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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Noble Energy: NBL is NGE

C. HUYGENS - Monday, June 10, 2013
The energy sector is hot.  Sure, its chief product is combustible or otherwise exothermically inclined. But, in a financial sense, the reputation of the sector  -- the economic benefits to energy sector companies arising from the social contract between them and their stakeholders -- is equally feverish

Body temperature, as most everyone knows is a measure of health. It is one of a handful of vital signs that serves as an early indicator of a health problem.

Equally so, fever is an indicator of a reputational health problem. The measure of reputational fever is the Consensus Trend, technically, an exponentially weighted moving average volatility of the company's reputational value metric. Causes of reputatational value fever include:

Unexpected CEO change
Conspicuous shareholder activism
Poor M & A decisions
Poor safety record
Loss of investment grade credit rating
Inability to access capital at competitive rates
Poor fleet utilization
Concentration of assets
Poor Return on Capital and Allocation decisions

Noble Energy, the top ranking energy sector firm in the June 2013 Consensiv 50 rankings, has been spiking a fever ever since the monthly rankings were released. Mind you, Noble didn't actually place in the top 50. It ranked around 200, but received notice in that it topped the league table for its sector which is generally having reputational value problems.

In the two weeks since Noble Energy was recognized, it's come down with a fever. Actually, it is both spiking a fever and losing reputational value, what Consensiv terms its Reputational Premium.  The Vital Signs chart (top row, left) shows that Noble Energy's reputation ranking has slipped from the #1 position among its peers to the 94th percentile. Its current RVM volatility is in the 77th percentlle among the 191-members of the Oil and Gas Production sector peer group. The fever spike is best seen in the Current RVM Volatility chart (top row, right). RVM is a non-financial measure of reputational value calculated by the reputational value insurer, Steel City Re. Values in excess of 7% are associated with, or are leading indicators of, material changes in market capitalization. High values reflect a lack of stakeholder consensus. Over the past two weeks, Noble has spiked to 15%.

Here's how financial analysts view the company, as summarized by Watchlist News:

Noble Energy (NYSE: NBL) had its price target cut by Barclays Capital from $140.00 to $70.00 in a research report sent to investors on Tuesday morning..A number of other firms have also recently commented on NBL. Analysts at Raymond James upgraded shares of Noble Energy from a market perform rating to an outperform rating in a research note to investors on Thursday, May 30th. Separately, analysts at JP Morgan Cazenove downgraded shares of Noble Energy from an overweight rating to a neutral rating in a research note to investors on Thursday, May 30th. Finally, analysts at TheStreet reiterated a buy rating on shares of Noble Energy in a research note to investors on Friday, May 24th. One investment analyst has rated the stock with a sell rating, eight have given a hold rating, twenty-two have issued a buy rating and two have assigned a strong buy rating to the company’s stock. Noble Energy currently has an average rating of Buy and an average target price of $107.13.

The analysts are confused. So are other stakeholders. The balance of the reputational measures, shown below, point to a negative future. Noble Energy, ranked at 200, may have been the best of the energy sector. But NBL, as it is known by its ticker, is apparently NGE (Not Good Enough).



It Depends: Measuring the measures of reputation

C. HUYGENS - Thursday, June 06, 2013
Ask someone to explain the meaning of the word, ‘reputation,’ and you will learn much about their world view. The same goes for institutional reputation reports, as the book, Reputation, Stock Price, and You (Apress, 2012) demonstrated. Not that the discrepancies of world view were necessarily material when the sole owners of corporate reputation lived in the marketing department. But now that the centrality of reputation is recognized at the highest levels of a company, measuring reputation for the purpose of managing it takes on greater importance.

It is therefore significant that the trends of non-correlated indicators of reputation observed last year between measures published by the Reputation Institute, Harris Interactive, Fortune/Hays, and Steel City Re (now with Consensiv) carry over into this year. The Reputation Institute's REPTRAK report is one of the three major reputation reports announced annually in the spring. REPTRAK is around 7 years old. Harris Interactive, the market research company, publishes the HARRIS RQ. It's been around 14 years and spawned the REPTRAK report after a fallout between the executives of Harris and the founder of the Reputation Institute. Fortune Magazine has published for the past 30 years a ranking called "The World's Most Admired Companies" that they've produced with the human resources consultancy, Hay Group. They now call it a Reputation Ranking, since Reputation is the "hot business concept."

Contrasting these survey-based reports is Steel City Re's algorithmic measures of reputational value. It has a 12-year history, but unlike the three survey reports that are published annually, Steel City Re's metrics are published weekly. The timeliness of the data are why only Steel City Re's metrics are used to inform a range of financial products including hedge fund strategies, reputational value insurances,  a composite equity index (Ticker: REPUVAR) calculated and published daily by Dow Jones Indexes and reported by Huygens weekly, and the monthly Consensiv 50.

While the three major reports are based on public surveys, they use slightly different methods. Because the Harris RQ and Reputation Institutes REPTRAK had a common development path, they use a similar brand research-type approach. Using an online questionnaire, they invite members of the general public to rank companies well-known to the respondent. The Reputation Institute looks at 7 axes that their research shows correlate with an emotional bond: Products/Services, Innovation, Workplace, Governance, Citizenship, Leadership and Financial Performance. In 2013, 55,000 respondents completed the surveys. The Harris RQ looks at 6 axes and obtained data in 2013 from 4600 respondents. Both surveys were conducted in February/March.

The Fortune/Hay survey targets a more business-centric population. For the 2013 survey, the survey asked 3,800 executives, directors, and analysts to pick the best companies and rank them on 9 axes that have a business focus: Innovation, People management, Use of corporate assets, Social responsibility, Quality of management, Financial soundness, Long-term investment, Quality of products/services, and Global competitiveness.

Steel City Re's metrics, as readers of this blog know, algorithmically extract the reputational value created in the social contract with customers, employees, suppliers, investors, etc. The algorithms process public data comprising decision market expectations of sales, net income & equity future returns; financial efficiency measures, including gross, operating and net margins; balance sheet factors, including cash and book value; and measures that help group and normalize values, including outstanding shares and moving average weightings. The calculations consume about 8 minutes. To compare SCRe data with the three surveys, Huygens selected data from the week of February 28, 2013.

The four measures of reputation and/or reputational value following three different methods have always yielded a wide range of results. This should not be too surprising since the Harris and Reputation Institute methods were designed to yield data to help the marketing community benchmark brand awareness and brand recommendation; the Steel City Re methods were designed to yield data to help risk, financial, and governance executives manage enterprise reputational value; and the Fortune data helped identify executive talent (and probably helped Fortune sell advertising space). 

The 2012 book showed that  the various methods produced data with poor correlations. It is no different with the 2013 data. As in 2012, the greatest contrast is between the Reputation Institute and Fortune. In 2012, they showed only a 20% correlation. This year, the correlation measured at -2%.  In 2012, the Reputation Institute and the Harris Interactive data correlated at 94% which was reasonable given the similar methods. This year, they correlated only 62%. Looking at average cross-correlations among the four measures, Harris Interactive measured in at 38%, Steel City Re at 29%, Reputation Institute at 25%, and Fortune at 20%. Looking at the spread of cross-correlations, an indication of consistency, Steel City Re's measures showed the greatest consistency with the narrowest spread at 27%, Harris and Fortune were more divergent at 42%, and the Reputation Institute's REPTRAK showed the greatest scatter at 64%.

Procter & Gamble: Its all about reputation

C. HUYGENS - Sunday, June 02, 2013
Huygens was musing why Procter & Gamble invited AG Lafley to assume the helm of a ship he left four years ago. At that time, he turned over command to his hand-picked successor. “I am retiring with confidence in Bob McDonald and his team," said Lafley. "This is the right time to complete our management transition.” Yes, the ship has foundered since then, so there was cause for concern. More than concern, frankly.

But in a Columbo-like moment of angst, Huygens couldn't make the pieces add up. Lafley arguably left P&G in tough shape having gutted much of the organic R&D to the benefit of buying customers and markets. Lafley groomed his successor who leaves as a failure. P&G's management bench is deep and strong. And given the recent uproar over JPMorgan Chase's Dimon holding titles of both CEO and Chairman, one would have thought the board at P&G would have been reticent to offer Lafley not two, and certainly not three, titles.

And what of those who offered the invitation? P&G's board comprises some of the best of the best:  The CEOs include Boeing Co's James McNerney, Hewlett-Packard Co's Meg Whitman, American Express Co CEO Kenneth Chenault, and Macy's Inc CEO Terry Lundgren; Archer Daniels Midland Co CEO Patricia Woertz, Frontier Communications Corp CEO Maggie Wilderotter and former Mexico President Ernesto Zedillo. Now while it is true that some of the board members are struggling with major challenges on their home turf, they are consummate professionals and are not the type to "let matters slip." In fact, they are all A-type personalities unlikely to yield for convenience. Less, so, even, if under stress.

Huygens thinks he gets it. There was no obvious solution to the P&G problem. Some board members thought the problem was McDonald. Others that McDonald was dealt a bad hand. No critical mass could be built around a going-forward strategy. When one thinks about a board's duty -- picking the CEO, approving a strategy, and protecting the firm's assets -- it's tough in the midst of a crisis to pick a new a leader to execute a strategy that doesn't exist.

And this brings us to the crux of the matter. No corporate director ever wants to be accused of failing in his or her duties of care or loyalty by picking a CEO who can not win, a strategy that can not succeed, or in squandering valuable corporate assets -- in this case, Procter & Gambles own once-stellar reputation. For directors, it is a matter of personal reputation. There's no hiding. Think about the three directors at JPMorgan Chase who have been saddled with the London Whale event. Ellen Futter, David Cote and James Crown had only slim majorities of shareholder support at last month's Annual General Meeting. And we all know about it, because transparency is the new watchword. And as far as Huygens knows, P&G does not have Reputational Value Insurance to protect its Directors.

As the joke once went, "no one ever got fired for buying IBM," Huygens hypothesizes there was only one safe choice that a plurality of Directors could agree to back: AG Lafley. The road to Abilene went right past Lafley's front door.

Huygens values his opinion. He values the opinions, and wisdom of the crowds, even more. Turning to the Steel City Re measures of reputational value which capture the wisdom of crowds, the stakeholders are not letting their guard down. Since last week, just before the announcement of changes in command, the company's reputational ranking (Reputational Premium by Consensiv's name), CRR, sank another 2 percentile points relative to the 43 member-peer group to the 81st percentile. Its Current RVM volatility, a measure of overall stakeholder understanding (Consensus Trend, by Consensiv's name) remained elevated at the 73rd percentile, and in excess of 4.5%. In fact, Procter & Gamble, which was ranked #18 in the Consensiv 50 league table of the most valuable reputations among the largest firms in the world in May 2013, fell off the list completely in the June 2013 report.

More complicated measures of reputational value and trend paint an equally disconcerting image. Reputational value velocity is increasingly negative, the reputational value vector is approaching 0 from a negative incline, and both trend measures are negative.

P&G puts, anyone?



Procter & Gamble: The king is dead. Long live the king!

C. HUYGENS - Monday, May 27, 2013
In December 2009, outgoing P&G CEO AG Lafley said, “I am retiring with confidence in Bob McDonald and his team. This is the right time to complete our management transition.” Last friday, wags were reading into communiques the reverse. "This is the right time to restore our former management transition."

There are several ironies about all this. First, after weeks of governance experts piling on to the idea that Jamie Dimon could not be trusted with both the CEO and Chairmanship roles at JPMorgan Chase, nary a negative word could be found suggesting that there was anything wrong with AG Lafley taking on the roles at P&G of Chairman, CEO and President. Second, there was near-universal accolades for Lafley's reputation as a giant in innovation -- a point Huygens disputed previously when he suggested that P&G's current problems are a direct result of Lafley's strategy.

However, as an American Pragmatist, Huygens appreciates that what matters is what the markets expect. It was apparent to all that under McDonald, P&G’s profit margins, market share and stock price lagged relative to peers such as Unilever PLC (UL), Colgate-Palmolive Co. (CL) and Clorox Inc. (CLX). In light of abysmal performance, those expectations, reflected in the Steel City Re reputational value metrics (or the Reputation Premium, Consensus Trend, and Consensus Benchmark as those metrics are explained by Consensiv) are informative.

This snapshot, taken at the close of markets last Thursday only hours before the announced change of leadership, shows evidence of stakeholder unrest peaking nearly three weeks ago when the Current RVM Volatility (or Consensus Trend) peaked at nearly 5% and was at the 73rd percentile of the peer group after nearly a year of hovering in a much lower state of anxiety at the 33rd percentile. Meanwhile, return on equity dropped to the 29th percentile representing a 10-point drop from September of last year and consistent with Huygens' projections.  Over the same period, the Current CRR Rank (Reputational Premium) dropped from the 95th percentile to the 83rd percentile.

The data suggest that McDonald's fate was sealed about one month ago. Owing to the time of sampling, the data do not show what the majority of stakeholders expect from Lafley going forward, although it is fair to say that the 4% equity boost Friday signals that equity investors, at any rate, are optimistic.


JPMorgan: Bowl Game Post-Mortem

C. HUYGENS - Wednesday, May 22, 2013
The votes are in and by a supermajority, Jamie Dimon is still both CEO and Chairman of JPMorgan Chase. Notwithstanding a concerted effort by the proxy services, ISS and Glass, he was returned to the dual role with a stronger showing than last year's simple majority.

For readers of this blog, the outcome was expected, according to an analysis of the Steel City Re reputation metrics by the advisory firm, Consensiv, and their Consensus Trend measure. While the outcome was not in doubt from a reputation-based model of behavior, a post-mortem is still valuable. In this regard, Huygens writes with authority having served as Deputy Coroner in Los Angeles County in a prior life.

Using Steel City Re's repetitional value metrics, Consensiv scores reputational value using a proprietary algorithm to calculate net expected behaviors. It is agnostic to qualitative values of what should matter to stakeholders, and measures instead the outcomes of whatever observably matters.

Like a jury, stakeholders as a group bring to the table a simple, unvarnished understanding of the facts. It is a valuable understanding described by James Surowiecki as the Wisdom of Crowds. The stakeholders understood that while companies are generally faceless, in times of crises or turmoil, their identity fuses with that of their leaders. This melding of CEO and company reputation has been studied by leading reputation experts such as Dr. Leslie Gaines Ross and summarized in the 2012 opus, Reputation, Stock Price and You.

Simply put, the stakeholders understood that the separation of CEO and Chair, allegedly on the basis of principles of good governance, would be perceived as a personal rebuke that would damage Jamie Dimon's reputation. They also understood that Dimon's personal reputation, that is, the expectations of the benefits of his leadership, were drivers of some of the excess value in JPMorgan Chase (what Consensiv terms Reputational Premium). Last, they understood that public humiliation, like a scarlet letter, would permanently stain Dimon and force his resignation. Reputational value insurances, which are designed to prevent such permanent damage to senior executives and board members, are not effective after the damage is done.

To remain in the limelight would only ensure repeated embarrassment, as the press would forever follow his name with a parenthetic reference to his fall; e.g., Tony (I want my life back) Hayward, Frederick (I would like my knighthood back) Goodwin, and the classic Michael (disgraced junk bond king) Milken. The stakeholders understood all that. The reputational value metrics, as Jonathan Salem Baskin explains in an article in Forbes today, captured behaviors that reflected those impressions.

Reputation Risks in the Supply Chain

C. HUYGENS - Tuesday, May 21, 2013
John R. Lund, then the senior vice president of Disney Parks Supply Chain Management for Disney Destinations LLC, told Supply Chain Quarterly, “The reputation of a company is fundamentally affected by the choices you make in running a supply chain.” Some of the details of Disney's approch to managing its reputation through supply chain controls are detailed in the 2012 publication, Reputation, Stock Price, and You: Why the market rewards some companies and punishes others.

Yesterday, Business Insurance magazine weighed in to the debate with an article prompted by the recent tragic collapse of a building in Bangladesh housing many clothing suppliers. There are a number of proposed strategies in the alternative reflecting the diversity of understandings of what comprise reputational risk. The most expensive, which seem to be addressing after-the-fact-liabilities, will probably not yield the best reputational results. The most efficient, however, require the paradigm shift advocated by firms such as Steel City Re and Consensiv; and by a growing number of risk advisers.

Reputation Risk Still #1

C. HUYGENS - Monday, May 20, 2013
When the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012), was in development last spring, the pitch to publishers was, "The #1 concern of 71% of corporate directors surveyed." It still is.

Eisner Amper, the accountancy, just released their 2013 board survey. "Other than financial risk, respondents were asked to identify risks of most concern. Seventy-three percent identified reputational risk as a primary concern of their boards – a 19% increase in the number of board members who identify this as their greatest concern since the initial Survey, four years ago. The top three reputational risks cited were: Product quality, liability and customer satisfaction; Public perception and brand Integrity, fraud, ethics; and the Foreign Corrupt Practices Act (FCPA)."

JPMorgan Chase: Saying foolish things?

C. HUYGENS - Sunday, May 12, 2013
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: The future of hiring

C. HUYGENS - Thursday, May 09, 2013
In an article titled, "Future hiring will be all about reputation," Janina Conboye write for the Financial Times, "The recruitment process will be about productivity... about reputation for delivery: can you deliver in a certain time and at what cost?”

PetroChina: Reputation of a different color

C. HUYGENS - Monday, May 06, 2013
Corporate reputation is an expectation of corporate behavior. Reputation value is the product of that expectation. This is the natural course of things according to Huygens. And according to the book, Reputation Stock Price and You: Why the market rewards some companies and punishes others. And according to Jonathan Salem Baskin, Managing Director of Consensiv, who wrote today for Forbes about PetroChina.

"The last two months of PR have not been kind to PetroChina . The company’s former chairman has been implicated in a murder and money laundering. A key team of execs resigned en masse. A giant facility has stayed shut-down by an earthquake and safety concerns, while the environmental risks of a new investment have prompted riots in the streets. Earnings are down. It’s a textbook case for a corporate reputation crisis. Only not the way you think, since the company’s reputation has stayed all but unaffected. The reasons why suggest that marketers at public companies should look at corporate reputation less as an idea, and instead measure it as a series of behaviors." The full article is a good read.

Here are the corresponding Steel City Re reputation metrics underpinning Mr. Baskin's quantitative observations. Note the following:

Top left, the historic RVM volatility, a measure of the volatility of PTR's reputational value, was very low. Mr. Baskin explains why. Now it is in the 98th percentile among the 52 peers in the integrated oil sector. The reputational value is at the median, notwithstanding all the bad press.

Top right, the current RVM volatility is approaching 5% suggesting that an increasing number of stakeholders are expecting that the status quo is unsustainable.


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