Alternative to Moody’s and S&P Still Missing Intellectual Capital

There is a brief but powerful article in Wired this month about a crowd-sourced alternative to traditional credit rating agencies, Rick Calculators: Forget Moody’s and S&P. These guys know how to beat both.

The article features Freerisk.org, which provides XBRL data from SEC filings to what the article calls “a volunteer army of finance geeks.” It quotes co-founder Jesper Andersen:

The problem is too big to leave to private profit centers.

This is a great application of the power of the knowledge era. And it’s a critical first step. But it won’t be enough.

Remember that the majority of reporting in the data everyone uses (including Freerisk) is produced under a financial accounting paradigm that is broken. Modern accounting cannot describe the roughly 70-80% of every company’s value that is off balance sheet. For some reason, everyone inside our financial system continues to put up with a system that focuses on tangible assets that are NOT the key drivers of earnings, competitive position or future outlook of a company.

We need to get this intellectual capital into the reporting stream. The first step is for companies to learn how to see and measure these assets internally. Some of our ideas on how to do this are in the award-winning article I wrote last year for the Emerald Business Strategy Series, Management 2.0: Leveraging the Growing Intangible Side of Your Business. I welcome your thoughts.