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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.

Sustainable sustainability?

Nir Kossovsky - Monday, July 13, 2009
Amongst our master list of key drivers of reputation recognized by the Society are ethics, innovation, quality, safety, sustainability and security. We gave the top post to ethics and its derivatives, confidence and credibility. We haven’t shared our thoughts on the pecking order for the five remaining intangible asset business processes, although recent events suggest that the market is moving sustainability into a lower ranking.

What is happening? A few weeks ago we noted that United Technologies (NYSE:UTX) had quietly terminated its sustainability-led advertising strategy. Now we read that BP (NYSE:BP) is moving from renewables back to petroleum.

We intend no offense. However, in light of the above, there is a open question: while sustainability is certainly a public good, can it be practiced by individual companies profitably? Or more specifically to the intangible asset aspects, "is a reputation for sustainability valued?" We invite your comments here and on the IAFS Linked-In platform.

Aeros and omissions

Nir Kossovsky - Tuesday, June 30, 2009
The Boeing Company (NYSE:BA) reported today that it would again delay the first flight of its new jet, the 787, the latest setback in a program that is considered crucial to the plane maker’s future. The New York Times reports that Howard Rubel, an analyst at Jefferies & Company, said the problem “doesn’t help the company’s credibility.”

Not so fast, Mr. Rubel. Credibility has many facets. The most important driver of reputation in the commercial aerospace sector is safety, and with the recent string of air disasters involving aircraft made by Boeing’s rival EADS NV (EPA:EAD), safety is very much on every stakeholder's mind.

The operational setbacks both Boeing and EADS have suffered highlight the difficulty of pulling off increasingly complex engineering feats involving new materials and global supply chains. And at least one financial lesson from the effort to create a global supply chain is that the savings from direct and tangible costs are being offset by intangible costs arising in the risks of a greater business network entailing less visibility and control.

Managing a complex supply chain is a business process, and failure to do it well – when stakeholders have been led to expect benefits – can be costly in terms of reputation. So returning to Howard Rubel’s comments, what is the net reputation impact?

We turn to the data from the Steel City Re IA (Corporate Reputation) Index. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

The index shows that over this past year, Boeing’s reputation ranking has sunk from the 69th percentile to the 48th percentile among the 47 companies in the Aerospace and defense sector. Worst, volatility has been climbing and the Exponentially Weighted Moving Average volatility is now four log orders of magnitude. Not surprisingly, return on equity is 14% below the median of the peer group.

Looking at industry more broadly, we see that the overall reputation ranking of the Aerospace and defense sector relative to other industry sectors has been generally rising while variance within the group has been declining and assuming greater homogeneity.

Within this environment, the outstanding reputation holders comprising the top decile as measured by the Steel City Re Reputation Index are: American Science & Engineering (NASDAQ:ASEI); Precision Castparts Corp. (NYSE:PCP); TransDigm Group (NYSE:TDG); and United Technologies Corp (NYSE:UTX).

United Technologies interests us because our colleague, Nancy Lintner, former Chief Marketing Officer and a speaker at one of our annual meetings, developed an award winning communications campaign that highlighted a number of corporate intangibles. Over the past year, the Reputation Index ranking for United Technologies has climbed slightly from an already high 89th percentile to the 92nd percentile, and its EWMA volatility has declined. The company has rewarded investors with an ROE that is 6% above the median return of the Aerospace and defense peer group.

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