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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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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.

Eight Horsemen of the Banking Risk Apocalypse

C. HUYGENS - Monday, February 03, 2014
Banks must develop a written framework to manage risks or face civil money penalties for failure to comply with new regulations from the Office of Comptroller of the Currency (OCC). Issued on January 16, the proposed rules and guidelines requires management controls for the following eight (8) enumerated risks: credit, interest rate, liquidity, price, operational, compliance, strategic and reputation.

The Proposed Guidelines would generally apply to insured national banks, insured federal savings associations, and insured federal branches of foreign banks with average total consolidated assets of $50 billion or more (each a Bank, and collectively Banks). Banks would also be required to develop a written three-year strategic plan that is developed by the CEO with input from the applicable business units (front line, risk management, and internal audit).

The Bank's board of directors (Board) would be required to evaluate, approve, and actively monitor implementation of the strategic plan. Read more.

Don't Drink the Water and Don't Breathe the Air

C. HUYGENS - Wednesday, January 29, 2014
Although Huygens generally addresses the link between corporate reputation and economic behavior, it is helpful from time to time to descend from the clouds of economic theory and remember that these principles are based on basic rational human behaviors and apply to everyday events. In other words, behavioral economics applied to issues such as ethics, innovation, quality, safety, sustainability, and security has practical applications.

Consider the safety reputation of Mexican water. Reputation is the expectation of future performance informed by past experience and moderated by actions in the present. There are enough personal and vicarious experiences with Mexican water to substantiate its reputation as "non-potable." Mexico City’s legislators have decided to combat this reputation by requiring that 65,000 restaurants install filters and offer patrons free, safe drinking water.

But just as you can lead a horse to water but not make it drink, this strategy is doomed. Requiring that restaurants serve safe water isn’t the same thing as ensuring it, even if they risk fines if the law is violated. Further, behaviors are the outcome of a sometimes implicit balancing of potential risks and rewards, and the upside for drinking free water out of a pitcher may well continue to be outweighed by the risks of doing so.

As with all the corporate examples of reputation leading to behaviors with economic consequences, this one has a monetary value too. Martinez-Robles [an industry consultant] estimates the bottled-water market in Mexico reached $5 billion in 2012. Read more.

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.

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