Can you afford the risk? Sarbannes Oxley, Duty of Oversight and Intangible Capital

Anderson Kill has a new article out called The SOX IP Imperative (thanks to Gabe Fried at Streambank for pointing it out).

Authors Gina Hough and Kanishka Argawala make a clear argument about the need for companies to pay greater attention to their intangible assets.

I usually talk about the strategic advantages of such a strategy (and growth, innovation and corporate value that can result). But there is an equally strong risk argument to be made and Sarbannes-Oxley (SOX) is one of the factors influencing this argument. Directors’ duty of oversight that Cathy Reese at Fish & Richardson has pointed out to us before is another factor. Read more

Intangibles, the Bottom Line and Shareholder Value

U.S. business culture is very much about results. Two of the ideas that best capture this perspective are the concepts of the “bottom line” and “shareholder value.” The bottom line is a financial calculation. As we have made clear throughout this book, the integrity of financial statements that are used to calculate the profit or loss of an enterprise is seriously compromised by their failure to address knowledge intangibles. Profit and cash flow are still important to the day-to-day survival of a business. But focusing on today’s bottom line without regard to tomorrow’s bottom line can lead you to make bad decisions: To outsource a function that should be a core competency. To fail to invest in an intangible that will preserve and protect a competitive advantage. Peter Drucker put it this way Read more

Remembering the traditional balance sheet: a wonderful, but outdated, tool (in its current form)

The roots of the balance sheet go back to 15th century Venice when merchants were building trading businesses that spanned the globe. They developed ways of keeping records for their businesses. These emerging practices were recorded by a monk named Luca Pacioli and his treatises became the foundation of the balance sheet and income statement that are still used today. The model held up remarkably well through many centuries and came into its own as standards for financial statements were codified in the early years of the 20th century. Public reporting of these statements was begun in response to calls for greater transparency following the Great Depression of the 1930s.
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Will Intangibles Ever Go on the Balance Sheet?

This week, we’ve been talking about collecting data on intangibles investment.

This discussion seems to beg the question of how it will be used. In contemporary accounting, the investment by an organization in tangible assets is “capitalized” on the balance sheet and depreciated over time. This serves as a way of keeping non-operating expenses (that is, not related to the current year’s operations) out of the income statement. It also serves as a way to track the cumulative effect of investing in a company’s capacity over time. As we have explained in previous posts, this model is not used for intangibles.

So if we recommend tracking intangibles investment, does that mean that we think  intangibles should go on the balance sheet? Read more

Analyzing I-Capex: How to understand the return on your intangible capital expenditure

This is a follow-up to yesterday’s post about intangible capital expenditure.

When you are starting out, an i-capex report will just be a separate report in your accounting system or in a spreadsheet to be used to report to management or your board of directors. Ideally, you should go back a few years so that you start out with a data series that you can use to learn about the patterns of your spending. When you do this, you might want to also gather some demographic data that can be used in calculating ratios.  Read more

On the Value of Intangibles (and why that’s the wrong question)

The measurement of intangibles tends to create a lot of confusion. That’s because there are a number of ways of measuring them and they all get jumbled together. If you look at my last post on intangibles spending, you’ll see a real mixture of metrics. Some of Nakamura’s estimates looked at categories of “spending.” But in the case of M&A data, “cost” data for acquired intangibles on the balance sheet (which sounds a lot like spending) is really derived from “valuations” of individual assets (we’ll explain this below). Stock market data would be considered “valuation” data because it is extracted from the total corporate value placed on the company by the stock market. You can see that value and cost get mixed together a lot of the time. This leads to a lot of confusion. We’ll try to break down the concepts of value here and then tell you why we don’t think value is the right question for managers most of the time. Read more

I-Capex Is the New Capital Expenditure

Capital expenditure (capex) is an accounting concept that has ingeniously supported the tangible economy for centuries. It allows a company to apply to its balance sheet the cost of investments in its future productive capability. This is called “capitalizing” an expense. Then the cost of this investment or capital is depreciated over a period of years. This is an extremely important feature that helps companies avoid having to show decreased earnings in a period where they make large investments. It is through a corporation’s capex that the tangible production value of the company (and by extension, its balance sheet) is built and maintained.

The idea of capital expenditure is actually very relevant to intangibles. U.S. businesses are already investing as much or more on their intangibles as they are on tangible investments in property, plant, and equipment. We know this from macroeconomic data. And we can see the benefit of it in stock and valuation data. But we don’t really know on the individual company level because no one counts it. That’s right. No one really knows how much is being spent on intangible capital expenditures (i-capex) by American companies to build their knowledge infrastructure. Read more

New Superpowers – Emerging Frontiers for Process

This week I have been talking about structural capital–the superpower of today’s organization. And process is one of the most important and least understood in terms of its importance and its sustained value to an organization.

Most internal processes in today’s organizations already have been automated to one degree or other. There are software programs for accounting, enterprise resource management, risk management, human resources management, performance management, and many, many others. That doesn’t mean that this automation is complete. Quite to the contrary, companies at every level still have a multitude of opportunities to standardize, automate and optimize most internal processes in today’s organizations.

And there are also new horizons where automation has only just begun: backward through the supply chain and forward in customer-facing systems. Read more

Let’s stop guessing and start counting intangible investments

I just posted a comment on an IAM blog post about Intangible Value and the Herd Instinct. It cited Nir Kossovsky, my colleague from IAFS, as saying that the S&P 500 has a larger intangible premium than the average of all western stock markets due to a market perception of better value from that market.

Here’s my comment: Read more

Today at noon EDT: Driving Intangible Risk Management into the C-Suite

The black goo may be coming ashore in the Gulf Coast, but many would argue that the muck originated in a remote boardroom. In the wake of major headline risk events at BP, Massey, and the venerated Johnson & Johnson, the IAFS’s Mission Intangible Monthly Briefing tackles the trifecta of risk, governance and compliance with our program, Driving intangible risk management into the C-suite.

Leading this conversation on Friday 4 June at 12h00 EDT are Matthew Hogg, Vice President at Liberty International Underwriters, who chairs the Society’s Risk Committee and Cathy L. Reese, a Principal with Fish & Richardson, who chairs the Society’s IA Corporate Governance Committee. Mr. Hogg is a pioneer in intangible asset risk transfer; Ms. Reese is a leading advocate for board-level oversight of intangible asset management.

Registration for this and each Mission Intangible Monthly Briefing is complimentary. Slides and an exemplary downloadable program are posted on the website EVENTS page. Mary Adams, I-Capital Advisors, moderates.

If you are general counsel, chief financial officer, a risk officer, a manager of strategic partnerships, a reputation executive (marketing, PR), a board member of any public company, or have a financial interest in any publicly traded security, you (or a colleague Send to a Friend) won’t want to miss this event.

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