Accounting for Intangibles Represents Strategic Opportunity for Corporate America

Thanks to Nir Kossovsky for his post on the Mission: Intangible Blog pointing out the opinion piece by long-time corporate governance leader, Nell Minow,  in the Financial Times last week entitled, Impresarios on the Board Are a Bad Sign. Minow makes the case that

Opponents of post-meltdown reforms to corporate governance are trying to hold back change by focusing on Washington. The US Chamber of Commerce is spending $100m (€69m, £63m) to try to defeat any substantive reforms. They are missing the point. No matter what happens in Washington, the market is forcing through significant and pervasive reforms. The companies that first understand that will benefit from a lower cost of capital and more committed long-term investors. As we understand better the mistakes of the past and the challenges ahead, fund managers and analysts will look at “new fundamentals”, four elements that will become as important as cash flow and return on investment.

There are four fundamentals she focuses on: accounting, boards, compensation and investor groups. Her comments are worth reading for each. But I would like to highlight her first point about accounting:

There is a reason accounting principles are called “generally accepted” rather than “generally accurate”. The accounting system is too grounded in a 19th-century notion of value based on hard assets. What useful information did we get from this about the value of subprime derivatives?…Accounting will evolve to put less emphasis on providing a snapshot and more on the basis for projections and on “what-if” scenarios. And investors will look for more and better information about carbon footprints and other environmental impacts. Like tobacco, climate change has moved from social policy to the risk management category. Dumb companies will ignore it. Benchmark-driven companies will have a compliance-based approach and tick the boxes. But innovative companies will recognise strategic opportunities created by this increased focus.

I added the bold on the last few sentences. To those of us in the intangible capital community, this must be the rallying cry. Understanding your intangibles is not an academic exercise, it is a strategic opportunity to provide greater transparency on the core of your innovative capacity. Isn’t it time you learned to measure and manage your intangibles?