On 25 August, Berkshire Hathaway Inc., Warren Buffett's investment company, agreed to sink $5 billion into Bank of America Corp, the beleaguered financial giant. The deal helped allay fears that America's biggest bank needs a fresh infusion of capital to withstand mortgage losses and another downturn in the economy. The investment was both fresh capital and a market signal -- a reputation thing, if you will.

By accepting the investment, Bank of America CEO Brian Moynihan was backing down after adamantly maintaining the he didn’t need additional capital. His capitulation could have been a signal that Bank of America was in as much trouble as stakeholders were assuming and give further life to an ongoing reputational crisis. It could have been an expensive capitulation. As reported in the 22 August issue of Agenda, a Financial Times service whose content is directed towards corporate board members, the median cost of a reputation event is 7% of market capitalization. Fortunately, it appears that the converse is true.

The Los Angeles Times (Aug 25, Reckard) acknowledges Buffet’s history of reputation restoration investments: ...when federal authorities accused Salomon of trying to corner government securities markets, Buffett wound up stepping in as chairman of the company to save its reputation and get it back on track. For Bank of America, Buffett's investment should help put to rest some of its own reputational damage.

Reuters (Aug 26, Baldwin) reported Warren Buffett showed again that his name and money is enough to give a struggling company instant credibility in the market. But the legendary investor also demonstrated his canny command of that reputation means that such deals can immediately generate profits.

Turning to the numbers, the Steel City Re Corporate Reputation Index shows an early appreciation of the investment of equity investors, and some general positive movement among all stakeholders in general. Over a period when the median value of the sector was flat, the Berkshire investment created an additional 9% of market value.


But what a reputational ride. Over the past few weeks, the company's reputation rank has dropped from around the 53rd percentile to the 4th percentile among the 96 peers in the Major Bank sector. Its exponentially weighted moving average reputational volatility peaked at 426% and its trailing twelve week reputational vector dropped to -23.6%. Only the reputational velocity indicated a break in the pattern with a rise this past week to a negative 50%.

In strict financial terms, over the trailing 12 months, its return on equity -- including the Thursday bump -- was 26.33% below the median of the peer group.

The Berkshire investment underscores the limitations companies face today in signalling to their stakeholders that "things" are better than they may appear, or stated in reputational terms, that stakeholders' intuitions may be excessively and unreasonably negative. OK, they can accept an expensive investment from Warren Buffet. Goldman Sachs saw the value of that last year. What else? They can improve their credit rating from S&P -- although Bloomberg did hint only recently that the rating agencies opinions (ratings) may have become irrelevant. They can point to their CEO's salary as evidence of leadership quality? No. They can point to their affordable D&O insurance? Not Bank of America. Crank up the PR machine?

You get the point. The value here is that a third party -- Berkshire Hathaway -- stepped in and "bet" on the come in a big way specifically for the purpose of signalling that there was significant upside potential.

Warren Buffet is well known and much respected for his earthy aphorisms. He is admired for his lofty valuation. Berkshire Hathaway (NYSE:BRK), an insurance-based conglomerate has been rewarded historically with outsized intangible asset values owing to the reputation of its founder. Those valuations are approaching the median of the Property and Casualty Insurance sector and the polish continues to come off.

What is the evidence? The man who made reputation management a "household" phrase in the C-suite and boardroom, who famously said, "“If you lose dollars for the firm from bad decisions, I will be very understanding. If you lose reputation for the firm, I will be ruthless,” is named in a shareholder suit alleging -- you guessed it -- loss of reputation for the firm.

The National Association of Corporate Directors NACD Daily (April 20), a compilation of other news sources, shares that "Warren Buffett and the rest of Berkshire Hathaway Inc.'s board of directors were sued by a shareholder Tuesday over presumed heir apparent David Sokol's trading in the stock of a company that was later bought by Berkshire," the Montreal Gazette (April 20, Hals) reports. Sokol, who purchased shares of Lubrizol Corp. before pitching the company as a possible acquisition, was also named in the lawsuit. He resigned from Berkshire Hathaway last month. "The lawsuit filed by Berkshire shareholder Mason Kirby in Delaware's Chancery Court calls for Sokol to give up any improper gains to Berkshire," the Gazette notes. "It also calls for Buffett and other directors, including vice-chairman Charlie Munger, to compensate Berkshire for the damage they caused to the company's reputation and goodwill."

In total, the Omaha World-Herald (April 20) states, Sokol purchased just over 96,000 shares of Lubrizol in early January prior to recommending that Omaha-based Berkshire acquire the company. In the suit, Kirby charges: "Sokol knew that Buffett would closely consider and likely take his recommendation. As a result of Sokol's unethical behavior, Berkshire suffered significant reputational losses and other damages."

The metrics affirm that something is up. The reputational value changes to the Steel City Re Corporate Reputation Index rankings noted two weeks ago persist, and both the reputation volatility and vector trends are on track upwards and downwards respectively.

Most telling, however, is that the loss of intangible asset fraction now makes the Company look like a typical property-casualty insurer. Sure, relative to other conglomerates, the Company's intangible asset fraction of some 10-20% was materially below the peer group's median. But seen as an insurer, the Company had a 20% higher valuation.

That valuation ascribable to intangibles, what we call for lack of a better term "reputation," is disappearing quickly (see asterisk below). Berkshire Hathaway's lofty intangible asset valuation is coming down to earth.
 

In late February, Alice Schroder writing for the Financial Times  challenged Warren Buffett to show his sage side on succession. Call it a governance thing. But the fact is that both last year, and again this year, Mr. Buffett failed to clarify how roles will be allocated when he inevitably steps down. According to Ms. Schroeder, “the market is fed up with the ‘trust me’ approach and is no longer giving Mr. Buffett the benefit of the doubt."

Fast forward to late March when the market is shocked to learn, according the Gainesvill Sun, "David Sokol has abruptly resigned from Berkshire Hathaway, the company run by the billionaire Warren E. Buffett, raising major questions about the future stewardship of the conglomerate." The 54-year-old was considered to be the top candidate to succeed the 80-year-old Buffett -- a major concern to Berkshire's investors." Furthermore, his departure occurs under a cloud of questionable trading.

According to the Economist,  “this is toe-curling stuff for the great investor, who prides himself on fair-dealing and likes to stake out the moral high ground. Think derivatives, which he has damned as dangerous. Or his tut-tutting over Wall Street’s book-cooking. (In both cases there is a whiff of hypocrisy: Berkshire dabbles in derivatives and it was recently forced to write down holdings that regulators deemed overvalued.) The affair will fuel talk that Mr Buffett’s halo is slipping."

What do the numbers say? The Steel City Re Corporate Reputation Index shows a tinge of negative reputational activity at Berkshire Hathaway -- and a rather droll economic performance over the trailing twelve months.

The Index ranking for Berkshire Hathaway (NYSE:BRK) has dropped from the 100th percentile to the 98th percentile,  the exponentially weighted moving average volatility has inched ever so slightly to 0.1%, and the reputation vector and velocity have been negative for a full month. These are insignificant movements -- perhaps, like the dog that didn't bark, they are notable because the economic performance of Berkshire Hathaway, a conglomerate, is trailing the median of its peers by 13%.

The halo may not yet be slipping, but it is increasingly vulnerable.

On Monday 14 February, Barron’s released its list of the world’s most respected companies. Apple (NASDAQ:APPL) tops the list at #1 yet again. And lest your curiosity be left hanging, finishing off the top 5 are Amazon (NASDAQ:AMZN), Berkshire Hathaway (NYSE:BRK), IBM (NYSE:IBM) and McDonald’s (NYSE:MCD).

And then there is Nokia (NYSE:NOK), the world’s biggest telephone handset-maker. Quotes the Economist, “We are standing on a burning [oil] platform,” Nokia’s CEO, Stephen Elop, wrote in a memo to all 132,000 employees. If Nokia did not want to be consumed by the flames, it had no choice but to plunge into the “icy waters” below. In plainer words, the company had to innovate -- quickly.

The value of Apple’s reputation for innovation, earned by actually being innovative, is that while the most respected company in the world only commands 4% of the telephone handset market, it commands 50% of the profits. That's pricing power, a benefit of a superior reputation, in the extreme.

Turning to the reputation metrics, Apple’s popular standing is reflected in its stable top ranking in the Steel City Re Corporate Reputation Index. Over the trailing twelve months, it has made the jump from the 97th percentile to the 100th percentile among the 51 companies in the Electronic Data Processing Equipment sector, and over the past six months, it hasn’t budged from that spot. Its corresponding trailing twelve month return on equity is 58.63% greater than the median of its peer group, its EWMA volatility is 1%, its trailing twelve week reputation velocity is 0.0, and its trailing twelve week reputation vector is undefined.

Its peer group shows a U-shaped drop and recovery in reputation standing relative to the market as a whole, and the intra-sector volatility is at the upper end of average. Significantly, the intangible asset fraction of the group has been progressively rising these past 12 months.

Nokia should wish for such metrics. Over the trailing twelve months, it has dropped from the 36th percentile to the 19th percentile among the 30 companies in the Diversified Electronics sector. Its corresponding trailing twelve month return on equity is 52.22% below than the median of its peer group, its EWMA volatility is 2%, its trailing twelve week reputation velocity is -10%, and its trailing twelve week reputation vector is -.8% which is a material level.

Its peer group shows a slight rise is reputation standing relative to the market as a whole, and the intra-sector volatility is at the low end of average. Last, its intangible asset fraction has dropped from 86% to 78% of market capitalization while the median of its peer group now stands at 88% of market cap.

Mr. Elop believes that one advantage Apple has over Nokia that he believes he can overcome is its access to the innovative genius that is resident in Silicon Valley. Stay tuned, as Finland comes to California.

Intangible assets are the primary source of enterprise value, and the Society’s mission is to advance best practices in their financial management through education, advocacy, and the promulgation of standards. The Society engages in several educational activities including a regular series of articles in Intellectual Asset Management magazine, regular call-in Mission Intangible Monthly Briefing, the recently published book, Mission: Intangible. Managing risk and reputation the create enterprise value, and of course, this blog. Click here to view the full menu of Mission: Intangible-branded educational opportunities.

One of the hallmarks of financial management is process monitoring through financial metrics and the collective measure of intangible asset value, reputation. Today we illustrate the value of intangible asset management with anecdotal metrics for constituents of the S&P500 Composite Index.

To recap and update, intangible assets comprise approximately 66% of the value of the median material publicly traded company. The chart below shows how the intangible asset fraction of companies over the past few years sampled from about 7000 publicly traded firms has dropped from its peak in 2007 of 78% and is now around 65% which, coincidentally, is the period median.


Using the Steel City Re Corporate Reputation Index as the reputation metric, only 61 constituents of the 10 June 2010 S&P500 Composite Index over the past 128 weeks has ranked in the top 1 percentile relative to approximately 7000 companies traded on the major western exchanges. The other 436 constituents of the current Composite Index have not held that reputation rank during this recent period. Of the 61 companies, the frequency at which they held rank in the top 1 percentile over the 128 week period is reflected in the order in which they appear in the table below, and is shown graphically on the chart. These are the reputation titans of the post-bubble period.




Berkshire Hathaway (NYSE:BRK.A) holds the distinction and lonely outpost at the far right of the graph having ranked in the top 1 percentile of all companies 97% of the time. To its left, the next three highest ranking firms comprising Colgate Palmolive (NYSE:CL), Google (NASDAQ:GOOG), and CR. Bard (NYSE:BCR)  each appeared 88.3%, 86.7%, and 85.2% of the time, respectively. 

Turning to corresponding economic performance, the 61 most highly ranked constituent members of the S&P500 Composite Index that had ranked at least once in the top 1% of the Steel City Re Corporate Reputation Index over the past 128 weeks -- Reputation Titans -- returned, as a group, -7.3% over the period compared with a negative 12.6% return for the portfolio as a whole (reflecting survivor bias) and a -23% return to the actual S&P 500 Composite Index. The remaining 436 (balance), of course, underperformed the portfolio. These data show that the Reputation Titans exhibited relative reputation resilience, a behavior fully consistent with a superior reputation and described in greater detail in the Society's book, Mission: Intangible.


Looking at the S&P500 Composite Index constituents from another perspective and dividing the group into top 15%, Mid Range Rankings, and Bottom Quartile as measured by the Steel City Re Corporate Reputation Index rankings, the top 50 most highly ranked firms over the entire period returned -8.7%, the 50 top-ranked companies that dominated the mid-range rankings returned -20.9%, and the 30 companies that essentially owned the bottom quartile for the period returned -28%. These compare, as expected, with the S&P500 Composite Index returns of -23%.


Summarizing, as shown repeatedly since 2005, there is a positive correlation between reputation ranking and economic return. Because superior reputations favorably impact pricing power, market share, vendor terms, operating costs, credit, costs, equity value, and price stability, executives seeking to maximize enterprise value would do well to concentrate on managing the intangible assets underlying reputation value.

One way to learn how to manage those assets is to become active in the Society. Why not sign up to our group on Linked-In to tap into a wealth of fresh content daily on intangible asset finance, management, policy, marketing and security? Or better still, become a member. We look forward to welcoming you.

The results are in and jaws are agape. Heroes are tarnished, the low are elevated, and we have a new crop of villains to talk about. Of course, were referring to the Harris Reputation Quotient.

The Harris organization released their 2009 rankings earlier this week. Based on interviews and other processes in the first weeks of 2010, this is one of the most widely watched reputation metrics.

One surprise is that Berkshire Hathaway (NYSE:BRK.A) took the top spot from frequent top scorer Johnson & Johnson (NYSE:JNJ). Of course, the latter had a reputation run in with both FDA and the US Justice Department earlier this year that appears to have cost them reputationally.

A true bright spot in the study belongs to Ford (NYSE:F), whose RQ score increased by 11.28 points from 2008, the largest single year improvement in the past nine years. Readers of the Mission:Intangible blog saw this coming with our post in April 2009. The major turning point for Ford was 30 October 2009. Below we paste the Steel City Re Corporate Reputation Index rankings for Ford relative to its 9 automotive peers. Compared with the fortunes of GM, Chrysler and Toyota (NYSE:TM), Ford is flying. Its rankings climbed from the 33rd to the 87th percentile.



But even compared with the reputation metrics of the largest public companies with values $50B and greater shown in the chart below, Ford is clearly rocketing. Among these 85 peers, Ford climbed from the 2nd percentile to the 29th percentile. Not to take a shine off its product, but corporate reputation in this instance clearly benefitted from a period ROE of some 230%. Alas, this is all so 2009.



Which leads us to assert, with restrained hubris, that the Harris Reputation Quotient is a lagging indicator of reputation relative to the Steel City Re Corporate Reputation Index. Really.