A meat-product snack called Slim Jim took pride in its two classes of followers: haters and lovers. The haters could be dismissed as long as there were enough lovers finding value in the product.

JPMorgan Chase (JPM) may be the banking equivalent. There is no shortage of governance executives and proxy advisors who have strong concerns about the fact that Jamie Dimon holds titles as both CEO and his own boss, Chairman of the Board. They're pushing for a split. Others see a Karmic injustice in the ability of Mr. Dimon to weather the consequences of the London Whale event and its multi-billion dollar loss without nary a scratch.

Other stakeholders have spoken through more economically compelling actions. Creditors are offering superior terms, equity value is high, and customers may have pushed the bank past Goldman Sachs on the M&A Value league table. Employees have love, too, and while the effects are transparent on the P&L, it's nice to know why.

Consider the bank's response to Super Storrm Sandy. CFO's Caroline McDonald writes, "Unlike many companies, faced with closed branch banks when people needed access, Chase chose not to passively wait for employees to get back to work whenever they could. The company provided transportation to pick up employees and take them to work, according to the employee I spoke to. The company also provided them with food, and those who had no home to go back to were put up in hotels, she said. This was all corroborated by a Chase spokesperson. The list went on and on, including taking care of children whose schools were closed through its backup childcare program, and helping employees find automobiles when theirs were destroyed."

What about the objective measures of reputational value from Steel City Re, and how is the growing horde calling for changes in Mr. Dimon's status affecting reputational value volatility? The short answer is not much. Relative to its 50 peers, JPM's ranking is in the 90th percentile. Its RVM volatility, a measure of uncertainty, is at the 15th percentile with an absolute measurement of around 1.5%. All indicators of reputational value stability are at top levels, suggesting that change is not expected. Which is not necessarily good if the proxy advisors get their way on principle - expect a major loss of equity value in the uncertainty that would follow.

It's hard to believe that more than a year has passed since Huygens last visited HPQ and opined that, based on the metrics, the board appeared dysfunctional. Yet in under thirteen months, HPQ has fulfilled expectations of underperformance and driven a once-fabulous company to the lowest rankings among 22 peers in the computer hardware processing sector. Tim Travis, writing for Seeking Alpha, put it this way:

The noise in the quarter was the result of a non-cash charge for the impairment of goodwill and intangible assets primarily relating from the Autonomy acquisition, which in my estimation can be firmly placed in the Mount Rushmore of disastrous acquisitions. The write down was no surprise to us as the day it was announced we were in disbelief that a CEO and Board of Directors could be so naïve about destroying shareholder value.

As to the metrics, the RVM measure of Steel City Re's reputational value metrics showed a consistently low level of volatility for the entire past year -- in English, all stakeholders were in agreement that the reputation was appropriately slowly drifting downward (just as Travis said). The metrics were scraping rock bottom. RVM vol was as low as they go among peers; current RVM vol was at the 10th percentile foretelling increasing uncertainty. CRR rank at the 33rd percentile (and sinking), ROE at rock bottom among peers, and forecast stability at the highest levels (it is hard to fall when you are near the bottom.) Collectively, all of these suggest that for the past year, all stakeholders have been anticipating the additional bad news finally announced end-of-day Monday 19 Nov.

Google (NASD:GOOG), as everyone knows, is a company with unlimited resources, vision, and technological prowess. By establishing a relationship with every human being on the planet inclined to inquire through its Search engine, Google will eventually capture every last heart, mind and wallet.

If there are grounds to doubt the above, they may lie in the words of Ira Goldman, an executive formerly with Kodak since 1969. Writing to the editor of the Financial Times (13 April),  Mr. Goldman shares what he believes led to the downfall of one of the most innovative firms of the prior century. “…it was a history of being able to afford multiple investments in new technologies without fully understanding the market needs, and then failing to make careful choices about which investments the company could afford.”

Google invests lavishly, to be sure. And based on recent controversial governance-related changes in the way Google allows its shareholders to influence management, it appears Google wishes to shield itself from the outside and continue to do what most investors agree they do best. Not that everyone agrees.

Nevertheless, right now, the reputational metrics support management. Google's metrics could hardly be better. The firm ranks #1 among the 133 peers in the Internet Software Services sector. The Vital Signs report a historical reputational volatility that is below the median and dropping; a return on equity for the trailing twelve months that is 43% higher than the median return (88th percentile), and a near certain future of reputational stability.


So why worry? Because, to paraphrase Herbert (Pug) Winoker who spoke this past Friday 13 April at the Mission Intangible Monthly Briefing, a firm’s success breeds its next crisis. Investor expectations outgrow a company’s ability to meet them. The data show that expectations could not be much higher.

Back to Kodak, whose obituary Huygens scribed earlier this year. “If the current management team and board of directors had managed the investments to match the cash flow available under realistic business conditions, they would not have proceeded with three large investments simultaneously (in digital printing, only one of which turned profitable after 10 years) and then accepted high cost overruns and failure to meet schedule,” added Mr. Goldman. One can only hope that having isolated its decision-making bodies from outside opinions, Google will nevertheless heed this excellent advice.

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.

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."

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

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

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

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

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

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

Seconds after Rajat K. Gupta, then a director of Goldman Sachs, finished up a board call during which he learned that Warren E. Buffett had agreed to invest $5 billion in the firm, he picked up the phone and called his friend Raj Rajaratnam, regulators contend. Minutes later, Mr. Rajaratnam placed bets on shares of Goldman Sachs that netted his firm, the Galleon Group, $900,000. As Andrew Ross Sorkin’s Dealbook observes, “The fact pattern looks bad, very bad."

Gupta has resigned from the boards of Harman International Industries Inc. in the wake of the SEC's accusations. He has also resigned from the boards of AMR Corp., Genpact Ltd., and Procter & Gamble. It is a rapid fall from grace. In October, Alan Lafley, the former chief executive of Procter & Gamble, described Mr. Gupta thusly. “I think of him like Thomas Aquinas,” the philosopher and priest.

This is why. Gupta has a far longer and more important connection to the world’s most prestigious consulting firm, McKinsey. He worked at the firm for 34 years, eventually rising to become its managing director—the McKinsey equivalent of chief executive. He was elected to the top job at McKinsey by his fellow partners at the firm for three consecutive terms—the maximum allowed by the firm’s rules. NetNet's John Carney worries that Rajat Gupta may destroy McKinsey.  Or at least generate bad publicity for the Firm.

McKinsey, which has watched this story grow over time, is also worried. On 4 March, the day Lloyd Blankfein, CEO of Goldman Sachs, agreed to testify for the U.S. government at the coming trial of Rajaratnam, McKinsey posted a job opening for a reputation risk specialist whose major responsibilities are described thusly:

1. Monitor globally public references to McKinsey, select clients or specific issues appearing in media and consumer generated media (CGM)/ social technologies, which are potential or actual reputation risks for the Firm
2. Collaborate with the Director of Reputation Risk Management to help report key reputation risks
3. Collaborate with the Reputation Risk Management team to help research and prepare for potential and actual situations:

This job may be based in Brussels, Belgium, London, UK or New York, NY

Learn More

If the above moves you to action, but you are not sure what that action should be, consider joining the conversation at the Society's Mission Intangible Monthly Briefings. Our 1 April program is titled, How reputation drives principled performance ; our 6 May program is titled: Economic value of trust.

“The Board is tasked with enterprise risk governance and it is daunting that the Board is also supposed to help build reputation!” exclaimed one of the 55 Directors attending an interactive panel discussion titled, “Importance of Reputational Risk,” convened by NACD Three Rivers Chapter in Pittsburgh.

The panel calmly took up the challenge. Featured were the Hon. Cynthia A. Baldwin, General Counsel of Pennsylvania State University, Director of Koppers Holdings (NYSE:KOP), and Immediate Past Chair, Association of Governing Boards of Colleges and Universities, William Hernandez, a Director of Albemarle Corporation (NYSE:ALB), Black Box Corporation (NASDAQ:BBOX), Eastman Kodak Company (NYSE:EK) and USG Corporation (NYSE:USG), George Long, Chief Governance Counsel and Corporate Secretary, The PNC Financial Services Group, Inc. (NYSE:PNC) and 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).

View a video clip from the January 2011 conference below.

Reputation, Risk and Finance

Now that you've both seen and heard it from the authorities, it's time for action. 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.

Note Added 14 February

The National Association of Corporate Directors has posted a written summary of the conference on its website. Click here to link directly to the summary.

There are national accounts, and national intangible assets. Our ability to account for the latter may be no better than what we show on corporate balance sheets. Worst, absent an indicator like market capitalization that reminds us that there is significant value in excess of book (x2-3), we may not even be aware of them.

National Public Radio’s Planet Money, a multimedia team covering the global economy, recently aired a program in which the benefit of the overarching term we use at the Society, reputation, was addressed in a geopolitical setting.

We used to talk about the G-7 — the world's seven biggest economic powerhouses. Every so often, the leaders of the G-7 countries would get together and hash out the important issues facing the global economy. That grew to become the G-20, which included big players in the developing world (China, India, Brazil). In the heat of the financial crisis, the G-20 made a good show of cooperation. But as the crisis has faded, so has the cooperation. What's left is a world where there's no clear economic leadership. That creates a new set of problems, David Gordon says. Gordon, research director at the consulting firm Eurasia Group, calls this new world "G-Zero."

The G-Zero is a concept that acknowledges that there is no longer any center of power and marks the end of the most recent era where the one remaining superpower provided global leadership.

According to Gordon, “the United States reputationally has been weakened by the financial crisis – blamed for it – and our model of capital markets and all of this, combined, are no longer seen as things that countries should aspire to. That reputation hit, combined with our own relatively weak recovery and fiscal challenges, means that we are no longer able to give the kind of leadership to the world economy that we did forever.”

Listen to the NPR Planet Money G-Zero podcast on the NPR website (click here) or to the current Planet Money program (click below).
 

Can shareholders rely on corporate boards to protect their interests? By Delaware law, certainly. The Duty of Care holds Directors responsible for oversight, and personally liable in the absence of oversight when it should have been there. Ask Society IA Corporate Governance Committee Chair Cathy Reese, an authority on board civil liabilities.

But guns and badges? Apparently, according to Advisen Front Page News,  which quotes last week Lynn Turner, a former chief accountant of the Securities and Exchange Commission who's criticized the failure of ratings agencies to see the risks in the failed Houston energy giant Enron Corp., which collapsed in late 2001. "I personally think until law enforcement agencies start holding these boards accountable, the point you're raising is probably right on target, and you're probably not going to get a lot of change."

Since the quote was in the context of an article on Moody’s Corporation (NYSE:MCO) and allegations of inadequate board oversight and risk management, we look at Moody’s reputation as captured by the Steel City Re Corporate Reputation Index.



The graph shows volatility, for sure, but over the course of the year among its 23 peers in the Diversified Financial Services sector, Moody’s reputation index climbed slightly from the 65th percentile to the 72nd percentile. There was a brief depression in September when Moody’s provided a somber earnings guidance, but both its reputation and economic returns bounced back to their mean trend for the year by year’s end. Moody’s ROE finished only 0.25% below the median of its peers and approximately equal to the period’s return for the S&P500.

Where does that leave us with respect to the value of the intangible asset of effective corporate governance? While sympathetic to the concept that criminal risk may foster compliance better than civil risk, we are still of the opinion that there is value to be discovered simply through superior governance as it manifests in ethics, quality, innovation, safety, sustainability and security. A riff on that concept is the subject of our Mission Intangible Monthly Briefing this Friday, 9 April, featuring Society Committee Chairs Paul Liebman from Dell, Inc. and Jon Low from Predictiv.