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.

Read future M:I posts via RSS RSS

Challenge of a Different Color

C. HUYGENS - Tuesday, August 29, 2017
Products like D&O insurance protect from from legal liability but they hold no sway in the court of public opinion.

“CEOs now need to avail themselves of new tools that defend against these new types of threats – products that provide third party warranties and demonstrate good governance in a way that creates an easy to understand, and completely credible alternative narrative when bad or false news strikes. Companies and their executives need credibility to deter attacks and financial protection when attacks do occur.”

Read more in Industry Today.

Boeing: Second-hand reputational value loss

C. HUYGENS - Sunday, December 22, 2013
Just as a rising tide floats all boats, a nation's reputation is closely woven into iconic firms that stand for national power. In the US, that puts McDonald's on similar footing as Boeing and Lockheed Martin. When a nation fails to meet the expectations of its stakeholders, the gap comprises reputational value risk. The risk of what, you might ask?

In a blog note at Consensiv, the reputation controls firm,  Managing Director Jonathan Salem Baskin explains that reputational value loss is when customers turn on you; e.g., Brazil's decision following exposure of NSA's overreach not to purchase Boeing-made military aircraft. Read more.

Boeing: Rough landing

C. HUYGENS - Monday, October 14, 2013
"Any landing you can walk away from," wrote U.S. Army Air Forces photographer Gerald Massie after crash-landing his B17, " is a good one!" What was true in 1944 is true today: the good news is Boeing is walking.

However, the BP-like serial doling of Dreamliner-associated issues has taken its toll, and Boeing has been winged. For the first time in modern history, Japanese national air carriers are opting for the competition.

Mission Intangible Monthly Briefing moderator Jonathan Salem Baskin published this thoughtful essay on innovation risk and its management in Forbes this past Friday. Read more.

The Steel City Re reputation metrics for Boeing show slow progressive value loss in its CRR Rank (Reputation Premium) from the 95th to the 89th percentile over the trailing 12 months. Notwithstanding daily meetings at Boeing hosted by CEO Jim McNerney, and his April 2013 declaration that "the original promise of the 787 is fully intact," the engineering issues have not abated -- the reputational volatility, termed Current RVM Volatility below (or Consensus Trend) evidence this persistent uncertainty. Stakeholders are no longer as confident (see Historic RVM Vol below) that Boeing is (or was) in complete control of its innovation processes.

Boeing: Face of reputation risk

C. HUYGENS - Tuesday, October 08, 2013
Huygens has been obsessing with Boeing's (BA) reputation. Remember, reputation is not a measure of likability; it is a measure of stakeholder confidence in a company's ability to fulfill expectations. That confidence, as the metrics have suggested, is falling. But to really appreciate the relationship between reputation and financials, look no further than today's headline from the New York Times:

Airbus announced a $9.5 billion order from Japan Airlines on Monday, the European aircraft builder's biggest breakthrough in Japan, which is one of the last redoubts of dominance by Boeing.

This is a big number. It will leave a material mark on the P&L's of many companies. It is sufficiently big to be useful in underscoring what reputation is NOT -- it is not something measured in opinion polls. Read more here.

Boeing: Please don't anger the Vikings

C. HUYGENS - Monday, September 30, 2013
After a series of issues with the 787 Dreamliner left the Japanese air carriers bruised, Boeing's (BA) travails are making an impact in Viking country, and they're mad. According to Bloomberg, "The Norwegian company said Sept. 23 it planned to confront Boeing Co. about the technical difficulties and that 'something must happen, fast.'"

The pithy Bloomberg summary notes that Norwegian Air, which has only two Dreamliners in service, is dealing with technical glitches from cockpit oxygen supply issues that delayed a flight to New York from Oslo on Sept. 22, to brake difficulties that affected the second 787 in Sweden this month. The Japanese carriers faced battery fires earlier this year that ended up grounding the global fleet. There were a couple of other fires involving a diversity of plane components in July. And over this past weekend, a Boeing 787 operated by LOT Polish Airlines SA had an unscheduled landing in Iceland after the failure of a system that identifies planes to air-traffic controllers.

Boeing patiently explained that glitches are typical of a new product roll out. That narrative mollified critics this past spring. Its now the fall, and the Norwegians are hardly sanguine. The Japanese expressed their displeasure more subtly referencing "delay risk." But aside from the PR issues, are these delays impacting Boeing's reputation, or are these issues, typically "expected?"

Turning to the Steel City Re reputational value metrics, Boeing Co. is a $90 billion aerospace and defense sector company numbering 83 peers. The company continues to exhibit high reputational value quality that is largely independent of short-term equity market volatility. Its CRR ranking, or Reputation Premium, is a the 95th percentile of this peer group, its current RVM volatility, or Consensus Trend, are at the 50th percentile, and return on equity is at the 81st percentile. Such metrics suggest that the company's stakeholders are generally comfortable with the story -- it's business as usual. In fact, the only indicator that would suggest otherwise is the fact that the RVM volatility,  now at the 51st percentile, is markedly higher than in the past (11th percentile), and that the current spike of that metric is on a four-week streak that is not apparently linked to the VIX.

Contrary to lore, reputation is rarely created or lost in an instant. But when customers turn to the competitor to provide backup aircraft -- as every baseball pitcher who has been relieved knows -- there is a risk that the "understudy" may be rewarded with the starring role. Huygens believes the movement in current RVM volatility upwards indicates others may be thinking the same thing about Boeing and EADS.

Boeing: When customers expect delay

C. HUYGENS - Friday, September 13, 2013
The financial benefits of a superior reputation among customers, Huygens has explained, arise from one or more of these three factors: customers will grant the firm pricing power, will purchase greater volume, or will shorten the sales cycle time. Raise the price, and the volume will fall. Lower the price and the sales cycle time will shorten. A superior reputation provide a company the opportunity to optimize the three for maximum enterprise value.

For those familiar with Cajun cooking, these three factors are like the trinity of onion, celery and green peppers. The ratio in which they appear in a particular meal depends on the chef's tastes, but irrespective of ratio, they provide a constant mix of water, solids and salt. Boeing, as reported by Reuters and discussed in the Consensiv blog today, is fighting a lengthening sales cycle time with aggressive pricing. The problem is that the Japanese airlines that have had the pleasure of sharing Boeing's growing pains are concerned about delay risk. And are therefore delaying their own decision making.

"...little concerning the 787 program has been business as usual at Boeing. It is a wildly innovative plane, from its design and manufacturing, to its performance and experiential capabilities. So it was never credible that its stakeholders should have been told (or allowed) to expect it to resemble past projects. Innovation comes with risks, but there was never an overt or clear effort to value and control it, leaving a delivery schedule as the only proof that made sense to everyone: No matter how different, the ultimate outcome of building and selling a new airplane would be the same. Only it wasn’t and isn’t, as evidenced by the reputational risk now being charged to Boeing.

The Reuters reference to the company countering with “a sales offensive” likely means reduced prices and higher costs on its planes. There are probably borrowing and insurance implications commensurate with this new reality. Perhaps the suppliers it relies upon for parts for the 777X will expect more liberal terms and protections, which will also hit the company’s bottom-line."
Read more here.

The Steel City Re reputation value metrics show that over the year, Boeing's reputation premium has been deteriorating. Over the summer, all vectors have been negative. Moreover, over the past four weeks, current RVM volatility has begun rising.

The metrics have a cyclic pattern reminiscent of the water torture BP went through, albeit to a much lesser degree. Still, the bad news is progressive, and as suggested in July, Boeing has reason to fear a BP moment -- when it becomes clear that stakeholder's worst fears are coming true.

Boeing: In Fear of a BP Moment

C. HUYGENS - Sunday, July 14, 2013
On Friday, January 13, fire on an Ethiopian Airlines Boeing 787 at Heathrow Airport in London and a separate technical problem on a second 787 owned by Britain's Thomson Airways raised new questions about an aircraft seen as crucial to Boeing's future. Boeing said it had people on the ground working to understand the causes of the fire.

Have we seen this movie before? In the early days after the Deepwater Horizon explosion in the spring of 2010, then-BP CEO Tony Hayward provided this assurance. "I think the environmental impact of this disaster is likely to have been very, very modest." Trust us, he said, to get this under control.

For weeks, BP benefited from the doubt, and its image of environmental concern built up through a major investment in marketing and communications. Surely, a firm that is beyond petroleum will successfully protect the environment.

Of course, talking about protecting the environment while allegedly cutting back on investments in processes that actually protect the environment is a recipe for a modern-day reputational crisis. And so it came to pass that stakeholder disappointment in the eventual outcome, forced by reality trumping hope, was expensive for BP, its CEO, the board, and investors. (See detailed case study in Reputation, Stock Price and You.)

Enter Boeing, a highly reputable aerospace and defense manufacturer that has had a string of significant problems with the 787 Dreamliner, most recently being fires associated with the aircraft’s batteries. It is also a firm whose cost-saving strategy for 787 production produced a three-year delay, the ire of its unions, and allegations of cutting corners.

At the 20 May resumption of flights by United Airlines after the FAA-ordered stand-down, and nearly three years to the day after Hayward’s comments, Boeing CEO James McNerney said, “We are very sorry about the delay that was caused by some of the technology work-arounds that we had to implement. But,” he added, “the promise of this airplane remains unchanged. We are confident of that. More importantly, we are confident in the safety of this aircraft. Safety means everything to us. It’s in our DNA.” Trust us, he said.

“I trust Boeing that they know what they are doing,” said a Flight 1 passenger to Bloomberg. And the reputational value metrics, shown below as of Thursday, 11 July, affirm the return in trust. CRR, a measure of reputational value premium, is up. Current RVM volatility, a measure of consensus trend or stakeholder concurrence, is more favorable (down). So on Friday, 12 July, when another Boeing 787 caught fire, stakeholders were surprised. Equity investors registered their surprise by shaving 5% off the stock price. On Sunday, Bloomberg reports, In the early stages of the investigation, airlines said they would continue to fly their Dreamliners, while others confirmed they would stick to their plans to buy the aircraft. Jonathan Salem Baskin, Mission Intangible Monthly Briefing moderator, explains on CNBC how other stakeholders may respond to this latest surprise. Click here.

Boeing: Boing

C. HUYGENS - Thursday, May 16, 2013
Sir Bedevere: What makes you think she's a witch?
Peasant 3: Well, she turned me into a newt!
Sir Bedevere: A newt?
Peasant 3: [meekly after a long pause] ... I got better.

Witch burning circa 500 AD and battery burning circa 2013 are arguably unrelated, and yet here is Boeing, getting better. Not that its marketing and communications efforts can claim credit for making anyone feel better. Nor that the engineers necessarily figured out why the batteries burned. It's just that regulators have opined that the plane is safe, and having an independent third party's endorsement, like an insurance policy, signals much more reputational value than any marketing campaign ever could in this circumstance.

The Steel City Re reputational value metrics show that Boeing has bounced back to its prior levels. Relative to the 82-member Aerospace and Defense peer group, Boeing's reputation ranks in the 91st percentile, return on equity ranks in the 66th percentile, and its current reputational value metric volatility, what Consensiv terms the Consensus Trend, is down to the 34th percentile at only 1.2%.

Boeing: Doubts lingering

C. HUYGENS - Tuesday, March 05, 2013
One of the hallmarks of a reputational value crisis arising from an operational failure is that the latter is appreciated by stakeholders as a systemic problem. While Boeing has not yet received approval by the US FAA to fly, and international airlines are watching closely, the investigations suggest that the series of problems each represented unique idiosyncratic events. As Boeing's engineers explained, "things happen."

The Huntington Post reported last week that "a probe into the overheating of a lithium ion battery in an All Nippon Airways Boeing 787 that made an emergency landing found it was improperly wired," according to Japan's Transport Ministry. Boeing reports that it has developed a "fix" for the batteries and that once the FAA approves the 22 February plan, the company is ready to execute. Details of the fix are not being widely circulated. Meanwhile, the Europeans are hedging their bets and moving to the older battery class for the Airbus.

James Surowiecki, writing for the New Yorker, sides with the Europeans. In a culture were the expectation for safety is now paramount, it is not clear how the FAA is going to be able to give Boeing clearance. "Boeing is in a business where the margin of error is small. It shouldn’t have chosen a business model where the chance of making a serious mistake was so large." The author of the Wisdom of Crowds suggests it was a mistake to "give other companies responsibility for the Dreamliner."

Turning the the measures of expectation, the Steel City Re Reputational Value Metrics, Boeing (BA) is one of 80 in the aerospace and defense sector and currently ranks in the 77th percentile. The chart of vital signs shows a rising Current RVM volatility. RVM is a non-financial measure of reputational value, and its volatility is the quantitative expression of the uncertainty reflected in the narrative above.  That being said, the current RVM volatility is still in the 1-2% range which is very low. Of note, should things go badly for Boeing, the odds of a material market cap fall are much greater than for the average company because its stakeholders, as evidenced by the low RVM volatility, are not used to being surprised. Ironically, a gently rising RVM volatility may help reduce the shock.

The indications are for little or very gradual change in the near future with a forecast for ongoing downward slope from the 77th percentile for the CRR, a measure of relative reputational ranking. ROE can be expected to lag. Background on the metrics can be found in the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others.

YUM!: Food safety issue comes home to roost

C. HUYGENS - Wednesday, February 06, 2013
Everybody has problems. Boeing has an airplane problem. Tesco has a hamburger problem. And YUM! has a chicken problem. Three different commercial sectors each with quality problems, often leading to safety issues, with one common element. All of the problems originated within the companies' supply chains, comprise failures in operational oversight and control, and have the potential for blossoming into full-on reputational crises.

Reputational crises are expensive. Customers slow down their purchase frequency and extend the their purchase decision cycle, to say nothing of their resistance to premium pricing. But the pain goes further. Vendors offer less favorable terms; creditors raise the cost of capital, employee turnover is but one indicator of morale problems that start brewing, NGOs take interest, and regulators start paying more attention. And of course, equity investors, who have the shortest fuse, sell. That is why Huygens prefers to call them, "reputational value crises."

CNBC reported yesterday that Yum Brands, the parent of restaurant chains Taco Bell, KFC, and Pizza Hut, reported surprise weakness in China. "This skews to the worst case for the company," said David Palmer, managing director and senior food & restaurant analyst at UBS, who covers the company. China represents almost half of the business, in profit terms, for the company, he said in an interview on CNBC's "Squawk on the Street."

Forbes reported, "At YUM’s analyst day on December 6, 2012, we asked CEO David C. Novak what his “defense” was to media exposes that one of KFC China’s suppliers had pumped its chicken full of chemicals to expedite their growth. The story prompted a furious social media reaction. His answer was “No worries. It will blow over.” When asked how, he shrugged: “It always has.”

Turning to a measure of reputational value, the Steel City Re reputational value metrics, the measures for YUM! in contrast to McDonald's, the sector reputational leader, are informative. The problem, it seems, hasn't blown over. The company's reputation ranking is sinking steadily and the forecast last week as shown below, before this week's news, was for further deterioration. The steadiness of the deterioration was suggested by the RVM volatility measures and the median forecast stability numbers. RVM, as Huygens' followers know, is a non-financial measure of reputational value.

YUM!'s loss would reasonably be expected to by McDonald's gain. MCD, with a CRR, a measure of relative reputational ranking, buried at 1.0 for the sector, could only gain in RVM.  MCD's RVM volatility suggests this is the case, and not surprisingly, its ROE has been climbing as YUM!'s has been sinking. 

The moral: supply chains are great sources of cost savings, value, operational risk, and reputational value risk. Their operations need to be overseen and controlled no less so than organic operations. And if the excuse is that the whole point of outsourcing was to reduce the costs associated with organic controls and oversight, well, then, add that sentence to the ever-growing collection of things that seemed like a good idea at the time.

Recent Comments