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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General Mills: Briefly overrun by ronin

C. HUYGENS - Tuesday, April 22, 2014
As modern day knights, lawyers are expected to to fight and so serve their liege Lord according to the Code of Law. But they are also expected to exercise discretion. A reputation for a willingness to strike at any foe, real or perceived, will likely leave the liege Lord isolated, and in due course, destitute. Even if the liege Lord is a $32B manufacturer and marketer of branded consumer foods named General Mills.

And so it came to pass that only four days after posting on its website terms, that according to the New York Times, required "consumers downloading coupons, “joining its online communities,” participating in sweepstakes and other promotions, and interacting with General Mills in a variety of other ways to agree to arbitration in lieu of suing the company in the event of a dispute," the company reversed itself.

It was an own goal scored by a narrowly focused group in the legal department that failed to read the memo about corporate reputation protection - the one about not unpleasantly surprising customers and other stakeholders. "Those terms – and our intentions – were widely misread, causing concern among consumers. So we’ve listened – and we’re changing them back to what they were before," General Mills explained.

The reputationally-blind act, and the rapid retreat, were reminiscent of a similar cycle by AIG's legal department in January 2013. After being bailed out by the US Government to the tune of tens of billions, and running a major advertising campaign thanking the American people, AIG announced that it was considering joining a suit by former CEO Hank Greenberg against the US Government.

According to the Wall Street Journal,  Superintendent Benjamin Lawsky at the New York Department of Financial Services, a key regulator of AIG's insurance businesses,  advised AIG CEO Robert Benmosche not join the suit, because he believed it would cause reputational harm to AIG that could affect the business and preclude it from getting federal aid again. The board expeditiously snuffed the suit.

Offended stakeholders may take a diversity of actions that can have significant adverse economic consequences. In the case of General Mills, customers opting not to engage the brand would be a material harm. "On behalf of our company and our brands, we would also like to apologize. We’re sorry we even started down this path. And we do hope you’ll accept our apology. We also hope that you’ll continue to download product coupons, talk to us on social media, or look for recipes on our websites."

General Mills could have done without the self-inflicted embarrassment. More important, the incident suggests that General Mills may not appreciate that reputation is an enterprise-wide asset, that reputation risk is created by failures in governance, controls and enterprise risk management (including internal controls), and that critically, reputation management has very little to do with brand.  In the company's most recent 10K from 2013, the only reputational risk cited in item 1A deals with food safety: "A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence." General Mills is learning the hard way that there are many paths to reputation damage.

The reputation metrics from Steel City Re, as interpreted by Consensiv, do not show any sudden major adverse reactions to the major error in judgement. Rather, they indicate a gradual progressive deterioration in General Mills' historically high reputation premium relative to the other 29 companies in its industry sector. Over the trailing twelve months, it has slipped from the top-ranked position to the 86th percentile. Similarly, the consensus trend, which is an indicator of stakeholder uncertainty, shows no major recent increase. Collectively, theses data suggest no short-term reaction to the legal silliness.

The fact that legal could come up with such a bad idea and deploy it, however is a worrisome indicator of culture. In this regard, the reputational health of General Mills, both by action and by metrics, is no longer in the top quartile.

Reputation Risk: Scoring an own goal

C. HUYGENS - Monday, April 21, 2014
A reputation crisis often follows a failure in an operational process when stakeholders hold the board culpable for a concomitant failure in governance, controls and risk management. There are specific strategies companies can follow, and products companies can acquire, that can protect Directors and Officers from undeserved opprobrium.

However, from time to time, the failure starts at the board level without any operational antecedent. There is little a company or an institution can do to deflect the well-deserved opprobrium other than listen to stakeholders, assess the importance of their support, and to find someone to fall on a sword. In the recent past, Susan Komen's Race for the Cure and Chick Fil-A had their self inflicted wounds spotlighted after positions were taken in the culture wars.

Months after the Susan G. Komen Foundation for the Cure made national headlines for halting then reinstating funding to Planned Parenthood, the organization's two top executives, its founder and president, stepped down. With Chick Fil-A, CEO Dan Cathy shared his experience after making public homophobic remarks with the Huffington Post, "“Every leader goes through different phases of maturity, growth and development and it helps by (recognizing) the mistakes that you make,” Cathy told the AJC. “And you learn from those mistakes. If not, you’re just a fool. I’m thankful that I lived through it and I learned a lot from it."

More recently, it was (re)revealed that now-former Mozilla CEO Brendan Eich had six years ago donated $1,000 to a group opposing same-sex marriage. Within two weeks of the public outcry, the board "allowed" the co-founder of the Mozilla project, which developed the Firefox browser, to step down. Of course, had the board done its homework, it would have found that the controversial donation was first hotly debated two years ago. Only then, Eich was not the CEO.

Meanwhile, at the centers of higher learning, the lessons are not sticking any better. Penn State University, whose former President, Graham Spanier is charged with covering up a child molestation scandal to protect the school's football program, has recently hired a new President who's prior school is being rocked by allegations of downplaying a rape scandal to protect the school's football program. According to Bloomberg,  "the New York Times has a front-page investigative story (and accompanying interactive) accusing both the school and local police of mishandling a Florida State University student’s report that she was raped by Jameis Winston, FSU’s star quarterback and winner of the 2013 Heisman Trophy." Penn State spokeswoman Lisa Powers wrote to Bloomberg that “Penn State Trustees conducted all appropriate, thorough background checks and investigations required by institutional policy.”

Reputation risk is the threat that stakeholders will discover that a company, foundation, or university is unable to meet their expectations, and as a result, change their expectations with resulting adverse economic consequences. There are strategies to align expectations and control operations. The first strategy is not to score an own goal.

All We Know Are the Facts, Ma'am

C. HUYGENS - Saturday, April 19, 2014
Sgt Joe Friday only knew facts. The rest of us have to ferret them out from all the spin. Fortunately, we are not alone. As further evidence that one of the causes of 21st century reputation risk is that anyone with a keyboard and access to the internet can be an investigative journalist, there are at least 59 organizations that "purport to check facts cited by politicians and news outlets that quote them."

The 16th US President once quipped, "You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time." These 59 groups are determined to use facts to reduce the frequency of the first two scenarios.

Read more.

Speaking of substance and spin, if managing reputation risk is on your mind, read this helpful recent "how-to" article from Risk Management magazine.

Brand v. Reputation: GM edition

C. HUYGENS - Thursday, April 17, 2014
An operational failure in business process controls or supply chain integrity management can help sharpen the difference between the value of a reputation, and the value of a brand. For a company like GM being roiled by evidence of longstanding failures in governance, controls and risk management, the difference implies two very different future courses.

Jonathan Salem Baskin, Managing Director of the reputation controls company, Consensiv, explains:

If corporate reputational value were nothing more than immediate public opinion — like brand awareness — then the company could rely on consumers’ ability, if not overt desire, to forget the past and literally “buy” the company’s latest sales pitch. But reputation is an asset based in operational reality, not the minds of consumers, and GM faces a long list of stakeholder expectations, and resulting valuations, that won’t be easily erased or forgotten. From processes to supply chain relationships, analysis and reporting thresholds, to all of the substance of its relationships with its various communities have been called into question by the ignition crisis, and those stakeholders are and will make future decisions based on it.

Read more.

Duke Energy: Directors personally responsible for coal ash disaster

C. HUYGENS - Tuesday, April 15, 2014
Less than 90 days after of the nation's worst coal ash spills, four Duke Energy (DUK) directors are being held personally responsible for the disaster by two large activist pension funds. An operational failure led to failure in one of the six key processes that govern reputational value: sustainabilty. More interesting than merely affirming, yet again, that a corporate reputational crisis is always personal to a corporate director, the concerted action by these two pension funds represents an entirely new strategy. It appears these two funds are trying to preserve enterprise value and mitigate a reputational crisis by naming and removing individual directors promptly.

Reuters reports today that "The California Public Employees' Retirement System and New York City Pension Funds have written to shareholders of Duke Energy Corp, urging them to vote against the re-election of four directors. "The financial, legal, regulatory and reputational risks for Duke Energy are serious and mounting," Calpers corporate governance director Anne Simpson and New York City comptroller Scott Stringer wrote in their open letter. according to the Financial Times. The funds blamed Duke Energy directors Alex Bernhardt, James Hyler, James Rhodes and Carlos Saladrigas for the 39,000 ton coal ash spill in North Carolina's Dan river in February, after a stormwater pipe broke under a 27-acre ash pond at the company's coal plant."

The February 2 spill, according to the activist organization, Southeast Coal Ash, began when "a stormwater pipe burst beneath a coal ash impoundment at Duke Energy’s retired Dan River Power Station near Eden, North Carolina." Duke Energy estimates 30,000-39,000 tons and 24 million gallons of wastewater, or about 140,000 tons of toxic waste, entered the Dan River.



The reputational value metrics profile of Duke Energy is instructive. The company is, and has been a top performer in its peer group of 131 electric utilities, coming in this week with a Reputation Premium at the 98th percentile. Befitting a company with a superior reputation (read, high expectations among stakeholders), Duke Energy struck a conciliatory tone, admitting the spill at its Dan River plant shouldn't have happened. "Duke Energy takes full responsibility for this accident. We'll be taking a fresh look at all of our ash basins and how we handle that after we fix this pipe," Duke Energy spokesman Tom Williams told WSOC TV.

The Consensus Trend, an indicator of stakeholder uncertainty, started rising after the spill taking Duke Energy up from below the first quartile to the median. By any objective measure of reputational value, this is discomfort, but certainly not a crisis.

In what should be viewed as a possible sea change, activist investors are now getting ahead of the "usual pile on of litigators, regulators and mommy bloggers. " They are going directly after the board -- not to extract monetary compensation -- but to preserve enterprise the company's reputational health and top drawer reputational value by shaking up what the funds believe constitutes a failure in governance, control and risk management. The are demanding individual board members be held culpable -- very personal, indeed.

Brazil: The cost of a bad reputation

C. HUYGENS - Friday, April 04, 2014
The central bank, which does not enjoy formal independence in Brazil, has increased the interest rate by 375 basis points since April 2013. The most recent increase this past Wednesday, ranks Brazil at the top of the league table for the most rate rises globally over the past year, according to Bloomberg data.

Reputation is a reflection of governance, controls and risk management. Weak governance comes at a cost. The Financial Times reports that "Brazil has been under pressure to regain the trust of the market. In March, Standard & Poor’s downgraded the country’s credit rating to BBB-, one notch above junk status, blaming several factors including the economic team’s lack of credibility."

Brand v. Reputation: Auto repair edition

C. HUYGENS - Thursday, April 03, 2014
Tuffy, a brand of auto-repair franchises, acquired a terrible reputation affirmed when its local franchise owner was arrested on felony charges for stealing from customers. A new owner bought the brand. Then he had to rebuild its reputation.

Read more.

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

Brand v. Reputation: CSI edition

C. HUYGENS - Wednesday, April 02, 2014
A buyer of illicit drugs with a reputation for toughness meets stakeholder expectations by stabbing repeatedly a dealer who failed to honor his commitment to sell. Not to do so would create reputation risk and in certain markets, reputation risk can be costly, indeed.

Read more.


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

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.

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