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.

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.

Reputation is all about meeting stakeholder expectations. Regulators are the often forgotten stakeholder. Other stakeholders, such as customers, employees, suppliers and creditors express their satisfaction with expectation management on well recognized lines of a company's profit and loss statement. Regulators, however, get a special line: extraordinary expenses. As explained in Reputation Stock Price and You: Why the market rewards some companies and punishes others (2012, Apress), a company's reputational value is reflected in these lines and thus ultimately, stock price.

From the Conflict of Interest blog, we share the updated list of the top ten greatest extraordinary expenses arising from a failure of meeting regulators' expectations (read, failure of governance.)

- BP – $1.256 billion (environmental and related offenses) (2012)
- Pfizer – $1.2 billion (marketing offenses) (2009)
- GlaxoSmithKline – $956 million (marketing offenses) (2012)
- Eli Lilly – $515 million (marketing offenses) (2009)
- AU Optronics – $500 million (antitrust) (2012)
- Abbott Laboratories – $500 million (marketing offenses) (2012)
- Hoffman-LaRoche – $500 million (antitrust) (1999)
- Yakazi – $470 million (antitrust) (2012)
- Siemens – $450 million (FCPA) (2009)
- Halliburton/KBR – $402 million (FCPA) (2008).

As the blog's author, Jeff Kaplan, a partner with Kaplan & Walker LLP, notes, "What is striking here is that fully half of the ten largest federal corporate criminal fines in history were imposed or agreed to in 2012. I cannot recall another year with so many new cases on the list."

In yesterday's Mission Intangible blog note, guest contributor Dr. Michael Greenberg articulated principles for better governance. Today's note punctuates that note with a reminder of the cost of failure.

Guest comment by Dr. Michael Greenberg.

We're once again heading into a new year. It’s the season of resolutions, of reflecting and taking stock, of setting new goals and getting back into shape. Most of us tend to think of this kind of New Year’s activity as a personal process, but it applies just as readily to corporations and their executives. Most avenues of human endeavor can benefit from periodic self-assessment, re-evaluation, and course correction. This is no less true of corporations, and of our collective economic behavior, than it is of individuals in their personal lives. For corporations, of course, the process of making New Year’s resolutions will tend to focus less on dieting, physical fitness, and personal improvement. Rather, the focus for corporate self-assessment typically starts with a few basic questions. Does our strategy and mission continue to make sense in the current operating environment? Are we doing what we need to do, in order to meet our performance goals and achieve success? And what can we do better as an organization, to improve our performance on key metrics?

A related issue that frequently comes up when I talk with executives involves governance. One striking thing I’ve noticed is that even though lots of senior executives express concerns about governance, they often use the word “governance” in very different ways, such that two people superficially using the same language are often actually talking about very different things.

Sometimes governance comes up in the context of a very pragmatic, corporate plumbing-type question: How do we set ourselves up in order to be more effective in accomplishing whatever it is that we’re trying to do? The embedded assumption is that governance is tied to management structure and control, power sharing, and information feedback within the organization. Good governance, in this sense, is synonymous with effective management – where an organization is optimized to carry out its function, then its governance is superior.

A very different view of governance comes up when you talk to corporate lawyers and directors. These folks often think of “governance” as being defined by “all the stuff that boards do.” Put another way, this is the kind of governance that involves board oversight of senior management, exercised on behalf of shareholders. For directors, this perspective on governance invites a bunch of performance assessment questions pertaining to management. And for shareholders, it invites a bunch of performance assessment questions pertaining to the board itself. The lawyers, meanwhile, often focus on the mechanics of how boards carry out their responsibility, and what the law requires them to do. Frequently overlooked by all is the fact that a board is ultimately just a group of people, who may be more or less interpersonally and technically competent, in working together to carry out a common purpose. Again, governance can be more or less capable and effective, on any of these dimensions.

Still another perspective on governance emphasizes the strategic and operational element. When a large group of people come together to execute a common purpose, who contributes to deciding what that purpose is going to be, and what the best way is to achieve it? How often are those basic decisions reviewed and revisited? How does senior management reach out to the rest of the organization, in order to mobilize everyone around a common vision? These are questions that go to the heart of what the organization actually does, and whether its form and function make sense over time.
And then, of course, there is a cynical perspective on governance, which I sometimes hear expressed by top executives. This is the view that “governance” reduces to a set of administrative hurdles that are set up to impede efficient management. A variation of this view is expressed by the CEO who says that the appropriate role of the board is “to hire the CEO, and then to stay out of my way.” Without commenting on the merits of this perspective, it both captures the way that some executives feel about governance, and also the reality that formal corporate controls and oversight are frequently set up to serve ends other than maximizing efficiency or corporate productivity.

All of which takes us back to the new year, and to New Year’s resolutions. Governance within a corporation most fundamentally is about the asking of critical questions, and periodically looking into a mirror, in order to make sure that what you’re doing still makes sense, and that where you’re going is where you really want to go. The act of asking and seeking answers helps to refine the organization and its course, and drives outward into operations, downward into organizational structure, as well as forward into mission and strategy. To engage in organizational self-assessment is to engage in an act of good governance, regardless of the fact that different people think about this exercise in widely varied ways. For corporations as well as people, the fact that the new year prompts us to look in the mirror is surely a good thing.

Michael Greenberg is a member of the Society’s Reputation Leadership Council and holds the Governance Portfolio. The views expressed here are solely those of the author.

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.

At a conference sponsored by the Three Rivers Chapter of the National Association of Corporate Directors, George L. Miles Jr., Director of AIG (NYSE:AIG), HFF Inc. (NYSE:HF), Harley-­‐Davidson, Inc. (NYSE:HOG), WESCO International, Inc. (NYSE:WCC), EQT Corporation (NYSE:EQT), observed that "the collapse of a company's reputation can stain its directors." The fallout from News Corp (NYSE:NWS) reputational crisis first arising from the phone hacking scandal continues. On March 14, James Murdoch informed the board of Sotheby's that he would not be seeking reelection. Previously, he stepped down from the board of GlaxoSmithKline and the chairmanship of News International, News Corp's UK newspaper division.

Frankly, Netflix (NASDAQ:NFLX) looks rudderless lately. Its strategic decision process is in disarray. That reflects poorly on the CEO and the company's board of directors. The CEO developed a strategy and then executed poorly; the board's oversight roles of governance and risk management were fails.

As summarized succinctly by The Wrap.com (23 Dec, Shaw), Netflix announced a controversial new pricing plan in July that enraged customers. Hastings then admitted the company erred in a blog post while announcing a new DVD-by-mail service, Qwikster. How was it different from the original Netflix service? It wasn't really, just a new name. Netflix then canceled Qwikster and brought all its services back under one roof. Throw in a few lost deals with the likes of Starz, and it's been a rough few months for the company.

Huygens rarely examines business strategy which is, after all, a business processes linking resources to objectives.  Strategy is not one of the six intangible operational pillars (ethics, innovation, quality, safety, sustainability, and security). Nor is it corporate brand (how a company wishes others to view it) or reputation (how others view it).

Rather, it links the conventional business resources of finance, product development, marketing, etc. to corporate objectives. To the extent that the strategy development process is an intangible asset, it falls somewhere between and among corporate culture and governance. The goofiness of the strategy Netflix developed and executed becomes a red flag of cultural insensitivity and lax board oversight. These, in turn, have become reputational issues that all stakeholders can appreciate and value negatively. As they rightly should.

Turning then to the Steel City Re Corporate Reputation Index metrics, as of 23 December, the company has dropped over the trailing twelve months from the 73rd to the 54th percentile among the 485 companies in the Service Organization sector. This 19 percentile drop is associated with an exponentially weighted moving average reputational volatility of 135% and a return on equity that is underperforming its peer group by 46.43%.

The trailing twelve week reputational velocity is -15% and the trailing twelve week reputational vector is -15.4%. And while the company's balance sheet is bare with a long-standing book value of 1% of market cap, that too has increased recently as the intangible asset fraction has been slightly eroded.

Some years back, Warren Buffet famously said, "If you lose money for the firm, I will be understanding. But if you lose our reputation, I will be ruthless." According to the company's filing with the Securities and Exchange Commission on Thursday, CEO Hastings' stock option compensation will be halved from $3 million this year to $1.5 million next year. Hopefully, investors will demand something from the Board as well.

In this month's issue of IAM magazine, #48, the regular contribution on reputation explains how this epiphenomenon can provide management with freedom to operate. In the words of editor Joff Wild, who also recently penned a much appreciated shout out, "Although it is intangible, reputation allows businesses and executives operational freedoms that lead to very tangible results."

Now for an update from the National Association of Corporate Directors. According to their daily newsletter, NACD Directors Daily (13 July), "In an rare example of how 'say-on-pay' votes can influence companies' relationships with some shareholders," Cincinnati.com (July 12, Boyer) reports that "a lawsuit has accused Cincinnati Bell Inc.'s outside directors of breaching their duty to investors and the company's top executives of 'unjust enrichment' over pay raises granted last year." The raises range from 54 percent to 80 percent for three of the company's top officers despite a 68 percent drop in 2010 net earnings. A non-birding shareholder vote in May opposed the pay raises. "The lawsuit was brought in U.S. District Court in Cincinnati last week by attorneys for the Illinois-based NECA-IBEW Pension Fund, a Bell shareholder," the website reports. "It seeks a court order and unspecified damages on behalf of the corporation, possible return or impoundment of the pay increases, and implementation of internal controls preventing excessive compensation to the company's top executives."

We've discussed "sue-on-pay" before. And we will again. It appears compensation is evolving into a contact sport.

NB: Further to recent queries from attentive followers of this blog, Huygen's will opine on the reputational crisis gripping News Corporation (NASDAQ:NWSA) presently.

In a curious twist on the Ashford/Simpson love duet, Massey Energy (NYSE:MEE) shareholders have signaled that they intend to pursue claims aggressively against the board of directors notwithstanding efforts by the latter to make a wash of the whole thing. The matter is now before the West Virginia State Supreme Court.

The case elements center about liability, reputation, and board oversight. Simply put, plaintiffs allege that the Board of Directors failed in its Duty of Loyalty by not ensuring that safety processes were being implemented. Safety, as we have noted before, is a key business process underpinning reputational value. And the safety-linked disaster at Massey certainly did knock with wind out of the company's reputational value.

We've seen this movie before -- most recently with Johnson and Johnson (see below). Here is how the National Association of Corporate Directors explains the current situation in their 31 May newsletter:

"The fate of a shareholder vote on Massey Energy's proposed $7.1 billion sale to rival coal producer Alpha Natural Resources is up to the state Supreme Court," the Washington Post (May 31) reports. The court is expected on Tuesday to take up the request by a trio institutional investors who are seeking to prevent a June 1 vote by Massey shareholders. The shareholders will also urge the court to seal case records. "The Charleston Gazette and National Public Radio are asking the court to open the files," the Post notes. "They argue the documents may shed light on the April 5, 2010, explosion at Massey’s Upper Big Branch mine that killed 29 miners." The investors state that the explosion and other actions damaged the company's value.

The Wall Street Journal (May 31, Maher) adds that the court will decide whether to grant a temporary injunction sought by the investors, "who allege that Massey's board agreed to the sale to escape any personal liability for a coal-mining accident last year that killed 29 miners and drove down the company's stock price." The suit claims the company not only gave Alpha preferential treatment during the bidding process, it also failed to disclose key information about the negotiating process in its filings with the SEC. In addition, the Journal states, "The West Virginia suit alleges that the board failed to comply with a 2008 court order to institute new safety systems at the company." The plaintiffs include the California State Teachers' Retirement System.

Combined, Benzinga (May 31, Wilcox) notes, "Alpha Natural and Massey would the be largest U.S. producer of metallurgical coal." Additionally, Massey is facing a separate suit brought by the New Jersey Building Laborers Pension Fund, which also seeks to halt the sale.

Here's the background as summarized recently in Intellectual Asset Management magazine, the official publication partner of the Society. According to Cathy Reese, a partner with law firm Fish & Richardson and chair of the Intangible Asset Finance Society’s Committee on Intangible Asset Governance, the Delaware Supreme Court’s 2006 opinion in Stone v Ritter adopted the concept of oversight liability, which had been discussed some 10 years earlier in the influential 1996 In re Caremark decision by the Delaware Court of Chancery. Importantly, this duty of oversight applies to all corporate assets, including intangible assets.

The court in Stone v Ritter stated that director oversight liability may be predicated on facts showing that either: “(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.”

Now the West Virginia Supreme Court gets to weigh in on the matter.

There's never a dull moment in the HP (NYSE:HPQ) boardroom. At the firm that just released its last CEO for ethical issues, the National Association of Corporate Directors newsletter this morning cites a story from the Denver Business Journal raising concerns about the close business ties between the ostensibly independent directors and the new CEO.

The Journal (Jan. 26, Schubarth) cites the concerns of several corporate governance experts that Hewlett-Packard Co. recently recruited executives to its board of directors who all have business ties to CEO Leo Apotheker. Consequently, they will need to prove they can act independently.

Dominique Senequier, for instance, manages an investment buyout arm of French insurer AXA SA, where Apotheker is on an advisory board. Three other new directors -- former General Electric Co. Chief Information Officer Gary Reiner, former Alcatel-Lucent CEO Patricia Russo, and ex-eBay Inc. CEO Meg Whitman -- all did business with SAP AG while Apotheker was on staff.

Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, comments, "If directors have significant relationships with the CEO or other directors of a company on whose board they sit, it's harder for them to be objective. Directors are supposed to be representing shareholders, not the CEO or one another, and that's why companies typically try to recruit directors who are independent of one another and management."

It  is an interesting problem, and one that will confront any CEO who's business (or prior business) has a large global footprint. After all, it could be argued that anyone coming from a firm that did not work with, or use, SAP products is coming from a business still operating in the dark ages. And that appears to be the reaction of the majority of stakeholders, as reflected in the Steel City Re Corporate Reputation Index metrics. In a word, no impact. No change in the relative ranking among 18 peers in the Computer Processing Hardware sector, no change in reputation volatility, and no change in reputation vector or velocity.


Yet given the governance challenges HP has faced over the past few years, the concerns in this instance merit deeper consideration.