In Corporations We Trust

Many thanks to all of my friends and colleagues who responded with such vigor to my previous blog post entitled Is Trust Necessary? In that post, I suggested that the European leaders who are embroiled in the German – Greek dispute shouldn’t worry so much about trusting each other, and should instead focus on developing reliable verification controls, in the manner first espoused by Ronald Reagan and Mikhail Gorbachev and currently advocated by John Kerry.

That led to a considerable amount of consternation and debate among my readers, with some individuals brusquely asking me whether I was actually implying that trust is worthless. My response?

Of course not. After all, necessity and worth are two entirely different concepts. In fact, although trust is not an absolute requirement for negotiating treaties, it is indeed helpful when it exists.

The same concept applies in the corporate world. Why, for instance, is Apple’s global brand worth more than $118 billion? It is because Apple has built the most valuable brand in the world by ensuring that its customers trust it to provide the most intuitively simple and immaculately stylish electronic devices on earth.

This customer trust in the Apple experience extends to other forums as well. Its unique retail store environment, for instance, extends its product experience to the shopping milieu. And the late Steve Jobs, a person who was trusted to perfect every detail of Apple products, remains one of the most fascinating leaders in business history. Biographies of his life still enrich the book industry.

Of course, it is true that generic “no name” products do exist. They often do quite well in the market place. Indeed, it is obvious that such trust is not necessary to build a successful business.

Nevertheless, Apple has demonstrated that trust can be extremely beneficial. And many other organizations have done so too.

But how can we assess an intangible, and sometimes ephemeral, advantage like trust? Although it represents a tremendously valuable asset, no corporation records “Trust” on its traditional financial statements. And yet some contemporary accountants are starting to design ways to account for trust.

The International Integrated Reporting Council, for instance, defines Social and Relationship Capital as one of the six value drivers (i.e. the “six capitals”) of a business. Trust is a key component of Social and Relationship Capital.

In addition, the Global Reporting Initiative states that “building and maintaining trust in businesses and governments is fundamental to achieving a sustainable economy and world.” It names Trust, along with Transparency and Decision-Making, as the three primary outcomes of its Sustainability Reporting Practices.

This emphasis on non-traditional corporate reporting represents a practice of codifying and then verifying the assertions that are made by corporations about their socially responsible business practices. Its underlying assumption is that public accountants will audit these assertions and verify their accuracy, in the same manner that they audit and verify the traditional financial statements.

In other words, when assessing the business practices of corporations, these organizations aren’t really assuming that verification activities can suffice in place of trust. Instead, they are assuming that verification activities will lead to trust.

It’s a distinctly different premise than the one espoused by Reagan, Gorbachev, and Kerry in the political world, isn’t it? And yet it’s quite possible that, in their world, those three gentlemen would hope that verification activities will eventually lead to trust as well.

Yahoo’s Flickr: Selling Your Snapshots

You take a snapshot of a sunset and decide to share it with the world. Naturally, you decide to upload the image to an online photo sharing service.

But which service do you use? Do you select Facebook’s Instagram? Or Adobe’s PhotoShop? Or perhaps Yahoo’s Flickr?

Most people would make this decision on the basis of personal habit. Some might consider the site’s target user group. Hardly any one, though, would consider the “business use” terms that are maintained by the owner of the service.

Nevertheless, if you’re considering Yahoo’s Flickr, you should keep in mind that the folks at Yahoo might sell your snapshot without your permission. And if they do, they might keep all of the proceeds of the sale for themselves.

Why are such sales transactions legal? Well, if a photographer intends to engage in non-commercial file sharing, he might choose the Creative Commons terms that are available on the service. Those terms permit others to utilize the snapshot for their own purposes, albeit with certain restrictions.

And what if the photographer does not read Flickr’s “tiny print” carefully? He may then neglect to impose restrictions on the utilization of the snapshot. Yahoo — or any other entity, for that matter — is then free to sell the image for its own commercial profit.

It may not be surprising that an enterprising firm would take advantage of the generosity of photographers by downloading and reselling snapshots from an independent web service without the photographers’ consent. But Yahoo is attracting photographers to its own service, and is then mining their snapshots to earn profits.

Oddly enough, Yahoo is a declining (though once dominant) firm that is desperately trying to recapture the goodwill of a consumer group that has moved on to competitors like Facebook, Google, and Twitter. Is the uncompensated sale of user snapshots really a practice that will endear Yahoo to these consumers?

History is full of tales of businesses that squandered durable consumer reputations in pursuit of short-term profits. General Motors, after all, was once the largest automobile company in the world. And Sears Roebuck was once America’s largest retail store and mail catalog organization.

But now General Motors is reeling from lawsuits and government investigations involving inexpensive (and defective) parts. And as the owner of Sears increasingly focuses on extracting value from the organization’s real estate holdings, the financial performance of Sears’ retail business becomes more deeply mired in losses.

Indeed, General Motors and Sears are learning that short-term profits often lead to long-term losses when consumers lose faith in the quality, reliability, and trustworthiness of a product or service. As Yahoo proceeds down a similar path, it may come to regret its decision to adopt an analogous strategy.

Apple, Samsung, Lenovo … and Xiaomi?

Two years ago, Samsung was on a roll. Its Galaxy S3 model shot past Apple’s iPhone 3 to become the best selling smart phone in the world. And in China, Samsung itself supplanted Apple as the most popular brand.

For a while, it appeared that the smart phone sector might go the way of the automobile industry, where an upstart Asian manufacturer named Toyota surpassed a once-dominant firm named General Motors in both sales volume and brand perception. But has that actually occurred in the phone sector during the past two years?

Fortunately for Apple, the tide has turned. Last week, the China Brand Research Center (CBRC) announced that Apple had retaken the top spot in brand perception from Samsung in China. And during the past month, Apple’s latest iPhone 6 model outsold Samsung’s Galaxy Note 4 in many regions, including Samsung’s home nation of South Korea.

So has Apple turned the tables on Samsung? Has the American firm taken the fight to its Korean foe in Asia’s largest markets, and reasserted itself as the world’s dominant smart phone maker?

In a word: “no.” Based on the most recent quarterly sale data, Samsung still leads Apple in global market share. And although Apple is closing the gap, both firms have been losing market share since the fourth quarter of last year.

To whom? To the Chinese firms Lenovo and Xiaomi, which have been growly rapidly at the lower end of the market spectrum. Lenovo grabbed significant market share by absorbing the handset manufacturer Motorola, while Xiaomi has surged in popularity by emulating Apple’s strategy.

In fact, “emulation” doesn’t begin to describe how closely Xiaomi is following Apple’s playbook. Its chief executive Lei Jun even appears at new product presentation events in Steve Jobs’ classic “black shirt and blue jeans” attire.

In other words, although Apple and Samsung are locked in a battle for the top spot in both sales volume and brand value, it would be inappropriate to continue to characterize the firms as the dominant forces in the industry. In truth, both firms are struggling to maintain their customers in the face of Chinese competition.

So is it possible that Apple and Samsung may eventually follow the path of General Motors? And some day, may Lenovo and Xiaomi surpass these firms in the manner of Toyota?

As long as Apple can continue to maintain superior brand value, its reputation for quality may help inoculate it against the encroachment of less costly consumer products. That’s why CBRC’s recent announcement was so meaningful to the American firm.

Nevertheless, when smaller upstart firms (like Xiaomi) can make inroads by simultaneously building reputations for both affordability and quality, it’s time for the established players to worry.

An Enron Nightmare: Andersen Returns!

Do you remember Arthur Andersen? Once one of the largest and most respected public accounting firms in the world, it collapsed under the weight of a federal conviction for obstruction of justice in regards to its activities during the Enron scandal. Although the conviction was later overturned, Andersen’s reputation was destroyed, and its employees assumed that the reputational stain would last forever.

It now appears, though, that “forever” barely lasts a decade. Earlier this month, WTAS LLC — a firm that was founded by former Arthur Andersen partners — bought the rights to the name and rechristened their firm AndersenTax. CEO Mark Vorsatz reminisced, “Our issues with Enron were the mistake of a few. Irrespective of Enron, we thought we were the benchmark in the industry.”

Vorsatz continued, “This was a fairly thoughtful, deliberative decision. I had colleagues who worked there for 30 years and retired, and they are walking around with a big stain on their chest. We’re going to change that.”

But can they really succeed? Is it possible that the Andersen brand will still generate some value for WTAS? According to certain brand valuation methodologies, Mr. Vorsatz may have a reason for optimism.

Interbrand, for instance, is a global consultancy that defines brand value as the product of: (a) the economic profit of a firm, (b) the role of the brand in its industry, and (c) the strength of its own brand.

Imagine a firm with economic profits of $100 million in an industry where the role of the brand determines 80% of those profits. Even a weak brand that scores a mere 10 on Interbrand’s 0-to-100 scale would be worth $100 million x 80% x 10% = $8 million.

Although $8 million might not sound like a significant valuation for a tainted asset, it is important to note that such a lowly regarded brand might be available for purchase at very little cost. Thus, a firm that purchases the brand might be investing very little in exchange for the acquisition of an $8 million asset.

You may not necessarily agree with the Interbrand valuation methodology, or with WTAS’s decision to acquire the Andersen name. According to theories of brand valuation, though, its transaction may yet prove to be a profitable one.