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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Morgan Stanley: No respect (Part II)

C. HUYGENS - Saturday, June 09, 2012
Huygens noted this past Thursday that Morgan Stanley (MS), according to Bloomberg, was getting the Rodney Dangerfield treatment - no respect. Today, with the benefit of the weekly Steel City Re reputation metrics, we take a closer look.

The time series chart in the top right corner below shows just how miserable the year has been for Morgan Stanley. Over the trailing twelve months, relative to its peers comprising some 260 financial service firms, its reputation rank (in blue) never reached above the 50th percentile. While its current reputation value volatility over the past three months is less than over the past year, the vital signs chart shows that relative to its peers the volatility has crept up from the 66th to the 70th percentile. More worrisome for the firm's stakeholders are that the forward-looking trend indicators (direction of change) are all negative which may explain both the high level of volatility and the most recent steep dive in the company's return on equity relative to peers.



For context, compare Morgan Stanley to one its better known peers, JPMorgan Chase (JPM), that has been in the news recently. Currently also facing a reputational challenge of some significance, JPMorgan Chase's issues are new and follow a period of low volatility (for this sector) ranking in the 16th percentile relative to peers. As a result, although JPM's direction of stability of its reputation rank is more negative than MS, its current reputational volatility is about the same (72nd versus 70th percentile), its reputational rank is still much higher (48th vs 24th percentile), and therefore its return on equity is greater.

Morgan Stanley: No respect

C. HUYGENS - Thursday, June 07, 2012
Bloomberg reports today (Moore, 7 June) that Morgan Stanley (MS) is having a hard time convincing investors that it is a different company than the one that borrowed more than $100 billion from the Federal Reserve to survive in 2008. "Morgan Stanley has the highest Tier 1 common ratio among the five largest U.S. investment banks, topping JPMorgan Chase & Co. (JPM) (JPM), Bank of America Corp. (BAC) (BAC), Citigroup Inc. (C) (C) and Goldman Sachs Group Inc. (GS) (GS) Still, it faces the largest potential downgrade from Moody’s Investors Service, has the highest-priced credit-default swaps and trades at the biggest discount to liquidation value."

The reputation metrics suggest that Morgan Stanley is having a hard time convincing any of its stakeholders that it has been rehabilitated. The reason its marketing efforts are falling on deaf ears may be due to its historical reputational volatility (See chart below). Good today, bad tomorrow. For firms such as Morgan Stanley, the path to reputation restoration includes a third party attestation.

Moody's is not playing along which is not a good sign if you believe there is value to Moody's opinion. Many banks, at least in Denmark, don't. In this setting, many banks have turned to Warren Buffet for an investment - a very expensive transparent and ringing endorsement. An alternative path for Morgan Stanley might be obtaining reputation insurance. If a third party with expertise and a view on what is going on inside Morgan Stanley -- Warren Buffet or a specialty reputation insurer -- is willing to risk significant capital, maybe investors should, too.

JP Morgan Chase: Is there a metric in the house?

C. HUYGENS - Saturday, May 19, 2012
In the opinion of many, JP Morgan Chase is having a reputational crisis. The onslaught of regulators, litigators, and mommy bloggers triggered by a $2 Billion hedging loss suggests that something has gone terribly wrong. The media’s qualitative pronouncements, however, are not meeting the needs of stakeholders for a quantitative assessment of JP Morgan Chase’s tarnished reputation.

Consider the conflicting interests of regulators, shareholders, management, corporate directors and employees on the matter of incentive pay clawbacks. According to Bloomberg (15 May, Marcinek, Griffin, and Kopecki), the company “can cancel stock awards or demand they be repaid if an employee ‘engages in conduct that causes material financial or reputational harm,’ JPMorgan said in its annual proxy statement. The company will claw back pay if it’s appropriate...”

‘Appropriate’ is a squishy word. Stakeholders want to know what formula will be used to convert the magnitude of the alleged damage into the magnitude of clawbacks, and at what time after the alleged damage was precipitated will the magnitude of the damage be assessed. Remember that $millions of compensation and bonus pay are at risk. Bloomberg reported that “New York City Comptroller John Liu said that JPMorgan should tell shareholders it will ‘aggressively claw back every single dollar possible from the executives responsible for the $2 billion loss.’” Employees subject to the clawback will probably have other opinions.

JP Morgan Chase’s corporate directors, caught between regulators on one hand and litigators – employees and investors tend to speak through litigators -- on the other, will find little comfort in subjective measures of reputation. Which means that the company’s D&O insurance carriers are no doubt wishing that the Directors would turn to objective measures and establish standards before they effect a clawback. More generally, every corporate board of directors that has identified reputation to be material to their business –there were 3414 public companies as of December 2011 that disclosed this in their proxy statements – should be seeking a solution to their need for objective reputation metrics if only to preempt future issues.

Fund managers and financial advisers would probably like objective measures, too, given the prevalence of concern about reputation risk. Auditors would no doubt appreciate objective measures, not only in the context of controls, but because reputation has also now been identified as a driver of liquidity. Last, communications professionals would likely find better ways to shape the stories surrounding JP Morgan Chase – and every other publicly traded client company -- if they had objective measures of reputation.

There are two different families of instruments stakeholders could turn to today to address their needs for objective measures of reputation. The best known family are survey-based instruments such as the Reputation Institute’s RepuTrak. The Reptrak 150 for 2011, the most recent publicly disclosed survey, reports that JP Morgan Chase’s ranking was 127 out of 150, and that its score was 59.89 up from 55.78 in 2010. The annual rankings had Morgan Stanley at 123 with a score of 60.51 up from 52.48 in 2010, and Goldman Sachs ranked at 147 with a score of 37.14 down from 46.75 in 2010.

There are arguably limitations to the value of these annual rankings. Survey-based measures provide a degree of reputational resolution that is both too late and blurry for time-sensitive issues such as compensation, equity, and tax. In addition to being mostly backward looking,  the Economist newspaper noted that there are issues with the mix of underlying factors underpinning these survey-based metrics.

An alternative family to surveys comprises observational instruments, Steel City Re's system, for example, infers reputation in quantitative terms from the economically relevant activity of stakeholders. The formulation of these metrics is algorithmic and follows the philosophical dictum of Steel magnate Andrew Carnegie who dismissed surveys in favor of observation. “I used to listen to what people say, now that I am older I just watch what they do.”

Taking a long view of JP Morgan Chase, it can be seen that the company's Steel City Re reputational value metric, a non-financial measure of value, has been volatile for the past three years. The reputational value metric of 0.55 GU on May 17, after a fall from a high of 59.7 GU, was nevertheless higher than the lowest value over the trailing twelve months – 0.54 GU on November 4th.

One benefit of metrics of this type is that they foster process controls, and they help to flag extraordinary deviations -- events that could be identified with bona fide reputational damage. In this context, one should note that JP Morgan Chase’s reputational volatility has been so great that the lower boundary of the two-year 2.25 standard deviation of the mean reputational value metric, 0.438 GU (Loss Gate 1), has not yet been breached by the current activity. On the basis of JP Morgan Chase's historical reputational value metrics, and in the context of the three-year long view, this current event could be viewed as just one more bump in a long and volatile history of bumps.



On the other hand, on the basis of its Steel City Re corporate reputational ranking, a relative measure of reputational standing, and in comparison with a peer group comprising all 7400 publicly traded companies tracked by Steel City Re, JP Morgan Chase's current drop from the 79th percentile on May 10 to the 51st percentile May 17 would appear to be material. Is this not incontrovertible evidence of a reputational crisis? Sadly, no. Even this striking piece of evidence is confounded by the fact that the reputation of the banking sector as a whole has been damaged by risks emanating from Athens.



Looking at metrics more familiar to followers of this blog, the bar graph below top right confirms the potential for confounding data. The chart shows that because of the Euro-area crisis, the entire banking sector as of 17 May comprising 216 companies -- one of many possible custom peer groups -- has had awful trailing twelve month (TTM) equity returns. The group's median return was -17.3%. JP Morgan Chase's return, after the mid-May fall, was -23.4% placing it in the 42nd percentile among its banking sector peer group. Over this same time period, the S&P500 lost only 1.6%.

Yet the JP Morgan Chase economic return is superior to two potential bell weather peers first mentioned in the RepTrak data. Morgan Stanley, which was friended by Facebook to be the lead May 18 IPO underwriter from a field of 33, reported a TTM return on equity in the 40th percentile while Goldman Sachs, an icon in its field, reported embarrassing returns earning it a ranking at the 33rd percentile. 

Not surprisingly, then, JP Morgan Chase's reputation as of 17 May is still higher than Morgan Stanley. It's corporate reputation ranking relative to the banking sector peer group is at the 44th percentile while Morgan Stanley is ranking at the 30th percentile. More suprising, perhaps, is that Goldman Sachs, notwithstanding poorer economic returns, is still dominating the other two with a ranking at the 83rd percentile. Among the explanations for the patterns seen are the volatility profiles of the reputation rankings. JP Morgan Chase jumped from the 16th percentile for the past year to the 62nd percentile for the past quarter, Morgan Stanley has been in the low 70's consistently, and Goldman Sachs has dropped from a one year volatility ranking in the 77th percentile to a past quarter ranking in 38th percentile.

There are still a few more ways to extract information from the quantitative Steel City Re reputational metrics and gain further insight into the current crisis. The top left chart below illustrates the magnitude of the JP Morgan Chase reputational ranking movement and economic returns between 10 May and 17 May relative to the peer group of 216 companies in the banking sector. It is striking. The charts at right illustrate the relative positions of Morgan Stanley, JP Morgan Chase, and Goldman Sachs on 17 May. Last, the time series chart at bottom left illustrates the trailing twelve months and emphasizes the point that reputation is a dynamic variable impacted by the impressions of many different stakeholders: customers, vendors, employees, investors, creditors, and regulators. That means than any objective measures established by a board of directors to clawback rewards, or to grant awards as UBS and BP reported recently, need to be defined both by magnitude and time.



Reputational metrics today are essential managerial and oversight tools. They objectify what would otherwise be subjective decisions at risk for being second guessed. Moreover, they inform various stakeholders of the status of an asset increasingly felt to be a vital part of a company's value.

Of course, Corporate Directors would not be the first to use reputational metrics to inform their actions. The RepTrak metrics, for example, have informed marketing executives seeking to improve their communication strategies. The Steel City Re metrics have informed equity investors seeking value opportunities. One visible example is the RepuStars Variety Composite Equity Index calculated by Dow Jones Indexes which is reported on this blog each Monday. Hedge funds have also found the Steel City Re metrics useful in screening equity opportunities and insurers have found the volatility measures of the Steel City Re metrics helpful in screening for increased D&O litigation risk.

Many different stakeholders today need quantitative reputational metrics for a wide range of core business activities. Since companies have already disclosed the materiality of reputational risks, they have opened the door to reputational management. In our culture, we tend to manage that which we can measure. As the JP Morgan Chase clawback issue shows, the need to adopt quantitative measures of reputation is a time-sensitive matter for many stakeholders.

Credit: Seeking an environmentally clean balance sheet

Nir Kossovsky - Tuesday, August 31, 2010
The New York Times reports today  that major lenders are backing off from companies that present the potential for material environmental risks. It's a reputational thing.

According to the report by Tom Zeller, "After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on industry practices that they regard as risky to their reputations and bottom lines." Major financial institutions now factoring sustainability issues into their lending decisions include Wells Fargo (NYSE:WFC), Credit Suisse (NYSE:CS), Morgan Stanley (NYSE:MS), JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citibank (NYSE:C), HSBC (NYSE:HBC), and Rabobank (AMS:ROBA).

In the parlance of the Society, it appears that sustainability policies and practices are emerging as material credit risk factors. And for those of you who were wondering what all the fuss is about at the Society, this is an example of what we mean by "intangible asset finance."

Financial spreads

Nir Kossovsky - Thursday, January 28, 2010
Reputation is the collective perception held by stakeholders of how a company manages its intangible assets. In the 74-member Capital Markets sector, those intangible assets underlying reputation comprise three types of risk management—operational, market and credit. “In a market system based on trust, reputation has a significant economic value,” noted Alan Greenspan, a former chair of the US Federal Reserve Board. In the absence of trust following the loss of reputation, liquidity is at risk. During the 2007-2009 financial crises, stakeholders perceived failures in one or more of those risk management processes and precipitated the liquidity crisis. We look at some exemplary reputation data.





As described in great detail in the forthcoming book, Mission: Intangible. Managing risk and reputation to create enterprise value, the data show that there is a strong association between reputation and long-term economic returns. The rank order of 3-year returns for BlackRock (NYSE:BLK), Goldman Sachs (NYSE:GS), Deutsche Bank (NYSE:DB), and Morgan Stanley (NYSE:MS) shown in the chart above adapted from bigcharts.com correspond to their rank order Steel City Re Corporate Reputation Index metrics and inversely to the volatility value and vector of that metric.



The data also show, as illustrated in the above chart that also shows Morgan Stanley's acute reputation drop, that the Capital Markets sector as a group experienced a reputation rise this past year, but that the variance within this group also increased.

Last, as described previously, the data show that the short term distortions of extraordinary returns following extraordinary losses do not skew the reputation metrics. Firms that have superior reputations are more resilient, will fall more slowly in periods of upheaval, and therefore have less ground to regain. The bright side of this relative lack of short-term upside is that the lower volatility translates to lower cost of capital.

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