Michael D. Moberly   August 31,  2010

If you’re like me, you want to know ‘back stories’ or, what prompts and/or influences certain phenomena to take shape (occur).  In the case of intangible assets, one of the first, and perhaps most influential early studies on intangibles that I read was Brookings ‘Understanding Intangible Sources of Value’.  But, for all the forward looking insights gleaned from the Brookings study itself and the product of its various working groups, it wasn’t intended necessarily to provide readers with the ‘underliers’ of why intangibles evolved so rapidly at the outset of the twenty-first century.

Or, as Baruch Lev stated it so well, ‘if intangibles are so risky, their benefits so difficult to measure and secure, and their liquidity (tradability) so low, how did they become the most valuable assets most companies possess?

The answer, Lev suggests, lies in two international economic developments, i.e., (1.) the increasing intensity of business competition, and (2.) the commodization of physical assets.

The first international economic development that influenced the ascendance of intangible assets was, according to Lev, the de-regulation of particular economic sectors, i.e., transportation, financial services, and telecommunications, etc.  In other words, as these, and other sectors de-regulated (went global), it served to intensify the overall competitive (global business transaction) environment.  As competitiveness intensified, a demand for continual/perpetual innovation evolved, i.e., the development and introduction of new products, services, and cost efficiencies.  Thus, continual/perpetual innovation quickly came to be a requisite to not merely competitiveness, but, successful business operations and sustainability.  As the global competitive pressures intensified further, companies already in the mix, or those that aspired to do so, responded by engaging in more innovation, fueled, in large part by greater awareness, appreciation, and investment in intangible assets.

The second international economic development that influenced the ascendance of intangible assets was, again, according to Lev, the commmodization of physical assets.  Translated, this means that competitors globally, had access, essentially on an equal footing, to those physical assets that were now so necessary for becoming global in scope.  For example, the ‘physical assets’ of FedEx, DHL, and UPS became globally operational, almost simultaneously.  Companies worldwide would now have access to, what I often call ‘instaneous supply - distribution chains for their goods and products’.  Therefore, a truly global and more responsive (timely) marketplace could evolve, and did so quite rapidly.

But, as competitors globally gained (equal) access to those physical (transportation, financial services, and telecommunication) assets, it meant that those assets, now engaged in intense competition, would not, standing alone, generate extraordinarily high profits and create sustained values.  Rather, profits and elevated shareholder value would come to be created through the prudent use (development, acquisition of) intangible assets unique to, for example, each air cargo carrier.  Each carrier then developed their own distinctive bundles, combinations, and/or synergies of intangible assets that better enabled them to withstand and respond more aggressively to the competition.

Obviously today, all three air cargo carriers remain intact and compete against one another.  But, the intangibles each company developed, out of necessity (competitive pressures) influenced the contributory value of intangibles and their ascendancy to representing 65+% of most company’s value, sources of revenue, and ‘building blocks’ for future wealth creation.

(Adapted by Michael D. Moberly from the work of Dr. Baruch Lev, ‘Encyclopedia of Social Measurement’ Volume 2, Elsevier, 2005.)

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 m.moberly@kpstrat.com.

Michael D. Moberly   July 26, 2010

Among the regular readers of this blog, there’s probably a commonality many of us share, that is, when we attend/participate in a business meeting, we are inclined to look for the often times invisible, but nevertheless present, ’900 pound gurerrilla’s’ that are being overlooked, and wonder why?

To be sure, there is a 900 pound economic gurerrilla in most every companies c-suite and board room that unfortunately is often ignored, dismissed, and overlooked, but still plays an increasingly integral role in and lays critical foundations relative to a company’s value, its sources of revenue, sustainability, and future wealth creation.  That 900 pound guerrilla I’m referring to of course, are a company’s intangible assets!

Reasons for expressing misgivings about and/or reluctance to really engage a company’s intangible assets are as varied as there are categories and types of intangibles.  Typically though, there remain a significant percentage of management teams and boards who, when they think about (company) assets, their inclination is to see primarily physical, or tangible assets such as property, equipment, real estate, accounts receivable, and perhaps various types of securities.  Presumably, those boards and management teams believe these so-called hard assets, i.e., ones that can be seen, touched, and are entered on company balance sheets, are the ones that really matter, and therefore remain, at least in their eyes, as the dominant (primary) means that drive and deliver company value and revenue.

Of course, the business realities and economic facts flowing from the knowledge (intangible asset) based global economies clearly convey something quite different, that is, 65+% of most company’s value, sources of revenue, and future wealth creation today lie in - evolve directly from intangible assets, not tangible assets. 

So, while my conversations with a cross section of management teams and boards, particularly in the small and mid-sized company arenas, reveal a general familiarity with intangibles, there’s little objective evidence, below the surface, that indicates there’s a deeper appreciation how intangibles have literally become embedded and integral to most company’s routine (business) operations, processes, and procedures insofar as they individually and collectively contribute to elevating (company) value, deliver competitive advantages, and serve a key sources/contributors to revenue.

There is another, very timely and relevant, explanation why some management teams and boards are not as receptive as they should (could) be relative to learning more about and seeking opportunities to more effectively utilize, exploit, and convert their companies intangibles into value and sources of revenue.  That explanation is, as the saying goes, ‘when you’re up to your hips in alligators, one may have forgotten the original goal was to drain the pond’. 

So, I hear some management teams and boards say ‘please don’t bother us with theoretical discussions about why we should pay more attention to intangible assets when our company ‘is up to its hips in alligators’ and fighting everyday for its financial survival, ala, the recession.

To that I say, intangible assets are not some theoretical concept.  They’re real, integral, and irreversible foundations to the knowledge (intangible asset) based global economies.  And, albeit I am a strong advocate of intangibles, now may be the perfect, perhaps even the best time for management teams and boards to seriously dig into the intangible assets their company is producing or has acquired and figure out how those assets can better serve their company versus remaining stagnant, un-exploited, and otherwide not delivering - producing their potential.

The ‘Business IP and Intangible Asset Blog’ is researched, written, and produced by Mr. Moberly to provide insights and additional and sometimes alternative 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 m.moberly@kpstrat.com.

Michael D. Moberly   July 22, 2010

In Stone v. Ritter (as they did in In Re Caremark and In Re Disney) Delaware courts brought attention to board and director oversight of regulatory compliance programs and company assets by stating…

 ’boards must be kept apprised of and receive accurate information, in a timely manner, that’s sufficient to allow them and senior management to reach informed judgments about the company’s business performance and compliance with the laws…’ 

Some court decisions can be precedent setting with the arguments presented by the winning side replicated in the form of framing points for (oral, written) arguments in future (similar) cases.  The prevailing arguments in Stone v. Ritter being no exception, I presume will be replicated in other cases in which board-director fiduciary responsibility (liability) is at issue, e.g., assessing the effectiveness of board and director efforts relative to ensuring their company is compliant with certain regulatory mandates and how personally engaged they are in the oversight (stewardship, management) of their company’s compliance program.

A close and admittedly desirous reading of the Stone v. Ritter decision suggests the ruling may go a long way toward eliminating some of the ambiguities associated with board and director fiduciary responsibilities and liability by bringing clarity to what actually constitutes ‘board oversight’ of a company’s assets which presumably include, both the tangible and intangible variety.

It’s certainly not a stretch then, at least in my view, in light of the collective and recent mishaps of BP, Massey Coal, Toyota, Johnson and Johnson, etc., and the on-going legal wranglings, to anticipate that the Stone v Ritter decision is being closely reviewed with the not so improbable possibility that new litigation will be framed to extend Stone v Ritter concepts to now encompass the newly adopted ASIS/ANSI American National Standard on Organizational Resilience.  

It’s just not out of the real of possibilities to see litigation being brought by stakeholders, in fact they may be remiss if they did not do so, arguing board fiduciary responsibilities should now encompass the highly proactive  ‘organizational resilience’ practices as detailed in the ASIS/ANSI Standard.  That is, in lieu of putting more lipstick on existing business continuity and contingency approaches which remain largely reactive. 

My views are that the prudent ’best practice’ norm for companies now, and for the foreseeable future, lie in organizational resilience programs that systematically identify and actively manage risks that can potentially hinder the achievement of a companies mission which are broadly congruent with the best interests of the public, should adverse events and/or circumstances materialize.

(Thanks to the work of Rebecca Walker in her paper titled ’Board Oversight of a Compliance Program: The Implications of Stone v. Ritter’ for some additional insight.)

 The ‘Business IP and Intangible Asset Blog’ is researched, written, and produced by Mr. Moberly to provide insights and additional and sometimes alternative 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 m.moberly@kpstrat.com.

Michael D. Moberly   May 19, 2010

A company’s trade secrets and proprietary information are intangible assets because they provide both objective and subjective value.  Objective value in the sense that they are directly related to the continuity of a company and subjective value in the sense that their value follows-flows from its nature.

And, when 65+% of most company’s value, sources of revenue, ‘building blocks’ for future wealth creation and sustainability lie in intangible assets, as they do today, it’s prudent for management teams and boards to have operational clarity about (a.) their decision to delare certain information assets as trade secrets, (b.) the requisites of trade secrecy, and (c.) recognize that designating a particular information asset as a trade secret is a strategic business decision, not solely a tactical legal process.

The intent of this post is not to convey trade secrecy as an extraordinarily complex, cumbersome, or burdensome process, rather, to provide management teams and boards with:

1. Relevant insights, perspectives, considerations, and equally important, options regarding decisions to declare - not declare certain information assets as a trade secret.

2. Important and necessary context for describing the (adverse) economic and competitive advantage impact to a company if a particular trade secret were lost, stolen, misappropriated, or compromised, etc.

In engagement conversations with management teams and boards about trade secrets and trade secrecy, often, the first items on my agenda are to thoroughly discuss - bring clarity to (a.) the six requisites to trade secrecy, and (b.) the absolute necessity for a company to be consistent, in their practices and procedures in meeting those requisites.  In other words, describe to them what’s required operationally and procedurally, for a company (on a enterprise wide basis) to ‘keep secrets secret’!

The second items on my discussion agenda with management teams and boards about trade secrets, equally important as the first in my judgment, is the actual value of the trade secret.  My rationale for assigning such significance to information (trade secret) asset value-valuation is that numerous and respected studies and surveys, as well as anecdotal experiences, clearly conclude that:

1. The indeterminate protection of proprietary information - trade secret assets is an increasingly challenging, but never-the-less essential undertaking for companies today.

2. The probability that a company will experience a breach, theft, compromise, or misappropriation of one or more of its trade secret assets and that it will it have been facilitated, enabled, or fully executed by a trusted employee (insider) is on, what may experts believe to be, an irreversible rise.

3. If the holder of trade secret is unable to build a legally persuasive, objective, and replicable case for (a.) the value of a stolen/misappropriated trade secret, and (b.) the consistency in which they met/followed the requisites to trade secrecy, then the assets’ trade secrecy status, when challenged or disputed, may not be conferred by a court if there are legal actions filed and litigation.

In this regard, the following are aspects of trade secret value and valuation that management teams and boards should find relevant, prudent, and beneficial to (a.) anticipate, (b.) consider, (c.) monitor, and (d.) prepare objective responses in advance, e.g.,

1. Does the trade secret have multiple and/or separable components, i.e., it consists of a specific formula in addition to a specific process to operationalize that formula?  If so, what would the value of the trade secret be if separated on a piecemeal basis?

2. Does the trade secret deliver and/or enhance the value of an entire enterprise/company or to an individual operation, business unit, technique, and/or method related to conducting-operating the business?

3. Does the existance of a trade secret add to the knowledge-competency of a single employee or particular group of employees?  If so, the resulting/subsequent intellectual capital those employees create and use/apply in their work (through the use of that trade secret) should be acknowledged and valued.

4. What would happen, in an organizational criticality context, if a trade secret were to literally disappear tommorrow? Could the company continue to function profitably?  If so, for how long?  Or, would significant and adverse operational difficultes/impacts and economic-competitive advantage hemorrhaging commence immediately and rapidly contribute to a ’shut-down’ of the company?

5. What level of economic-competitive advantage benefit can a company objectively expect (project) from declaring a particular information asset as a trade secret?  Is the value of a trade secret indeterminately sustainable, or does it fluctuate - change over time?  if so, what is the range and frequency of such fluctuations?

6. Respecting the reality that maintaining certain information assets in a trade secret status requires time, resources, and money, is there a specific (observable, meaurable) point when a trade secret either becomes obsolete or its value (permanently) depreciates to a level that it is no longer prudent to retain its trade secrecy status and allow it to enter the public domain.

7. Have the transactions and/or litigation by competitors or other industry sector firms in which there’s  been a trade secret loss, misappropriation, and/or compromised been suffiently studied relative to identifying a basis-framework for approximating comparable trade secret value?  If so, would the market for this particular information (trade secret) asset be considred active in the context of elevating validity to the value a company has assigned to one of its comparable trade secrets?

8. Does each information asset a company has declared to be a trade secret have independant economic value that can be directly attributed to it ‘being kept secret’?

9. If a trade secret were stolen, misappropriated, or otherwise compromised, what would its ‘re-development value’ be, assuming it could be re-developed?  Can the management team and board attach a ’price to the process’ for acquiring - re-acquiring a particular trade secret asset?

To be sure, the above are not intended to represent an exhustive list of issues or questions for management teams and boards about their decision to declare - not declare certain information assets as trade secrets.

Admittely, and for multiple reasons, there remain some arguable challenges when trying to objectively calculate and assign value to a trade secret.  One of which is that trade secrets are sometimes used in multiple ways within the same firm, and thus may exhibit higher value in one business unit compared to another business unit.

Hopefully, a memorable ‘bottom line’ to this post about trade secrets, is that management teams and boards must be able to demonstrate the consistent use-application of the trade secret in a manner in which the company obtains either economic or competitive advantage value!

I welcome your comments and suggestions.

Michael D. Moberly    April 27, 2010

An increasingly important requisite to a successful launch of new innovation or product is, as Apple knows better than most, not permitting prototypes to be left in bars.   For Apple, long recognized as the epitome of corporate secrecy, that particular incident was, to be sure, an anomaly. 

An increasingly important requisite to successful launches of a new product or innovation today, is not overlooking the economic fact-business reality that 65+% of the value underlying that launch are intangible assets!

Apple clearly understood this well, by virtue of the remote ’shut down’ capabilities it incorporated into its prototypes and could be executed once the absent minded engineer alerted the company to his blunder.  In the R&D world of prototypes and new product launches, be assured, there is no lack of adversaries, competitors, and a variety of other entities who are well positioned to instaneously exploit, if not influence, such opportunities (misques).

Thus, the effectiveness and success of new product-innovation launches today are increasingly dependant on protecting and sustaining control and use of any and all distinguishing and competitive advantage delivering features, i.e., those intangible assets embedded in the innovation-product.

The premature disclosure or compromise of any distinguishing or competitive advantage delivering feature or component, particularly in about-to-be launched innovation or products, will, for most company’s, present a substantial and generally irreversible economic - competitive advantage blow by, among other things, (a.) putting the company in the untenuous (undesirable) position of having to decide whether to waylay an already announced launch date, or (b.) advance a launch date in a not-so-disguised defensive effort to deflect or absorb any adverse publicity stemming from the reality that the product - innovation has probably already fallen into the hands of adversaries and/or competitors, been dissected, and the findings disseminated.  Depending on what the ‘finders’ objectives are, those findings may enter the public domain.

But, if/when the genie gets out of the bottle, an essential requisite for commencing recovery is no delay in discovering and/or being alerted to the incident.  Delays will complicate and weaken a company’s (legal) position and the possibility of achieving even a reasonably favorable outcome, i.e., retrieval of the intangible assets.

Integral to the asset - value recovery process is having conducted, in advance, a thorough intangible asset - competitive advantage assessment of the new product - innovation to identify each of the ’genies’ embedded in the product-innovation and what will be required to return them to their bottle while reducing the probability they could/would be acquired by adversaries or competitors in the interim.

A specialized intangible asset - competitive advantage assessment can position management teams to deliberate and act on two important points:

   1. The circumstances, priorities, and options relative to trying to (re-) establish ownership and/or (re-) obtain control and use of the, by now, economically - value hemorrhaged asset.

   2. Strategies to try to stop and/or mitigage further economic -competitive advantage hemorrhaging (of the assets), i.e., devaluation, undermining, public scrutiny and criticism, shareholder value, consumer goodwill, company reputation, etc.

Far too many companies lose, inadvertently relinquish, and/or become entangled in extraordinarily costly, time consuming, and momentum stifling legal disputes and challenges over the ownership, control, use, and value of their intangible assets and IP.  Frequent reasons are that management teams (a.) dismiss the fiduciary responsibilities of addressing the persistent and stealthy risks-threats to those assets and their value, and (b.) underestimate the role and contribution which their intangible assets make to successful and sustainable launches of new companies, ideas, and products!

I welcome your thoughts and perspectives.

Michael D. Moberly   April 13, 2010

The newly published (2009) book ‘Reorganize For Resilience: Putting Customers At The Center Of Your Business’ by Ranjay Gulati is, in my judgment, not merely another book that describes an alternative view or re-emerged importance of customer centricity.  

Rather, it’s a book about recognizing that customer relationships are intangible assets.  And, as intangible assets, in order for customer relationships to be as effective and profitable as possible, consistent engagement and high level inquiry with customers that extends beyond the often times siloed boundaries of a company’s products and/or services, is essential.

There is an analogy here that is not unlike conducting an intangible asset assessment for a company. Wherein company management teams may not fully recognize or be dismissive about the potentially valuable and revenue producing intangible assets that are routinely embedded in (their company’s) processes and practices and contribute to a company’s value and revenue through better products and/or services.

In part due to intangible assets and customer centricity essentially lacking a conventional sense of physicality, and neither being reported on balance sheets, there is a tendency for both to become neglected and distanced abstractions, rather than the ‘in your face’ realities they really are!

An adverse alternative Gulati suggests, is that if customers’ real needs go unrecognized as conveyed in his book, they (customers) will likely commence ‘commoditizing’ a company’s products and services by making purchase decisions based primarily on price rather than retaining a personal connection to a company.  

Also, management teams and boards that continue to assume that a company’s brand (an intangible asset) standing alone, will serve as a perpetual life saver, is an assumption, Gulati points out, that no longer reflects the realities of a globalized market place that is filled with competing options, products and services.

Thus, to more effectively compete, companies must define themselves beyond a single intangible asset, i.e., a brand, product, and/or service, especially in the increasingly globalized and knowledge-based economy.  Being first to identify and address ’problem spaces’ for clients represents a powerful business intangible asset that can produce value, revenue, and serve as distinctive foundations for future wealth creation.

Michael D. Moberly   March 16, 2010

While in London recently where I served as one of the keynote speakers for the European Information Asset Protection Conference, I secured a meeting with officials of the British Venture Capital Association (BVCA) which serves as UK’s public policy advocate for the private equity and venture capital industry.

A significant percentage of my discussion with BVCA officials evolved around comparing and contrasting UK’s VC industry with the US, and the so-called ’silicon valley’ model which my hosts did not advocate tyring to replicate in the UK.

Our discussion also explored possible differences between US and UK entrepreneurs.  One such difference expressed by BVCA was that some would be UK entrepreneurs may be more reluctant to start an entrepreneurial business compared to their US counterparts due to stronger personal concerns about the consequences of (business) failure.  It was said that a contributing factor to this perception lie in UK bankruptcy laws that are not considered particularly entrpreneur friendly.  That is, company and personal bankruptcies in the UK are generally considered indistinguishable, therefore a combination of business failure and bankruptcy may discourage, in a entry barrier context, more entrepreneurial activities because it elevates-carries a sense (probability) of personal failure.

While UK’s VC industry is generally considered to be the most advanced in the EU, BVCA officials suggested there are relatively few (UK-based) investors with the financial capability to fund promising (innovative) companies through each stage of their development.  If reality, this contributes to the perception that UK’s VC industry focuses more on later stage and more established companies vs. start-ups and early stage companies. 

In that regard, the BVCA concedes there may be structural problems (within UK’s VC industry) that need to be addressed to ease the flow of equity capital into early stage and innovation intensive companies particularly. With that, the BVCA is exploring-seeking ‘the most suitable type and/or correct mixture of interventions.

Michael D. Moberly   March 15, 2010

Generally, my consultancy focuses on identifying ways small and medium size businesses can profit from the intangible asset and intellectual property side of their business.  During initial meetings with management/leadership teams I address, among other things, the key objectives of an engagement, i.e., elevate asset performance, unlock and enhance their contributory value including revenue and sustainability, and the value proposition that will accrue through more effective and efficient oversight and use of intangibles.  

While the initial engagement meetings are with business management/leadership teams and/or board members, its routine, as well as very prudent, for them to pose skeptically oriented questions, especially if they perceive, and they often do, (a.) any subjectivity in the characterizations of deliverables, or (b.) intangibles being portrayed as a silver bullet and/or quick fix to create heretofore un-utilized sources of value, revenue, competitive advantage, and sustainability.

By far, the most common demands expressed by management/leadership teams during initial (pre) engagement meetings are, (1.) prove it to me with examples, and (2.) where’s the value proposition?  

These types of questions are warranted, should be expected, and the answers should not be overlooked because a consultant presumes the answers are self-evident.  Remember, all management/leadership teams and boards do not yet recognize or have yet to act on the economic fact that 65+% of most company’s value, sources of revenue, competitive advantages, sustainability, and building blocks for future growth evolve directly from intangible assets. 

Therefore, the consultant must have the experience to articulate a strong and compelling repertoire of relevant, but most importantly, real world, trustworthy, and value proposition-based responses to those important questions.  Absent that, an intangible asset management and protection consultant should not become optimistic about receiving a (second chance) follow-up meeting.

But, I often believe, respectfully so, the way management/leadership team members frame those questions:

1. are not so much oriented to intangible assets specifically as they evolve from one-size-fits-all templates for questioning vendors regardless of the product or service being pitched, and also, they

2. underly various levels of misunderstanding and operational un-familiarity with either the existance or utilization of the intangible asset side of a business.

I engage, on a daily basis, the real world of small-medium businesses, which include founders, owners, management teams, and boards who, in the midst of this recession, are personally skeptical about ‘quick fixes’ or ’silver bullets’ particularly when their credit lines have been marginalized, if not cut off, and lending sources are moot to their requests and even more likely to dismiss out-of-hand even the best articulated and structured proposals for (intangible) asset monetization or asset backed lending.

Small and medium-size businesses in the U.S. however, are 20+ million in number, deliver approximately 39% of the GDP, and reportedly produce two and one half times as much innovation per employee compared to larger firms according to various sources and studies including the Small Business Administration.  The bottom line is, small and medium sized business produce (possess) intangible assets that deliver value, revenue, sustainability, and serve as a foundations (viable building blocks) for growth and future wealth creation.  It’s time to believe it and act on it!

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.)