While we have often written of the link between reputation, liquidity and credit risk, examples help underscore the point. JPMorgan Chase (JPM) is in the throws of an alleged reputation crisis which by many measures, is not particularly noteworthy. On the other hand, notwithstanding the media blitz, there are potential costs to this event that are consistent with reputational damage, if not a full blown reputational crisis.

From the Financial Times (Cotterill, 11 May), we have reactions from Fitch and S&P the day after the 10 May disclosures:

Fitch Ratings has downgraded JPMorgan Chase & Co.’s (JPM) Long-term Issuer Default Rating (IDR) to ‘A+’ from ‘AA-’ and its Short-term IDR to ‘F1′ from ‘F1+’. Fitch has placed all parent and subsidiary long-term ratings on Rating Watch Negative. Fitch has also downgraded JPM’s viability rating (VR) to ‘a+’ from ‘aa-’ and placed it on Rating Watch Negative. Fitch views the size of loss as manageable. That said, the magnitude of the loss and ongoing nature of these positions implies a lack of liquidity. It also raises questions regarding JPM’s risk appetite, risk management framework, practices and oversight; all key credit factors. Fitch believes the potential reputational risk and risk governance issues raised at JPM are no longer consistent with an ‘AA-’ rating.

Standard & Poor’s Ratings Services revised its outlook on JPMorgan Chase & Co. (JPM) and its banking subsidiaries to negative from stable...We currently view JPM’s risk position as “adequate” and not “strong” (as our criteria define the terms), partially because of the risk on JPM’s balance sheet, which we believe contributes to the need for elaborate hedging strategies. Management’s admission that the hedging strategy was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored” contributes to our negative outlook.

Weekly Reputation Index Metrics

The RepuStars® Variety Corporate Reputation Index calculated by Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re corporate reputation ranking metrics. The metrics comprise non-financial indicators of reputational value. The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here for real time quotes.

Analysis

At some point, the emotional shock of a crisis gives way to rational thought. The media’s obsession with Facebook has yielded to the cognitive reality that there is less than once met the eye; and the ongoing Greek-inspired meltdown of the Euro is, well, ongoing. In a competition for stakeholders’ minds, fear is yielding to rational expectations. The “fear index,” the CBOE VIX, dropped 10% from a week ago. In this more rational setting, the central thesis to RepuStars, which tries to anticipate both opportunities and pitfalls through an analysis of reputation metrics – rational expectations as reflected in economic behavior – is again manifesting in market behavior.

Repustars Variety is outperforming the S&P500 by more than 3.5 percentage points in this highly volatile year. Turning to companies who appear to have been undervalued at the start of this calendar year, the greatest gains in the 2012 RepuStars portfolio are being reported by Vertex Pharmaceuticals (VRTX) with a year-to-date climb of 78.6%. American Eagle Outfitters (AEO) is in second place at 44.75% for the year. In third place, BMC Software Inc. (BMC) with a year-to-date return of 28.46%. These are three of the 38 firms identified by the RepuStars Variety algorithm at the start of the year as value opportunities.

Side Note: A description of the 2012 portfolio constituents can be obtained here: click here.

Weekly Update

At the close of trading May 25, 2012, REPUVART and REPUVAR stood at 2684.13 and 2320.96 respectively. Over the past four weeks, the former has changed by -6.19%, while the latter has changed by -6.54%. The benchmark S&P500 Composite Index stood at 1147.85 (31 Dec 2001=1000) and has changed over the past four weeks by -6.10%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by -3.37% and -4.69% respectively; the S&P500 Composite Index has changed by -1.00%. Since January 2009, the REPUVART and REPUVAR have changed by 114.50% and 102.09% respectively; the S&P 500 Composite Index has changed by 41.43%. Other interval changes in the magnitude of the indices are shown below.

Background

The RepuStars Variety Corporate Reputation Index is the first index based on a quantitative model for analysts, investors, and company managers to help demonstrate the impact of reputation on corporate equity prices. The companies selected for the RepuStars Variety Index are chosen algorithmically to capture the disparity between value at which a company is currently trading and its value as calculated by Steel City Re’s reputational metrics.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to their metrics as measured by Steel City Re’s proprietary Corporate Reputation Rank™, which tracks 7000 companies weekly. In using the RepuStars Index as an investment strategy, investors can take advantage of this price disparity. The principles behind Steel City Re's reputation metrics are discussed in the book, Mission:Intangible (see below).

The RepuStars indices are reconstituted annually in the first week of January and posted by Dow Jones Indexes in the third week. The Indices were last reconstituted 20 Jan 2012.  Click here for additional information on the index.

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, specialty finance sector retailers, 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.

Notices

STEEL CITY RE and REPUSTARS are registered trademarks of C. Huygens & Co. LLC and are used under license. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes. The RepuStars Variety Corporate Reputation Indexes are calculated by Dow Jones Indexes, the marketing name and the licensed trademark of CME Index Services, LLC. (CME Indexes). Dow Jones Indexes is a service mark of Dow Jones Trademark Holdings LLC. (Dow Jones). Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones or their respective affiliates, and CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s).

The Facebook Fiasco (FB) has tarnished many a reputation. But only one firm at ground zero experienced a failure of a business process that is core to its reputation. The NASDAQ OMX Group, Inc., (NDAQ) the holding company of The Nasdaq Stock Market, Inc., is the world’s largest exchange company. By its own description, it’s a technology company. “We are not just financial types that sell technology. We’re market-savvy technologists that know first-hand the business challenges technology is supposed to solve. “ That technology failed dramatically Friday, 18 May. The punters want to know: was this a reputational event; is this time to short NDAQ; and while we are at it, how does this rank relative to what JPMorgan Chase is experiencing?

On first pass, the relative drop in the reputation ranking of NDAQ from the 80th to the 71st percentile among its 80 peers seems unambiguously less severe than the drop in the ranking of JPMorgan Chase (JPM) among the same peers earlier this month from the 79th to the 52nd percentile (although it has already started recovering and is now at the 54th percentile (Steel City Re Corporate Reputation Ranking time series below).


However, looking at both the one and three year time series for the two companies, the historic reputation ranking (above) and reputation value metric volatility (below) shows a more nuanced comparison. All other things being equal, JPMorgan Chase is a firm with a much more volatile reputation. In the loss gate chart for NDAQ below, the gates 1-5 show the reputational value metrics for 1, 1.5, 2, 2.5, and 3 standard deviations of the two-year historic mean. The tight clustering of the five loss gates for NDAQ, with loss gate 3 (2 standard deviations) centered on 0.4 GU reflects a much less volatile reputational pattern than JPM where loss gate 3 is centered about 0.47 GU. Even so, the reputation value metrics for both firms is still wide of the mark for even one standard deviation drop from the 2-year historic mean.





There's more to consider. In the multi-variable time series charts below illustrating the 90-day exponentially weighted moving average of the reputational metric volatilty, and now looking at the data with custom peer groups, the volatility of NDAQ's metrics are less sensitive to the volatility of the CBOE VIX, or "fear index" than than are JPM's metrics. Which among other things suggests that at least some of JPM's reputational metric depression may be attributable to the background uncertainty associated with Greece and the Euro.


Returning last to basic reputational metrics, the vital signs column charts and time-series charts provide an interesting quantitative perspective for all of the current media chatter about these two firms.  Relative to the 80 firms in the Finance peer group, the historic volatility of NDAQ is in the 28th percentile and is climbing with the most recent value at the 46th percentile. Its current reputational rank is in the top quartile, return on equity in the third quartile, and projected reputational stability is just above median. JPM's historic reputational volatility, notwithstanding the great swings seen above, is still in the lowest quartile among the custom peer group of 258 financial service sector firms; and the current volatility only moves JPM's volatility to the high end of the third quartile.


These data indicate that neither reputational event affecting the two companies was particularly severe. The data further suggest that there is significant resilience in the reputation of NDAQ that should be able to absorb the impact of the high profile technological glitch; and that the most recent event to surprise JPM is already resolving from a reputational perspective.

Weekly Reputation Index Metrics

The RepuStars® Variety Corporate Reputation Index calculated by Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re corporate reputation ranking metrics. The metrics comprise non-financial indicators of reputational value. The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here for real time quotes.

Analysis

The media’s obsession with Facebook notwithstanding, the dominant economic story was the now expected collapse of the Greek political will to remain with the European monetary union and the fear of western economic Armageddon. In a competition for stakeholder’s minds between fear and rational expectations, fear usually wins. In that setting, the central thesis to RepuStars, which tries to anticipate both opportunities and pitfalls through an analysis of reputation metrics – rational expectations as reflected in economic behavior – become irrelevant.

Nevertheless, Repustars Variety is still outperforming the S&P500 so far this year. Turning to companies who appear to have been undervalued at the start of this calendar year, the greatest gains in the 2012 RepuStars portfolio are being reported by Vertex Pharmaceuticals (VRTX) with a year-to-date climb of 68.93%. American Eagle Outfitters (AEO) is in second place at 33.24% for the year. In third place, BMC Software Inc. (BMC) with a year-to-date return of 22.49%. These are three of the 38 firms identified by the RepuStars Variety algorithm at the start of the year as value opportunities.

Side Note: A description of the 2012 portfolio constituents can be obtained here: click here.

Weekly Update

At the close of trading May 18, 2012, REPUVART and REPUVAR stood at 2582.92 and 2236.04 respectively. Over the past four weeks, the former has changed by -7.09%, while the latter has changed by -7.33%. The benchmark S&P500 Composite Index stood at 1128.16 (31 Dec 2001=1000) and has changed over the past four weeks by -6.04%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by -6.89% and -8.10% respectively; the S&P500 Composite Index has changed by -2.85%. Since January 2009, the REPUVART and REPUVAR have changed by 106.42% and 94.70% respectively; the S&P 500 Composite Index has changed by 39.00%. Other interval changes in the magnitude of the indices are shown below.

Background

The RepuStars Variety Corporate Reputation Index is the first index based on a quantitative model for analysts, investors, and company managers to help demonstrate the impact of reputation on corporate equity prices. The companies selected for the RepuStars Variety Index are chosen algorithmically to capture the disparity between value at which a company is currently trading and its value as calculated by Steel City Re’s reputational metrics.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to their metrics as measured by Steel City Re’s proprietary Corporate Reputation Rank™, which tracks 7000 companies weekly. In using the RepuStars Index as an investment strategy, investors can take advantage of this price disparity. The principles behind Steel City Re's reputation metrics are discussed in the book, Mission:Intangible (see below).

The RepuStars indices are reconstituted annually in the first week of January and posted by Dow Jones Indexes in the third week. The Indices were last reconstituted 20 Jan 2012.  Click here for additional information on the index.

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, specialty finance sector retailers, 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.

Notices

STEEL CITY RE and REPUSTARS are registered trademarks of C. Huygens & Co. LLC and are used under license. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes. The RepuStars Variety Corporate Reputation Indexes are calculated by Dow Jones Indexes, the marketing name and the licensed trademark of CME Index Services, LLC. (CME Indexes). Dow Jones Indexes is a service mark of Dow Jones Trademark Holdings LLC. (Dow Jones). Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones or their respective affiliates, and CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s).

In the opinion of many, JP Morgan Chase is having a reputational crisis. The onslaught of regulators, litigators, and mommy bloggers triggered by a $2 Billion hedging loss suggests that something has gone terribly wrong. The media’s qualitative pronouncements, however, are not meeting the needs of stakeholders for a quantitative assessment of JP Morgan Chase’s tarnished reputation.

Consider the conflicting interests of regulators, shareholders, management, corporate directors and employees on the matter of incentive pay clawbacks. According to Bloomberg (15 May, Marcinek, Griffin, and Kopecki), the company “can cancel stock awards or demand they be repaid if an employee ‘engages in conduct that causes material financial or reputational harm,’ JPMorgan said in its annual proxy statement. The company will claw back pay if it’s appropriate...”

‘Appropriate’ is a squishy word. Stakeholders want to know what formula will be used to convert the magnitude of the alleged damage into the magnitude of clawbacks, and at what time after the alleged damage was precipitated will the magnitude of the damage be assessed. Remember that $millions of compensation and bonus pay are at risk. 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.’” Employees subject to the clawback will probably have other opinions.

JP Morgan Chase’s corporate directors, caught between regulators on one hand and litigators – employees and investors tend to speak through litigators -- on the other, will find little comfort in subjective measures of reputation. Which means that the company’s D&O insurance carriers are no doubt wishing that the Directors would turn to objective measures and establish standards before they effect a clawback. More generally, every corporate board of directors that has identified reputation to be material to their business –there were 3414 public companies as of December 2011 that disclosed this in their proxy statements – should be seeking a solution to their need for objective reputation metrics if only to preempt future issues.

Fund managers and financial advisers would probably like objective measures, too, given the prevalence of concern about reputation risk. Auditors would no doubt appreciate objective measures, not only in the context of controls, but because reputation has also now been identified as a driver of liquidity. Last, communications professionals would likely find better ways to shape the stories surrounding JP Morgan Chase – and every other publicly traded client company -- if they had objective measures of reputation.

There are two different families of instruments stakeholders could turn to today to address their needs for objective measures of reputation. The best known family are survey-based instruments such as the Reputation Institute’s RepuTrak. The Reptrak 150 for 2011, the most recent publicly disclosed survey, reports that JP Morgan Chase’s ranking was 127 out of 150, and that its score was 59.89 up from 55.78 in 2010. The annual rankings had Morgan Stanley at 123 with a score of 60.51 up from 52.48 in 2010, and Goldman Sachs ranked at 147 with a score of 37.14 down from 46.75 in 2010.

There are arguably limitations to the value of these annual rankings. Survey-based measures provide a degree of reputational resolution that is both too late and blurry for time-sensitive issues such as compensation, equity, and tax. In addition to being mostly backward looking,  the Economist newspaper noted that there are issues with the mix of underlying factors underpinning these survey-based metrics.

An alternative family to surveys comprises observational instruments, Steel City Re's system, for example, infers reputation in quantitative terms from the economically relevant activity of stakeholders. The formulation of these metrics is algorithmic and follows the philosophical dictum of Steel magnate Andrew Carnegie who dismissed surveys in favor of observation. “I used to listen to what people say, now that I am older I just watch what they do.”

Taking a long view of JP Morgan Chase, it can be seen that the company's Steel City Re reputational value metric, a non-financial measure of value, has been volatile for the past three years. The reputational value metric of 0.55 GU on May 17, after a fall from a high of 59.7 GU, was nevertheless higher than the lowest value over the trailing twelve months – 0.54 GU on November 4th.

One benefit of metrics of this type is that they foster process controls, and they help to flag extraordinary deviations -- events that could be identified with bona fide reputational damage. In this context, one should note that JP Morgan Chase’s reputational volatility has been so great that the lower boundary of the two-year 2.25 standard deviation of the mean reputational value metric, 0.438 GU (Loss Gate 1), has not yet been breached by the current activity. On the basis of JP Morgan Chase's historical reputational value metrics, and in the context of the three-year long view, this current event could be viewed as just one more bump in a long and volatile history of bumps.



On the other hand, on the basis of its Steel City Re corporate reputational ranking, a relative measure of reputational standing, and in comparison with a peer group comprising all 7400 publicly traded companies tracked by Steel City Re, JP Morgan Chase's current drop from the 79th percentile on May 10 to the 51st percentile May 17 would appear to be material. Is this not incontrovertible evidence of a reputational crisis? Sadly, no. Even this striking piece of evidence is confounded by the fact that the reputation of the banking sector as a whole has been damaged by risks emanating from Athens.



Looking at metrics more familiar to followers of this blog, the bar graph below top right confirms the potential for confounding data. The chart shows that because of the Euro-area crisis, the entire banking sector as of 17 May comprising 216 companies -- one of many possible custom peer groups -- has had awful trailing twelve month (TTM) equity returns. The group's median return was -17.3%. JP Morgan Chase's return, after the mid-May fall, was -23.4% placing it in the 42nd percentile among its banking sector peer group. Over this same time period, the S&P500 lost only 1.6%.

Yet the JP Morgan Chase economic return is superior to two potential bell weather peers first mentioned in the RepTrak data. Morgan Stanley, which was friended by Facebook to be the lead May 18 IPO underwriter from a field of 33, reported a TTM return on equity in the 40th percentile while Goldman Sachs, an icon in its field, reported embarrassing returns earning it a ranking at the 33rd percentile. 

Not surprisingly, then, JP Morgan Chase's reputation as of 17 May is still higher than Morgan Stanley. It's corporate reputation ranking relative to the banking sector peer group is at the 44th percentile while Morgan Stanley is ranking at the 30th percentile. More suprising, perhaps, is that Goldman Sachs, notwithstanding poorer economic returns, is still dominating the other two with a ranking at the 83rd percentile. Among the explanations for the patterns seen are the volatility profiles of the reputation rankings. JP Morgan Chase jumped from the 16th percentile for the past year to the 62nd percentile for the past quarter, Morgan Stanley has been in the low 70's consistently, and Goldman Sachs has dropped from a one year volatility ranking in the 77th percentile to a past quarter ranking in 38th percentile.

There are still a few more ways to extract information from the quantitative Steel City Re reputational metrics and gain further insight into the current crisis. The top left chart below illustrates the magnitude of the JP Morgan Chase reputational ranking movement and economic returns between 10 May and 17 May relative to the peer group of 216 companies in the banking sector. It is striking. The charts at right illustrate the relative positions of Morgan Stanley, JP Morgan Chase, and Goldman Sachs on 17 May. Last, the time series chart at bottom left illustrates the trailing twelve months and emphasizes the point that reputation is a dynamic variable impacted by the impressions of many different stakeholders: customers, vendors, employees, investors, creditors, and regulators. That means than any objective measures established by a board of directors to clawback rewards, or to grant awards as UBS and BP reported recently, need to be defined both by magnitude and time.



Reputational metrics today are essential managerial and oversight tools. They objectify what would otherwise be subjective decisions at risk for being second guessed. Moreover, they inform various stakeholders of the status of an asset increasingly felt to be a vital part of a company's value.

Of course, Corporate Directors would not be the first to use reputational metrics to inform their actions. The RepTrak metrics, for example, have informed marketing executives seeking to improve their communication strategies. The Steel City Re metrics have informed equity investors seeking value opportunities. One visible example is the RepuStars Variety Composite Equity Index calculated by Dow Jones Indexes which is reported on this blog each Monday. Hedge funds have also found the Steel City Re metrics useful in screening equity opportunities and insurers have found the volatility measures of the Steel City Re metrics helpful in screening for increased D&O litigation risk.

Many different stakeholders today need quantitative reputational metrics for a wide range of core business activities. Since companies have already disclosed the materiality of reputational risks, they have opened the door to reputational management. In our culture, we tend to manage that which we can measure. As the JP Morgan Chase clawback issue shows, the need to adopt quantitative measures of reputation is a time-sensitive matter for many stakeholders.

Reputation can speak to a 14% swing in equity value. We noted recently that with this in mind, corporate boards have linked reputation to incentive bonuses both at BP and UBS. Going forward, a component of the CEO's bonus will be tied to improvements made in corporate reputation.

Today we share the converse. At JPMorgan Chase, according to Bloomberg (Marcinek, Griffin and Kopecki, 15 May), the biggest U.S. bank that recently lost $2B in what appears to be a failure in internal controls, will consider reclaiming incentive pay from employees. "The lender can cancel stock awards or demand they be repaid if an employee 'engages in conduct that causes material financial or reputational harm,' JPMorgan said in its annual proxy statement...(N)o decisions have been made."

In short, we know now why companies and their stakeholders care about reputation, reputation measurement, and reputation risk mitigation. Investors care because it affects equity value. Creditors care because it affects liquidity and credit risk. Regulators care because (in the US) it is a point of consideration (extenuation or mitigation) in Federal sentencing guidelines. Last, and most important, those who are ideally situated to measure and manage reputation -- employees and corporate leadership -- care because it directly affects compensation.

You can read more about the foundations of quantitative reputation measurement and management in the Society's 2010 book, Mission: Intangible.

Weekly Reputation Index Metrics

The RepuStars® Variety Corporate Reputation Index calculated by Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re corporate reputation ranking metrics. The metrics comprise non-financial indicators of reputational value. The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here for real time quotes.

Analysis

While macroeconomic concerns dominate the news, unexpected but favorable surprises gave the RepuStars Variety index a boost this week. Afterall, that is central thesis to RepuStars, which tries to anticipate both opportunities and pitfalls through an analysis of reputation metrics.

Turning to companies who appear to have been undervalued at the start of this calendar year, the greatest gains in the 2012 RepuStars portfolio are now being reported by Vertex Pharmaceuticals (VRTX) with a year-to-date climb of 70.81%. American Eagle Outfitters (AEO) drops back to second place at 41.96% for the year. Returning to third place is eBay (EBAY) at 29.59% for the year just a touch ahead of Veolia Environment Ve SA (VE) which slipped and is now up 29.05% for the year. These are four of the 38 firms identified by the RepuStars Variety algorithm at the start of the year as value opportunities.

Side Note: A description of the 2012 portfolio constituents can be obtained here: click here.

Weekly Update

At the close of trading May 11, 2012, REPUVART and REPUVAR stood at 2758.77 and 2394.03 respectively. Over the past four weeks, the former has changed by 0.22%, while the latter has changed by 0.20%. The benchmark S&P500 Composite Index stood at 1178.83 (31 Dec 2001=1000) and has changed over the past four weeks by -1.23%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by -0.29% and -1.37% respectively; the S&P500 Composite Index has changed by 1.17%. Since January 2009, the REPUVART and REPUVAR have changed by 120.47% and 108.45% respectively; the S&P 500 Composite Index has changed by 45.24%. Other interval changes in the magnitude of the indices are shown below.

Background

The RepuStars Variety Corporate Reputation Index is the first index based on a quantitative model for analysts, investors, and company managers to help demonstrate the impact of reputation on corporate equity prices. The companies selected for the RepuStars Variety Index are chosen algorithmically to capture the disparity between value at which a company is currently trading and its value as calculated by Steel City Re’s reputational metrics.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to their metrics as measured by Steel City Re’s proprietary Corporate Reputation Rank™, which tracks 7000 companies weekly. In using the RepuStars Index as an investment strategy, investors can take advantage of this price disparity. The principles behind Steel City Re's reputation metrics are discussed in the book, Mission:Intangible (see below).

The RepuStars indices are reconstituted annually in the first week of January and posted by Dow Jones Indexes in the third week. The Indices were last reconstituted 20 Jan 2012.  Click here for additional information on the index.

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, specialty finance sector retailers, 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.

Notices

STEEL CITY RE and REPUSTARS are registered trademarks of C. Huygens & Co. LLC and are used under license. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes. The RepuStars Variety Corporate Reputation Indexes are calculated by Dow Jones Indexes, the marketing name and the licensed trademark of CME Index Services, LLC. (CME Indexes). Dow Jones Indexes is a service mark of Dow Jones Trademark Holdings LLC. (Dow Jones). Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones or their respective affiliates, and CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s).

Reputational crises tend to bring out in force litigators, regulators, and mommy bloggers. JP Morgan Chase (JPM) is in the early phases of its own crisis arising from the apparent failure of its hedging strategy. After day 1, it is beating the median 7% equity value loss with a respectable 9.28% but this number will fluctuate presently while equity investors sort out the implications of Jamie Dimon's admission that "in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective as an economic hedge than we thought.”

Make no mistake about it. The media believe this is a reputational crisis.

National Public Radio: It will hurt JPMorgan's reputation…JPMorgan has widely been viewed as the best risk manager among the big banks…This mistake will not only dent this reputation. it will give more credibility to those arguing for a narrower implementation of the Volcker Rule to restrict the trades banks can make with their own money.

Financial Times: Fitch believes the potential reputational risk and risk governance issues raised at JPM are no longer consistent with an ‘AA-’ rating… JPM’s ratings remain at heightened risk for downgrade until the firm’s risk governance practices, appetite, oversight and reputational impact can be further reviewed. Fitch will also review the potential implications for market confidence in JPM and reputational damage as a result of this loss on both its liquidity profile and counterparty and dealings.

Reuters: The dollar loss, though, could be less significant than the hit to Dimon and the bank's reputation...Analysts at Citigroup said they expected the trading loss to hurt JP Morgan's reputation and cut their price target to $45 from $52.

Wall Street Journal: Outright downgrades by Wall Street analysts of JPMorgan Chase & Co.'s (JPM) stock are tough to find, even as analysts voice concern about its formerly sterling reputation following the bank's surprise announcement of a substantial trading loss. Kurt Schact, managing director of the CFA Institute, thinks that analysts are sticking with their bullish calls because of the reputation of JPMorgan and its CEO Jamie Dimon.

France 24: JPMorgan Chase's share price plunged after a $2 billion derivatives loss left the bank's reputation and that of its pugnacious chief executive Jamie Dimon in tatters.

Huffington Post: It's a hit to JPMorgan's reputation and profit.

JP Morgan Chase experienced a failure in a business process - risk management. Risk management is a core banking business process so the failure may relate to a failure in innovation -- i.e., a new way to manage risk. Let's call it an innovation failure for now. The failure appears to involve a French national trader in the London office suggesting the real failure may have been in the company's internal controls and the degree to which the New York-headquartered company manages the risk of innovation.

The event generated significant adverse media on day 1, and the media honed in on reputation. The firm lost 9% in value. Collectively, these would suggest a reputational crisis of significant proportion. Perhaps. Or more of a tempest in a teapot? $2 billion, for JPMorgan, represented only 0.5% of its pre-crisis value.

Steel City Re provides the Society with quantitative reputational value and ranking data each Thursday. Consequently, this week's data do not reflect the impact of the latest events, characterized by the media as a crisis. Fear not. Huygens will return to this story next week for a quantitative look at JP Morgan Chase, its peers, and reputation.

The chairman’s letter in the annual report, signed 6 March 2012, is clear. “The board set three priorities for BP,” wrote Carl-Henric Svanberg. “Safety must be enhanced and embedded. Trust must be regained. Value must be created through a clear strategic plan”

Safety, now a factor in the executive bonus plan, is tangible evidence of the company’s strategic priorities of reinforcing safety and risk management, rebuilding trust and reinforcing value creation of its intangibles. At group level, the safety and risk management component includes targets for recordable injury frequency, loss of primary containment and implementation of change programmes. Rebuilding trust is focused on external reputation as measured by external surveys and internal morale as measured by surveys.

BP’s board considers reputation from two perspectives – the reputational risks to the group and the processes the company has in place to manage these risks. In 2011, the board reviewed external reputation data which looked at BP’s reputation in the UK and US. It also discussed the group’s communications strategy and its reputation management plan.

To assure that stakeholders know that BP is serious about reputation and its risk management, the annual report offers up the term 20 times in the 10k section 1A-Risks. The term also appears liberally throughout the balance of the document for a total of 45 mentions over twenty different pages in the 300 page document.

In what appears to be a growing trend first announced formally at UBS, but clearly preceded by BP, both reputation measurement and reputational risk are major issues at the Board level. This is why: as reported here earlier, firms that have superior reputations newly discovered can pickup an average of 6% of market cap, while firms that experience a reputational crisis can lose an average of 7%. Anything that can precipitate a 13% swing in value is bound to get the attention of a corproate board.

The Steel City Re reputation metrics for BP this week show the following trends: BP’s reputational value metric, a non-financial indicator of reputational value, is stabilizing with a near median volatility relative to its peers, and a long term forecast of stability. The company’s corporate reputation ranking, an indicator of relative standing, places the firm in the 81st percentile. Since the volatility indicators are neutral, the data do not yet indicate a near term boost in equity returns above the median for the peer group. After years of reputational volatility, it appears at this point that equity investors are waiting for further evidence of material risk reduction in RepRisk -- reputation risk. Nevertheless, considering where things were two years ago, BP has come "a long way baby."

The accounting firm Eisner Amper published their third annual survey, Concerns About Risks Confronting Boards. Based on the opinion of 193 corporate directors, the data show that excluding financial risk, 66% believe that reputational risks are the most concerning currently. The top three reputational risks of 2012 were quality (30%), ethics/integrity (24%), and “public perception” (16%). Security was #4 at 12%. These three named risks, along with innovation, safety, and sustainability (8%), comprise the six major sources of reputational risk according to research published by the Society in the 2010 book, Mission: Intangible.