Joff Wild

On 14th December, the Intangible Asset Finance Society (IAFS) and the Athena Alliance (AA) co-sponsored the conference Mission Intangible: Exploring the Financial Impact of Extra-Financial Information at the Deutsche Bank Building, in the heart of New York City’s Financial District. IAM is a media partner of the IAFS and follows the work it is doing closely. I got this report on the event from Nir Kossovsky, the IAFS’s executive secretary and chief executive of Pittsburgh’s Steel City Re:

Cynthia Glassman, US Undersecretary of Commerce for Economic Affairs, delivered the keynote address, during which she complimented the work of IAFS. “Investors need cutting-edge information to make good decisions,” she told delegates. “I’ve seen the results of decisions made with inaccurate information that distort macro-economic growth statistics and micro-economic decisions about investment.”

According to studies done by the Brookings Institution and Steel City Re respectively, IA comprise 70%-87% of S&P 500 companies’ market value, and companies with superior IA management have three-fold higher market capitalisation of their revenue-matched peers. Nevertheless, few public companies are aware of their full IA inventories.

“The precise numbers may be questioned, but there is no doubt that IA – patents, trademarks, copyrights, quality, safety, security, brand equity and reputation – is a significant, and growing, class of assets which companies must consider as they formulate all manner of business strategies,” said Nir Kossovsky. “As the global economy becomes increasingly knowledge-based, IA will become more important than physical assets.”

The role of extra-financial information in corporate decision-making is significant already, explained Nancy Lintner, vice president of communications at United Technologies. “Reputations and brands are IA that evolve from business and operational processes which promote innovation, integrity, ethics, social responsibility, good governance, safety and security.” She also emphasised that companies are only in partial control of their IA messaging because blogs, the internet, and current cultural and commercial trends, have led stakeholders and other interested parties to discount traditional communications channels heavily and receive information raw rather than from filtered sources.

The explosion of available information has affected the ways in which interested parties interact with corporations. “Stakeholders form their impressions of companies’ reputations by what they glean from sources other than corporate financials,” said Jon Low, a partner in Predictiv/Communications Consulting Worldwide, a joint venture with Omincom/Fleishman-Hillard. “In other words, they’re relying on IA whether they know it or not.”

Despite the importance of IA, few companies have plans to manage their IA value. “Most companies neither understand their IA, nor appreciate the link between IA and key financial metrics, such as revenue, net income and earnings multiples,” said Roland Burgman, president, Asset Economics.

The contribution of IA to enterprise value is non-linear, which makes it difficult to measure. But according to Burgman, “not having average perceived levels of innovation, safety, security and integrity destroys value, as does hypocrisy. Only by being perceived as an authentic, superior manager of IA can a company expect to materially improve its key financial metrics of net income, earnings multiples and enterprise value stability”.

In that same vein, UT’s Lintner cautioned that “allowing messaging to get ahead of reality destroys value”. As for operational considerations which are relevant to IA, Lintner believes that superior IA management can only come from the C-suite: “It’s possible for the process to work bottom-up, but the top-down approach is clearly more effective.” Because IA value is hard to build and easy to lose, Burgman believes “only superior IA managers are able to show a material impact relative to their peers.”

In the realm of IA, the only absolute is that certainty of IA value is impossible to establish. “IA value is a derivative of IA’s ability to generate cash flow,” said Professor Baruch Lev, director of the Vincent C. Ross Institute of Accounting Research at New York University’s Stern School of Business. “The closer the link to sales, earnings and operating efficiencies, the clearer, or more direct, the perceived path is, and the greater the value of IA.”

To help companies protect the value of their IA, they need outside assistance, just as in protecting their assets listed on financial statements. “Insurance and risk transfer instruments are powerful means of affirming, signalling and protecting IA value,” said Robert Liscouski, group president of Steel City Re and a former Department of Homeland Security Assistant Secretary.

In concluding the day’s exchange of ideas, Kenan Jarboe, president of the Athena Alliance, a non-profit research organisation, acknowledged the lack of concrete information about IA and challenged attendees to devise ways to manage uncertainty effectively. “We have to consider IA as assets or attributes and educate corporate management, the news media and public officials about their growing level of importance.”