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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Nokia: Stained shorts

C. HUYGENS - Tuesday, September 03, 2013
Surprise, surprise! Shorting securities is a high risk gamble. Never mind that a key motivator is a deep-seated belief that a company is doomed. Dead is dead. But equity investors have a wonderful way to resurrect companies in advance of a sale. Nokia (NOK), pronounced dead by Huygens long ago, returns to help Microsoft (MSFT) address its own problems. The street says Microsoft is buying hardware, intellectual property, and a former Microsoft executive who may replace Ballmer.

Over the past five years, Nokia has lost 80% of its value falling from $21 to less than $4 on Friday. Today it is up 40% in early morning trading. Nokia shareholders are celebrating. Nokia shorts are turning to NetFlix (NFLX) shorts for advice. Microsoft investors are less enthused. The stock is down 4.75% in early morning trading.

That equity investors were surprised should not be surprising, looking at Steel City Re's reputational value metrics. Stakeholders as a group were seeing upside, but no there was no expectation of a major event. Stakeholders collectively were progressively giving Nokia some additional reputational premium that was pushing its equity returns to above average levels relative to the 72 peers of the telecommunications equipment sector. The expectations were for continued increase in the reputation premium (CRR). Also, while forecast stability, a vital sign, was only in the 14th percentile, the consensus trend (RVM Volatility) was below average suggesting a uniformity of expectations. These data all suggest that shorting Nokia at this time would have been a bad idea, but they also indicate that there was no real expectation of a major upside event.

NetFlix: In flux

C. HUYGENS - Saturday, December 24, 2011
Frankly, Netflix (NASDAQ:NFLX) looks rudderless lately. Its strategic decision process is in disarray. That reflects poorly on the CEO and the company's board of directors. The CEO developed a strategy and then executed poorly; the board's oversight roles of governance and risk management were fails.

As summarized succinctly by The Wrap.com (23 Dec, Shaw), Netflix announced a controversial new pricing plan in July that enraged customers. Hastings then admitted the company erred in a blog post while announcing a new DVD-by-mail service, Qwikster. How was it different from the original Netflix service? It wasn't really, just a new name. Netflix then canceled Qwikster and brought all its services back under one roof. Throw in a few lost deals with the likes of Starz, and it's been a rough few months for the company.

Huygens rarely examines business strategy which is, after all, a business processes linking resources to objectives.  Strategy is not one of the six intangible operational pillars (ethics, innovation, quality, safety, sustainability, and security). Nor is it corporate brand (how a company wishes others to view it) or reputation (how others view it).

Rather, it links the conventional business resources of finance, product development, marketing, etc. to corporate objectives. To the extent that the strategy development process is an intangible asset, it falls somewhere between and among corporate culture and governance. The goofiness of the strategy Netflix developed and executed becomes a red flag of cultural insensitivity and lax board oversight. These, in turn, have become reputational issues that all stakeholders can appreciate and value negatively. As they rightly should.

Turning then to the Steel City Re Corporate Reputation Index metrics, as of 23 December, the company has dropped over the trailing twelve months from the 73rd to the 54th percentile among the 485 companies in the Service Organization sector. This 19 percentile drop is associated with an exponentially weighted moving average reputational volatility of 135% and a return on equity that is underperforming its peer group by 46.43%.

The trailing twelve week reputational velocity is -15% and the trailing twelve week reputational vector is -15.4%. And while the company's balance sheet is bare with a long-standing book value of 1% of market cap, that too has increased recently as the intangible asset fraction has been slightly eroded.

Some years back, Warren Buffet famously said, "If you lose money for the firm, I will be understanding. But if you lose our reputation, I will be ruthless." According to the company's filing with the Securities and Exchange Commission on Thursday, CEO Hastings' stock option compensation will be halved from $3 million this year to $1.5 million next year. Hopefully, investors will demand something from the Board as well.

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