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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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.

Governance: Costs of failure rise

C. HUYGENS - Friday, January 04, 2013
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.

Governance: Resolved to do better

C. HUYGENS - Thursday, January 03, 2013
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.

Walmart: Looming reputational value crisis (again)?

C. HUYGENS - Monday, November 19, 2012
Reputation is what the market--a diversity of stakeholders--expects a company to do, and why it rewards some companies and punishes others. Reputation has measurable value. Reputational value risk is when a diversity of stakeholders holds an institution culpable for failures of one of six business processes (ethics, innovation, quality, safety, sustainability, or security) and then adjusts its expectations as reflected in economically unfavorable actions. Turning to various actions by those stakeholders that create or destroy value:

Customers: They're not buying. Walmart announced that it expects (surprisingly) lower sales revenue relative to peers. Three companies announced earnings and Q4 expectations last Thursday: Limited Brands (LTD), Ross Stores (ROST), and Walmart (WMT). .
Source: Google Finance

Employees: They're not working. Strikes are expected in 1000 stores.

Vendors
: Don't know.

Creditors: They're not sanguine. Credit default swap prices rose 5% Friday even as the VIX fell.

Equity Investors: They're not happy. Stock price has dropped almost 6% in the past 48 hours. See Customers.

Regulators: They're smelling blood. The company may have violated the U.S. anti-bribery law in China, India and Brazil, according to an internal probe, on top of the Mexican allegations we already know about.

Other indicators...

Reputational Value Metrics
: Integrated measures of stakeholder expectations show reputation stability slipping to the median, rank only slightly above median, and volatility trends showing a recent spike in RVM (a non-financial measure of reputational value) and a negative direction projection for CRR (a relative measure of reputation ranking) within a peer group of 15 discount stores.





Data Source
: Steel City Re Reputational Value Metrics


Media Coverage: The strikes are getting attention in the blog-o-sphere as the public aka, Walmart customers, are now taking notice. The spikes of web searches are matching levels last seen in 2006 when Walmart was reportedly losing 10% of its customers over labor concerns.

National Football League: Post game show

C. HUYGENS - Thursday, October 18, 2012
In late September, Huygens commented on how quickly the National Football League (NFL) resolved an emerging reputational value crisis. By invitation of CFO magazine's risk editor, Caroline McDonald, a follow up article was published Monday 15 October detailing the financial issues at stake as an operational failure began blossoming into a full-blown quality-linked reputational value crisis. Click here to link to CFO.com

National Football League: Crisis resolved

C. HUYGENS - Thursday, September 27, 2012
When a labor dispute escalates into a reputational crisis, the calculus changes. Instead of owners making money with substitute labor while labor starves through attrition, owners face the risk of reputational value loss. For the NFL and its owners, measurable losses would include fans buying fewer tickets, and branded products; fans watching less broadcast programming; lost pricing premiums on tickets, branded products, and broadcast slot advertising; greater employee costs (turnover, litigation); greater supplier/vendor costs; greater credit costs; and possible loss of anti-trust immunity. The incentives to settle the matter quickly were transparent to all, and so they did. Did we mention that reputation has significant value?

National Football League: Reputation crisis?

C. HUYGENS - Wednesday, September 26, 2012
Professional football is an entertainment business. Its customers and employees both expect fairness which means, in part, a just application and interpretation of the rules of the game. Referees are critical to that process. With professional referees locked out of the games in a pay dispute with the National Football League, much rests on the capabilities of the substitute referees.

The game Monday night where referees unjustly awarded a goal to the Seattle Seahawks allowing them to defeat the Green Bay Packers has the market up in arms. In a blog post on Slate entitled, "I'm A Minnesota Viking, and I think Green Bay got screwed," Vikings punter Kluwe writes that the NFL's reputation "is tarnishing faster than a sailor's virtue in a two-dollar whorehouse." The quality of the substitute referees is not meeting market expectations. "Players see it; coaches see it; fans see it," says Kluwe in an open letter to NFL Commissioner Goodell. "These refs are not fit to stand in for the men you've locked out for what is increasingly looking like nothing more than simple greed—attempting to squeeze blood from a stone simply because you can."

We've seen this movie before. The market's uproar should come as a wake up call for Goodell whose mission of not letting anything tarnish the brand of the NFL is at risk of failure.

Standard Chartered: Rogue or victim?

C. HUYGENS - Thursday, August 09, 2012
It was a typical week in the banking sector—another regulator and another accusation of bad behavior…with a twist. Standard Chartered plc says it is being maligned and now seeks advice over a countersuit.

According to the Financial Times (9 August 2012, Scannell K and Jenkins P) “Standard Chartered has sought advice about whether it can pursue a legal action against the US regulator that on Monday accused the British bank of being a rogue institution which had funded $250bn of Iranian sanctions breaches. The bank’s legal advisers believe 'there is a case' for claiming reputational damage, according to two people close to the situation, although StanChart is conscious of the delicacy of taking an aggressive stance towards its regulators.”

Through Thursday of last week, Standard Chartered’s reputational metrics calculated by Steel City Re gave no obvious indication of a lurking reputational problem. In hindsight, the trend indicators for reputational ranking were slightly negative. It's reputational ranking has been drifting downward from the mid 80's percentile to 46 among the sector of large banks for a year. This drift may reflect the concerns of an increasingly large number of stakeholders over the eventual findings by five separate investigations on both sides of the pond.

But reputational value volatility, a key indicator of stakeholder uncertainty, had been low for months and most recently was drifting lower still. There are no indications anyone expected anything like this. But for the fact that one of the parties to the dispute is a powerful regulator, the metrics suggest that this may indeed be a tempest in a teapot.



Knight Capital: Good grief

C. HUYGENS - Saturday, August 04, 2012
This past week, Knight Capital Group (NYSE:KCG), a major market maker in global equities, watched briefly as its electronic systems began trading for themselves. Knight Capital picked up the tab for the bad trades: $440 million. Knight's safety system, like BP's blowout protector on the Deepwater Horizon, failed, but unlike BP, the company is not too big to fail. Knight’s reputation as a safe platform for US equity trades is in tatters. It's future is bleak.

Meanwhile, as with most reputational disasters, the regulators – soon to be followed by the litigators – are joining the mommy bloggers in outrage. "Existing rules make it clear that when broker-dealers with access to our markets use computers to trade, trade fast, or trade frequently, they must check those systems to ensure they are operating properly," SEC Chairman Mary Schapiro said Friday. "And, naturally, we will consider whether such compliance measures were followed in this case."

Ironically, Knight Capital Group’s reputational metrics were signaling danger. According to Steel City Re's data, starting 19 July, and then again 26 July, there were two great drops in the company’s reputation ranking and a surge in reputational value volatility from the 52nd to the 92nd percentile. Also, both forward looking trend indicators predicted a further deterioration in the company's reputation standing. The weekly data calculated Thursday night 28 hours into the crisis show a bleak reputational picture. The vital signs signal terminal. Ranking near zero, volatility near 100%. Trends strongly negative. In short, stakeholders, knowing that technology companies rarely recover from bad core events, and knowing that regulators are not being kind to the sector, are already mourning the firm’s passing.



A lesson to be remembered is that reputation is a consequence of corporate behavior that motivates stakeholders to behave in ways that either reward or punish the corporation. A safety failure of a mission-critical aspect of a company's core business motivates adverse behaviors in most stakeholders: customers, employees, vendors, regulators, creditors, and of course, investors.

In contrast to the more commonly understood surveys of reputation comprising stakeholder opinions that are ephemeral, stakeholder behaviors leave artifacts such as pricing power, sales volume, labor costs, credit costs, vendor terms, regulator burden, and equity prices. These quantitative artifacts can be captured and reported back to boards on an accelerated, algorithmic, and cost-effective basis. Call them Reputation Metrics. Reputation metrics that capture in near real time the "wisdom of crowds" -- such as those from Steel City Re -- can give management and boards operational situational awareness from a perspective not typically available through traditional corporate operational controls.

In businesses where reputation affects either capital liquidity or regulatory admonishment, factoring reputational metrics into both strategic decision making and active crisis management can be valuable. As Alan Greenspan noted four years ago in a speech at Georgetown University, “In a market system based on trust, reputation has a significant economic value.”

Knight Capital: Bad News Squared

C. HUYGENS - Thursday, August 02, 2012
It is never a good idea to have a core business service breakdown in a bad financial market. Investors, already in a bad mood, give no pause for thought. Or reputation.

Heartland Payment Systems suffered a near death experience when, in a bad market, they suffered the greatest data breach in history. Over time, they were able to restore trust, and repair much of the damage to their reputation. But the short-term liquidity gap was perilous.

This week, the unlucky firm is Knight Capital. According to Dealbook, technical problems yesterday "led the firm’s computers to rapidly buy and sell millions of shares in over a hundred stocks for about 45 minutes after the markets opened. Those trades pushed the value of many stocks up, and the company’s losses appear to have occurred when it had to sell the overvalued shares back into the market at a lower price." Its own share price has dropped from $10.30 at Tuesday's close to $3.54 as this note is being posted.

Once again, a fine company with a small prominent technology problem, fixed, and  a large reputational crisis looming. In the spirit of mortui vivos docent, there could not be a better example of the business case for quantitative reputation management and  Reputation Value Insurance.

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