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.

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Activist Investors Have a New Bloodlust: CEOs

C. HUYGENS - Wednesday, May 17, 2017
Emotionally charged disappointed activist investors existential threat to CEOs as #reputation #risk roars through the boardroom and into the corner office. Culpability insurance is in limited supply and demand is growing.

Activist investors, a perennial nuisance for chief executives, are becoming an existential threat. Since January, they have helped push out the leaders of three high-profile S&P 500 companies: insurance giant American International Group Inc., railroad CSX Corp. and aerospace-parts maker Arconic Inc. They are gunning for the CEOs at other companies including Buffalo Wild Wings Inc. and Avon Products Inc.

Read more in the Wall Street Journal.

Avon: Ethical calling

C. HUYGENS - Wednesday, May 25, 2011
Several months ago, in the ongoing post-mortem of the BP disaster, John Kay noted in the Financial Times that, “today’s willingness to cut corners is tomorrow’s headline risk.” Were this observation to be appreciated more widely, many reputations might have been saved.

Which brings Huygens to the happy story of Avon Products, Inc. (NYSE:AVP). Under financial pressure, the rumor mills last fall suggested the Company was in the cross hairs of L’Oreal S.A. In early October, the call volume on Avon surged relative to puts giving holders a whopping 18% 3-month return. L’Oreal didn’t take the bait, and Avon moved quickly to cut costs. In mid-October, it announced plans to cut about 400 jobs and to shut down an Ohio manufacturing facility. On early November, it announced that it had agreed to tender its 75% ownership interest in its Avon Japan business to an affiliate of TPG Capital, the global private investment firm. There were a number of intellectual property licenses associated with the deal. The stock priced tumbled.

Yet when faced with a major ethical issue whose resolution could have further impaired cash flows, the Company avoided the temptation to cut corners. In mid April 2011, Avon suspended the president, chief financial officer and top government affairs executive at its China unit and a senior executive in New York who was the company's head of internal audit until the middle of last year. According to Business Ethics (13 April, Connor), in its most recent SEC 10-K filing, Avon said it had voluntarily disclosed to the SEC and the Department of Justice internal investigations and compliance reviews which had “started in China” and focused on “certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees” Avon said in its 10-K filing that the investigation had grown to include “additional countries.”
The Wall Street Journal cited a source as saying those countries were in Latin America, a major source of revenue and earnings for Avon.

With the benefit of a month’s hindsight, we can see how the financial and reputation markets have reacted. Over the trailing twelve months, the Company has underperformed the median of its 41 peers in the Household/Personal Care sector by 19.44%. The big fall off from parity traces back to the actions in the fall of 2010.

The reputational metrics, however, suggest that the Company is on a value-creating path. According to Steel City Re, the Company’s reputation index metrics are unchanged over the trailing twelve months with a most recent ranking at the 70th percentile. The Index’s exponentially weighted moving average volatility has been drifting downward consistently since the fourth quarter and is now at 66% -- a high value for sure, but a trend that is value-creating. The twelve-week reputation index velocity and vector values show recent upward movement s of 19% and 5% respectively suggesting a positive response to the corporate actions and disclosures.

Looking last at enterprise value, the intangible asset fraction of the company is now greater than it was a year ago, affirming that all other things being equal – as Alan Greenspan noted several years ago – “in a market based on trust, reputation has value.”

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