Michael D. Moberly   March 8, 2010

In Stone v. Ritter (but also, In Re Caremark and In Re Disney) Delaware courts drew attention to board/director oversight (management, stewardship) of compliance programs and company assets.

As we know, court decisions carry the potential to serve as, if not broad precedents, at least as a basis for framing future tactical - strategic (litgation) arguments in similar cases.  The courts’ opinion in Stone v. Ritter, in my view, carries such potential particularly when board/director liability is at issue relative to the effectiveness, and even perhaps questioning how actually engaged boards’ were, in the oversight (stewardship, management) of a company’s compliance programs.

An inferrence I drew from reading the court’s decision (Stone v. Ritter) and Rebecca Walker’s fine paper titled ’Board Oversight of a Compliance Program: The Implications of Stone v. Ritter’, is that Stone will come to be viewed (applied) not so much for its specific focus on board oversight of compliance programs per se, as it will for bringing operational clarity to the definition of ‘board oversight’.  That is, describing the key elements - what constitutes (basic requisites of) oversight (e.g., stewardship, management) of a company’s assets, and by extension, its intangible assets.

And, when 65+% of most company’s sources of revenue, value, and building blocks for future growth and sustainability lie in - are directly related to intangible assets, bringing operational clarity to this increasingly critical arena is a good thing!  Particularly, that is, when the elements, as outlined below, will surely not be lost on, or overlooked by plaintiff’s counsel. 

Integral to this of course is enterprise risk management (ERM) and its perspective of being ’proactively defensive’.  Therefore, company management/leadership teams, legal counsel, and boards/directors in general, would be well served by becoming familiar with these elements to position themselves to more effectively address - meet boards’ (fiduciary) duties, i.e.,

 ’…ensuring the board is kept apprised of - receives accurate information in a timely manner that’s    sufficient to allow it and senior management to reach informed judgments about the company’s business performance and compliance with the laws…’  by

1. Expanding the type of information that boards receive.

2. Scheduling meetings with members of the management team to inquire about:

    a. how the company’s (internal, external) reporting system is structured

   b. the company’s investigation policies relative to suspected incidences of (internal, external) misconduct

  c. employee perceptions of the company’s reporting - compliance - audit programs, and sufficiency of employee training in this arena.

3. Structuring the company’s reporting (compliance) programs to include sufficient resources and authority for effective execution.

4. Examining the manner in which the company actually conducts risk assessments, prioritizes its risks, and actually addresses (prevents, mitigates) those risks. 

Michael D. Moberly  March 4, 2010

Stone v. Ritter, In Re Caremark, and In Re Disney are three cases that emphasize the importance of 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 timely and relevant issues that warrant board, director, and management team attention.  Collectively, these cases go to the very heart of the increasing number of intangible-IP asset driven (knowledge-based) businesses. That is, today, 65+% of most company’s sources of revenue, value, and building blocks for future growth and sustainability lie in - are directly related to intangible assets.

Also, these cases, among other things, bring clarity and specificity to board’s-director’s being kept apprised of and/or knowing what’s going on inside their company.  That is, the extent and parameters in which boards/directors have a good faith duty, even perhaps duty of loyalty, to ensure (company) monitoring and reporting (compliance) systems are not merely in place (on paper), but they were specifically designed and now function to routinely and properly apprise senior management and boards:

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’) to ensure each of the above occurs, they may well be, (in light of the aforementioned cases - 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 (accept) a more ‘hands on’ view of their stewardship, oversight, and management responsibilities relative to their company’s assets, particularly, 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.

As noted numerous times in this blog; integral to - underlying board, director, and management team stewardship, oversight, and management (fiduciary) responsibilities is the ability to sustain (protect, preserve) control, use, ownership, and monitor the value and materiality of a company’s (intangible) assets.  If the latter does not occur, or fails, little else matters, because asset value may quick go to zero!

(Mr. Moberly adapted this blog post from the work of Rebecca Walker of Kaplan & Walker.)

Michael D. Moberly   March 2, 2010

All value proposition statements (pitches) should be framed, sequenced, and articulated so that a management/leadership team audience will likely interpret-assess the subject matter and objectives similarly in terms of relevance, importance, usefulness, and application, etc., to them and their companies!  Obviously, this represents a significant and relatively complex challenge to achieve in a time restricted ‘pitch’! 

In addition, a value proposition statement should include:

1. a clear, believable, and understandable statement of the tangible - quantifiable results that will be delivered, i.e., the added value a client will - can expect to experience and when. 

2. logical and evidence-based linkages - paths between the product and/or service being pitched and how it will favorably impact the audience’ business, i.e., benefits, returns, address unmet needs. etc.

Value proposition pitches that focus exclusively on intangible asset services must, in addition to the above, include statements to:

1. to influence management/leadership teams to acknowledge that a company’s intangible assets reach well beyond the conventional brand, reputation, image, goodwill, and IP.

2. to identify the mandated fiduciary responsibilities relative to managing, utilizing, protecting, and effectively exploiting a company’s intangible assets, i.e., Stone v Ritter, Delaware, 2006.

3. that give credence to the economic fact that 65+% of most company’s value, sources of revenue, building blocks for growth and sustainability lie in intangible assets, and are not merely ’sound byte’ cliches, rather they’re business (economic) realities.

4. bring clarity and understanability to the reality that intangibles ’lack physicality’ by providing examples that minimize managerial skepticim and dismissiveness about the contributory and exploitative value of a company’s intangible assets. 

A good ‘value proposition’ pitch for intangible asset services can also include insights reported in Accenture’s recent national study, i.e., ‘50% of companies today rely on intangible assets and intellectual capital as their primary drivers of value, but only 5% (of the reporting companies) have internal controls, procedures, and processes in place for the stewardship, oversight, and management of those assets at the board and c-suite levels respectively!

Michael D. Moberly   March 1, 2010

A ‘value proposition’ should, in as few words as possible, accompany every (new, existing) business initiative.  It’s essential that a value proposition include, at minimum:

1. a clear - understandable statement of the tangible - quantifiable results and benefits that will be delivered (can be expected), i.e., the added value a client will experience and can use.  

2. believable and logical (evidence-based) link(s) - path(s) between the product and/or service being pitched and how either will favorably impact a business, i.e., provide specific benefits and returns that meet a need.

Value propositions that are service (versus product) oriented though, may present particular challenges relative to how they’re framed, written, and presented.  In my view, this is especially important when the (value proposition) service being pitched is describing benefits - returns that will accrue to company’s that identify, utilize, and exploit their intangible assets more effectively.  

In these instances, it’s especially important ’to do the necessary homework’ which begins by not assuming the management/leadership team audience will be on the same page with respect to their orientation to intangible assets.  I have found on numerous occasions that management/leadership team familiarity with intangible assets tends to be focused on the intangible assets they believe are relevant to their particular company, industry sector, and/or professional domain. 

For example banker and investor orientations’ to intangible assets may logically be focused on lending and monetization issues, whereas the orientation of the management/leadership team of a knowledge (know how) intensive firm may be more focused on employees and intellectual capital matters, i.e., retention, etc. 

A value proposition that is overly broad and includes an exhaustive range of intangible assets may not be particularly well received because the (management/leadership team) audience is primarily interested in determing what specific intangible assets affect their company/organization, and perceive anything beyond that as constituting unncecessary ’clutter’.  

The challenge then, is to frame, write, and present a value proposition that respectfully allows management/leadership team audiences to recognize broader applications and more inclusive ranges of intangible assets (internally, externally) that (a.) have relevance to their company, and (b.) which their company can benefit and obtain returns.

Given the preferred brevity though, in terms of length and time to present a value proposition to an audience, the speed which that audience understands and recognizes the relevance, benefits, and returns (of intangible assets) are key!

Michael D. Moberly   February 23, 2010

Intangible assets are embedded in - integral to most every company, regardless of its size or industry sector!  And, presumably, readers of this blog believe the economic fact, like I do, that increasing percentages (65+%) of most company’s value, sources of revenue, ‘building blocks’ for future wealth creation, and sustainability evolve from - are embedded in internally produced and/or (externally) acquired intangible assets.  

But, why is it that significant numbers of SME, SMM, and early stage company management teams’ familiarity with, or even perhaps, interest in intangibles, i.e., (a.) what they are, how they’re produced, where they exist, and the different forms they take in their company, and (b.) how they can be effectively and profitably utilized, leveraged, and exploited, appears to be relatively low?  

What’s this attributable to?  Numerous studies, many referenced in this blog, consistently report senior executives in ‘fortune 1000′ types of companies, consider the management, utilization, and risks to intangibles a priority (top three) issue facing their company.  For various reasons though, again many discussed in this blog, there is little objective evidence and even fewer examples that these consistent, and seemingly convincing findings are (a.) reaching, (b.) resonating, or (c.) prompting SME, SMM, and early stage management - leadership teams and boards to action.

Perhaps, there lies the crux of the problem or challenge that intangible asset (management, monetization, risk, and protection) specialists should focus.   That is formulating a stronger and better articulated repertoire of business (plan) oriented messages directed to SMM, SME, and early stage management-leadership teams and boards, that (a.) bring clarity, (b.) stress universality, and (c.) describe efficient strategies to identify, manage, utilize, and exploit intangible assests, i.e., to actually enhance a company’s value, deliver new sources of revenue, and provide foundations (building blocks) for future wealth creation.  

Also, perhaps, part of the challenge lies in SME, SMM, and early stage management team attitudes toward intangibles.  That is, for many management teams in publicly traded companies, their initial exposure to intangibles was literally thrust upon them, sometimes in near ’crisis-mode’, to rapidly comply with Sarbanes-Oxley mandates, FASB statements, and/or ISO standards in relatively narrow time frames, which routinely required extraordinary staff time, new procedures, additional resources, and costs.

In most instances, compliance was burdensome and, most respectfully, left little time, inclination, or curiosity to look (explore) beyond the compliance mandates to strategize about the potential benefits and options to utilize and exploit those already identified intangibles to enhance a company’s value, revenue, competitive advantage, and sustainability, etc.

Other reasons that contributed to management team reticence to pursue intangibles beyond meeting SOX, FASB, and ISO compliance minimums, include:

1.  there was no (regulatory) obligation to disclose (share, be particularly transparent with) information about intangibles to shareholders or other external groups. 

2. many managers have limited experience with intangibles and thus retain a tendency to rely on (their) intuition versus seeking and applying objective tools to quantify their contributions, value, and otherwise devise projective (return-on-investment) business plans to justify devoting resources to their utilization and exploitation. 

Michael D. Moberly   February 22, 2010

In every business transaction today, whether its across the street or around the globe, but particularly acquisitions in knowledge-intellectual capital intensive sectors, growing percentages of the deal will inevitably consist of intangible assets. 

For acquisition management teams, the prospect of acquiring (intangible) assets that are (a.) complimentary, readily transferable and exploitable, and (b.) quickly facilitate/enable execution of strategy, should be key drivers for acqusition proposals.  This is especially relevant given the economic fact that 65+% of most company’s value, sources of revenue, building blocks for future wealth creation, and sustainability lie in and/or are directly related to intangible assets!  In other words, intangible assets will be integral to the deal’s value and outcomes, e.g., achieving the near term and strategic objectives which the acquisition team presumably foresaw.  

For the acquiring firm, not-to-be-overlooked factors that underly - add to the probability that the acquisition will be as successful, contributory, and profitable as intended, requires the acquisition team:

1. to recognize that its not solely about asset acquisition, rather it’s about their effective integration and utilization which is an exercise quite different from the acquisition of purely physical/tangible assets, because intangibles (a.) lack physicaliy, and (b.) evolve from - are embedded in intellectual,  relational, and structural capital, therefore,

2. acquisition due diligence and management should be designed and conducted to include pre and post contexts (components), e.g.,

     a. to unravel and assess the assets’ status, stability (fragility), (legal) defensibility, and transferability - integratability factors, and

   b. ensure the assets’ control, use, ownership, value, and materiality are sustainable and monitorable, particulary in post acquisition contexts.

Any acquisition today, or business transaction for that matter, in which the pre and post perspective is not considered or poorly executed, the probability that costly and morale deteriating post-deal challenges will evolve that adversely affect shareholder-stakeholder attitudes and undermine the deals’ success, are almost inevitable!

in today’s extraordinarily predatorial and winner-take-all transaction environment, these (pre-post) perspectives cannot be overstated insofar as the role and contribution of the acquisition management/due diligence team.  Why?, because (intangible) asset contributions and value are sometimes quite fragile, that is, they can rapidly erode, be undermined, and/or their potential benefits literally unravel in hours, not days or weeks. 

Michael D. Moberly   February 19, 2010

Intuitively, the speed which a start-up company can actually deliver its innovation is a critical factor to it’s sustainability and attractivity for (continued, future) investment.   The question presented here is, can consistent stewardship, oversight, and management of the ancillary-complimentary intangible assets the start-ups’ innovation produces make the process even more speedy?  

A quick, but obviously biased, answer by a person who writes a ‘business IP and intangible asset blog’ is an unequivocal yes!

More convincingly though, in a still relevant study produced by Ans Heirman and Bart Clarysse formerly of Ghent University and now with ScientificCommons, put forth the notion in their paper titled ‘Do Intangible Assets at Start-Up Matter for Innovation Speed?’, that intangible assets such as:

1. start-up management team and founder experience, tenure, routines, and their cross-functionality, and

2. alliance and/or collaboration agreements with other relevant parties and organizations

     …combine to serve as important and contributing factors to innovation speed! 

As successful entrepreneurs realize, innovation speed (i.e., product launches and time to market) are important for many reasons, key among them are to:

1. gain early investment to achieve more (greater) financial independence,

2. gain broader external visibility and legitimacy as quickly as possible,

3. gain early competitive advantages, i.e., market position and possibly market share, which collectively, 

4. elevates the probability that the company will survive , in other words, be sustainable.

The study’s researchers state however, and I agree, new product innovation/development cycles vary.  For one, they may not consistently or immediately commence at the start-ups founding, and two, the speed of innovation development will vary relative to product development tasks and phases, and technologies required, among other variables. 

Again, no surprise here, other than making the argument once again, that identifying individual and/or inter-connected clusters of intangible assets that frequently emerge as ancillary and complimentary by-products of innovation should not be dismissed, overlooked, or neglected as potential (and additional) sources of value, revenue, and building blocks for complimentary (future) innovation.  And, their stewardship, oversight, management, and protection, like the primary innovation itself, should be routine considerations by management/leaderships teams, in board rooms, and among investors.

Michael D. Moberly   February 18, 2010

In the current global, knowledge-based economy and business transaction environment in which intangible assets and IP are routinely in play, there is, unfortunately, little direct insight about how or whether c-suites and boards assess and/or attach concern about doing business in country’s that do not have, apply, or enforce intellectual property laws and protections. 

Admittedly, I know several instances in which this issue is not only a routine fixture in c-suite and boardroom agendas, but is deliberated in the context of known vulnerabilities-probabilities, i.e., those left unchecked, ill-considered, or ill-conceived will surely become inevitabilities!

A key second question those company’s seek consensus is (a.) their (business, strategic) tolerance for IP - intangible asset risk, and (b.) if losses - compromises to those assets occur, how quickly will either begin to erode, dilute, and/or undermine company value, market share, competitive advantages, and revenue?

In other words, are that countries IPR’s protections (enforcement scheme) particularly weak or sufficiently strong enough to satisfactorily protect a company’s IP for the duration of its admittedly, abbreviated life-value cycle.  This argument presumes, that the value, sustainability, defensibility, and projected returns of IP developed and/or brought into a country with weak IPR’s, will experience lower projected returns.

I am aware of a few instances, in SME and SMM arenas, in which companies have actually elected to wholly withdraw operations (and their IP and proprietary competitive advantages) from a country they found to be especially weak in IPR’s.  I can’t say for sure whether those company’s were exercising particularly forward looking or risk averse strategies on behalf of their investments in IP and intangible assets, or whether their decision was influenced by a significant loss or compromise?

A 2004, University of Minnesota study/survey of U.S. headquartered companies titled ‘Doing R&D In Countries With Weak IPR Protection: Can Corporate Management Substitute For Legal Institutions?’ reasoned that (1.) technologies developed in weak IPR countries will be used more for internal purposes, and (2.) companies conducting R&D in weak IPR countries will likely have tighter IP-asset protection measures in place to compensate, and therefore, try to take advantage of such gaps across countries.  

Insofar as whether ’doing R&D in countries with weak IPR protection’ is a relevant action item for c-suites and boards, prudent starting points for either to consider are, (1.) if the decision is made to conduct IP bearing R&D and/or bring IP into a country in which a signficant percentage of that country’s GDP is linked to - dependant on the production, distribution, and sale of infringed or pirated (IP) products, it’s likely your company’s IP will experience the same or similar fate, and, (2) the presumption that my company can invent, innovate, and produce IP faster than others can steal or infringe it, and even it it does occur, the stolen/infringed IP will rapidly become obsolete and therefore hold little, if any, market value; therefore, why devote extraordinary resources to its protection and preservation, beyond the minimum?, is likely ill-conceived.

Michael D. Moberly   February 12, 2010

The need for company’s to have greater assurance of (their) operational continuity in an envirionment in which there are  (a.) increasing business interdependencies and alliances, (b.) lengthier and ‘just in time’ supply chains, interwoven with (c.) elevated vulnerability to - probability of disruptions with (d.) the capability of producing immediate adverse cascading impacts that ripple throughout an enterprise (internally and externally), is prompting management teams to look more objectively and critically at their standard, but seldom executed, ’business continuity and contingency plan’.

In other words, putting a much needed and warranted 2010 ’spin’ on the conventional business continuity and contingency plan by re-framing it as ‘organizational resilience’ is a good thing!

Determining (assessing) with some degree of precision, just how resilient a company really is to the growing array of asymetric risks and threats is challenging.  Many of those risks, if they materialize, their criticality can be relentless and immediate insofar as undermining and eroding a company’s value, standing, market share, and revenue streams, etc., in ways that cannot be readily mitigated or reversed without having well grounded, practical, and objective organizational resilience plans in place. 

A ’virtual’ reality (exacerbating) making organizational resilience all the more challening for company management teams, is that most company’s consumers, clients, and suppliers, (a.) have a propensity to be skeptical, synical, and less-believing of a company’s (obviously) resiliency motivated communications following an incident (ala Toyota), and (b.) can readily find satisfactory alternatives to meet their needs, either in the interim, or for the long term. 

Perhaps the single greatest challenge to designing and executing an organizational resilience plan is objectively identifying, evaluating, and achieving internal consensus about those assets, services, and business processes (all of which are intangible assets) that are the most essential insofar as measuably elevating - contributing to a company’s overall resilience, i.e., returning to a state of reasonable operational normalcy following an adverse event or act.  

Management teams that inadvertently overlook or do not specifically include a company’s intangible assets in their organizational resilience planning are, in my judgment, not merely being near-sighted or neglectful of their fiduciary responsibilities, they’re actually taking their company down a much more riskier path because:

1. 65+% of most company’s value, primary sources of revenue, building blocks for future wealth creation and sustainability lie in or directly evolve from intangible assets including intellectual property, and

2. intangible assets are typically more fragile, volatile, transportable, and susceptible to adverse information whether real or ‘hyperized’  than physical/tangible assets.

(Some aspects of this post were modified by Michael D. Moberly from ASIS Internationals’ 2009 ’Organizational Resilience’ standard.)

Michael D. Moberly   February 11, 2010

Today, for many intangible asset specialists, its puzzling, even occasionally frustrating, but more importantly, unfortunate anytime we hear company management teams, leadership, c-suites, and/or boards express-convey a sense of dismissiveness about intangible assets, or a reluctance to utilize intangible assets in general, and their company’s intangible assets in particular. 

Its become a universally accepted economic/accounting fact and business reality, in the knowledge-based (global) economy, not merely theoretical ‘academic speak’ or self-serving marketing jargon, that 65+% of most company’s value, sources of revenue, building blocks for future wealth creation and sustainability today, lie in - are directly related to intangible assets and intellectual property.  

Given this, It seems appropriate then to respectfully ask, are management teams listening?, when far too few of them are benefitting from those realities.

Intangible asset specialists are professionally obligated to respectfully and aggressively engage business leadership globally, to bring relevance and clarity for the full and efficient utilization of a company’s intangible assets.  One requisite to helping companies and management teams achieve this state of awareness, is by incorporating more relevant, timely, and respectfully simplified narratives designed to more effectively, but quickly, articulate three key-essential things, (1.) the practical existance of intangible assets, (2.) their contributory value to a company, and (3.) how to identify, utilize and exploit them to benefit a company. 

An obvious, and perhaps one of the biggest challenge for intangible asset specialists however, aside from issues related to intangible asset monetization, is articulating that intangible assets are just that, they’re intangible.  That is, they lack physicality.  But, their lack of physicality does not mean their performance and value cannot be objectively measured and benchmarked. 

So even though most management teams readily understand and recognize intangible assets’ existence, and appreciate their singular/individual contributions and importance to their company, e.g., brand, reputation, image, goodwill, customer/client (external) relationships, and internal know/intellectual capital, etc., there still remains a sense of reluctance and/or desire among some management teams to advance to the next level of intangible asset utilization and exploitation.

That next level would entail-encompass, in my judgment, four key elements, i.e., taking a more active role in…

1. engaging best practice fiduciary responsibilities for the management, stewardship, and oversight of the intangibles, 

2. identifying, unraveling, positioning, leveraging, and efficiently utilizing a company’s intangibles,  

3.  recognizing how to effectively exploit intangibles to generate revenue, enhance company value, create building blocks for future wealth creation and company sustainability, and 

4.  put in place measures to ensure control, use, and ownership of the assets is indeterminately sustainable, and their value and materiality (to the company) is consistently monitored.