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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Screw Up, Cough Up

C. HUYGENS - Monday, April 07, 2014
When the big banks screwed up, taxpayers felt the pain. Much was made of the observation that those who could, or should, have seen the disaster coming were financially rewarded in the interregnum. There is no monopoly of socializing risk. The New York Times observed over the weekend that "While shareholders of G.M. will shoulder the costs of fines, settlements and the loss of trust arising from the mess, the executives responsible for monitoring internal risks like these are unlikely to be held to account by returning past pay."

The word is clawback. Two years ago, as the crisis of the London Whale was engulfing JPMorgan Chase, Bloomberg reported "that “New York City Comptroller John Liu said that JPMorgan should tell shareholders it will ‘aggressively claw back every single dollar possible from the executives responsible for the $2 billion loss.’” Huygens observed that employees subject to the clawback would probably have other opinions.

Fast forward, and it is deja vu all over again-but different. In additional to financial shenannigans, Scott M. Stringer, the current New York City comptroller, who oversees five municipal employee pension funds with assets of $140 billion, has successfully negotiated expanded thresholds for clawbacks at five companies this year including both banks and non-banks: Allergan, Halliburton, Northrop Grumman, PNC Financial and United Technologies.

According to the New York Times, "Under the agreements, pay can be retrieved from a wider array of senior executives than is typical. And recoveries can be sought not only for intentional misconduct and gross negligence, but also for violations of law or company policies that cause significant financial or reputational harm to the institution." Failures in governance, controls, and risk management are actionable causes.

Huygens has often suggested that reputational value metrics, such as those published by Consensiv,  could be useful tools for managing reputation. The New York City comptrollers have identified another application: measuring loss to trigger punishment.

Read more.

BP: Finger pointing

C. HUYGENS - Friday, April 29, 2011
On 21 April, BP sued Halliburton, Transocean, and Cameron International Over the Gulf Disaster – known in polite circles as the “ink in the drink.” It is a reputation story that is still unfolding. According to the NACD Director’s Daily and its summary of various news services,

"BP PLC said it had filed a lawsuit against Halliburton Co.," the Wall Street Journal (April 21, Chazan) reports, "claiming its 'misconduct' contributed to last year's Deepwater Horizon disaster that led to the worst offshore oil spill in U.S. history." The lawsuit was filed on April 20, the first anniversary of the blowout on BP's Macondo well in the Gulf of Mexico, that killed 11 men and destroyed the Deepwater Horizon rig. Wednesday marked the expiration of a court-issued deadline to make filings preserving the right to sue companies involved in the spill. Halliburton designed the failed cement seal that experts believe permitted explosive gas to flow into the well and reach the rig. "Halliburton doesn't deny the seal failed," the Journal notes, "but argues BP should have run tests that would have revealed the problem." BP's says its lawsuit aims to hold Halliburton accountable for "improper conduct, errors and omissions, including fraud and concealment." Halliburton said it would "vigorously deny these claims."

Bloomberg (April 21) adds that the lawsuit comes shortly after BP filed suit against two other contractors, Transocean Ltd., the Deepwater Horizon's owner and operator, and Cameron International Corp., which manufactured a critical safety device known as a blowout preventer. According to BP's complaint, the former "breached its contractual duties, including failing to adequately maintain the rig and fix earlier engine problems and failing to train its crew and properly coordinate efforts to fight fires on the vessel." BP is suing Transocean for at least $40 billion in damages. Cameron, meanwhile, is being sued over allegations that its blowout-prevention equipment was a cause "in whole or in part" of the blowout and ensuing oil spill in the Gulf.

According to Reuters (April 21, Bergin), analysts said BP had little chance of winning the cases and was more likely trying to force the companies to settle. The wire service adds, "Management experts said pursuing the lawsuits could further damage BP's already battered reputation as well as reveal yet more embarrassing details of the way the disaster was handled."

Turning to the reputation metrics, the Steel City Re Corporate Reputation Index rankings for the respective firms is shown in the composite graph below. Most notable are the differences in both the magnitude and duration of the reputation depression associated with the same singular event -- the destruction of the Deepwater Horizon rig last year.

Turning now to the reputation derivatives, the velocity and vector values for the respective companies, the magnitudes and directions of reputation change over the trailing 6 months shows patterns suggesting that the expectations noted above are probably right -- BP's reputation will continue to be battered as long as this matter remains in circulation. Halliburton runs a close second with extraordinary volatility, but both TransOcean and Cooper Cameron are not showing currently any significant reputational wear and tear.


St Joe: Heaven help us; alternatively, sue the #@!%*

Nir Kossovsky - Thursday, August 05, 2010
Reputation is a key performance indicator because it reflects the expected behaviors of stakeholders – the people who potentially buy goods and services, those thaat provide supplies on potentially favorable terms, the employees who potentially work willingly and frictionless, and the providers of credit and equity who may bet on the come. In short, reputation is the mediator of behaviors based on expectations.

St Joe (NYSE:JOE) a large Florida real-estate developer that owns 577,000 acres of land in Florida, mostly within 15 miles of the Gulf, reported that the April BP (NYSE:BP) Deepwater Horizon disaster resulted in huge losses for the company when hundreds of tourists canceled vacation plans to stay at its resorts. So it is suing Halliburton (NYSE:HAL) claiming damages evidenced by a 40% drop in its stock price and loss of $1 billion in market capitalization.
 
Neither the blog’s author nor the Society have a horse in the race. But we are interested in behaviors triggered by expectations because it is the underlying premise of the Society. This is it. There is a business case in managing the business processes (we call them intellectual properties) governing operational risk (call it governance, compliance, and risk management) through the deployment of intellectual capital that directly creates the impression held by stakeholders that we all call "reputation." Or stated simply, there is an upside to enhancing reputation, and a cost for losing it – and executives should have the tools to manage and monitor it. And if they don’t, the Society is here to educate. It's our mission

Turning to the metrics, we note that over the trailing twelve months, JOE’s reputatation ranking as measured by the Steel City Re Corporate Reputation Index slipped from the 10th percentile to the 0 percentile among 90 peers in the Land and Real Estate sector. Over this same period, the company has underperformed its peers by about 30%.

Looking more broadly at the sector, we note that the median reputation ranking for the entire sector rose over this period, and has been rising steadily over the past three months. Last the variance in the sector has been declining, making the reputational drop at JOE (or shown graphically, the lack of a rise) that much more significant.

Last, looking at JOE’s vulnerability to reputation volatility, we note that around 60% of its value is intangible; while the median fraction for the sector is near 0%. (The median fraction for all companies is about 65%; for the S&P500, the median fraction is around 82%).

The executive message points are that in firms whose value comprises a significant intangible asset fraction, stakeholder behaviors based on expectations – what we call “Reputation” – can have significant economic consequences. We will also note that JOE’s ranking has not been exemplary this past year. Our data (see book for details) show that when adversity strikes, firms with lower reputation rankings are unlikely to show reputation resilience and bounce back economically.

BP: Oh no, not again

Nir Kossovsky - Monday, May 03, 2010
In Douglas Adams’ The Hitchhiker's Guide to the Galaxy, “the only thing that went through the mind of the bowl of petunias as it fell was 'Oh no, not again.' Many people have speculated that if we knew exactly why the bowl of petunias had thought that we would know a lot more about the nature of the Universe than we do now.”



We can reasonably assume that similar thoughts raced through the minds of BP (NYSE:BP) executives on 20 April as the Deepwater Horizon drilling rig exploded, caught fire, and sank. And while we are probably equally clueless about the nature of the Company, as are stakeholders who own its reputation, of this we can be certain: it is sinking.

As illustrated in the series of Steel City Re Corporate Reputation Index charts below, BP and the other firms associated with this safety and environmental disaster are experiencing an acceleration of a steady reputational decline. And as noted in the book, Mission Intangible and more recently in an article in CFO magazine, these declines are indications and warnings of an increased risk of a reputational event.

Not that BP is unaware. The New York Times quotes BP CEO Tony Hayward on Friday as saying, “Reputationally, and in every other way, we will be judged by the quality, intensity, speed and efficacy of our response.”

BP has blamed the rig’s owner and operator, Transocean (NYSE:RIG), for the accident. Further investigation is now suggesting that a drilling subcontractor, Halliburton (NYSE:HAL), may have failed to execute a critical task that prevents gas and oil from escaping from the well.

The process is called ‘cementing’ and it is challenging. A 2007 study by the U.S. Minerals Management Service found that cementing was the single most-important factor in 18 of 39 well blowouts in the Gulf of Mexico over a 14-year period. More recently, Halliburton (NYSE:HAL) has been accused of performing a poor cement job in the case of a major blowout in the Timor Sea off Australia last August. An investigation is under way.

As a case study of risk and reputation management, this has almost all the main elements. Consider the following:

1. Iconic brand, BP, working through subcontractors - a key source of risk (we explore this topic further this Friday, see below)
2. History of failures in managing the processes of assuring safety - a reputation lacking resilience 
3. Marketing campaign built around sustainability laid to waste by a massive oil spill - lack of authenticity

The LA Times notes in a story on 1 May that experts were cautious about attributing blame, pending what are expected to be lengthy investigations by Congress and the Department of Homeland Security, which oversees the Coast Guard.

Satisfy your intellectual curiosity!

If the above issues pique your interest, here are several things you can do right now:

1. Register free of charge for the next IAFS Mission Intangible Monthly Briefing set for Friday 7 May at 12h00 EDT. The conversation will feature Scott Childers from Walt Disney and Bob Rittereiser from Zhi Verden on “Process-driven reputation risk in supply chains”
2. Purchase the book, Mission: Intangible. Managing risk and reputation to create enterprise value, at the IAFS Store (or any online book retailer) 
3. Become a member of the Intangible Asset Finance Society.
4. Join our community on Linked-In.

Popularity, reputation, and financial metrics

Nir Kossovsky - Friday, May 08, 2009
On 29 April 2009, the Reputation Institute released its annual survey on the nation’s most respected companies. Based on its surveys of the general public, the Institute ranked 153 companies on how esteemed, admired, trusted and liked each was. The top and bottom ranks were held by Johnson and Johnson (NYSE:JNJ) and Halliburton (NYSE:HAL), respectively.

The Intangible Asset Finance Society is interested in the relationship between the intangibles (the business processes that underlie reputation) and finance. So we turned to the Steel City Re Index for an independent quantitative view (and second opinion) of stakeholders’ collective assessments of the corporate reputations of these two iconic firms.

Unlike the Institute survey, the Steel City Re index is designed to capture forward looking indications of expected stakeholder behaviors that impact cash flow, enterprise value, and cost of credit. These indicators are good predictors of stock price, which remains the single most useful metric of value.

Data through 1 May 2009 show that Johnson & Johnson is in the top tier of the Pharmaceutical sector (see Ethical Pharmaceuticals) with an index ranking this past year that started in the 98th percentile and ended in the #1 position (100th percentile). Index EWMA volatility was low averaging only two orders of magnitude. It is therefore not surprising that its return on equity outperformed the median of 84 of its peers by 13%.



Halliburton, on the other hand, bounces between the upper quartile and second quartile of the Energy equipment and services sector having started the year in the 91st percentile and ended the year in the 86th percentile. Index EWMA volatility was much higher averaging four orders of magnitude. A falling index and high volatility, notwithstanding an above average percentile ranking, is rarely associated with superior economic returns. And indeed, over the past year, Halliburton outperformed the median of 69 of its peers by only .75%.



In fairness, there are significant sector effects behind these numbers. The median pharmaceutical index value among the 5000 companies tracked by Steel City Re ranged between the 20th and 30th percentile and the sector showed an index variance of between .35 and .4. In contrast, the Energy equipment and services sector began the year with a median index ranking in the 70th percentile which then fell precipitously in the fall of 2008 to a median in the 50th percentile. Overall variance, however, is much narrower indicating that the perceived differences among firms in this sector are much smaller than the perceived differences among pharmaceutical firms.




In summary, these data show that a top performer in a sector that is in the reputation doldrums will effectively surprise the markets and significantly outperform its peers; and that a good performer in a sector that has disappointed the markets may still marginally outperform its peers. But with the median pharmaceutical ROE closely matching the S&P500 returns, and the median energy equipment and services ROE underperforming the S&P500 by 20%, Halliburton’s low “popularity” is not surprising.

Bonus: Top and bottom ranked firms on the Steel City Re corporate reputation index for the Pharmaceutical and Energy services sectors as of 1 May are, for Pharma: Johnson & Johnson and Discovery Laboratories, Inc. (NASDAQ:DSCO); and for Energy equipment and services: Seacor Holdings, Inc. (NYSE:CKH) and ION Geophysical Corporation (NYSE:IO).

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