Michael D. Moberly    December 5, 2011

The term ‘systemic risk’ has a relatively long history, but one could hardly say it was a routine fixture of our lexicon until Fall 2008 when it became part of the financial crisis vocabulary.  Its wide spread use in legislative (House, Senate) committee hearings wherein testifying cabinet secretaries, legislators, regulatory agency heads, and financial services c-suites routinely evoked the term (systemic risk) as part of a larger narrative in an attempt to explain:

• how-why the financial services sector was literally unraveling
• the globally intertwined nature of the country’s financial systems and central banks
• the underlying rationale of ’too big to fail’ in response to the TARP bailout provisions.

One, perhaps best understood, definition of systemic risk is provided by Steven Schwarcz of Duke University School of Law wherein he described it (systemic risk) as ’the probability that cumulative losses will occur from an event that ignites a series of successive losses along a chain of (financial) institutions or markets comprising a system’.

Another, admittedly ‘cherry picked’ definition of systemic risk is provided by BusinessDictionary.com in which it (systemic risk) is defined as ’the probability of loss common to all businesses…and inherent in all dealings…risk that cannot be circumvented or eliminated’.  This definition, in particular, places the notion of systemic risk in an enterprise risk management (ERM) context.

A commonality embedded throughout the various definitions of systemic risk is the notion of a ‘triggering event’.  A triggering event is one that can prompt internal – external domino or ripple effects or consequences. 

In the scenario I’m conveying here, the triggering event adversely affects aspects of a company’s value and/or revenue generation capacity, i.e., erosion of asset value, market position, reputation, brand, image, goodwill, and competitive advantages, etc.  Respecting the economic fact that 65+% of most company’s value, sources of revenue, and ‘building blocks’ for growth evolve directly from intangible assets and IP, any system risk to those assets, in my judgment, is significant.

In the case of a company’s IP and/or intangible assets, ‘triggering events’ could be the:

• theft, misappropriation, infringement, leakage or otherwise premature disclosure of proprietary information
• significant product counterfeiting or piracy which could readily undermine asset value and a company’s competitive position.

 Collectively this constitutes a strong rationale why companies should engage in routine monitoring, valuation, and ’stress tests’ on the strength and consistency of their intangible asset and intellectual property protection – defensibility initiatives.  The objective of course is to proactively determine if any (intangible) asset has experienced materiality changes, value erosion, and/or competitive undermining, etc., and if so, move rapidly to mitigate further losses. 

Such exercises are now being recognized as not merely being periodically useful, rather essential fiduciary responsibilities relative to:

• the effective stewardship, oversight, and management of their company’s intangible assets
• avoid costly and often times irreversible surprises!