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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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Corporate Boards: Charge them with the usual crimes

C. HUYGENS - Monday, July 08, 2013
The CEO may be getting big bucks. Moreover, in the US, they're getting bigger notwithstanding efforts at France-inspired salary caps. But when it comes to where the buck stops, ground zero appears to be the boardroom. Last month, the Financial Times published a story by Peter Whitehead titled, Company disasters – boards are to blame. The article was accompanied by a somber promotional video clip from the consultancy, Reputability, embedded below, explaining why.

In a spirited discussion on the Boards and Advisors LinkedIn group triggered by the article, it was flatly alleged "...that - even with non-performance of management - boards must be to blame, by their very nature and power. There are no flawed companies, only flawed boards. Boards are responsible for everything - management selection, strategy approval, risk oversight, compensation setting, etc. Boards can't argue "we missed it" because increasingly regulators are saying we will hold you responsible if you do miss it because it is your responsibility to know and not to miss. So institute systems and reporting so you do not, and replace management if need be."

Huygens is all for rounding up the usual suspects and charging them with the usual crimes, but he's not sure this is the best path to improved operations, superior governance, or better risk management. Nor a particularly good route to value creation.

Blame for most company failures will concentrate in the boardroom, with a serious skills gap and risk blindness of Board members being the most common allegations. That is why company crises become personal reputational matters for Board members, and why management and insurance solutions that help Board members combat these allegations, reputation risks, are now in great demand.

However, operational risks and reputational risks can be bifurcated. Data show that a reputational crisis is not a necessary consequence of an operational crisis provided that the Board has made a reasonable concerted effort to anticipate and mitigate the risk. And that stakeholders are aware of the effort and are able to appreciate and value it.

Warren Buffet would approve. Remember, he would forgive a financial loss; not a reputational loss.

Boards can be forgiven just as Jamie Dimon was forgiven.  What is helpful is having an established track record, a reputation, that can counter allegations of incompetence etc. This is a strategy Board members concerned about their personal reputations would do well to understand as they seek personal reputation protection solutions.

That Would be Reputation Risk, Stan

C. HUYGENS - Thursday, July 04, 2013
In the comedy film, Miss Congeniality, Sandra Bullock plays a no-nonsense FBI agent working undercover as a beauty contestant. She is offended by the required vapidness of her cover identity. “I’m not gonna parade around in a swimsuit like some airhead bimbo that goes by the name Gracie Lou Freebush and all she wants is world peace?”

In a later scene she finds herself in the Q & A round of the beauty pageant, facing the exact situation she was dreading: "What is the one most important thing our society needs," asks the emcee, William Shatner's Stan Fields. Bullock thoughtfully replies, "That would be harsher punishment for parole violators, Stan." The audience is silent. Bullock mounts a plastic smile and cynically adds "…and world peace." The audience explodes in applause.

Fun watching: World Peace Clip

As public companies file their 10K's again this year, how will they answer the question, "What is the one most important risk facing our companies?" Will they say, "That would be reputation risk, Stan?" And more important, if the response is to be more than canned or vapid, what are the reputation risk disclosers going to do about it?

It depends. If they view reputation in the context of marketing and brand, then they may increase the IR budget, the PR budget or buy crisis communications insurance. But that would be misguided. And according to the advisory firm, Consensiv, wasteful.

If the above sounds odd, then please suspend for a moment the lay understanding of "reputation" -- a variant of brand -- and assume the following definition of its risk courtesy of the reputation insurer, Steel City Re: the threat to enterprise value when myriad stakeholders perceive that corporate behavior violates their expectations. It is not a PR problem; it is an issue of governance and control.

Cutting to the chase, reputation risk management requires a bold new understanding of reputation risk. A comprehensive solution needs to (1) provide superior governance controls; (2) exculpate the Directors and Officers, (3) allow stakeholders to appreciate and value a company’s business controls, and (4) indemnify the company for reputational value losses.

Reputation: Who's asking?

C. HUYGENS - Wednesday, June 19, 2013
Reputation is a reflection of the implicit social contract between a company and its myriad stakeholders. One size does not fit all.

Ron Orol reports this week in Capital Report that supply-chain management, interest-rate risk and sustainability issues are three topics that are high on the list of concerns raised by investors in U.S. corporations. He writes:

Lynn Turner, a former chief accountant at the Securities and Exchange Commission, said shareholders’ focus will vary by industry. Big banks, for example, need to explain to investors how they will manage their risk as interest rates rise, he said. “If you are retail corporation, supply-chain stuff has got to be at the top of the list,” Turner said. “If you are a financial institution today, what is going on with interest rates and, as interest rates rise, being able to manage your debt, being able to explain to investors how you are positioned to deal with the risk as interest rates rise and spreads change is going to be very important.” He added that oil and gas companies invested in natural resources will need to respond to investors with environmental concerns.

Steel City Re calculates measures of reputational value that report company performance against that which stakeholders expect -- the implicit social contract. Those metrics "aren’t value judgments, they’re tangible proof of the quality of stakeholder relationships."

Consensiv, a consultancy focusing on returns in investments in reputation and which incorporates the licensed metrics into robust management solutions, explains the inherent value in what are agnostic measures. "We don’t decide what causes matter, or how to best substantiate our beliefs that they should have effects. We measure effects as a platform from which to better explore and reveal causes."

Companies seeking to maximize stakeholder value, the value of the implicit social contracts, aka, reputational value, will be sure to know what is of greatest concern to their stakeholders. They will find creative ways to enable stakeholders to appreciate and value that which they are doing, and monitoring tools to ensure that they are meeting stakeholders' expectations.

Grainger: Profile of a Consensiv 50 constituent

C. HUYGENS - Tuesday, June 11, 2013
The CONSENSIV 50, published monthly, is the first-ever ranking of global leadership in reputational value based on stakeholder behaviors with measurable financial consequences. The ranking provides a number of new perspectives on corporate governance and are based on a decade of data on 7000+ companies that are the underpinnings of Steel City Re’s reputational value insurances and the S&P Dow Jones RepuStars Variety Corporate Reputation Index (Ticker: REPUVAR), the world’s only reputation-linked composite equity index*.

These data are objective financial measures, such as premium pricing, supplier and vendors terms, labor relations and productivity, and borrowing costs. The resulting insights have proven to be deep and reliable tools to measure the outcomes of corporate governance.

W. W. Grainger is a constituent of both the May and June 2013 league tables. The metrics indicate Grainger is a great company. Non-quantitative measures concur. Seeking Alpha writes, "W.W. Grainger (GWW) is one of the best performing companies in the United States. It's reputation within its industry is outstanding amongst its employees, suppliers, customers, and even competitors. More importantly for shareholders, it has demonstrated the ability to generate returns."

Looking at the metrics of this Consensiv 50 constituent member in greater detail, the company's CRR, a relative ranking of reputational value relative to the 70 peer companies in the Wholesale Distribution sector, is at the 100 percentile. It is a company that, in the words of Consensiv, is maximizing its Reputational Premium. Furthermore, there appears to be a general consensus that this is deserved. The current RVM volatility, the Consensus Trend, a measure of reputational value uncertainty, is in the 2nd percentile. It doesn't get much lower, or much better.

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.

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