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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Program - 17 May 2013 - Register Now

C. HUYGENS - Friday, May 03, 2013

Briefing Friday 17 May at 10h00 ET

Program: Herbicides for Digital Forget-Me-Nots


To deal with the problem of people hearing or seeing things best not heard nor seen, the Men in Black used a neuralyzer to wipe the memory of a target or witness. The silicon of the world wide web is resilient, so more powerful tools are needed when inaccurate or biased information appears or when a reinvention is desired.

Joining our conversation are Shannon M. Wilkinson, Founder and CEO, Reputation Communications; and Michael D. Greenberg, Director of RAND’s Center for Corporate Ethics and Governance, and a member of the Society's Reputation Leadership Council. Jonathan Salem Baskin,  author of Tell the Truth, moderates. Learn more.

Apple: Golden

C. HUYGENS - Wednesday, May 01, 2013
Apple Inc., rated AA-plus by Standard & Poor's Ratings Services which a notch below rival Microsoft's AAA, borrowed $17B at record low rates yesterday. Notwithstanding S&P's rating and misgivings of some equity investors, it borrowed $5.5B for 10 years at 2.415% which is comparable to Microsoft's cost last week of 2.413%. Overall, Apple sold $17B in bonds to a market that expressed an appetite for $50B of the company's notes.

Reputation is best valued through behavior. Apple is being offered credit at such low rates because the market expects to be repaid--the benefit of an excellent reputation in the credit market. "There was $52 billion worth of orders for the deal, making it one of the most hotly desired bond deals Wall Street has ever seen, said bankers at Deutsche Bank," reported the Wall Street Journal.

For a broader understanding of the relationship between expectations, stakeholder behavior, and value, read Reputation, Stock Price and You: Why the markets reward some companies and punish others. For an understanding how how measures of reputational value such as those calculated by Steel City Re can inform managerial decision making, visit Consensiv.

Consensiv 50 League Table for May 2013

C. HUYGENS - Tuesday, April 30, 2013
Consensiv, a consultancy, inaugurated today monthly publication of the Consensiv 50, the most reputable large companies in the world. The ranking is informed by Steel City Re's reputational metrics.

As Consensiv explains in their press release, "the first-ever ranking of global leadership in reputational value based on stakeholder behaviors with measurable financial consequences...provides a number of new perspectives on corporate governance."

(Links Updated 3 May 2013)

Link to press release.
Download link to Consensiv 50 report for May 2013.

Barclays: Committed

C. HUYGENS - Sunday, March 17, 2013
Cynics insist that the big banks have only an interest in reputation -- an interest that distributes risk inequitably on others. As the old fable goes:

A Pig and a Chicken are walking down the road. The Chicken says: "Hey Pig, I was thinking we should open a restaurant!" Pig replies: "Hm, maybe, what would we call it?" The Chicken responds: "How about 'ham-n-eggs'?" The Pig thinks for a moment and says: "No thanks. I'd be committed, but you'd only be involved!"

Last year, UBS tied the CEO's bonus to measures of reputation. Now, a second bank is no longer chicken. In a bigger and bolder display of commitment, the 2012 Barclays Bank Annual Report describes robust board and operational level controls designed to drive reputation risk management throughout the enterprise.

In order to strengthen the governance relating to reputation matters, we have recategorised reputation risk as a new Principal Risk and have created a Board Conduct, Reputation and Operational Risk Committee in 2013. The Barclays Reputation Council created a Bank wide Reputation Risk Control Framework and Reputation Risk Impact/Control Policy, both of which were approved by the Board. The Council has also delivered training on reputation risk to senior executives across the bank to ensure the knowledge and culture is embedded.

The Steel City Re Reputational Value Metrics suggest Barclays is realizing some of the rewards associated with transparently reporting its commitment. RVM is a non-financial indicator of reputational value. The current RVM volatility, an indicator of homogeneity of expectations of reputational value, has been dropping steadily over the past 4 weeks since Huygens last reported the metrics.  Meanwhile, the CRR, a measure of relative reputational value in rank order, shows that BCS has climbed from the 21st to 24th percentile since mid-Feb. ROE is holding steady at just above the median for the sector comprising 49 banking firms.

The data show that BCS's emphasis on reputation, backed by authentic controls, is creating value. The controls have not been tested, so those that have been converted appreciate the qualitative effort. The data also show that while the number of sceptics is dropping, BCS current RVM volatility is still above the median at the 54th percentile. To extract more value from the investment, BCS needs to turn around this very large block of sceptics with a quantitative story -- something made possible by a product like reputational value insurance, perhaps?



Barclays: Stirring the pot

C. HUYGENS - Wednesday, February 20, 2013
The path to providence for a prodigal bank was never expected to be easy. Human nature delights in the fall of the mighty; more so the meek who once suffered at their hands. We are speaking, of course, of the hands of the masters of the Universe.

William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. He scoffs as Antony Jenkins, the chief executive officer of Barclays Plc., seeks to shred the banks old culture and restore ethics, integrity, and other critical values. Cohan wrote on Monday,

It’s tempting to trust this sweet-talking British banking executive, still in the flush of his new appointment to run the scandal-ridden institution. He is understandably anxious to distance himself and his bank from the atrocious behavior rampant at Barclays during the absolute monarchy of his predecessor, Robert Diamond.

Scoffing, as it is now abundantly clear, is a mainstream financial media concern. Last Thursday, the NYSE announced the start of a metric-based publication service tracking sentiment - a social media data analysis service. Call it a scoff meter. Barbara Gray, an analyst with Brady Capital, explains the demand in the financial sector for sentiment data this way.

Social media is creating a new form of appreciating equity called social capital and we are now starting to see an explosion in growth of the number and sophistication of social analytics tools. As these new tools turn more and more qualitative data on companies (previously ignored by investors that just focused on the numbers) into quantitative data, I believe social capital will become even more of a predictive variable for determining stock price performance.

Indeed, the scoff meter is a 17 year old idea whose time has come. As described in Reputation, Stock Price and You, as far back as 1996, Cap Gemini Ernst & Young, a global accountancy, established that non-financial performance plays a critical role in how public companies are valued, accounting for as much as 35% of institutional investors’ valuation. In 2005, PwC, another global accountancy, reported controlled experiments showing that extra-financial data and intangible asset value calculations swayed 40% of analysts to change their target valuations of public companies. That same year, Thomson Extel, the publishing group, reported that 6% of buy-side brokerages devoted material resources to extra-financial data to determine intangible asset value. A year later, that figure was updated to 32% of buy-side brokerages.

The Society, in cooperation with Steel City Re, has been publishing reputational value metrics for several years. S&P/DowJones Indexes publishes an equity index (Ticker: REPUVAR)  informed by the same measures. These measures capture the expected economic consequences of stakeholder actions influenced by, among other things, the same data streams tracked by the scoff meters. In fact, the volatility of the RVM metric, a non-financial measure of reputational value, is a measure of stakeholder expectation alignment -- truly, a scoff meter. And CRR, a measure of reputational value premium, is an indicator of the relative value of those expectations among all stakeholders in terms of expected economic impact. When RVM volatilty is high, CRR naturally suffers.

Below, Barclays' most recent data from Steel City Re in both Investor Relations-friendly and traditional Risk Manager-centered actuarial formats. Looking first at the IR-friendly form of reputational value reporting, the data show that the measures of expectation alignment - the degree to which stakeholders believe what is being said about Barclays and plan to act accordingly, is around the 8th percentile relative to the other 49 firms in the financial services sector. The measure captures the expected economic impact of Cohan's scoffing, as shown on the same Peer Standing chart where the reputational value premium is around the 21st percentile. Two measures, both in the black box, indicating (optimistically) great upside potential.

Below, in the bottom left, a comparison of current alignment versus historic alignment. The measure appears to be decreasing, which could be interpreted to mean stakeholders are trusting the messaging less, or more aptly here, with the new messaging, stakeholders aren't accepting it...reference Cohan again.

Turning to more traditional economic measures, the Beta charts at right show that Barclays' economic returns have a Beta of 1.5 x both the group median and the S&P500; Barclays' reputational value metrics, on the other hand, have a Beta of 0.0 relative to the group median and the market measure of uncertainty -- the VIX. Barclays, from a reputational value perspective, is now in a league of its own.



The story is no different looking at the actuarial data below although time series data provide more nuanced insight. Barclays wild ride goes back to September 2012 and a steady rise in economic value not yet matched by a rise in CRR suggesting equity investors have a feeling for something others, like Cohan, are fighting tooth, nail, and blog.

Walmart: Awful quarter

C. HUYGENS - Monday, February 18, 2013
Three months ago, Huygens reported that the reputation value metrics calculated by Steel City Re suggested that Walmart was on course for a reputational value crisis. It was a message easy to ignore, as Walmart's travails have been covered extensively by Huygens among many others and stumbling consequent to a host of reputational value crises has been long expected. It had to come eventually, although Huygens in December boldly predicted -- there's nothing all that bod about interpreting reputational value metrics, actually -- it would be evident by Spring 2013.

Hours before Bloomberg News leaked emails from Wal-Mart executives calling February sales a "total disaster," off to the worst start in seven years, the updated reputational value metrics showed yet another spike in RVM volatility. RVM, as described in the book Reputation, Stock Price and You,  is a non-financial measure of reputational value, and its volatility is an indicator of stakeholder expectation alignment with messaging. High RVM volatility values suggest poor alignment. Somethings 'a comin'.

Compared to Target, a much smaller company, Walmart's RVM volatility is leaping of the vital sign charts to the 71st percentile among the 15 companies in the Discount Store peer group. The company's CRR, a measure of reputational value  premium, is in the 93rd percentile. This measure should be a source of good cheer but for the corresponding RVM volatility and the fact that Walmart's ROE is comparable to Target's at the 77th and 69th percentiles, respectively. This mix of measures of reputational value make for an unstable picture as the four week rise in Current RVM Volatility suggests. Worst yet for Walmart, the reputational value Forecast Stability metric, the fifth of the five vital signs, suggests that this pattern of volatility can be expected to remain, well, stable.

Twenty hours after this chart was generated, the markets closed for the extended weekend. Walmart was down 2.18% for the day; Target was reflexively down 2.14%, and the S&P500 was down only 0.1%. Equity investors are event driven. With more thought, expect Target to rebound, and Walmart to continue to sink.

Blackberry: Bye bye

C. HUYGENS - Friday, February 15, 2013
Reputational value is the benefit of stakeholder confidence in a company's future narrative. With a nod to comedian Jeff Foxworthy, you may be having a reputational value crisis...if your former CEO dumps all of his shares at rock bottom prices.

In a regulatory filing yesterday, former Blackberry Co-Chief Executive Officer Jim Balsillie said that by the end of last year he had sold his entire stake in the company. Balsillie, who stepped down as CEO a year ago, owned about 26.8 million shares, or a roughly 5 percent stake in the company, as of Dec. 31, 2011.

US Airways: Soaring

C. HUYGENS - Thursday, February 07, 2013
There is good news in the airlines industry. Notwithstanding safety issues on the hardware side of the business at Boeing, the service side is getting some recognition for improved quality. As Huygens points out from time to time, its great to have a superior reputation and capture the economic premium. But if equity investors have already factored all that into the stock price, there is little upside potential. The big returns come from companies with poor reputations and little reputational value premium who surprise everyone with better (fill in the blank.) In the airline business, there is only one variable measure: service quality.

Compare USAirways (NYSE:LCC) and Delta (NYSE:DAL) as reflected in the Steel City Re reputational value metrics. Over the past year, USAir's CRR, its relative rank or reputation premium, grew; equity prices grew to match - with a 70% ROE. Going forward, and based on both the CRR velocity and RVM volatility, it looks like Delta will make the next hop upward. Soon.

Chesapeake: CEO's departure reduces risk

C. HUYGENS - Wednesday, January 30, 2013
It bears repeating: Reputational value is how the markets reward or punish a company in ways that are either joyfully or painfully transparent on corporate financials.

Reputation is an expectation, some say confidence, in an outcome. Because of the outsized influence CEOs have on a company's direction, stakeholders often (reasonably) confuse a CEO's personal reputation with a company's reputation.

Risk, a threat to a desired outcome, is equally influenced by a CEO's action. Today's Bloomberg Businessweek reports that five-year credit-default swaps on the Chesapeake Energy Corp.’s (CHK) debt dropped 72.5 basis points to 391.9 basis points (15% reduction) as of 7:30 a.m. in New York after the company announced yesterday that Chief Executive Officer Aubrey McClendon would retire. In other words, the chances of the firm defaulting on its debt is expected by investors to decrease with McClendon's retirement. All things being equal, that should translate into lower costs the next time Chesapeake rolls over its debt.

To understand how the expectations by other stakeholders -- customers, employees, vendors, equity investors, creditors, and regulators -- create or reduce value through behaviors that are equally transparent on corporate financials, read the new book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others.

Boeing: A reputation problem

C. HUYGENS - Friday, January 25, 2013
Innovation is the process by which products and services are made better, faster and cheaper. Outcomes are uncertain, which means the process is inherently risky where risk is a threat to an outcome that is desired. Because innovation is also one of the six major drivers of reputational value, innovation risk presents reputational value risk.

On CNBC's Kudlow Report last night, Jonathan Salem Baskin, a member of the Society's Reputation Leadership Council and moderator of the Mission Intangible Monthly Briefings, explained this to Bob Crandall, former Chairman and CEO of American Airlines' holding company, AMR. Click here to link to the CNBC clip.

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