Michael D. Moberly July 12, 2010
Let’s not quibble, the answer to the question posed in this post’s title is a resounding yes, at least in my view. Achieving consensus in favor of this notion however, will surely prompt challenges and resistance internally and externally from those not merely opposed to change, but those who find intangibles unwieldy due, in large part, to their lack of physicality.
Stone v. Ritter, In Re Caremark, and In Re Disney however, are three cases that emphasize the importance and provide practical context to board/director (fiduciary responsibilities) for the oversight, management, and stewardship of company assets, with specific implications to intangible assets and intellectual property.
Yes, these are Delaware cases, and yes, they are 2006 and 1996 decisions respectively, but they present relevant issues that warrant board, director, and management team attention today. Collectively, these cases are underliers to the economic fact that 65+% of most company’s sources of revenue, value, and building blocks for future growth and sustainability today lie in intangible assets.
Perhaps most importantly, these cases bring clarity to the necessity that boards, management teams, and directors be kept apprised of what’s going on inside their company in the form of a good faith duty and/or duty of loyalty to ensure their company has sufficient (asset) monitoring and reporting (compliance) systems in place to routinely and properly keep each appropriately apprised, i.e.,
a. with timely and accurate information, that is sufficient to allow them (within their respective scope) to
b. reach informed judgements concerning a company’s compliance with law, and business performance.
In other words, today, absent specific efforts (by boards, directors, etc.) to ensure each of the above occurs, they may well be (in light of these New Jersey court decisions) failing to satisfy their duty to be reasonably informed about the company and therefore, be held personally liable for problems that arise.
While attempting to hold directors (personally) liable for the misconduct of (company) employees, may be one of the most difficult theories in corporation law which a plaintiff might hope to prevail, it is nevertheless, essential, in today’s extraordinarily competitive, aggressive, predatorial, and ‘winner-take-all’ (global) business and transaction environment, that boards, directors, and management teams assume a more ‘hands on’ position with respect to the stewardship, oversight, and management of their company’s intangible assets.
Why?, because in cases such as Stone v. Ritter, In re Caremark, and In re Disney, important and necessary information failed to reach the board because of ineffective internal (company) controls and regular monitoring of those controls. So, what’s the significance and (potential) applicability of these cases to company boards, directors, and management/leadership teams in general?
Most likely, its that each may/could be held (personally) liable for damages resulting from legal violations committed by employees, if there’s a failure to, (a.) implement reporting or information systems or controls, and/or (b.) regularly monitor such systems.
Irrespective of these court cases, or a company’s size, revenues, value, or industry sector, it’s also likely that some management teams and boards will regard the (potential) contributions of an intangible asset specialist, ala chief intangible asset officer, as being unnecessary, and merely an additional impediment, to achieving a company’s (strategic) goals and objectives, in favor of retaining the more conventionally titled ‘c-suite’ positions in which intangible asset (management, stewardship, and oversight) responsibilities can be added.
But, management teams and boards who elect to be dismissive of, or table this notion indefinately, without deliberation, would be doing so at their financial peril, because there is that pesky little economic fact – business reality that 65+% of most company’s value, sources of revenue, and future wealth creation today lie in – are directly related to intangible assets.
So, when the proposition is framed in the factual context that increasingly larger percentages of a company’s value, sources of revenue, and future wealth creation lie in intangibles, management teams and boards are compelled…have a fiduciary responsibility to objectively ask, ‘is their company positioned, insofar as possessing the expertise and skill sets, to consistently and identify, unravel, nuture, utilize, bundle, and effectively and efficiently extract as much value as possible from its intangibles, while simultaneously protecting, sustaining, and monitoring those assets’ value and materiality’?
So, instead of assuming satisfaction with the way things have always been done, or worse, assuming all things intangible are either legal or accounting decisions, not business decisions, management teams and boards globally, have fiduciary obligations to critically and objectively assess ‘has the time come’ for their company. The economic (business) realities are certainly clear, i.e., the knowledge-based intangible asset economy, and it’s irreversible.
As management teams and boards drill down, sometimes ever so slightly, to reflect on how much of their company’s value, revenue, sustainability, growth, and future wealth creation are literally integral to – dependant on intangibles, the aforementioned economic (65+%) fact resonates (manifests itself) as an irrefutably strong fiduciary rationale for dedicating personnel to serve as stewards, overseers, managers, and monitors of a company’s increasingly valuable intangible assets.
The ‘Business IP and Intangible Asset Blog’ is researched and written by Mr. Moberly to provide insights and additional views for company management teams, boards, and employees to aid in identifying, assessing, valuing, protecting, and profiting from their intangible assets. I welcome and respect your comments and perspectives at [email protected].
