In the race for distinction by dysfunction, scoring an own-goal is helpful. But from time to time, it does not hurt to have an assist. We're referring, of course, to the lack of love between Oracle and Hewlett Packard. Here's the latest installment, a press release from Oracle 28 September, reproduced without edits or comments.

"After HP agreed to acquire Autonomy for over $11.7 billion dollars, Oracle commented that Autonomy had been ‘shopped’ to Oracle as well, but Oracle wasn’t interested because the price was way too high. Mike Lynch, Autonomy CEO, then publically denied that his company had been shopped to Oracle. Specifically, Mr. Lynch said, “If some bank happened to come with us on a list, that is nothing to do with us.” Mr. Lynch then accused of Oracle of being ‘inaccurate’. Either Mr. Lynch has a very poor memory or he’s lying. ‘Some bank’ did not just happen to come to Oracle with Autonomy ‘on a list.’ The truth is that Mr. Lynch came to Oracle, along with his investment banker, Frank Quattrone, and met with Oracle’s head of M&A, Douglas Kehring and Oracle President Mark Hurd at 11 am on April 1, 2011. After listening to Mr. Lynch’s PowerPoint slide sales pitch to sell Autonomy to Oracle, Mr. Kehring and Mr. Hurd told Mr. Lynch that with a current market value of $6 billion, Autonomy was already extremely over-priced. The Lynch shopping visit to Oracle is easy to verify. We still have his PowerPoint slides.”

The latest reputation numbers from Steel City Re show no material change from last week, if you consider another 4% relative under performance immaterial. The alleged overpayment by HP for Autonomy by nearly $6B is impressing no one that hasn't already formed an opinion on Hewlett Packard's (NYSE:HPQ) reputation. At the close of trading 29 September, HP was ranked in the 47th percentile relative to the 17 companies in the Computer Processing Hardware sector. This is up a notch from the 41st percentile last week. Its exponentially weighted reputational ranking volatility is up from last week's 460% to 512%, while both the reputational vector and velocity are negative at 19.6% and 41% respectively compared to -15% and -46% last week, respectively.


 Economically, the performance is poor with a trailing twelve month return on equity that is under performing the median of the peer group by 33.05% down approximately 4% from last week's 29.28% under performance leading us to affirm that the expectations set by a board -- its reputation -- are material.

Weekly Reputation Index Metrics

At the close of trading 22 Sep 2011, the RepuStars® Variety and Repustars Prime Composite Indices stood at 222.59 and 186.43 respectively. Over the past four weeks, the former Index has decreased by 2.02%, while the latter has decreased by 1.23%. The benchmark S&P500 Composite Index stood at 100.61 (5 April 2002=100) and has decreased over the past four weeks by 2.56%.

Over the trailing twelve months, the RepuStars Variety and Prime Composite Indices have, respectively, gained 3.4% and lost 3.0%; the S&P500 Composite Index has lost 1.66%. Since January 2009, the RepuStars Variety and RepuStars Prime Composite Indices have gained 75.61% and 67.69% respectively; the S&P 500 Composite Index has gained 21.22%. Other interval changes in the magnitude of the indices are shown below.


The RepuStars® family of composite indices represent a strategy of reputation arbitrage and reflect the added value of reputation resilience. The RepuStars® Prime Composite Index comprises no more than one firm in each of 20 major sectors with the greatest potential for reputation-linked equity appreciation sampled from the large-cap segment of the U.S. equities market. The RepuStars Variety Composite Index comprises no more than 3 firms in each of 19 major commercial sectors. The benchmark metric is the S&P 500® Composite Index.

The RepuStars indices are reconstituted annually in the first week of January. The Indices were last reconstituted 6 Jan 2011.  Click here for additional information on the indices.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store or other leading online book retailers. 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow. 

REPUSTARS is a registered trademark used under license.

Leo Apothekar is out and Meg Whitman is in as Yahoo! and HP continue their odd competition for the most interesting performance by a governing board this past decade. Here's a quick recap of HP's ongoing  saga, courtesy of The Economist (22 Sep): "Whatever happens, the saga is another blow for a company that has lurched from one boardroom crisis to another. Mr Apotheker took the wheel at HP in November 2010 following the departure of Mark Hurd, who left abruptly amid stories of sexual indiscretions and problematic expense-reporting. Mr Hurd had taken over from Carly Fiorina, who was binned in 2005 after the firm’s profits plunged. A year later Patricia Dunn, HP’s then chairman, also departed after a scandal involving an investigation into suspected press leaks from HP directors."

This Board-level soap opera has left its mark.This week, HP ranked in the 41st percentile among the 17 companies comprising the Computer Processing Hardware sector. This ranking represents a 35 percentile drop from a ranking of 76 twelve months ago. Its exponentially weighted reputational ranking volatility is hovering around 460% while both the reputational vector and velocity are negative at 15% and 46% respectively.

Over the past few weeks, the median reputational metric of the Computer Processing Hardware sector has been stable at a relative ranking of 40%.  Meanwhile, the intangible asset fraction of the company continues to climb to more than 110% suggesting either major book asset write downs or additional leverage. The median for the sector is around 80%.

Economically, the performance is poor with a trailing twelve month return on equity that is underperforming the median of the peer group by 29.28% leading us to conclude that the expectations set by a board -- its reputation -- are material.

Weekly Reputation Index Metrics

At the close of trading 15 Sep 2011, the RepuStars Variety and Repustars Prime Composite Indices stood at 244.07 and 204.16 respectively. Over the past four weeks, the former Index has increased by 9.06%, while the latter has increased by 9.39%. The benchmark S&P500 Composite Index stood at 107.69 (5 April 2002=100) and has increased over the past four weeks by 6.0%.

Over the trailing twelve months, the RepuStars Variety and Prime Composite Indices have gained 16.23% and 9.34% respectively; the S&P500 Composite Index has gained 7.42%. Since January 2009, the RepuStars Variety and RepuStars Prime Composite Indices have gained 92.55% and 83.63% respectively; the S&P 500 Composite Index has gained 29.76%. Other interval changes in the magnitude of the indices are shown below.


The RepuStars® family of composite indices represent a strategy of reputation arbitrage and reflect the added value of reputation resilience. The RepuStars® Prime Composite Index comprises no more than one firm in each of 20 major sectors with the greatest potential for reputation-linked equity appreciation sampled from the large-cap segment of the U.S. equities market. The RepuStars Variety Composite Index comprises no more than 3 firms in each of 19 major commercial sectors. The benchmark metric is the S&P 500® Composite Index.

The RepuStars indices are reconstituted annually in the first week of January. The Indices were last reconstituted 6 Jan 2011.  Click here for additional information on the indices.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store or other leading online book retailers. 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow. 

REPUSTARS is a registered trademark used under license.

Conventional wisdom suggests that 7% of market capitalization is the median cost of an adverse reputational event. UBS only wishes its losses would be no worse. On Thursday, according to Reuters (Howley and Thomasson, 16 Sept), Swiss bank UBS said it had lost around $2 billion due to rogue dealing by a London-based trader at the Swiss bank. UBS stock ended the day down 10.8 percent, its lowest close since March 2009, after the bank said it might post a third-quarter loss due to the trading , a huge blow as it struggles to rebuild credibility after years of crises.

Bloomberg reports (Buhayar, 15 Sept) that UBS AG  had its credit ratings put under review for possible downgrade by Standard & Poor’s and Moody’s Investors Service. The examination “will center on ongoing weaknesses in the group’s risk management and controls that have become evident again,” Moody’s analysts led by Robert Thomas said yesterday in a statement. S&P said in a statement today it will make a decision on the ratings “once further details emerge on the scale of the loss and the risk management lapses that enabled it to occur.”

Turning to the Steel City Re Corporate Reputation Index, among the 45 companies in the Financial Conglomerates sector, over the trailing twelve months UBS's ranking has slid from the 64th to the 34th percentile. Its most recent exponential weighted moving average reputation index volatility is at 60%, and the 12 week reputation velocity and vector are both negative at -23% and -5.3%.


Over the past few weeks, the median reputational index ranking of the sector dropped below 50% and the intra-sector volatility has been climbing. Returning to UBS, its intangible asset fraction has be deteriorating and is approaching the median of its peer group which today is about zero (0%) percent.

 

There is a lesson. Reputation risk management means entails the management of different types of risks in different commercial sectors. In financial services, the business processes that need risk management for the purposes of protecting reputation are ethics, quality, and innovation. In this instance, the quality of the trading processes was subverted by an unethical trader.

Reputation is an expectation held by stakeholders. Those expectations can vary over time, but at the end of the day, they are what drive commercially relevant behaviors among the stakeholders that create value -- 9% rise in enterprise value on the occasion of an investment in Bank of America by Warren Buffet -- or or destroy value, as in the present case of rogue trading at UBS.

Earlier this week, Yahoo’s (NASDAQ:YHOO) board fired CEO Carol Bartz and appointed CFO Tim Morse as interim CEO. That makes 4 CEOs in 4 years and casts a shadow on the board of directors, among whose duties are the selection and oversight of the CEO.

According to the Associated Press (8 Sept, Liedtke), “Carol Bartz's firing as Yahoo Inc.'s CEO isn't going to be enough to placate a loudening chorus of shareholders who believe Chairman Roy Bostock and his fellow board members also should be ousted after years of questionable choices that raised doubts about their competence."

Turning to the numbers, the Steel City Re Corporate Reputation Index shows a steady decline in Yahoo’s reputation ranking over the trailing twelve months relative to its 104 peers in the Internet Services and Software sector. On 3 September 2010, Yahoo ranked in the 89th percentile; yesterday they ranked in the 70th percentile. The 19 point decrease has been associated with an increase in Yahoo’s reputational volatility. Over the trailing six months, the exponentially weighted moving average reputational ranking volatility has climbed from around 10% to 49.4%. The trailing twelve week reputational vector and velocities are reading in at -9.4% and -7% respectively. It is therefore not surprising that the company is underperforming the median its peers over the trailing twelve months by 6.64%.
More globally, the entire sector appears to be rising ever so slightly reputationally relative to the broad market. The sector's median ranking has been edging up from the 40th percentile over the trailing 12 months. Within the sector, however, variance is relatively high reading in at 28% on 8 Sept. Last, looking specifically at Yahoo’s intangible asset fraction, it has dropped recently from around 60% to the low to mid 50%; the median fraction among the peer group is in excess of 80%.

Activist investors are taking note. So are long time stakeholders. The AP story quotes Darren Chervitz, co-manager of the Jacob Internet Fund, a longtime Yahoo shareholder, this way: "This board has presided over some of the worst decisions made by any company in recent history." Bartz frames it more colorfully in a profanity laced interview with Fortune magazine. "The board was so spooked by being cast as the worst board in the country. Now they're trying to show that they're not the doofuses that they are."

Weekly Reputation Index Metrics

At the close of trading 1 Sep 2011, the RepuStars® Variety and Repustars Prime Composite Indices stood at 242.60 and 201.46 respectively. Over the past four weeks, the former Index has increased by 2.95%, while the latter has increased by 0.98%. The benchmark S&P500 Composite Index stood at 107.28 (5 April 2002=100) and has increased over the past four weeks by 0.36%.

Over the trailing twelve months, the RepuStars Variety and Prime Composite Indices have gained 19.04% and 11.97% respectively; the S&P500 Composite Index has gained 9.05%. Since January 2009, the RepuStars Variety and RepuStars Prime Composite Indices have gained 91.4% and 81.21% respectively; the S&P 500 Composite Index has gained 29.26%. Other interval changes in the magnitude of the indices are shown below.


The RepuStars® family of composite indices represent a strategy of reputation arbitrage and reflect the added value of reputation resilience. The RepuStars® Prime Composite Index comprises no more than one firm in each of 20 major sectors with the greatest potential for reputation-linked equity appreciation sampled from the large-cap segment of the U.S. equities market. The RepuStars Variety Composite Index comprises no more than 3 firms in each of 19 major commercial sectors. The benchmark metric is the S&P 500® Composite Index.

The RepuStars indices are reconstituted annually in the first week of January. The Indices were last reconstituted 6 Jan 2011.  Click here for additional information on the indices.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store or other leading online book retailers. 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow. 

REPUSTARS is a registered trademark used under license.

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.