Times. 

That there should even be a question about the  London interbank offered rate's -- Libor’s -- integrity is problematic. As the Financial Times explains, Libor is used as a reference rate for about $350,000bn in financial products.

Regulators in the US, Japan and UK are investigating whether some of the biggest banks conspired to “manipulate” this benchmark interest rate. The investigation centres on the panel of 16 banks that help the British Bankers’ Association set  Libor – the estimated cost of borrowing for banks between each other.

The probe came to light on Tuesday when the Swiss bank UBS (NYSE:UBS) disclosed in its annual report that it had received subpoenas from three US agencies and an information demand from the Japanese Financial Supervisory Agency. The other banks on the panel are: Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Lloyds, Rabobank, Royal Bank of Canada, Bank of Tokyo-Mitsubishi, Norinchukin Bank, Royal Bank of Scotland and West LB.

As to the Libor calculation algorithm, “…it is fully transparent – all of the data inputted by the contributor banks is publicly available, as is our methodology,” said the BBA.

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