Brands have always had value, but now more than ever, businesses are recognizing the impact of brands and other intangible assets on their value and bottom line. In 1975, more than 50 percent of the value of Fortune 500 companies was attributed to tangible assets. By 1995, that figure had dropped to about 25 percent, putting intangible assets firmly in the driver’s seat.

Despite the growing impact of brands and other intangibles on organizations’ earnings and stock market valuations, these assets have generally not found their way onto corporate financial statements. The result of this lag is a widening gap between the perceived value of a business to investors and the net assets shown on the balance sheet.

Nonetheless, when a company’s brand is damaged by a product recall, for example, the impact is felt in the stock markets and on financial statements. Whether the company is public or private, management has a responsibility to protect shareholder value. Thus, the business needs to give as much thought to protecting its brand as it does to building it. For those managing for the brand, this means augmenting traditional marketing duties with the new and sometimes daunting responsibility for risk management.

Over the past few years, the concept of risk management has grown from looking at the security of physical assets to protecting the company from fluctuations in commodity prices and currencies. It can include an analysis of political risk and the protection of patents, trademarks and even key personnel. Individuals at every level of management must take ownership for managing risk within their area.

With the growing value of brands comes the increased need to protect the company from the financial risks of damage to the brand. Companies can avoid or mitigate damage to their reputations and their brands if they improve their ability to assess, monitor and manage risks in advance. But even the best planning cannot eliminate the potential threat to a brand that is inherent in a product recall, whether that recall results from a company error, product tampering, extortion, a hoax, or a “market assault” by those antagonistic to the company.

In this case, managers can turn to a traditional tool of risk management, insurance, which is meeting the challenge of protecting the brand. Long used to protect traditional assets such as manufacturing facilities, insurance can now provide a measure of brand protection and, by extension, offer shareholder value protection for companies faced with product recall.


Companies invest millions of dollars building their brands and, thus, corporate reputations. The case for building a premier brand is well documented. Strong reputations are rewarded with increased customer and employee loyalty, and these organizations can command premium prices for their products. Strong brands can provide companies with an enduring source of competitive advantage.

A recent survey by Lloyd’s of London of major food and drink companies in the U.K. and the U.S. found that brand was considered to be the most valuable asset of a corporation’s image. The prominence of the brand, together with innovation and image/reputation, highlights the importance of intangible assets to these companies.

While important for a broad range of businesses, brands are particularly important for companies producing and processing fast-moving consumer products like food and drink. The importance of brands within this industry is reflected in The World’s Most Valuable Brands 2000, which evaluates the worth of a corporate or product brand by the projected economic earnings of the product and the role of the brand in generating those earnings ( Seventeen of the top 75 brands are associated with food and drink companies or products.

Coca-Cola, for example, had the most valuable brand, estimated to be worth $83.8 billion (all currency in U.S. dollars). Other food and drink brands ranked in the Interbrand survey include Nescafé, $17.6 billion, and Heinz, $11.8 billion. Another key area for brands is the technology sector, commanding spots 2 through 5—Microsoft, IBM, Intel and Nokia—and a total of 13 companies in the top 75. According to the survey, in the past 12 months the technology sector has created the most brand value.

While none of the top 75 brands is Canadian, there is no shortage of highly valued brands here at home in food and non-food categories. Examples include The Bay, Roots, Molson’s, Schneider’s, or even President’s Choice. The power of brands is evident in the growing number of brand extensions such as Roots Air and President’s Choice Financial.

Brands and other intangible assets are playing an increasing role in generating economic earnings. The financial world now recognizes intellectual property and a company’s brand as major revenue-generating assets for many companies. Clearly, a good reputation is worth protecting. But if companies do not put a financial value on their reputations and brands, it is difficult for insurers to offer the protection they need.


Despite the growing role of brand and other intangibles in a company’s economic success, the majority of companies do not actively attribute values to their brands on their financial statements.

According to the Lloyd’s survey of food and drink companies, 2 out of 3 businesses do not account for their brands and other intangible assets on their balance sheets. Of those who do assign values to intangibles on their organization’s balance sheet, most of these companies have been involved in the purchase or sale of a brand. This is primarily because numbers arise in accounting through transactions with third parties. Under most international accounting regimes, the value of a company’s intangible assets is only manifest when they are sold or transferred, no matter how valuable they are.

The growing importance of intangibles has resulted in a widening gap between the perceived value of a business to investors and the net assets shown on the balance sheet. “Accounting rules do not take into account the new forms of capital upon which the prosperity of business currently depends,” according to Jean-Florent Rerolle of Cap Gemini Ernst & Young, who pointed out that in 1998 the capitalization of Microsoft was 18 times higher than its actual net situation. “An essential part of Bill Gates’s business does not appear in its accounts; it is elsewhere: It is in the intellectual and human capital of the company and in the growth opportunities that its market share ensures.”

A 1997 Cap Gemini Ernst & Young study found that an average of 35 percent of investors’ decisions are made using non-financial criteria. A key factor in the investment decision was the strength of the company’s brand. Rerolle noted: “The emotional power of brands is a determining factor in the value creation.” (Jean-Florent Rerolle, Value Creation and the New Economy, Ernst & Young LLP, 1998.)

The implications are clear. Because it is the combination of tangible and intangible assets that creates value, shareholders are not getting a complete picture of a company’s value if the latter does not value its intangible assets.

The growing importance of this gap is largely due to the changing nature of business. As Peter Martin, a Principal in the Accounting Standards Department of the Canadian Institute of Chartered Accountants, notes: “Traditional accounting measures were designed, and work quite well, for Old Economy manufacturing businesses where physical assets comprise much of the value of an organization. Such measures fall short, however, in recognizing the value in New Economy knowledge-based organizations. For these businesses, value is most often found in intangible assets—intellectual property such as brands, patents and trade secrets. For some companies, the assets that are not reflected on the balance sheet are more important than those that are.

“It took some time to develop current accounting practices for the Old Economy, and it will take time to develop new practices better suited to the New Economy. No one has all the answers yet, but a lot of people are paying attention to the issues. Companies are experimenting internally to find out what works. This will lead to a variety of types of information being provided to external users of financial information, who will decide what is most useful to them. Some generally recognized best practices will emerge from the experimentation, which can eventually form the basis of future accounting and disclosure requirements applicable to all businesses.”

Only 30 percent of companies that value intangible assets have done so for more than five years. “This development is partly due to companies realizing the benefits of valuation to both internal and external strategy,” states Shailendra Kumar of the branding consultancy Interbrand. “Internally, from the point of view of establishing which brands are creating value, which are destroying value, and which are value neutral. This assists in determining whether investment is providing a suitable return and where to continue such investment. Externally, it communicates to the investment community the value of a brand portfolio as both a measure of performance and the inherent value of a company.”

Nonetheless, accounting for intangible assets is not an easy task. “The problem is that in decision-making about physical assets, we can rely on well-developed calculation models and indicators, whereas for intangibles we have to rely on intuition time and again,” notes Dr. L.M.H.A. Hermans, Minister of Education, Culture and Science, Netherlands.


Reputation/brand image is the asset that most businesses regard as their most valuable, and vulnerable. As more companies derive a substantial portion of earnings from the strength of their brand and other intangible assets, concern about protecting these assets will grow. And, whether or not a brand is recognized financially on the balance sheet, damage to a brand can have serious financial consequences.

The August 2000 recall of Firestone tires provides a clear picture of the economic effect of brand reputation damage. Only a few weeks after the recall, the company estimated that it would take a $350-million charge against earnings for recall expenses. More significantly, a U.S. survey of 500 consumers conducted only days after the recall found that 16 percent who owned Bridgestone or Firestone tires say they will never buy them again; 14 percent who have never owned Firestones say they won’t buy the brand in the future. The company’s stock lost more than half of its value in the following weeks.

Among food and drink companies, product and contamination, whether accidental or vindictive, is the most serious risk to corporate image. Product contamination incidents can cost companies millions of dollars, affect share prices, and even result in bankruptcies. As well as product recall costs, adverse media reaction can severely damage a brand’s reputation in the eyes of the public, as evidenced by the experiences of Perrier and, more recently, Coca-Cola.

In June 1999, Coca-Cola withdrew a range of products from the U.K. and other European markets because of quality concerns. The incident cost Coca-Cola $91 million in lost sales and $12 million in recall and administration costs. It also prompted a steady decline in its share price. Interbrand’s annual survey of the world’s most valuable brands reveals a 13 percent decline in Coca-Cola’s value from 1999 to 2000, arguably attributable to incidents such as these.

Despite the damage associated with a recall, many companies either do not purchase insurance coverage or are not aware that it is available. As noted by a company that was forced to initiate a recall after 11 cases of listeria poisoning were connected to their products. “Just the cost of the FedEx alone is mind-boggling. We don’t have recall insurance. I didn’t even know it existed.” As well as lost revenue, the company bore the cost of sending written warnings to their customers and suffered considerable damage to its reputation.

Insurance underwriters such as Ian Harrison at Lloyd’s Beazley syndicate in London have noted how awareness is increasing. “There is a growing demand for this kind of coverage. Organizations are beginning to recognize the value of their brands, be it on a balance sheet or not. This is particularly true of the food and drink industry, where damage to a corporate reputation or brand is most physically manifested in recall.”

Insurance to cover the actual costs of a product recall has long been available, but in most cases these policies have required a legal liability trigger before going into effect. Now, insurers are adding coverage for related costs and for brand rehabilitation under policies that are triggered by reputational and brand damage. For example, Total Recall, an insurance product developed by the Beazley syndicate, covers recall expenses such as transportation and the cost of communications with customers, retailers and the public. These direct costs also include fees for security and public relations consultants, as well as the analysis of products and their destruction, if necessary. Beyond these costs, insurance is available to cover the cost of replacing recalled products.

Total Recall also covers damage that is more difficult to quantify, such as losses from sales reduced to levels below what could have been reasonably expected had there not been a recall. That coverage can preserve the finances of a large company and even save the life of a smaller organization.

Finally, there is the cost of brand rehabilitation—the advertising, marketing and public relations expenses required to rebuild the brand. This raises a common question in insurance: Given the cost of building, or rehabilitating, a brand, how much coverage is enough?

“Until recently, no insurer had developed a valid method of adequately defining the intellectual property of a company, including its brand, or assessing its worth to a particular business,” says Robert Chase of Kiln at Lloyd’s, which also offers coverage under its 4Thought Intellectual property insurance product. “Therefore, they were not able to assess the cost to a business of intellectual property that was impaired or devalued.”

Each company and each insurer must determine the level of coverage between them. The factors they look at include: gross annual product revenue; maximum likely sales impact of a public incident; how long that impact can be expected to last; direct costs of a product recall and the costs of rehabilitation; and any production cost savings resulting from lower sales. In most cases, the coverage is likely to be between 10 percent of annual product sales, for a larger company with a range of products and outlets, and 20 percent for those with limited product range and distribution.

Reflecting the range for companies that take out insurance as part of the risk management of their brands, premiums can range from about $5,000 to over $1 million. Insurers will often offer reduced premiums to clients with a crisis management plan in place and provide crisis experts to help their clients before and during an incident. Canadian companies tend to be keen adopters of this type of insurance, slightly behind the U.S. but ahead of Europe, according to Ian Harrison of Beazley. He notes it is often more important to smaller firms than large, multi-product and multi-brand companies: “Insurance can be an essential lifeline to small companies, and an effective balance-sheet protector for companies which are very large and financially strong.”

Managers are beginning to realize that managing brands also includes managing risk for those brands. Recall insurance allows companies to react quickly and decisively in a crisis. As brand managers know, a company’s reputation is often formed by the way it reacts in a crisis situation. The Tylenol incident of the early ‘80s is one of the best examples of swift reaction saving, and even enhancing, brand image. Along with a detailed crisis plan, it could play an important role in defending a company’s brand reputation and protecting shareholder value if a recall occurs.