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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Brand v. Reputation: Nissan edition

C. HUYGENS - Tuesday, April 01, 2014
British car buyers would rather buy Japanese-made Japanese branded cars than British-made Japanese branded cars. As the Consensiv blog explains, it was the reputation of Japanese workmanship and quality that sold the cars, not the brand.

Read more.


Planning to attend RIMS 2014 Denver 29 April? Come learn more on enterprise reputation risk.

JPMorgan Chase: You're doing it wrong

C. HUYGENS - Monday, March 31, 2014
"Doing it," a double entendre used extensively in the arts, rarely raises an eyebrow nowdays. But when used in banking?

Last week, start-up condom company Lovability learned that Chase Paymentech, an operating company of JP Morgan Chase, would not handle its credit card transactions. Lovability’s founder, Tiffany Gaines, who started the company as a way to discreetly sell condoms to women, told the Huffington Post that a representative told her on the phone that they would not work with her because doing so posed a “reputation risk” to the company.

The financial sector is under orders from the Office of Comptroller of Currency (OCC) to manage financial risk where "reputation risk" is a named component. But reputation risk, in this context, is a risk of negative future expectations -- which in the financial sector, means liquidity risk. Confounding reputation risk with social concepts such as likability and cultural acceptability, as Jonathan Salem Baskin wrote in Forbes,  is simply "doing it" wrong.

Planning to attend RIMS 2014 Denver 29 April? Come learn more on enterprise reputation risk.

Carnival Corp: Hidden value or fool's gold?

C. HUYGENS - Wednesday, March 26, 2014
Huygens has reflected in the past on the travails of Carnival Corp (CCL), the vacation experience company that at times has provided passengers with more than they bargained for. This week, the Consensiv blog picks up a discussion at Motley Fool in which is is observed that the stock price for CCL, while apparently a bargain, may also reflect outsized operating expenses, future liabilities, and ongoing adverse publicity.

Carnival does offer a dividend yield of 2.50%, which is more generous than Royal Caribbean at 1.90%, but considering the other factors — PR challenges and lack of efficiency — that shouldn’t be enough to lead investors in Carnival’s direction.


The key message from Motley Fool's discussion, notes Jonathan Salem Baskin, a reputation controls expert, is that different stakeholders will potentially view the reputational value of CCL differently. Equity investors speak through stock price, which is the most transparent to all outsiders; other stakeholders speak through more opaque channels that create or reduce revenue, increase or reduce expenses and operational efficiencies, etc.

The myriad "valuations" diverge most during and after shocks; over time, they converge. In between the two, there are arbitrage opportunities. Such opportunities are exploited in the RepuStars Variety and RepuStars SPX equity strategies whose weekly returns are posted on this blog.

Read more.

Reputation Value: Sovereign state edition

C. HUYGENS - Wednesday, March 19, 2014
"In a market based on trust, reputation has value," noted Alan Greenspan, former chairman of the Federal Reserve, as Wall Street imploded.

Certainly reputation has value in the financial sector. In fact, the US Office of Comptroller of the Currency now recognizes reputation risk as one of eight sources of financial risk that institutions need to manage.

And reputation has value in public companies in general. Around two thirds of public company directors, and an equal number of public companies, disclose the materiality of reputation risk in their SEC filings (10K item 1A).

But what about the public sector? Does reputation impact budget line items in the public sector the same way it impacts line items in a public company’s P&L. Apparently, yes.

As far as state budgets go, Illinois has one of the worst, suffering from underfunded employee pension obligations and an economy that isn’t adding enough top-line cash. Its credit rating is the nation’s lowest, which means it’s considered the worst borrowing risk out of a list of 50 (and therefore pays the most for it).

But beyond this low credit rating, Illinois pays interest rates on its debt that are higher than the actual default risk that these ratings are designed to reflect. Illinois pays a reputation risk premium.

In a recent paper published by the University of Illinois' Institute of Government and Public Affairs, University of South Carolina professors Tima Moldogaziev and Martin Luby studied this reputation risk premium and found that it costs the state plenty. For bond sales between 2005 and 2010, they estimate that this reputation risk premium cost the state more than $80 million. That's $80 million over and above what the state should have been paying based on its worst-in-the-nation credit rating.

Read more.

Brand v. Reputation: NJ Edition

C. HUYGENS - Friday, March 14, 2014
An opinion survey's purpose is to discover what respondents think, not to influence or alter it. Actually, beyond "think," the real purpose is to obtain an indication of how the respondents will behave; e.g., vote for a candidate or buy a branded product. The problem with surveys is that what people think about candidates or brands is not necessarily an indication of what people will do about a candidate or product. The "moment of truth" can be shocking when expectations fed by opinion surveys are dashed by the realities of behavior as was demonstrated so vividly by Karl Rove in the 2012 US Presidential election.

Brands are about emotions and connections; reputations are about behaviors. To wit, A mere 38 percent of voters in New Jersey approve of Governor Chris Christie's post-Sandy efforts, more than half find him culpable for "Bridgegate," and yet 90 percent of respondents to a survey said they would vote for him again. So how badly damaged is the Governor's reputation?

Read more.

Buffett Buys Businesses At Bargains and Deputies at Discount

C. HUYGENS - Monday, March 03, 2014
If you have not yet caught on that reputation is much bigger than brand marketing, and if the fear of personal reputational damage doesn't motivate reputation-linked changes in your company's governance, controls and risk management strategy, try this incentive: cost savings.

Warren Buffett's reputation creates cost benefits. Business Insider reports: "Berkshire Hathaway's annual shareholder letter explains that 'If you treat people well, they'll often sell their companies to you and work for you for less than they would the competition.'

These cost savings can be applied to investments in reputation protection, as when Berkshire purchased for BNSF rolling stock that exceeds safety requirements and reduces the risk of deadly railroad fireballs. The reputation burnishment Berkshire gained from taking a position opposite the one the auto manufacturer took when confronted with the risk of deadly Ford Pinto fireballs reinforces stakeholder expectations of responsible behavior. This creates further goodwill (lay definition, not accounting definition.) "This strategy of creating goodwill to get lower prices is an explicit part of Berkshire's strategy."

A superior reputation creates value in many tangible and intangible ways. While most of the value eventually becomes apparent on the profit and loss statement, there are good reasons to signal the benefits of better reputation management to those who can appreciate and value it.

Warren Buffett's annual investment letter may be the most followed corporate communication in the world. If you don't have Warren Buffett's cachet, consider Reputational Value Insurance. Like a warranty, this index-linked insurance tells stakeholders that the company has the requisite risk controls to protect its reputational value, a message that by themselves neither Public Relations nor Investor Relations can credibly deliver.

Read More.

Google: More reputation business

C. HUYGENS - Tuesday, February 18, 2014
Google and reputation -- not as catchy as soup and sandwich or horse and carriage, but you get the drift. At  the start of the year, Google's reputation took a dive from controversial behavior. Read more here. Now the shoe is on the other hoof. Some German fellow's reputation allegedly took a dive from controversial behavior readily rehashed by Google's algorithms.

So which is it, Marshall McLuhan? Is the medium the message that shapes reputation, as the German courts have ruled, or is the behavior the message that the medium highlights? Read more on the medium, the message and reputation according to the German courts, here.

Brand, Reputation and Risk Management

C. HUYGENS - Monday, February 17, 2014
Here's one more entry in the ongoing series on the difference between brand and reputation. In this most recent posting, Jonathan Salem Baskin from Consensiv explains to a Risk Managers' group on Linked-In why understanding the difference is important...to risk managers. Read more here.

Reputation Risk Disclosure is Not Exculpation

C. HUYGENS - Sunday, February 16, 2014
Disclosing reputation risk and doing nothing more may be a risk unto itself and a company's executives, suggests a recent district court decision. As reported by the law firm Morgan Lewis, in In re Longwei Petroleum Investment Holding Ltd. Securities Litigation, the U.S. District Court for the Southern District of New York denied a motion by the CFO to dismiss a case under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange Act) noting, among other things, that the signing of Form 10-K alone is sufficient evidence of control (even if control is ineffective or blatantly faudulent). Because of other facts in the case the court also found that the plaintiffs' allegations that the two audit committee members failed to take any action in response to "acknowledged reporting failures" established scienter.

There you have it. Disclose the risk and you help establish scienter without any of the immunities associated with evidencing real working controls. This is a bad hand when playing a high stakes game with an aggressive plaintiff's bar. It is also one more round of bad news for the authors of Forms 10-K who, with respect to reputation risk, were as a group charged with doing it all wrong in a study by Consensiv as reported in the Financial Times service, Agenda.

Richard Leblanc, Associate Professor, Law, Governance & Ethics, York University, observed, Just disclosing the risk may help to establish scienter, but control would be what investors want to see: namely what are the internal controls (or lack thereof) over reputation risk? And are these controls effective? Is the design and implementation of these controls regularly tested and independently reported to the board (or a committee)? Investors want to see how the various risks are being mitigated, not just that there exists reputation risk, which is blindingly obvious.

Real working controls would help exculpate Directors and Officers. Real controls, if sufficiently transparent, would signal value to investors and a red flag to the plaintiff's bar. Reputational value insurances, when designed properly with quantitative measures, provide that transparency.

CVS Caremark: Cares more?

C. HUYGENS - Thursday, February 06, 2014
Yesterday morning, CVS Caremark (CVS), the pharmacy healthcare provider, announced that it would no longer sell cigarettes effective October. The loss in revenue was projected at $2 billion which pundits quickly dismissed as an insignificant loss relative to the reputational value gain. It was an ethical move, clearly signaled so that the market could appreciate and value it.

By removing tobacco products from our retail shelves, we will better serve our patients, clients and health care providers while positioning CVS Caremark for future growth as a health care company. Cigarettes and tobacco products have no place in a setting where health care is delivered. This is the right thing to do. Link to CVS where President and CEO Larry Merlo explains further.

While the value to the company's image is hard to measure, there's little doubt that it's big. "They'll end up getting more than $2 billion in reputational capital and kudos," Dartmouth professor Paul Argenti tells Shots. "How often is the president of the U.S. going to come out and say your company is great?" says Argenti, referring to President Obama's praise of CVS Wednesday morning. Read more from NPR.

Actually, it is not hard to measure and it may or may not be big depending on what stakeholders were expecting, or what they value. Equity investors were not overjoyed. Over the day, CVS lost 1% while its closest rivals by market cap were flat or rose. See chart from Google.

Steel City Re's reputational value metrics, which reflect the expectations of all stakeholders including investors, are run weekly and will be added to this breaking story when they become available.

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