Intangible asset financial management is a serious matter affecting what is once again the source of 70% of the average public company's value. There is also a lighter side.

We entered the American Thanksgiving holiday with story about food (beer, actually) and reputation. We bookend the holiday by sharing a view of the inside flap from a carton of eggs. Not any egg carton, mind you, but one of the many that played an important role in the holiday meal supply chain.



Parva sub ingenti.

Operating costs such as internal frictional costs are the bane of any executive accountable for the bottom line. True, they can be cut – usually through workforce reductions – but the long-term effects on surviving employees may include net losses in productivity and even greater internal frictional costs.

Here is good news, executives. There is a proven strategy for lowering internal frictional costs. This is it. Be ethical. Be sustainable. Be safe. And be known for it.

In other words, all you need to do is apply the best practices found in other companies that are superior stewards of their intangible assets – the business processes that lead to reputations for ethics, safety, quality, innovation, security, and sustainability. Companies that follow these practices tend to out perform their peers and better reward their shareholders.

The relationship between these business processes, reputation, internal frictional costs, and value creation are illustrated on a webpage of one of our members, Steel City Re, a leader in risk and reputation management. The latest data affirming these principles comes from Kelly Services, Inc. (NASDAQ: KELYA, KELYB), a world leader in workforce management services and human resources solutions.

According to the Kelly study announced late last month,

Major public issues such as a company’s reputation for strong ethical practices have become critical factors in choosing where to work, even to the point where many employees are prepared to sacrifice pay or promotion in order to work for organizations that are actively engaged in good social responsibility practices. More specifically, concerns about ethical behavior outweigh concerns about the environment by all generations, when making employment choices.

Here are some other key findings:

• Almost 90 percent of respondents say they are more likely to work for an organization that is considered ethically and socially responsible, something that is consistent across all age generations.
• 80 percent are more likely to work for an organization that is considered environmentally responsible, a figure that is considerably higher among older age groups.
• In deciding where to work, an organization’s reputation for ethical conduct is considered ‘very important’ by 65 percent of Gen Y, 72 percent of Gen X, and 77 percent of baby boomers.
• 46 percent of Gen Y would be prepared to forego pay or promotion to work for an organization with a good reputation, rising to 48 percent for Gen X and 53 percent for baby boomers.
• In deciding where to work, policies to address global warming are considered ‘very important’ by 31 percent of Gen Y, rising to 35 percent among Gen X and 36 percent for baby boomers.

Here's the action part. Want to cut operating costs? Ramp up your company’s reputation for ethics, sustainability, safety, etc. Become a superior risk and reputation manager.

Want to know how to do it? Join the Intangible Asset Finance Society. We provide a forum for executives to discover better ways to increase the visibility, transparency, and value of intangible assets. These assets comprise 50% of the average company's value. Click here for information on membership and affiliate with us on LinkedIn.

The headline risk de jour is being realized by Maclaren, a premier British parenting lifestyle company “that produces the world’s most safe, durable, and innovative and styling baby buggies…” You get the drift from their website lead-in.

On Monday, U.S. Consumer Product Safety Commission (CPSC) announced the recall of some 1 million Maclaren strollers that were released nationwide from 1999 through November of this year. This is why. Maclaren received reports that 12 children had their fingertips amputated after they placed their fingers in the hinge where the stroller folds.

The blogosphere is active. Some parents are outraged, as would be expected. But the story is getting significant mainstream news uptake and that means a greater range of stakeholders will be impacted. This morning, for example, the Financial Times had a banner ad above the fold and below the masthead leading to an op-ed piece on page nine, “How not to take care of a brand.”



Safety is one of the six key intangible assets that support the Roman Arch of corporate reputation. Safety is the state of being certain that a set of conditions will not accidentally cause adverse effects on the well-being of people or the environment. The safety issue has grown into a reputation-driven existential issue at Maclaren. There are several reasons.

1. There was a design problem. The product design did not anticipate certain forms of use. Children walking alongside and using the strollers for support may hold on to the product at the amputating hinge.
2. The design problem could have been addressed at any point in time post-market release with a simple engineering fix: a hinge cover.
3. There was a surveillance problem. Safety is a core asset for a company that serves children and their parents. The company was not monitoring for indications and warnings of safety problems.
4. There was a preparedness failure. The company had no crisis management system in place.
5. There was a failure of execution. The company’s response to the crisis failed to conform to well established crisis management best practices:
   1. Instead of empathy, the company offered statistics
   2. Instead of contrition, the company suggested that parents were at fault for using the strollers as walkers rather than push carts
   3. Instead of reaching out to all stakeholders with the engineering fix (see #2), the company focused their attention on the US market (even though they are UK-based and sell worldwide)
There is a take home message. Even in private companies, reputation management may be one of the best investments an executive team can make. Join the Society and learn more about increasing, protecting, and restoring intangible asset value.

In each blog piece, we champion intangible asset management on the premise that superior stewardship creates enterprise value. We point out that management entails the adoption and conformance with specified business processes. We often provide enterprise-level data showing intangible asset value creation.

Today's note on safety also enumerates process steps and provides more granular value data. First, the value: 18 months, 1500 lives, $200 million.

Now the back story and process steps. This past Friday, HHS Secretary Kathleen Sebelius today announced the award of $8 million to fund a national expansion of the Keystone Project.

The Michigan Keystone Intensive Care Unit (ICU) Project, a partnership between the Michigan Health & Hospital Association and Johns Hopkins University, sought to change clinicians’ behaviors when inserting catheters into ICU patients. It was hypothesized that introducing best practices in the execution of an invasive medical procedure on relatively infection-prone patients would reduce the incidence of health care-associated infections.

Health care associated infections are among the top ten leading causes of death in the United States. Such life-threatening infections significantly drive up the cost of health care by nearly $28 to $33 billion per year.

These are the process changes the team deployed. First, the team made a process checklist, measured infection rates, and changed hospital culture. The checklist’s components consisted of hand washing; using a cap, gown, and mask; cleaning the patient’s skin with a disinfectant; avoiding placing catheters near the groin; and removing unnecessary catheters. These five steps were associated with a 66-percent reduction in these infections throughout the state. The ROI calculation: for every dollar invested, $200 was saved.

The take home message: to effect business process changes, defining and measuring key metrics, deploying processes (train, observe, and encourage conformance), and communicate benefits arising comprise the best practices. Follow this sequence, and you will be able to show a favorable ROI and maybe even save lives.

During the 6 February 2009 MISSION:INTANGIBLE Monthly Briefing, Fish & Richardson’s Cathy Reese, who chairs the Society’s IA Corporate Governance Committee, indicated that under Delaware Law, Directors and Officers had a Duty of Care to oversee the management of the business processes that help establish reputation. She noted that absent oversight systems, Members of the Board could be personally liable to shareholders for adverse events that impaired a company’s reputation.

Cathy’s warning of shareholder-driven exposure is just the beginning. Now companies are seeking restitution, too. According to the newspaper Deutsche Welle, after spending nearly 2.5 billion euros to cover legal bills and fines stemming from an international bribery scandal, Munich-based Siemens AG (NYSE:SI) is seeking payments from its former leadership team. Siemens was investigated for paying 1.3 billion euros in kickbacks between 2003 and 2006 to potential buyers in 12 countries, including Italy, Greece, Russia and Nigeria. In Germany and in the United States, the company was found guilty of corruption and ordered to pay combined fines of just over a billion euros. After the 2006 investigation, Siemens then accused some of its former managers of having failed to stop illegal practices and wide-ranging bribery.

It gets more interesting. The Financial Times reports that some of Siemens’ investors have threatened to sue the company if it did not claim damages from its former managers.

The value of risk and reputation management at the board level should be painfully obvious. The consequences of failing to manage a firm’s business processes for ethics, sustainability, innovation, quality, safety, security, etc. – the drivers of reputation – can place officers and directors at great personal peril. Yes, it’s personal.

We dedicate most of the time and effort of this communication channel to a discussion of the intangible assets that underpin reputation. Usually, the subject matter involves corporate behavior.  Awareness of issues associated with corporate behavior may come to light because of government regulatory action. More often, it is the result of NGO-driven publicity. In a break with tradition, the subject of today's note comprises NGO transparency. 

An on-line Wall Street Journal op-ed posted earlier this week alleged that Human Rights Watch, a 30-year old NGO dedicated to defending and protecting human rights, sent its leading Middle East official, Sarah Leah Whitson, to extract money from potential Saudi donors by bragging about the group's "battles" with the "pro-Israel pressure groups." The ongoing dialogue appears to affirm the allegations.

NGOs are important actors in both the geopolitical and commercial worlds. They encourage and monitor corporate compliance with many of the best practices comprising key business processes that underpin reputations for ethics, safety, and sustainability. They are respected and feared by much of the business community. Their primary tool is the threat of headline risk. Their moral authority depends on their reputation for independence. Their value is ephemeral. Loss of reputation and moral authority can be catastrophic.

Ronelle Burger and Trudy Owens from the University of Nottingham recently published a study that was motivated by “widespread calls for NGOs to become more accountable and transparent.” They conclude that “… NGOs with antagonistic relations with the government may be more likely to hide information and be dishonest.“

Human Rights watch has an antagonistic relationship with the Israeli government. The Israeli government wasted no time questioning HRW's "moral compass. "

Quis custodiet ipsos custodes?

Amongst our master list of key drivers of reputation recognized by the Society are ethics, innovation, quality, safety, sustainability and security. We gave the top post to ethics and its derivatives, confidence and credibility. We haven’t shared our thoughts on the pecking order for the five remaining intangible asset business processes, although recent events suggest that the market is moving sustainability into a lower ranking.

What is happening? A few weeks ago we noted that United Technologies (NYSE:UTX) had quietly terminated its sustainability-led advertising strategy. Now we read that BP (NYSE:BP) is moving from renewables back to petroleum.

We intend no offense. However, in light of the above, there is a open question: while sustainability is certainly a public good, can it be practiced by individual companies profitably? Or more specifically to the intangible asset aspects, "is a reputation for sustainability valued?" We invite your comments here and on the IAFS Linked-In platform.

Supply chain continue to hurt Boeing's (NYSE:BA) reputation. Strategies executed earlier in the 787 program to (1) reduce costs and (2) garner intangible political benefits associated with global job creation introduced lurking risks in the supply chain that are dogging this company. At the heart of the matter is oversight and control.
 
Indeed, a key economic lesson learned these past two years is that iconic firms with global operations, a stable of business partners, and reputations for ethics, safety, security, and quality; must have better managerial oversight of their partners. There are several strategies for improving oversight. To protect and restore its reputation rapidly, Boeing appears to be pursuing a strategy of total control by acquiring troubled suppliers. It is not an inexpensive proposition. The latest acquisition is reported today in the Financial Times:

http://www.ft.com/cms/s/0/cd36e146-6b56-11de-861d-00144feabdc0.html

"Boeing has been forced to take over one of the key suppliers to the 787 Dreamliner, its troubled new jet, in an effort to gain tighter control of the production process.

It has agreed to pay at least $580m for the facility that makes chiefly composite sections for the 787, a planned family of long-range jets that is running more than two years behind schedule.

The purchase of the South Carolina plant from Vought Aircraft Industries - owned by the Carlyle Group, the private equity firm - is the second time Boeing has been forced into an acquisition to strengthen its global supply chain.

Last year, the US aircraft maker took over Vought's stake in Global Aeronautica, a joint venture with Alenia of Italy that assembles 787 fuselage sections. Vought said it received $55m from that deal."

The Boeing Company (NYSE:BA) reported today that it would again delay the first flight of its new jet, the 787, the latest setback in a program that is considered crucial to the plane maker’s future. The New York Times reports that Howard Rubel, an analyst at Jefferies & Company, said the problem “doesn’t help the company’s credibility.”

Not so fast, Mr. Rubel. Credibility has many facets. The most important driver of reputation in the commercial aerospace sector is safety, and with the recent string of air disasters involving aircraft made by Boeing’s rival EADS NV (EPA:EAD), safety is very much on every stakeholder's mind.

The operational setbacks both Boeing and EADS have suffered highlight the difficulty of pulling off increasingly complex engineering feats involving new materials and global supply chains. And at least one financial lesson from the effort to create a global supply chain is that the savings from direct and tangible costs are being offset by intangible costs arising in the risks of a greater business network entailing less visibility and control.

Managing a complex supply chain is a business process, and failure to do it well – when stakeholders have been led to expect benefits – can be costly in terms of reputation. So returning to Howard Rubel’s comments, what is the net reputation impact?

We turn to the data from the Steel City Re IA (Corporate Reputation) Index. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

The index shows that over this past year, Boeing’s reputation ranking has sunk from the 69th percentile to the 48th percentile among the 47 companies in the Aerospace and defense sector. Worst, volatility has been climbing and the Exponentially Weighted Moving Average volatility is now four log orders of magnitude. Not surprisingly, return on equity is 14% below the median of the peer group.



Looking at industry more broadly, we see that the overall reputation ranking of the Aerospace and defense sector relative to other industry sectors has been generally rising while variance within the group has been declining and assuming greater homogeneity.



Within this environment, the outstanding reputation holders comprising the top decile as measured by the Steel City Re Reputation Index are: American Science & Engineering (NASDAQ:ASEI); Precision Castparts Corp. (NYSE:PCP); TransDigm Group (NYSE:TDG); and United Technologies Corp (NYSE:UTX).

United Technologies interests us because our colleague, Nancy Lintner, former Chief Marketing Officer and a speaker at one of our annual meetings, developed an award winning communications campaign that highlighted a number of corporate intangibles. Over the past year, the Reputation Index ranking for United Technologies has climbed slightly from an already high 89th percentile to the 92nd percentile, and its EWMA volatility has declined. The company has rewarded investors with an ROE that is 6% above the median return of the Aerospace and defense peer group.

A few weeks ago, we commented on the-then topical food safety issue of Salmonella and peanut butter. In that note, we lauded Nestle SA (VTX:NESN), the food conglomberate that seemed to have steered clear of the mess that left Kellogg mired.

Now it appears that Nestle has its own food safety mystery. According to the Washington Post, the Nestle plant in Danville, VA, that makes their refrigerated Toll House cookie dough is the suspected source of an outbreak that has sickened at least 65 people in 29 states with with E. coli 0157.

In supermarkets this past Saturday, Nestlé products had been pulled from the refrigerated section, and consumers were once again left to ponder the safety of the U.S. food system.

Nestle is proud of its risk and reputation management processes. We will watch closely to see how Nestle manages the operational and headline risks from this latest Food products sector peril.