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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Walgreen: Many stakeholders with many expectations

C. HUYGENS - Friday, August 15, 2014
On Wednesday, 5 August, Walgreen announced that it would not take advantage of tax law and relocate headquarters to Europe as part of its acquisition of a European peer. This surprised shareholders for whom the move was a no-brainer: It was expected to save the company roughly $4 billion over the next five years. The surprise precipitated a reputation crisis--at least with Walgreen's equity investors.

A reputation crisis begins when a company fails properly to set expectations or fails to meet them, and then stakeholders turn on a company and lower their expectations. The going-forward economic consequences result from how customers thereafter respond to prices, how effectively employees work, creditors set borrowing rates, suppliers set terms, and how severely regulators impose penalties.

The surprised equity investors punished Walgreens' stock. Between 1 and 15 August, the company's market capitalization dropped 10%; the benchmark S&P500 rose 1%. The equity loss, however, does not evidence a reputation crisis. It only reflects investor disappointment. Walgreen, promoting itself as the "pharmacy America trusts," had to meet a diversity of expectations. Nor does Walgreen's submission to legislative pressure indicate that the US reputation for being pro-business is eroding. Read the thoughtful discussion by Jonathan Salem Baskin at Consensiv.

This Week at Lake Reputation-be-gone

C. HUYGENS - Friday, July 25, 2014
"It was hardly a quiet week at Lake Reputation-be-gone," Garrison Keeler might have said. "Walgreen, McDonald's & Yum!, and current poster-child GM had their respective moments in the sun...again."

Walgreen's issue is an ethical one. The company whose motto proclaims it to be "the pharmacy that America trusts" would just as soon not pay America $4 billion in taxes over the next five years. The company is now deciding whether to take advantage of the US tax law loophole that would reward it substantially with a lower tax base were it to acquire controlling interest in a Swiss-based company and nominally relocate its headquarters overseas.

McDonald's and Yum! were apologizing for supply chain issues that again raised questions of food quality and safety in the Chinese operations. Earlier this week, Chinese regulators closed the Chinese division of an Illinois-based good supplier (OSI) after a TV report showed workers picking up meat from a factory floor and mixing expired lots with fresh lots of meat. Upton Sinclair would have been proud.

GM announced six additional automobile recalls this week bringing its total for the year to 60 announcements covering 29 million cars worldwide. Quality and safety issues are at the forefront, but they are not all associated with supply chain failures. Some, in fact, are due to assembly and integration issues in GM's wholly-owned operations.

As is the case after every major operational issue, the press is making much ado about the damaged reputations of these firms. The events are certainly news-worthy and embarrassing. Whether they cause stakeholder to reassess their respective relationships with the companies, however, is the central issue in a reputation crisis.

Walgreen's issue is unlikely to have any effect on most stakeholders. Equity investors will be thrilled, and creditors equally so. Legislators are unhappy, but it is not clear their opinion matters much since they have proven their inability to do much of anything.

This is Yum!'s second bout of China-related supply chain safety and quality. The toxic chickens of 2012/2013 gave them quite a reputation scare, which is why they may have dumped OSI like a hot pan. McDonald's is new to this type of crisis and is sticking with OSI. Also, McDonald's maintains qualitatively different types of relationships than Yum! with its suppliers. By forgiving OSI, McDonald's is demonstrating the benefit of OSI's historically stellar reputation…to OSI.

GM is now in a league of its own. Credit the company with fabulous spin control by declaring that Wednesday's additional recalls signified how the company had enhanced its approach to safety.

Walmart: Laboring to protect its reputation

C. HUYGENS - Wednesday, May 12, 2010
As April came to a close, Walmart Stores Inc. (NYSE:WMT) received bad news. The United States Court of Appeals for the Ninth Circuit, in San Francisco, ruled that the plaintiffs alleging unfair labor practices against female employees (read, unethical practices) can head to court as a class action. This decision transforms a nine year old matter into the largest class-action employment lawsuit in U.S. history.

Besides being a welcome break from the headline risk crises on safety, quality and ethics facing BP (NYSE:BP), Toyota (NYSE:TM), and Goldman Sachs (NYSE:GS), the issue provides an opportunity to test a central hypothesis held by the Society and described in detail in the book, Mission Intangible. This is it.

Reputation value is the sum of the value contributed by six key intangible assets (business processes) governing ethics, quality, innovation, safety, sustainability, and security. The assets create value cooperatively like the stones in a Roman arch; loss of any one key stone can destroy significant value.

Let’s also recap what is value. Market capitalization is the obvious one. More to the point, companies with superior reputations have enhanced pricing power, lower operating costs, lower credit costs, and higher earnings multiples. It's that simple.

Walmart has invested significant time and effort into building authentic credentials and a reputation for excellence in sustainability practices. Is its reputation for sustainability sufficient to compensate for its less-than-stellar reputation in labor (ethics)? The hypothesis would suggest that they are independent, and that failure in either could erase the reputation value created by the other. Let’s look at the numbers.



The Steel City Re Corporate Reputation Index, also described in greater detail in the book, Mission Intangible, shows that Walmart’s reputation ranking has slipped from the coveted #1 slot of the 100th percentile among 39 peers in the multiline retail sector. Over the past 16 months, Walmart has moved from the top ranking to the 94th percentile. Economically, its return on equity has underperformed both the median return of its peers (by 42%) and the S&P500 benchmark index.



In contrast, Target Inc. (NYSE:TGT), a rival whose charting in this Mission Intangible blog back in June 2009 has been the most popular post ever, raised its reputation ranking among this peer group from the 46th percentile to the 94th percentile. At the same time, it outperformed the median of its peers (by 27%) and the S&P500 index.



Also for contrast look at Walgreen Co. (NYSE:WAG). During this period, their reputation ranking rose from the 69th percentile to the 81st percentile, and it outperformed its peer group by a narrow 2%, but comfortably beat the S&P500 Index.



Last, note that the multiline retail sector, as a group, slipped in its median reputation ranking relative to the broad market. Furthermore, the variance among the individual companies comprising this sector narrowed. The sector's median reputation ranking drop stands out dramatically in contrast against Target's reputation ranking rise.

Overall, these data affirm the increasing importance of reputation management in increasing, protecting and restoring enterprise value; and that reputation management involves addressing core business processes whose perceptions by stakeholders comprise reputation. These data also affirm the Roman Arch model, which plainly says, if you don't pay attention to all of your key business processes, then, when a headline crisis strikes, your stakeholders may turn on you in a heartbeat.

Monetizing the CEO

C. HUYGENS - Tuesday, September 29, 2009
In the world of intangible asset management and value, there are those who argue that the CEO's reputation is the main driver of corporate intangible asset value. We touched on this a few weeks back in the context of Whole Foods and their outspoken CEO, John Mackey. While we agree that the CEO alone can impact reputation-linked value, the magnitude is often far less than might be expected.

The Chicago Tribune posted a recent story titled: More CEOs cast themselves in company commercials: Corporate commercials: GM, Walgreens, Sprint put executives on the air, but effect is debatable. The short article includes a quote from Jon Baskin who spoke at our 2008 Fall Conference and is worth a read. We thought we would cut to the chase on motivation. The Tribune reports that "GM is trying to resurrect its image after a trip through bankruptcy court and a government bailout. Walgreens is undergoing a marketing makeover as it aims to return to steady profit growth. And Sprint is attempting to stem the loss of subscribers." The two year equity returns, shown below, speak volumes.



In the chart above, General Motors (NYSE:GM) is blue, Sprint-Nextel (NYSE:S) is in red, Walgreens (NYSE:WAG) is in black, and the S&P 500 index is golden yellow. We have looked at both General Motors  and Sprint  in the past and noted significant reputation losses. We have also shown in our forthcoming book, Mission:Intangible, that the business processes driving quality, integrity etc. are the primary sources of reputation value. The role for the CEO is to champion value-creating best intangible asset management practices.

But, fundamentally, we are empiricists, so we'll return in a few months to gauge effectiveness of the "CEO as brand" strategy.

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