The crippled economy is forcing the business community to make tough choices about where to cut costs; personnel, overhead expenses, security investment, or anything that doesn’t add to near-term solvency. Mindful that we haven’t had an attack on US soil in 7 ½ years; our fleeting memory of fear of terrorism has been replaced by an immediately palpable fear of losing our jobs and facing financial ruin.
But we’re not just facing a tough economy – we are still facing threats from terrorism both abroad and here in the US. So how do those responsible for securing our corporations protect what is critical to the company (and our nation) with less resources? One way is on the business processes most critical to protecting corporate reputation and intangible asset value and at the same time, achieve the level of security that help drive corporate value. For example, in 2007 Mattel’s supply chain system securely facilitated the shipments of the lead paint coated products. While the security of the shipment of lead paint coated toys met CTPAT requirements, the products themselves caused significant reputational damage and resulted in a loss of approximately $110 million. The lead painted toys likely resulted in a higher loss than if an IED exploded in a container during shipment. The same goes for pharmaceuticals manufactured abroad – the rise in counterfeit drugs in the US market place and the focus on securely shipping those drugs will continue to cause vulnerabilities in our system that threaten US consumers. So how can we have our cake and eat it too? Companies need to remain compliant with government regulation and at the same time meet their business goals. And for most companies today, that goal is survival.
Why protect reputation and intangible assets? The importance of reputation resilience, as illustrated by the Mattel example, is it takes millions of dollars to build a reputation that customers trust and investors reward, but a 30-second lead story on the evening news or a 10-line blog on the web can destroy everything a company has done to develop and protect its vital assets. What are Intangible Assets? Security is an intangible asset. Like reputation, safety and quality, security comprises elements of what is generally known as a brand and interdependently supports other intangibles comprising intellectual properties. Collectively, superior management of security and other intangibles is associated with higher gross margins, net income, earnings multiples, enterprise value and market capitalization. Threats to the reputation of a company can come from bad judgment of a corporate officer, criminal behavior by a global business partner, a terrorist attack on facilities, or extortion involving food products. Reputational threats destroy value by reducing the value of specific corporate intangible assets. Intangible assets are those assets that are known to create value but have no form of recordation on company balance sheets. The “business” intangibles comprise business processes governing ethics and integrity; quality, safety, sustainability, security, and innovation; patents, trademarks. Because they can not be measured by standard accounting methods, there is a tendency in our culture of “manage what you can measure” – to not manage them.
Congress has actually (and unintentionally) helped build the business case. In the aftermath of the 9/11 terrorist attacks, the U.S. Congress passed the Maritime Transportation Safety Act (MTSA) on November 25, 2002. Although Public Law 107-295 was designed to protect U.S. ports and waterways from terrorist attacks, it had the unintended consequence of reducing the physical risks to which various industry sectors were exposed, lowering the weighted average cost of capital and creating immediate value.
More to follow in the coming weeks…