MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Bali: Those negative waves

C. HUYGENS - Wednesday, December 04, 2013
Like negative waves, a negative reputation creates a perverse death spiral. This is as true for would-be war booty hunters (Kelly's heroes) as it is for capital markets and for non-governmental bodies.



Reputation is an expectation of behavior. Capital markets have a reputation for seizing when liquidity ebbs. As in musical chairs, being last to call debt has significant consequences, so at the first signs of real trouble, individual constituents of the market act on the markets reputation, call their loans, and precipitate the very thing they fear: illiquidity.

Then there's the World Trade Organization. Twelve years since the Doha round began, the institution is trying to overcome impenetrable roadblocks. No one really expects the negotiations now taking place in Bali to succeed, so no one is really motivated to yield on a sensitive point that will only create a future liability -- ensuring that the negotiations will not succeed.

Read more on the Consensiv blog.

Zurich Insurance: Properly managing an adverse event

C. HUYGENS - Friday, November 29, 2013
Reputational crises are often, but not necessarily, consequences of an adverse event. When Pierre Wauthier, Zurich’s Insurance Group’s chief financial officer, killed himself last August, and blamed clashes with the company’s chairman, Josef Ackermann, as a cause, Zurich did all the right things to protect its reputation.

Zurich understood the relationship between expectation, uncertainty and reputation; and its actions were targeted at the underpinnings of reputation. Few, especially those in the reputation management business with a PR bias, took note which is why this comment by Jonathan Salem Baskin of Consensiv is worthy of further study. Read more.

Reputation Mountains from Satisfaction Mole Hills

C. HUYGENS - Wednesday, November 27, 2013
The old joke about medical mediocrity, Jeopardy style, had the punchline "Doctor" to the set up, "What do you call the students who graduated at the bottom of their medical school class?" Humor aside, that job title, which once ensured a stable respectable income, is losing its intrinsic value as standardized patient satisfaction measures become public. A reputation for quality matters.

Alas, the road to hell is paved with good intentions. The Centers for Medicare & Medicaid Services, an $820 billion operating division of the United States Department of Health and Human Services, administers the HCAHPS (Hospital Consumer Assessment of Healthcare Providers and Systems) survey, the first national, standardized, publicly reported survey of patients' perspectives of hospital care. The HCAHPS (pronounced "H-caps") survey asks discharged patients 27 questions about their recent hospital stay. The survey contains 18 core questions about critical aspects of patients' hospital experiences (communication with nurses and doctors, the responsiveness of hospital staff, the cleanliness and quietness of the hospital environment, pain management, communication about medicines, discharge information, overall rating of hospital, and would they recommend the hospital).

The survey has teeth. Since October 2012, hospitals whose HCAHPS scores have been subpar have been penalized with reductions in their Medicare and Medicaid reimbursement.

Here's the rub. There are perverse incentives in a system that seeks to optimize its operations for only one stakeholder group: patients. Without in any way diminishing the importance of customer (patient) satisfaction, a medical center's highest goal is to provide the greatest degree of affordable access to the highest quality care. Satisfaction has much to do with expectations that in matters of life and death, are often emotionally laden; quality care has much to do with optimizing health outcome in the setting of limited resources. The former is only one of several contributors to the latter, which at the end of the day, is the foundation for a medical center's reputation. There is an inherent tension, captured in the dark comedy doctor-coming-of-age novel, House of God, and rule #13: The delivery of good medical care is to do as much nothing as possible.

It does not help matters when the two concepts, patient satisfaction and institutional reputation, are intermingled. As Jonathan Salem Baskin points out in his blog at Consensiv, "Pleasing a clinic customer now will certainly have an impact what other customers expect from a future visit, but that influence isn’t necessarily direct or reliable. We presume a variety of operational variables affect reputations in the clinic industry, such as services offered, accessibility, accountability, pricing and reimbursement, even the unavailability of competing services."

Reputation mountains should not be built on patient satisfaction mole hills. It's a bad business strategy; it is also a bad health care delivery strategy.
Read more.

GM: Brand v. Reputation, Impala Edition

C. HUYGENS - Tuesday, November 12, 2013
A brand is a promise; a reputation is the promise expected, after discounting. Consider Chevy's Impala. The brand:

Impala has always been a flagship for Chevrolet. But a leader should never rest on the laurels of its past — especially when it wears the Chevy bowtie. So, when it came time to reinvent one of the brand’s most iconic nameplates, Chevy designers and engineers reached far into the future and shaped it in the present.

Are laurels of the past sufficiently solid to support such a promise? Apparently not, according to a review of the car by the Globe and Mail's Ted Laturnus. The reputation:

"I don’t trust this car. Or, more to the point, I don’t trust those that have come before it. Traditionally, the Impala has been one of the more problematic models in GM’s stable…"

Read more.

Brand reflects the owner's aspirations; reputation reflects the expectations of stakeholders; and reputational value is the economic consequence of decisions made by myriad stakeholders that impact every line item of a company's P&L. Q.E.D.

Viacom: Blockbuster busted

C. HUYGENS - Friday, November 08, 2013
It's Theodore Levitt week: a time to pause and reflect on the work of a brilliant professor of business and one of the most prolific authors at Harvard Business Review, publishing 26 articles -- a number exceeded only by Peter Drucker.

Tuesday, Levitt's most famous article, Marketing Myopia, published in the summer of 1960, was cited in an article at CFO.com that presented the November 2013 Consensiv 50 reputation league table. The star of the article is Hermes, a firm that began life as a manufacturer of buggy whips and adapted to the changing needs of its market, without losing touch why its customers sought out Hermes products. It the November league table, it was recognized for its "top of the heap" reputational value.  Read more of CFO.com

Today, in Forbes.com, another look at Marketing Myopia. The star is Blockbuster, a firm that took a decidedly different course than Hermes. Blockbuster announced this week that it will shutter its remaining 300 retail stores.

The article's premise is that Blockbuster did not get in trouble because the need for entertainment was filled by others such as Netflix and YouTube. Rather, Blockbuster failed because the need for entertainment was not filled by Blockbuster itself. Quoting from Levitt's 1960 article:

The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because that need was filled by others (cars, trucks, airplanes, and even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad oriented instead of transportation oriented; they were product oriented instead of customer oriented.... .

While Blockbuster saw itself in the entertainment distribution business, Blockbuster’s retail customers were expecting solutions for entertainment experiences. When the expectations became harder to meet through self serve, and Blockbuster didn’t step up with operational changes to meet those expectations, Blockbuster’s reputation as a reliable solution provider for entertainment deteriorated. Management’s response to lost sales was to focus on “retail, not otherwise specified.” The strategy obviously did little to address the ongoing failure in meeting customer expectations, left employees demoralized, and precipitated a financial death spiral. Read more of Forbes.com

Oil is Thicker than Sentiment

C. HUYGENS - Friday, November 01, 2013
Mission Intangible Monthly Briefing moderator Jonathan Salem Baskin explains why Saudi Arabia's global reputation for reliable oil production easily overcomes the costs of social disparagement from remote interested parties. Read more.

Goldman Sachs: Reputation is just fine, thank you.

C. HUYGENS - Thursday, October 31, 2013
Last week, an article in the New York Times' Dealbook declared that Lloyd C. Blankfein presided over the implosion of Goldman Sachs’s brand and reputation. Really?

Written by Jesse Eisinger who is a top-notch investigative financial journalist working for ProPublica, the charge against the company's Chairman and CEO should stick. No slouch, he and colleague Jake Bernstein were awarded in 2011 the Pulitzer Prize for National Reporting for a series of stories on questionable Wall Street practices that helped make the financial crisis the worst since the Great Depression. He and Bernstein were also finalists for the 2011 Goldsmith Prize for Investigative Reporting for the series.

Here's the funny part. Eisinger documents all the operational successes Goldman Sachs appears to be realizing and the remarkably light touch regulatory opprobrium it navigated -- all empirical proof points that stakeholders are valuing Goldman Sachs' reputation. He concludes that reputation must be irrelevant, quoting Yale legal scholar Jonathan R. Macey. “Reputation is no longer an asset in which it is rational to invest,” writes Macey in his recent book, “The Death of Corporate Reputation” (FT Press).

The problem and source of Eisinger's congnitive dissonance, as followers of the blog picked up from the opening paragraph, is lack of clarity over the meaning of reputation. It is not brand, and it can not be understood the way brand is understood -- through opinions and sentiment surveys.

Andrew Carnegie, one of Pittsburgh's most famous capitalists, explained, "As I grow older, I pay less attention to what men say, I just watch what they do." Sentiment and opinion surveys only capture what 'men' say. To appreciate a company's reputation, you need to watch what its stakeholders do. Everything else is just marketing.

Turning to what stakeholders do as evidenced by the Consensiv metrics, Goldman Sachs' Reputation Premium is at the 86th percentile having bounced near the peak these past few months. Its Consensus Trend, the uniformity with which stakeholders agree on its Reputation Premium, is high with a scatter of only 1.2%. Both values stand out as extraordinary when compared to the 80 peers in the Investment Banks/Brokers sector. The Consensus Benchmark is at a generous 10.5% indicating that the normal variance of reputational value and the associated ability of the company to exhibit resilience in the setting of bad news, is at an optimum.

Notwithstanding all the stories over the past few years, none of which present a more sinister image of Goldman Sachs than Matt Taibi's "giant vampire squid," the customers flock to its doors, employees love working for the firm, its costs of capital are reasonable, and the greatest cost of all -- regulatory burden -- somehow seems lighter.

Yes, the overall reputational health, as Eisinger points out in detail, is quite good.



For more background on the Consensiv reputation controls, click here. To view the October 2013 reputational value league table at CFO.com, click here.

We Stayed for the Show

C. HUYGENS - Wednesday, October 23, 2013
The shenanigans on Capitol Hill follow a plot line so transparent that capital markets are enjoying the Kabuki, not panicking. Investors expect a good show with a happy ending.

As explained in a note by Jonathan Salem Baskin titled, Long-Term Reputation of US Markets Appears Intact, “But investors didn’t panic. The yield on the benchmark 10-year Treasury note was 2.62 percent on Sept. 30, a day before the shutdown began. The prospect of a default should have driven the yield much higher. Instead, the yield barely budged. It never rose above 2.73 percent.”

Read more.

Reputation and the NFL (Roman) II

C. HUYGENS - Monday, October 21, 2013
It is the Monday after a solid weekend of American football that Huygens would like to memorialize with links to two business parables drawn from stories about the league. The first story deals with the relationship between reputation and regulatory opprobrium; the latter, with reputation and entity viability.

It is well known -- in fact, it is black letter law -- that regulators are to consider reputation as a mitigating factor when levying fines for regulatory infractions. the inverse is also true. In a blog posting at Consensiv, Mission Intangible Monthly Briefing moderator Jonathan Salem Baskin explains what this means at a very personal level for Detroit Lions’ defensive tackle Ndamukong Suh who was fined $31,500 for a hit on Cleveland Browns’ quarterback Brandon Weeden, even though it didn’t earn him a penalty flag during the game. Read more.

Notwithstanding its importance to the well being of a large segment of the US population, football is at the end of the day a source of entertainment. Football players, referees, and all that goes with the spectacle is, well, a spectacle. When the entertainment value of that spectacle is placed at risk, significant value is at risk for being destroyed. One way to destroy value is to reshape the expectations of the fans, who, while desperately eager for their favored team to win, expect any victory to emerge from a fairly-refereed game. Last year's lockout of the regular referees placed that expectation at risk, as CFO.com explains. Read more.

Reputation Risk Redux

C. HUYGENS - Monday, October 07, 2013
Five years ago, as Wall Street was imploding, former Federal Reserve Chairman Alan Greenspan rationalized the chaos in a speech at Georgetown University, “In a market system based on trust," he said, reputation has a significant economic value.” Last week, on the anniversary of that address, Deloitte Touche Tohmatsu Ltd. released results of a survey of more than 300 C-suite executives from around the world showing that reputational risk has emerged as the top strategic risk, overtaking brand concerns and economic trends.

These are the reasons for reputation risk's dominance, which will be addressed in San Francisco at the RIMS ERM event November 5:

  1. Rise in intangible asset fractional value and its dependence on the value of future expectations;
  2. Democratization of communications and corporate loss of messaging control in setting expectations;
  3. Rise in expectations for socially and ethically-sensitive corporate behavior; and
  4. Promulgation of Sarbanes-Oxley and Dodd-Frank legislation providing material penalties for breaches to #3.

It is impractical for companies not to demand controls for reputation risk. It is equally impractical not to transfer that risk in a manner appropriate for the losses it causes. Real risk transfer for reputation risk comes from an integrated solution that exculpates directors and officers, signals the value of reputation controls to the market, and indemnifies a diversity of losses associated with failures in the processes that underpin reputational value.

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