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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Reputational Benefits of the London Stock Exchange

C. HUYGENS - Monday, January 27, 2014
Reputation was the major source of enterprise value growth for listed companies on the London Stock Exchange according to a public relations trade magazine, the Holmes Report. Notwithstanding the blather about reputation contributing to market cap, which is all true, the article unfortunately concludes with a hearty "atta-boy" for the communications industry, to wit, "Communications leaders should take a lot of credit for building the value of the assets in their charge. The growing professionalism of the function and its impact on corporate decision-making paid dividends."

Points for linking reputation to value; demerits for focusing on market cap and communications.

Jonathan Salem Baskin applauds the metrics, but cautions that a diversity of financial metrics are better for gauging reputational value; i.e., pricing power, labor costs, credits costs, etc. where the impact of every stakeholder can be seen. Stock price is a less useful measure because it is closely linked to the expectations of one particular group of stakeholders: investors. And in down markets, a reputation may be very strong but spending power very weak - it is then that reputation as a relative source of value becomes most apparent. Ultimately, notes Baskin, reputation is "an expression of relative worth between companies, within sectors, and across markets." Read more.

As for the value of public relations, communications are clearly part of the equation, but they are the tail, not the dog. Reputation, whose value rests on the degree to which key business processes meet or exceed stakeholder expectations, realizes its value when stakeholder are able to appreciate transparently the benefits of the business processes. These processes generally fall into the six categories of ethics, innovation, quality, safety, sustainability and security. Communications can only communicate that which the business achieves, or reasonably aspires to achieve . If communications are ahead of business realities, then communications becomes a source of reputation risk.

It turns out, though, that there is something rather special about the London Stock Exchange and perhaps communications. Not noted in the Holmes Report is that the risk of an adverse event that triggers a material loss of reputational value is about 35% lower for companies listed on the London Stock Exchange when compared to the average listed company. Other quantitative measures courtesy of Steel City Re, the reputational value insurer, is that Xetra-listed, NASDAQ-listed, and NYSE-listed companies are at about par, companies on the peripheral eastern and western European markets are about 40% higher, and companies listed on the southern European markets are 200% (Athens) and 400% (Cyprus) higher, respectively. 

These data suggest that communications and operations are most closely in-sync with respect to operational excellence for companies on the LSE. Points to all for setting and meeting stakeholder expectations.

Scandals, Stunts and Substance

C. HUYGENS - Tuesday, January 21, 2014
"Reputation capital" is a genuine intangible asset that is embedded in a company's market value, a joint study from the business schools at Stanford and Emory recently concluded. In addition to customers, the study's authors report, a diversity of stakeholders care about reputation, and their behaviors are reflected in "the improvement in cash flow and lowered cost of capital that a company enjoys when its various stakeholders trust it to uphold its commitments."

Companies can repair reputations by reaching out to a diversity of constituents with substance. PR stunts, as Jonathan Salem Baskin notes, are not the answer, and may in fact be part of the problem.

Read more.

Reputation: Simple metrics

C. HUYGENS - Monday, January 20, 2014
In Pittsburgh, Pennsylvania, a drinking town with a football problem, the collective rise and fall of the emotional state of the city's populace is linked to the fortunes of its (American) football team. Expectations, surprises, and disappointments elate and depress -- a fact the city's restaurants, bars and other beneficiaries of discretionary spending know all too well.

These reputation-like economic consequences from the marriage, happy or otherwise, of expectations and reality remind us that measuring reputational value isn't all that difficult -- or at least, shouldn't be, as Jonathan Salem Baskin explains. Read more.

For another view of football and reputation, see this article from CFO.com on last season's issues. Read more.

What Did Ya Expect?

C. HUYGENS - Friday, January 17, 2014
In the rough and tumble world of regional politics, what happens in New Jersey with its physically imposing Republican Governor and a Democratic legislature is pretty much what you would expect. Bare knuckles retribution is (or perhaps should be) as shocking as the religious practices of the Pope or the bodily functions of a bear in the woods.

As the crisis over politically-motivated lane closures on the George Washington Bridge connecting New Jersey to New York City continues to suggest that New Jersey Governor Chris Christie may have set the tone for such actions, without having directly authorized them, the bigger story is, well, the bigger story: It’s not the first time Christie has been associated with such “tough guy” tactics and, in fact, they’ve been a constructive component of his national reputation for being a no-nonsense, get the job done kind of guy. Read more.

Ironically, those most surprised by the Governor's tough-guy act appear to be conservatives who had written him off as a liberal, a RINO -- Republican in Name Only for a litany of ideologically heretical acts. Suddenly, they like what they see.

Reputation Risk Disclosure Could Boost Returns

C. HUYGENS - Monday, January 13, 2014
“The threat of a scarred corporate reputation currently ranks as the No. 1 type of strategic risk, according to a survey of board members, C-suite executives and risk managers conducted last year by Deloitte. So it’s surprising that some experts say most companies give investors fairly worthless information about reputational risks in the risk-factor sections of annual reports," writes Tony Chapelle today in Agenda, a Financial Times service.

“You have to put it into operational terms for it to mean something for the investors,” says Bill Gruver, a professor of investments and strategy at Bucknell University and former audit committee member at TheStreet. Carol Fox, the director of strategic and enterprise risk practice for the Risk and Insurance Management Society (RIMS), says that reputational risk is more about how managers cause the organization to behave to meet investors’ expectations rather than trying to cultivate an external image. “Disclosure of reputation risk in the 10-K … provides little value,” writes Jonathan Salem Baskin of the risk management consulting company Consensiv.

Yet a study by Baskin’s firm and Steel City Re, which insures companies’ reputations, is finding clues for making this disclosure more useful for investors."

Link to the Consensiv reputation risk disclosure study

Link to the full Agenda article (paywall)

Reputation: Walk the walk

C. HUYGENS - Friday, December 27, 2013
Consultants seeking to feast on reputation management pie naturally want to earn a seat at the table. Reputation management still being a field of great uncertainty and a diversity of frameworks, the price of admission often looks like a dish for a pot-luck. Alas, such a smorgasbord can be risky for those who are naive, ravenous, or gluttonous. Here's a helpful hint. Real reputation management is walking the walk, not talking the talk. Read more.

And if you have not yet prepared something to bring to the table, try this: pick up a copy of Reputation Stock Price and You: Why the markets reward some companies and punish others (Apress, 2012).

Boeing: Second-hand reputational value loss

C. HUYGENS - Sunday, December 22, 2013
Just as a rising tide floats all boats, a nation's reputation is closely woven into iconic firms that stand for national power. In the US, that puts McDonald's on similar footing as Boeing and Lockheed Martin. When a nation fails to meet the expectations of its stakeholders, the gap comprises reputational value risk. The risk of what, you might ask?

In a blog note at Consensiv, the reputation controls firm,  Managing Director Jonathan Salem Baskin explains that reputational value loss is when customers turn on you; e.g., Brazil's decision following exposure of NSA's overreach not to purchase Boeing-made military aircraft. Read more.

Hilton: Another one gets it wrong

C. HUYGENS - Tuesday, December 10, 2013
The SEC-required proxy statements, the 10-Ks, exist to level the playing field for all investors. After all, transparency is a driver of market trust and liquidity. Item 1A, Risks, was added by the Sarbanes Oxley legislation in furtherance of that noble goal, and as part of the reaction to large scale shams such as Enron and WorldCom.

Reputation risk is disclosed in many 10Ks. Just among the S&P500, the disclosure rate for reputation risk has risen from around 8% of the firms in 2009 to 66% of the firms in 2013. A study of the materiality of those disclosures reported earlier this year that the consumer sector seems to have it all wrong, confusing reputation risk with brand risk. Read the study.

(Ironically, many regulators are getting it wrong too...which eventually will have a materially negative impact on systemically important financial institutions (SIFI). Read more on getting it wrong.)

The problem with getting it wrong is not semantic. Rather, getting it wrong is fostering the belief that the path to a better reputation is to better manage social media, or any media for that matter. It focuses attention and resources in the wrong place. It is wrong because the media-associated noise is an epiphenomenon; what needs to be managed are the business processes underpinning reputation comprising ethics, innovation, safety, sustainability and security. Read more on the pillars of reputational value.

Constituent members of the consumer section continue to get it wrong. The most recent entrant into the league of wrong-thinking companies is the soon-to-be-public Hilton Hotels. Read more on Hilton.

Bali: Those negative waves

C. HUYGENS - Wednesday, December 04, 2013
Like negative waves, a negative reputation creates a perverse death spiral. This is as true for would-be war booty hunters (Kelly's heroes) as it is for capital markets and for non-governmental bodies.



Reputation is an expectation of behavior. Capital markets have a reputation for seizing when liquidity ebbs. As in musical chairs, being last to call debt has significant consequences, so at the first signs of real trouble, individual constituents of the market act on the markets reputation, call their loans, and precipitate the very thing they fear: illiquidity.

Then there's the World Trade Organization. Twelve years since the Doha round began, the institution is trying to overcome impenetrable roadblocks. No one really expects the negotiations now taking place in Bali to succeed, so no one is really motivated to yield on a sensitive point that will only create a future liability -- ensuring that the negotiations will not succeed.

Read more on the Consensiv blog.

Zurich Insurance: Properly managing an adverse event

C. HUYGENS - Friday, November 29, 2013
Reputational crises are often, but not necessarily, consequences of an adverse event. When Pierre Wauthier, Zurich’s Insurance Group’s chief financial officer, killed himself last August, and blamed clashes with the company’s chairman, Josef Ackermann, as a cause, Zurich did all the right things to protect its reputation.

Zurich understood the relationship between expectation, uncertainty and reputation; and its actions were targeted at the underpinnings of reputation. Few, especially those in the reputation management business with a PR bias, took note which is why this comment by Jonathan Salem Baskin of Consensiv is worthy of further study. Read more.

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