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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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.

JPMorgan Chase: The limits of reputation resilience

C. HUYGENS - Tuesday, October 15, 2013
A strong reputation among a diversity of stakeholders can sustain a firm for years through thick and thin. Witness the 25-year run enjoyed by Johnson & Johnson (JNJ) after the famed 1982 Tylenol poisoning, and the less famed but much more important 1986 Tylenol poisoning II. Alas, resilience has its limits as Johnson & Johnson discovered in recent years.

Enter JPMorgan Chase (JPM), an integrated bank led by Jamie Dimon, a CEO with rock star-like cult status as a risk manager extraordinaire, who guided his firm through the ugliness of 2008 unscathed. Since the London Whale event hit the news 18 months ago, sturm und drang have played out amongst stakeholders, especially those at the periphery comprising regulators, litigators and mommy bloggers, who have piled on the opprobrium -- and the fines. The New York Times' pithy summary comprises the headline: The Bloodlust of Pundits Swirls Around Jamie Dimon. See cartoon clip starting at 0:56/2:31 - http://www.youtube.com/watch?v=KNCz0-CYj8M

The damage has been incremental, but measurable; the largest U.S. bank by assets, on Friday reported a $380 million loss, or 17 cents per share, in the third quarter on lower revenue and massive legal bills. That compares with net income of $5.7 billion, or $1.40 per share, a year earlier. Excluding litigation expense, the New York financial giant posted a profit of $5.82 billion, or $1.42 per share.

The Steel City Re reputational value metrics reflect the lowered reputation (CRR) ranking (reputation premium) driven by the volatility of stakeholder (RVM Vol) expectations (consensus trend). Wells Fargo (WFC) now enjoys a greater premium and greater return on equity, and lower current volatility. The projections are for Wells Fargo to continue gaining premium value, and for JP Morgan Chase to continue losing.

Herbalife: Resilience even a hedge fund could love

C. HUYGENS - Thursday, May 23, 2013
If the nameless and faceless blather of business reporting leaves you hungry for drama, you'd get more than a full plate at Herbalife. The core issue is captured by Bloomberg's story title this week, "Herbalife: Pyramid Scheme or Juggernaut?" The drama behind the story is the battle of hedge fund managers with egos equal to the task. The current score, headlined by Forbes this week, "Carl Icahn And Herbalife Are Crushing Bill Ackman."

The Steel City Re reputational value metrics, having correctly anticipated the JPMorgan Chase vote this past Tuesday through an analysis of the consensus trend, as Consensiv describes the process, affirm the expectations of stakeholders for a brighter future. Looking first at the underpinnings of the consensus trend, the Current RVM Volatility, the value has decreased from a worrisome 7% to the peer median (technically, 60th percentile) of around 2% relative to the 11 companies in the food distributors sector. The CRR, a measure of the reputational premium value, is also at the 60th percentile which is impressive given the events of the past few months. Return on equity, reflecting reasonable reticence by equity investors, is lagging at the 10th percentile suggesting by the logic underpinning the RepuStars Variety Corporate Reputation Composite Equity Index (Ticker: REPUVAR) that there is significant upside opportunity.

Additional background on these measures of reputational value can be found in the 2102 book, Reputation, Stock Price, and You.

Goldman Sachs: Reputational luster

C. HUYGENS - Wednesday, March 07, 2012
Mathew Philips, writing for Bloomberg Businessweek (March 7), is perplexed. After recounting recent history including the Securities and Exchange Commission's $550 million fine for misleading clients on securities that were "built to fail," the swaps engineered for the Greek treasury that went bad and exacerbated the nation's financial distress, and the apparent conflict of interest in the sale of El Paso to Kinder Morgan, he is faced with a troubling fact. "Goldman’s sullied reputation doesn’t appear to be negatively impacting its business. In fact, Goldman is outpacing its Wall Street competition recently in key areas of business. In 2011, Goldman was the top adviser for both global M&A and equity IPOs. A Bloomberg survey of traders, investors, and analysts last May showed that while 54 percent of respondents had an unfavorable opinion of Goldman, 78 percent believed that allegations it duped clients and misled Congress would have no material effect on its business."

Two quick charts on reputational value and reputational rankings based on Steel City Re data reinforce his observations: the reputational rank and reputational stability of Goldman Sachs are both in the top quartile of all 267 firms in the banking and financial services sector.





















By five of the key "vital sign" reputational metrics shown at left, Goldman Sachs is looking good. Yet its return on equity -- reward to its long suffering investors -- is the the 17th percentile within this peer group. Contrast Goldman Sach's reputational standing with another full-service investment bank, UBS. UBS with a market cap of $50B compared to Goldman's $57B, has a corporate reputational ranking in the mid 40th percentile even though its return on equity is slightly less negative. Goldman's PE is excess of 26 while UBS's is around 11.

We call this reputational resilience, and having tracked and measured Goldman Sach's reputation for the past three years, we are not surprised. Notes Philips, "There’s a reason why firms keep doing business with Goldman, and it’s not because of its sterling ethical reputation."

Indeed, it is not. The six key business processes that underpin reputational value are ethics, innovation, quality, safety, sustainability, and security. In the investment banking sector, it is hard to argue that one firm is more or less ethical than the other. That makes other drivers of reputation more valuable, and the evidence suggests the most important of them is innovation.

Opines William Cohan who studied Goldman Sachs and their culture and was interviewed by Philips: “This gets back to the advantages that Goldman has had for years over its competition. They attract the best and brightest people. They consistently have the best risk-taking culture on Wall Street. No one understands the markets as well as Goldman.”

Concludes Philips, "In short, if you want the smartest bankers, there’s a price to pay." The reputational value metrics and corporate reputation ranking data concur.

Reputation Year In Review

C. HUYGENS - Saturday, December 31, 2011
Let's not get carried away. Huygens can not possibly do justice to a review on reputation in a year which almost $6.3tn (12.1%) was erased from global stock markets as the eurozone financial called into question the future of the world’s largest currency bloc, according to the Financial Times (Dec 30, Wigglesworth). Instead, Huygens offers a tale of two intellectual property strategies, and an example of reputational resilience.

TIVO and Rambus are two firms that have been fighting IP infringement battles for many years. At the end of 2011, TIVO finds itself experiencing one of the greatest reputational jumps over the trailing twelve months while Rambus story has a less than happy ending, so far.

Among the 28 companies in the Electronics/Appliances sector, Tivo's reputation metrics, according to the Steel City Re Corporate Reputation Index, rose from the 3rd to the 84th percentile. Its most recent EWMA reputational volatility was 74% after a very volatile year, and while its volatility continues to trend downwards, its trailing twelve week reputational velocity and vector are at 8 and 11 percent, respectively. All good signs consistent with the fact that it has outperformed the median of its peer group by 37%.


Among the 98 companies in the Semiconductor sector, Rambus dropped from the 89th percentile to the 4th percentile. After a volatile year, its exponentially weighted moving average volatility is down most recently to 30% while its vector and velocity continue to trend negative at -36 and -9% respectively. Not surprisingly, Rambus is underperforming the median of its peer group by 39%.

Last, the Coca Cola Company distinguished itself this year by exhibiting among the lowest levels of reputational metric volatility. Among its 14 peers in the Soft Drink Producers & Bottlers group, it showed no change on any metric. It outperformed the median of its peer group by 7.67%.

The first lesson among many this past year comes from the last case: in a highly volatile market, reputational stability has value. Things do go better with Coke.

NetFlix: In flux

C. HUYGENS - Saturday, December 24, 2011
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.

Warehousing goodwill

C. HUYGENS - Saturday, December 17, 2011
“Reputation resilience is the benefit arising from having a company pre-position stores of goodwill on which it can draw when the headline crisis strikes,” the Mission Intangible blog of the Intangible Asset Society asserted in June of last year. “It means stakeholders will tend to feel a company’s pain and empathize rather than holding a company culpable.”

The S&P500 index  lost nearly 10% of its value in November. There is fear in the markets as evidenced by the rise in the CBOE VIX. The result is a broad-based run on corporate goodwill. Therefore, today, those stores of goodwill are needed more than ever to conserve enterprise value. To build and protect stores of goodwill, corporate boards need to understand what intangible assets underpin their company’s reputation. They need to oversee the management of the reputation of their firms.

But before boards can oversee reputation management, and before executives can manage reputation, they need to measure it. This is how. The benefits of reputation are embedded in the value and costs associated with operating a business. These values can be extracted, inexactly but usefully using the same tools financial analysts estimate value – essentially, the unexplained excess or deficit in an appropriately structured multivariate regression holding all other comparable elements constant.

If DIY is not on the table, there are an increasing number of consultancies providing access to third party data and offering integrated solutions that fall under the general heading of quantitative reputation management. The data shared weekly in the blog branded as the Steel City Re® Corporate Reputation Index metrics, are exemplary of the  range of reputation management tools now emerging.

With so much value tied today to corporate reputation, few other managerial investments can create, protect or restore an equivalent amount of value.

Goldman Sachs: It's only a flesh wound

Nir Kossovsky - Wednesday, September 29, 2010
Goldman Sachs (NYSE:GS) is back. As reported by the Dow Jones wire service Monday 27 September 2010, Goldman Sachs has retained its coveted position at the top of the league table of M&A advisers by both revenue and number of deals globally, and for the U.S. and Europe, during the first nine months of 2010, figures from Dealogic show Monday. Goldman's dominance in the coveted list--only twice broken in the past ten years--is unchanged compared with a year ago on a global basis for the first nine months of the year, reinforcing the idea that the investment bank continues to see little fallout from the negative publicity it has garnered this year.

On a global basis, Goldman advised on 225 deals, with a total value of $401.6 billion, Dealogic figures show, giving them a market share of just over 20%. Goldman generated $961 million in revenue from its global M&A advisory. It also topped the rankings according both to deal value and advisory revenue in the U.S. In Europe, although it took the top position measured by deal value, it fell to fifth position according to advisory fee revenue, beaten by Morgan Stanley (MS), Rothschild, JP Morgan and Deutsche Bank AG (DB). In Asia Pacific excluding Japan, however, Bank of America Merrill Lynch topped the M&A ranking, according to value of deals, with a nearly 20% market share. UBS A.G. (UBS) topped the Asia Pacific ranking measured according to the M&A fees ranking, Dealogic says. For Japan, Nomura (9716.TO) dominated the rankings over the same period for both criteria.

The reputation metrics indicate that Goldman Sachs has retained its position at a cost. The Steel City Re Corporate Reputation Index™ ranking for the Company has dropped a net 9 percentile points over the trailing twelve months from the 98th percentile to the 89th percentile as shown in the top chart. Concurrently, the reputation rankings for the entire industry improved, as shown in the 4th chart, with little change in the inter-sector variance. Goldman Sachs' return on equity, in the top chart, and its fractional intangible asset value, shown in the last chart, reveal under performance by 19% and a persistent material loss of intangible asset fractional value.

When we last looked at the Company's metrics, we speculated that the equity markets were not appreciating the Company's value. With the benefit of hindsight, we see that the markets were underpricing the Company relative to its reputation ranking, but were nevertheless sensing real expected loss. A loss of pricing power. We interpret these metrics, in the aggregate, to suggest that Goldman Sachs has had to yield a bit on price. We believe customers want Goldman Sachs for their intellectual prowesss, but sense that they can squeeze Goldman on price. A bit, anyway. For now.  And so it goes.


Johnson & Johnson: Is one quality tzar enough?

Nir Kossovsky - Thursday, September 02, 2010
On 18 August, Johnson & Johnson (NYSE:JNJ) said it is creating a new position to oversee companywide quality, manufacturing and compliance issues and appointing chief quality officers for each of its three major business units. Vice President Ajit Shetty will fill the position overseeing the push for quality improvements in its pharmaceutical, consumer products and medical device and diagnostics groups.

The Company has announced eight recalls involving millions of bottles of nonprescription medicines since last September. They involved products made at factories in Pennsylvania and Puerto Rico. Now the Company, which has come under scrutiny for quality problems with its drug units, is starting to experience similar problems with its device divisions. DePuy Orthopaedics, a J&J company, last week announced a recall of some hip-replacement devices that appear to fail excessively. DePuy also received a warning letter citing it for marketing the TruMatch Personalized Solutions System in the U.S. without clearance or approval.

Quality is one of the six key intangible assets that underlie the value of reputation. (The other five are ethics, innovation, safety, sustainability, and security). Increasing, protecting, and restoring the value of these assets, you might say, is a company’s Mission:Intangible.

This is why. The Steel City Re Corporate Reputation Index, which tracks the financial consequences of intangible asset management, shows that over the trailing twelve months, Johnson & Johnson’s ranking dropped from the 93rd to the 88th percentile relative to the 28 companies in the Major Pharmaceuticals sector. As is often the case with a deteriorating reputation profile, the Company has underperformed the median of this sector this past year by nearly 13%.

The numbers show three other trends. The Company is large with a long history and used to hold the number one reputation rank in this sector, and according to some surveys, among all companies. That standing has provided resilience, but has not been able to arrest the slow and steady decline evidenced by the low volatility. That loss comes almost exclusively from an impairment of the Company’s intangible assets. Whereas a year ago, the Company’s intangibles comprised 91% of the firms market value – right in line with the median of the sector – today that fraction has dropped to less than 88%. All this comes amidst challenges for the industry as a whole, whose reputational standing relative to all companies has also declined from the 91st to the 88th percentile.

With all this going on, Mr. Shetty, a vice president, will have his hands full. And his work will have little impact on enterprise value (and potential derivative law suits and D&O claims) unless signals start emanating from even higher levels that the Company’s credo – written by General Johnson himself – has been once again found and will be honored to the letter. Attention Board of Directors! Are you listening?

St Joe: Heaven help us; alternatively, sue the #@!%*

Nir Kossovsky - Thursday, August 05, 2010
Reputation is a key performance indicator because it reflects the expected behaviors of stakeholders – the people who potentially buy goods and services, those thaat provide supplies on potentially favorable terms, the employees who potentially work willingly and frictionless, and the providers of credit and equity who may bet on the come. In short, reputation is the mediator of behaviors based on expectations.

St Joe (NYSE:JOE) a large Florida real-estate developer that owns 577,000 acres of land in Florida, mostly within 15 miles of the Gulf, reported that the April BP (NYSE:BP) Deepwater Horizon disaster resulted in huge losses for the company when hundreds of tourists canceled vacation plans to stay at its resorts. So it is suing Halliburton (NYSE:HAL) claiming damages evidenced by a 40% drop in its stock price and loss of $1 billion in market capitalization.
 
Neither the blog’s author nor the Society have a horse in the race. But we are interested in behaviors triggered by expectations because it is the underlying premise of the Society. This is it. There is a business case in managing the business processes (we call them intellectual properties) governing operational risk (call it governance, compliance, and risk management) through the deployment of intellectual capital that directly creates the impression held by stakeholders that we all call "reputation." Or stated simply, there is an upside to enhancing reputation, and a cost for losing it – and executives should have the tools to manage and monitor it. And if they don’t, the Society is here to educate. It's our mission

Turning to the metrics, we note that over the trailing twelve months, JOE’s reputatation ranking as measured by the Steel City Re Corporate Reputation Index slipped from the 10th percentile to the 0 percentile among 90 peers in the Land and Real Estate sector. Over this same period, the company has underperformed its peers by about 30%.

Looking more broadly at the sector, we note that the median reputation ranking for the entire sector rose over this period, and has been rising steadily over the past three months. Last the variance in the sector has been declining, making the reputational drop at JOE (or shown graphically, the lack of a rise) that much more significant.

Last, looking at JOE’s vulnerability to reputation volatility, we note that around 60% of its value is intangible; while the median fraction for the sector is near 0%. (The median fraction for all companies is about 65%; for the S&P500, the median fraction is around 82%).

The executive message points are that in firms whose value comprises a significant intangible asset fraction, stakeholder behaviors based on expectations – what we call “Reputation” – can have significant economic consequences. We will also note that JOE’s ranking has not been exemplary this past year. Our data (see book for details) show that when adversity strikes, firms with lower reputation rankings are unlikely to show reputation resilience and bounce back economically.

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