Briefing Friday 28 June May at 10h00 ET

Program: How to Celebrate a Cornucopia of Intangibles

Texts as old as the bible affirm that one reaps what one sows. Returning to present times, what does one sow to harvest intangibles, and is there a more modern text with a less pithy presentation of strategy?

Joining our conversation are Andrew J. Sherman, author of 17 books on the legal and strategic aspects of business growth, franchising, capital formation, and the leveraging of intellectual property, and a partner with Jones Day; and Paul Liebman, an OCEG fellow, an ethics and integrity thought leader, and a member of the Society's Reputation Leadership Council.

Jonathan Salem Baskin,  author of Tell the Truth, moderates. Learn more.

If the nameless and faceless blather of business reporting leaves you hungry for drama, you'd get more than a full plate at Herbalife. The core issue is captured by Bloomberg's story title this week, "Herbalife: Pyramid Scheme or Juggernaut?" The drama behind the story is the battle of hedge fund managers with egos equal to the task. The current score, headlined by Forbes this week, "Carl Icahn And Herbalife Are Crushing Bill Ackman."

The Steel City Re reputational value metrics, having correctly anticipated the JPMorgan Chase vote this past Tuesday through an analysis of the consensus trend, as Consensiv describes the process, affirm the expectations of stakeholders for a brighter future. Looking first at the underpinnings of the consensus trend, the Current RVM Volatility, the value has decreased from a worrisome 7% to the peer median (technically, 60th percentile) of around 2% relative to the 11 companies in the food distributors sector. The CRR, a measure of the reputational premium value, is also at the 60th percentile which is impressive given the events of the past few months. Return on equity, reflecting reasonable reticence by equity investors, is lagging at the 10th percentile suggesting by the logic underpinning the RepuStars Variety Corporate Reputation Composite Equity Index (Ticker: REPUVAR) that there is significant upside opportunity.

Additional background on these measures of reputational value can be found in the 2102 book, Reputation, Stock Price, and You.

The votes are in and by a supermajority, Jamie Dimon is still both CEO and Chairman of JPMorgan Chase. Notwithstanding a concerted effort by the proxy services, ISS and Glass, he was returned to the dual role with a stronger showing than last year's simple majority.

For readers of this blog, the outcome was expected, according to an analysis of the Steel City Re reputation metrics by the advisory firm, Consensiv, and their Consensus Trend measure. While the outcome was not in doubt from a reputation-based model of behavior, a post-mortem is still valuable. In this regard, Huygens writes with authority having served as Deputy Coroner in Los Angeles County in a prior life.

Using Steel City Re's repetitional value metrics, Consensiv scores reputational value using a proprietary algorithm to calculate net expected behaviors. It is agnostic to qualitative values of what should matter to stakeholders, and measures instead the outcomes of whatever observably matters.

Like a jury, stakeholders as a group bring to the table a simple, unvarnished understanding of the facts. It is a valuable understanding described by James Surowiecki as the Wisdom of Crowds. The stakeholders understood that while companies are generally faceless, in times of crises or turmoil, their identity fuses with that of their leaders. This melding of CEO and company reputation has been studied by leading reputation experts such as Dr. Leslie Gaines Ross and summarized in the 2012 opus, Reputation, Stock Price and You.

Simply put, the stakeholders understood that the separation of CEO and Chair, allegedly on the basis of principles of good governance, would be perceived as a personal rebuke that would damage Jamie Dimon's reputation. They also understood that Dimon's personal reputation, that is, the expectations of the benefits of his leadership, were drivers of some of the excess value in JPMorgan Chase (what Consensiv terms Reputational Premium). Last, they understood that public humiliation, like a scarlet letter, would permanently stain Dimon and force his resignation. Reputational value insurances, which are designed to prevent such permanent damage to senior executives and board members, are not effective after the damage is done.

To remain in the limelight would only ensure repeated embarrassment, as the press would forever follow his name with a parenthetic reference to his fall; e.g., Tony (I want my life back) Hayward, Frederick (I would like my knighthood back) Goodwin, and the classic Michael (disgraced junk bond king) Milken. The stakeholders understood all that. The reputational value metrics, as Jonathan Salem Baskin explains in an article in Forbes today, captured behaviors that reflected those impressions.

John R. Lund, then the senior vice president of Disney Parks Supply Chain Management for Disney Destinations LLC, told Supply Chain Quarterly, “The reputation of a company is fundamentally affected by the choices you make in running a supply chain.” Some of the details of Disney's approch to managing its reputation through supply chain controls are detailed in the 2012 publication, Reputation, Stock Price, and You: Why the market rewards some companies and punishes others.

Yesterday, Business Insurance magazine weighed in to the debate with an article prompted by the recent tragic collapse of a building in Bangladesh housing many clothing suppliers. There are a number of proposed strategies in the alternative reflecting the diversity of understandings of what comprise reputational risk. The most expensive, which seem to be addressing after-the-fact-liabilities, will probably not yield the best reputational results. The most efficient, however, require the paradigm shift advocated by firms such as Steel City Re and Consensiv; and by a growing number of risk advisers.

When the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012), was in development last spring, the pitch to publishers was, "The #1 concern of 71% of corporate directors surveyed." It still is.

Eisner Amper, the accountancy, just released their 2013 board survey. "Other than financial risk, respondents were asked to identify risks of most concern. Seventy-three percent identified reputational risk as a primary concern of their boards – a 19% increase in the number of board members who identify this as their greatest concern since the initial Survey, four years ago. The top three reputational risks cited were: Product quality, liability and customer satisfaction; Public perception and brand Integrity, fraud, ethics; and the Foreign Corrupt Practices Act (FCPA)."

It's last call at the betting window. Cold beers have been wagered on the outcome of the May 21 annual shareholder meeting of JPMorgan Chase. One one side, the status quo which has weathered risky times, rebounded from mistakes, and outperformed on a range of metrics. On the other side, philosophical and ideological notions of governance backed by the moral principle that less risk-taking is an inherent good. Governance blogs on LinkedIn provide ample background:

Boards and Advisors Blog 1
Boards and Advisors Blog 2
Boards and Advisors Blog 3

The quants, too, have their say. With five days, left, the Steel City Re reputational value metrics, as before,  show exceptionally low levels of current reputational value (Current RVM) volatility at JPM indicating stakeholders are not expecting change.

Weekly Reputation Index Metrics

At the close of trading May 17, 2013, REPUVART and REPUVAR stood at 3486.44 and 2958.31 respectively. Over the past four weeks, the former has changed by 9.05%, while the latter has changed by 8.40%. The benchmark S&P500 Composite Index stood at 1452.40 (31 Dec 2001=1000) and has changed over the past four weeks by 7.22%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 34.98% and 32.30% respectively; the S&P500 Composite Index has changed by 28.74%. Over the trailing 36 months, the REPUVART and REPUVAR have changed by 69.81% and 61.83% respectively; the S&P 500 Composite Index has changed by 48.77%.

Other interval changes in the magnitude of the indices are shown below.

Analysis

Real estate, the markets, and consumer sentiment is all up. Unemployment compensation applications are up, too, but that is not important. The froth is too much fun.

In a continuing demonstration of “errors in decision making” as termed by behavioral economists, rational expectations, which are central to assessments of reputational value, are taking a back seat to other competing drivers of stock price. RepuSpx, a portfolio that seeks algorithmically to find the best reputation-linked opportunities among the S&P500 constituent members, continues to benefit from this effect. It is ahead of the market index for the calendar year by 8.69% this week, a leap from last week. Its trailing twelve-month returns of 36.35% are beating the market by 8.57%.

RepuStars, plagued by a few companies that have greatly disappointed stakeholders, is still containing its losses. The greatest gains in the portfolio for the year are being reported by GameStop Corp (GME), now in its fifth week at the top ranking with a year-to-date return of 60.32%. Wellpoint Inc (WLP holds onto second place with returns of 31.24% and Lamar Advertising (LAMR) returns to third place with a year-to-date return of 21.71%. These are three of the 19 firms identified by the RepuStars Variety algorithm at the start of the year as value opportunities.

As for those whose reputational value has not panned out so far, Royal Gold Inc. (RGLD) leads the losers at -38.39%, Fusion I-O, now sans its founders, is down 32.99% and scandal-plagued VeriFone Systems Inc. (PAY) is down further at -27.21%.

Side Note: A description of the portfolio constituents and historical returns data from December 31, 2001 can be obtained on request from Technology Option Capital, its manager. Click Here.

Background

The RepuStars® Variety Corporate Reputation Index calculated by S&P/Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re Reputational Value Metrics. The metrics comprise non-financial indicators of reputational value (RVM) and ranking (CRR). 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.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to  Steel City Re’s proprietary Reputational Value Metrics™, which track 7400 companies weekly. The principles behind measuring reputational value are described in the book, Reputation, Stock Price, and You: Why the market rewards some companies and punishes others (2012, Apress).

The RepuStars indices are reconstituted annually in the first week of January and posted by S&P/Dow Jones Indexes in the third week. The Indices were last reconstituted 20 Jan 2013.

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 second Friday of every month, read the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (2012)  or its predecessor, Mission: Intangible. Managing risk and reputation to create enterprise value (2010), 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

Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”), a subsidiary of The McGraw-Hill Companies, Inc. Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). “RepuStars” and “Steel City Re” are registered trademarks of C. Huygens & Co. LLC. The method underpinning the RepuStars Variety indexes is subject to a pending patent assigned to C. Huygens & Co. LLC. S&P Dow Jones Indices LLC, Dow Jones, S&P and their respective affiliates (“S&P Dow Jones Indices”) makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and S&P Dow Jones Indices shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. Past performance of an index is not an indication of future results. All information provided by S&P Dow Jones Indices is general in nature and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments offered by third parties that are based on that index. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that seeks to provide an investment return based on the performance of any Index. 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.

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%.

It is heartbreaking to watch a company whose reputation was built on a credo in a crisis fail to appreciate the lesson it taught the world. Yes, J&J's PR was fabulous back in 1982 when cyanide found its way into bottle(s) of Tylenol. More importantly, J&J instituted robust changes in its supply chain security and at the end of the day, it was the company's ability to demonstrate extraordinary control that won it both accolades and a 30% boost in market value.

Now, plagued by one quality crisis after another, the company appears to be turning to a major PR campaign to save the day. But as Jonathan Salem Baskin, who moderates the Mission Intangible Monthly Briefings, writes for Forbes, "It’s established fact that no company (or individual) can declare truth any longer. We’ve all gotten too suspicious and jaded, and tech tools empower us to fast-forward past promises, and get to checking-up on follow-through. So company values, credos, and mission statements are worthless unless they’re translated into action. The world doesn’t need an ad campaign to show what’s “behind” J&J since it can judge the behaviors it sees. Stakeholders determine truth, not marketers."

The truths determined by stakeholders are captured, in part, by the Steel City Re Reputational Value Metrics. The measures of reputational value for Johnson & Johnson, the bases of which are described in detail in the book, Reputation, Stock Price and You, show a relatively high reputational ranking (CRR) in the 90th percentile relative to the 30 companies in the major pharmaceuticals sector. Surprisingly for a company of its size, both its historic and its current RVM volatility, measures of volatility of its reputational value, are above median and climbing. Overall, the data suggest that it is a company stakeholders would love to respect, but are having trouble understanding its current narrative.

The chatter is nice, but to borrow from another campaign, "where's the beef?"

The chattering classes are terribly excited about the upcoming annual meeting of JPMorgan Chase. True, the banking industry is generally not all that exciting, except when it is uncomfortably so. But JP Morgan Chase has much good news to share. This part quarter, for example, its trading team had a perfect record of no losses on any day bringing in a performance that beat both Morgan Stanley and Goldman Sachs. Its M&A team also topped the league tables for the prior year, again beating Goldman Sachs. The bank's borrowing costs are rock bottom, and its CEO was offered up as Secretary of the Treasury by none other than Warren Buffet.

None of that, however, is factoring in to the chatter. The press and airwaves are dominated by expressions of outrage by proxy advisory groups that CEO Jamie Dimon, the earstwhile Treasury secretary nominee, has the audacity of being his own boss by holding also the title of Chairman. Their distress, to be shared in Tampa, Fla., on May 21, is more broadly directed at the board as a whole comprising individuals who failed to monitor the bank’s risk management, a failure highlighted by last year’s $6 billion trading loss in the company’s chief investment office. The directors stand charged with "letting down outside shareholders."

Writing for the Financial Times, Gary Silverman offers a refreshing counterpoint. In an essay aptly named "Daydreams of supervising Dimon," Silverman concludes "that just about the only person who would be truly capable of supervising Mr Dimon at JPMorgan these days is Mr Dimon himself, and that means this column leaves him as it found him – in a lonely place."

Huygens, being a numbers man, seeks comfort in the wisdom of crowds. Yet as Jacques Anatole François Thibault, winner of the 1921 Nobel Prize in Literature observed, "If fifty million people say a foolish thing, it is still a foolish thing." Huygens, being a numbers man and being from Pittsburgh and and being an admirer of Andrew Carnegie, is less interested in what people say, and more interested in what they do (or are expected to do).

Stakeholders are generally rational. Activist investors have a point, and when a company is in trouble, things need to be shaken up. Witness the value created at JCPenny by activists investors who upon the departure of then CEO Myron Ullman and brought in Apple Inc. retail giant Ron Johnson to restore integrity to the sinking retail ship. Seeking Alpha's assessment: JCP's stakeholders must be furious that the company spent $170M of their money to hire Ron Johnson and his team...only to rack up dreadful five quarters of 15%+ year-over-year declines in comparable sales. So who's in charge now? Myron Ullman.

From a reputational value perspective, JPMorgan Chases remarkable journey over the past two years has been document here previously. At the risk of having a Karl Rove moment, Huygens opined recently on a LinkedIn blog, Boards and Advisors, that the Steel City Re Reputation Value Metrics indicated no major changes at JPMorgan Chase. Huygens shared the same with friends on the LinkedIn blog of the Intangible Asset Finance Society. Updated metrics from this past week, now only less than two weeks from the annual meeting, affirm Huygen's impression. JPMorgan Chase's reputation is in generally good standing, and the current volatility of its RVM, a non-financial measure of reputational value, is at a peer-group low of less than 1% (Chart, top, row, Vital Signs and Current RVM Volatility). The data, representing the wisdom of crowds including, but not limited to pundits and shareholder advisers, indicate that as a group, no one is expecting any surprises. Or in the words of Consensiv, an advisory group, the Consensus Trend for JPMorgan Chase reflects a remarkable coherence of expectations.

Which leads Huygens to predictions in the alternative. First, it is unlikely that there will be major changes at JPMorgan Chase's Board of Directors; second, if in the unlikely scenario there are, the stock price will become quite volatile.