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: It's Director season!

C. HUYGENS - Monday, June 02, 2014
Last week, activist investors called for the resignation of 7 of Target's 10 Directors for having failed in executing their duties of oversight as evidenced by the security breach in November. Its Director Season! Demands for their heads follows only weeks after these same Directors demanded the head of Target's Chairman and CEO. It's CEO Season!

(To Warner Brothers aficionados, it's both Duck and Rabbit Season.)



For four years, directors and officers have appreciated that adverse corporate reputational events -- cybersecurity in Target's case; ethics, innovation, safety, sustainability and quality events more generally -- will both impair most lines of their companies' income statements and also stain their personal reputations. This is because stakeholders are directing their grievances more and more at board members and corporate officers in increasingly more personal ways. D&O liability insurance may cover the litigation costs of stakeholder frustrations, but as these matters move from the legal system to the court of public opinion, the personal reputations of Directors and Officers are left to bear the full brunt of stakeholder activism – often blemishing decades of career success with disparaging innuendos. That is why they continue to declare through surveys and corporate 10K item 1’s that reputation risk is among their top concerns.

As of June 1, 461 CEO’s stepped down this calendar year, a removal rate that is up 17 percent from the same period last year. “CEOs are not only under increased scrutiny from shareholders, employees, government regulators and consumers, but these groups have more tools with which to amplify their complaints. Twitter, LinkedIn, Facebook, etc., make it far easier to rile up the masses,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas. Lead time is short. Activist investors started encouraging four directors of Duke Energy to step down only 12 weeks after the company’s February coal ash disaster.

It may be the 21st century, but in governance circles, human sacrifice has become the "new norm."

Target: -6.0 percent solution

C. HUYGENS - Tuesday, May 06, 2014
The mobs wanted a head, and the Board of Directors gave it to them. And why not? If one believes opinion polls and the Twitterati, Target's reputation was sullied. Following age-old protocols, the biblical solution to appease the gods of media crises is to throw the CEO overboard.

Had the company's directors known about the reputation metrics discussed yesterday, things might have been different, an executive's life might have been spared, and Target would be worth 6% more than it was today at the close of markets. Below from BigCharts.com, equity values of Target and the S&P500 composite index shown in contrast.

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.

Target: It's back on

C. HUYGENS - Friday, January 24, 2014
What happened in last year, stays in last year. Target's data breach, as the metrics below indicate, is no longer expected to further impact stakeholder behavior.

The adverse security event did not materially permanently erode reputational value because the company has long had a solid and valuable reputation which supported it during the recent data security crisis. That value acted like a reputation line of credit, back-filling Target's reserves during an unexpected draw down. That value provided much needed resilience.

Of course, like many other safety nets, they work well once and then need to be replaced. They are rarely "rated" for two saves. Target is a company that could use reputational value insurance to help reinforce that value against the next event. As discussed back in December:

Time will tell how significant a hit the incident will be to Target's reputation and sales. Bad events don't necessarily trigger a loss of reputation, said Nir Kossovsky, chief executive of Steel City Re, a Downtown-based insurer of corporate reputational value. The impact will depend on whether customers believe the company took reasonable actions and whether they hold the hackers, rather than Target, culpable for the breach, he said.

"Bad news headlines sting, but it's only a reputation problem if people behave differently because of it," said Jonathan Salem Baskin, managing director at Consensiv, a reputation management firm in Chicago. "There's no indication that shoppers are avoiding the chain, and experts already considered Target a leader in data security, so it's unlikely it will be punished for an all-but unforeseeable event."


The reputational value profile of Target, according to Consensiv and based on Steel City Re's reputational value metrics, is shown below. The profile provides an indication of the value and riskiness of stakholder expectations in the company's controls for such reputation-related processes such as ethics, innovation, safety, sustainability, quality, and in this case, security.

In the month that passed, Target's Reputation Premium is back to its 12-month high, the Consensus Trend, CT, hasdropped back down to its low level of 0.7% among 15 companies in the peer group.


For more background on the Consensiv reputation controls, click here. To view the December 2013 reputational value league table, based on Consensiv's metrics, and available exclusively at CFO.com, click here. Last, to read more about how reputational value is linked to stakeholder expectations and enterprise value, read, Reputation Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012) (click here).

Target: In the cross hairs

C. HUYGENS - Monday, December 23, 2013
Last Thursday, Target (TGT), the nation's second-largest discounter, acknowledged that data connected to about 40 million credit and debit card accounts was stolen as part of a breach that began over the Thanksgiving weekend (Read more). In a discussion on the security breach, reputation experts Nir Kossovsky and Jonathan Salem Baskin shared these thoughts with the Pittsburgh Post Gazette (Read more):

"Time will tell how significant a hit the incident will be to Target's reputation and sales. Bad events don't necessarily trigger a loss of reputation, said Nir Kossovsky, chief executive of Steel City Re, a Downtown-based insurer of corporate reputational value. The impact will depend on whether customers believe the company took reasonable actions and whether they hold the hackers, rather than Target, culpable for the breach, he said. "Bad news headlines sting, but it's only a reputation problem if people behave differently because of it," said Jonathan Salem Baskin, managing director at Consensiv, a reputation management firm in Chicago.

Do the metrics bear them out?

The Consensiv reputation metrics, powered by Steel City Re's measures of reputational value, reflect stakeholder expectations and their economic effects. Of the 15 firms in its sector, Discount Stores, Target has generally hovered around the third quartile of the metric, Reputation Premium. Its most recent value, however, was the 57th percentile. Target's bullseye is a black eye of sorts - not necessarily permanently or even long-term, but the hit registered. Its stakeholders are slightly less confident that this premium is appropriate as evidence by a slight, almost imperceptible, rise in theConsensus Trend metric 1.3%.  The Consensus Benchmark,which is based on a one-year average standard deviation of the Reputation Premium, indicates at 4.0% a far more stable course than its peers.

The data suggest that while shaken, stakeholders are probably going to forgive Target and move on. The company, in their minds, is good; it's the hackers that are miscreants.



For more background on the Consensiv reputation controls, click here. To view the November 2013 reputational value league table, based on Consensiv's metrics, and available exclusively at CFO.com, click here.

Walmart v Target: Great expectations chapter 2

C. HUYGENS - Tuesday, September 17, 2013
Among the giant retailers battling for customers' attention and wallets, ethics has emerged as a point of differentiation. This issue manifests in two forms: ethical treatment of retail employees, which includes matters of pay and attitude towards sexual orientation; and ethical treatment of suppliers, which includes a much larger range of work environment and labor standards issues. Walmart Stores (WMT) and Target (TGT) are two stalwarts of this battle who've been favorites of Huygens and the Mission Intangible blog readers for many years. Walmart is famous for its domestic labor issues; also, its supplers were party to both the Tazreen factory fire and the Rana Plaza building collapse tragedies in Bangladesh over the past year. Target, famous for its pro-gay policies, was not implicated in either of those events that consumed so many garment workers' lives.



The Steel City Re reputational value metrics reveal that stakeholder expectations were impacted by the events described above with RVM volatility (Consensus Trend) being the earliest measure and Reputation Rank deterioration (Reputation Premium) being the casualty, with the advantage going to Target.  Yet if stakeholders are giving Target a range of economic benefits as the result of its superior reputation, what caused Target to report a severe drop in profitability in late August which then triggered its stock price to plunge from a +10% ROE to a -6% ROE over the past few weeks? Stay tuned.

WMT v. TGT: Spring 2013 Edition

C. HUYGENS - Tuesday, April 02, 2013
It's time to review Huygens' favorite retail rivalry. Previously, six weeks ago, Walmart (WMT) made the news as leaked emails suggested management was concerned about awful sales. It was not the economy, although it provided good cover. It was further evidence of a looming reputational crisis.

A reputational crisis, as readers of Reputation, Stock Price and You well know, is a business condition when a plurality of stakeholders reassess their relationship with a company and act with economic force in a way that punishes a company. Customers stop buying, price premiums drop, employees work less efficiently for higher labor costs, suppliers charge more or otherwise reduce a company's priority, credit costs rise, etc.

Bloomberg reports today that Walmart is having trouble stocking its shelves. Customers are not finding that which they seek, and are not returning. According to Bloomberg, the problem is labor -- more specifically, a shortage. "The Bentonville, Arkansas-based retailer’s workforce at its namesake and Sam’s Club warehouse chains in the U.S. fell by about 120,000 employees between 2008 and Jan. 31, according to a securities filing on March 26. The company now has about 1.3 million U.S. workers. In the same period, it has added about 455 U.S. Wal-Mart stores, bringing its total to 4,005." Here's the math: Five-year store growth at 13%; employee growth at -1.3%.

Recapping, Walmart has regulatory issues with possible violation of the Foreign Corrupt Practices Act; labor groups are active again; customers are not visiting; work is not being done...a reputational crisis in waiting, no? Other objective measures, namely the Steel City Re Reputational Value Metrics, indicate significant volatility in the measure of reputational value. In "investor relations" parlance, these data indicate that there is a deteriorating consensus about Walmart's prospects. In "reputation risk" parlance, these data are indicators of a reputation in the early stages of trouble. Momentum indicators are still neutral, but given Walmart's heft, once they start sliding aggressively, it'll be tough to reverse.

By the way, if you were wondering who were the leading and lagging firms in the retail sector, the current king is Costco (COST). At the other end of the spectrum, the firm with the lowest reputational value among its 15 peers is Sears Holdings (SHLD).

Walmart: Awful quarter

C. HUYGENS - Monday, February 18, 2013
Three months ago, Huygens reported that the reputation value metrics calculated by Steel City Re suggested that Walmart was on course for a reputational value crisis. It was a message easy to ignore, as Walmart's travails have been covered extensively by Huygens among many others and stumbling consequent to a host of reputational value crises has been long expected. It had to come eventually, although Huygens in December boldly predicted -- there's nothing all that bod about interpreting reputational value metrics, actually -- it would be evident by Spring 2013.

Hours before Bloomberg News leaked emails from Wal-Mart executives calling February sales a "total disaster," off to the worst start in seven years, the updated reputational value metrics showed yet another spike in RVM volatility. RVM, as described in the book Reputation, Stock Price and You,  is a non-financial measure of reputational value, and its volatility is an indicator of stakeholder expectation alignment with messaging. High RVM volatility values suggest poor alignment. Somethings 'a comin'.

Compared to Target, a much smaller company, Walmart's RVM volatility is leaping of the vital sign charts to the 71st percentile among the 15 companies in the Discount Store peer group. The company's CRR, a measure of reputational value  premium, is in the 93rd percentile. This measure should be a source of good cheer but for the corresponding RVM volatility and the fact that Walmart's ROE is comparable to Target's at the 77th and 69th percentiles, respectively. This mix of measures of reputational value make for an unstable picture as the four week rise in Current RVM Volatility suggests. Worst yet for Walmart, the reputational value Forecast Stability metric, the fifth of the five vital signs, suggests that this pattern of volatility can be expected to remain, well, stable.

Twenty hours after this chart was generated, the markets closed for the extended weekend. Walmart was down 2.18% for the day; Target was reflexively down 2.14%, and the S&P500 was down only 0.1%. Equity investors are event driven. With more thought, expect Target to rebound, and Walmart to continue to sink.

WMT v TGT: Fall 2012 Edition

C. HUYGENS - Thursday, December 13, 2012
With less than two weeks of shopping before Christmas, Huygens thought it would be interesting to return to an perennial favorite--the rivalry between Walmart (WMT) and Target (TGT). When last compared in the spring of 2012, Target was leading Walmart in all indicators of Steel City Re's Reputaitonal Value Matrics signaling reputational value growth. The volatilityy of Historic and current RVM's, non-financial measures of reputational value, were both elevated for Target. Also, the CRR, a measure of relative reputaitonal ranking, was higher as was ROE. The forecast, on the other hand, suggested more change in store for Walmart with indicators pointing to a reduction in CRR. And so it came to pass as Walmart spent the balance of the year wrestling with a number of labor and ethical scandals.

Turning to a face-off of the most recent metrics among a custom peer group of 125 retail stores, and Targets CRR has risen only slightly from the 87th percentile to the 90th. And while Walmart's reputational metrics were more volatile and trended negative in the late spring, by early summer, the measures changed course and the company's reputation climbed to its current CRR in the 89th percentile. The ROE, not surprisingly, outperformed Target's returns with rankings in the 57th and 47the percentiles, respectively. Interestingly, as the chart below row 1 column 2 shows, Walmart's RVM volatility is countercyclical to both Target, the industry median and somewhat so relative to the CBOE VIX, better known at the "fear index."

Forecasting for next time, the measures again show less stability for Walmart and a negative CRR. Stay tuned through Spring 2013 when we'll present the next installment of WMT v TGT.

WMT v. TGT: Spring 2012 Edition

C. HUYGENS - Sunday, April 29, 2012
For several years, Huygens has compared and contrasted the reputational metrics for Walmart (NYSE:WMT) and Target (NYSE:TGT). After yesterday's posting on Walmart, several followers of the Mission Intangible blog asked for an update on the comparative metrics. Below, key reputational metrics in contrast reflecting different directions and prospects for these two firms over the near term.

With respect to Target, the firm's Steel City Re corporate reputation ranking has climbed over the  trailing twelve months from 77th to the 87th percentile within the 127 member peer group of retailers. Walmart's declined. Target's repulational value volatility has been higher historically and is higher currently than Walmart's but the direction of the change is slightly positive while Walmart's is negative. Target's reputation is expected to be more stable in the future; not so with Walmart. The bottom line: whatever is afflicting Walmart that is leading to its reputational decline has not infected Target.


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