Michael D. Moberly   October 28, 2009

The risks (threats) to the intellectual property and intangible assets held by SME’s (small, medium enterprises) and SMM’s (small, medium multinationals) are quickly rising to systemic levels!

Those systemic risks (threats) lie largely with ’insiders’ along with the proliferation of extraordinarily sophisticated and predatorial data mining, information brokering, infringement, misappropriation, and counterfeiting operations that function profitably on a global scale.  The risks (threats) presented by these entities and the subsequent asset compromises that occur are persistent, assymetric, and frequently devastating to small company’s profitability, competitive advantages, and reputation, etc.  Multiple respected studies consistently report that U.S. company’ losses of IP (largely attributed to insiders, infringement, theft, and misappropriation, etc.) range from $45 to $200+ billion annually.

True enough, the adverse affects/consequences of those IP - intangible asset losses/compromises incurred by U.S. SME’s and SMM’s, may not rise to the same ’systemic level’ as experienced by AIG, Lehman, or Bank of America, etc., but, they do carry adverse cascading (systemic) affects that are often equally devastating in the SME and/or SMM arenas.

BusinessDictionary.com (as noted in a previous post) defines systemic risk as the probability of loss common to all businesses, and inherent in all dealings, in other words, risk that cannot be circumvented or completely eliminated.  If SME’s or SMM’s wish to expand, grow, and prosper it will be necessary and perhaps inevitable, at some point, for some or all of their IP and intangible assets to be part of a (business) transaction, and therefore, in play and therefore, at risk.

Systemic risk then, is the vulnerability, probability, and criticality associated with loss, theft, misappropriation, infringement, compromise, and/or leakage of IP (know how, trade secrets) which can constitute, for SME’s and SMM’s the equivilent of ’market shocks’ which, in turn, produce adverse ’cascading’ affects throughout an enterprise and its alliance partners, suppliers, and service providers as well.

Of course, those adverse affects are comparable to the systemic risks experienced by the financial services industry recently, i.e., defaults, bankruptcies, employee layoffs, loss of markets and market share, and competitive advantages, which unlike the bailed out and/or merged financial services sector firms, is generally irreversable and unrecoverable for SME’s and SMM’s. 

Michael D. Moberly   October 26, 2009

Question; are there systemic risks to the intellectual property and intangible assets held by companies?

The phrase-term ’systemic risk’ has a relatively long history.  But, its revival, beginning in early Fall, 2008 has now become part of our ’recession lexicon’.  Its subsequent wide spread use in legislative (House, Senate) committee hearings on Capital Hill wherein testifying cabinet secretaries, legislators, regulatory agency heads, and c-suites routinely evoked the term (systemic risk) as part of a seemingly self-explanatory narrative, i.e. visualized sound byte, to convey (a.) how - why financial institutions and the financial services sector was literally unraveling, and (b.) the intertwined - embedded nature/elements of the globalized financial system.  Then interestingly, systemic risk was also ultimately applied as the underlying rationale for the notion of ’too big to fail’, hence 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 surely places the notion of systemic risk in an enterprise (IP-intangible asset) risk management (ERM) context.

A commonality embedded throughout the various definitions of systemic risk is the notion of a ‘triggering event’.  A trigger is an event that causes (internal, external domino types of) consequences that adversely affects (a company’s) competitive advantages, asset value, market position, reputation, brand, image, goodwill, etc.  In the case of a company’s IP and/or intangible assets, ‘triggering events’ could be the (a.) theft, misappropriation, infringement, and/or leakage, and/or (b.) significant counterfeiting or product piracy anyone of which could collectively undermine asset value, competitive position, etc.

Collectively then, this constitutes a fairly strong rationale why company’s should engage in routine monitoring, valuation, and ’stress tests’ on their IP and intangible assets.  The purpose is to objectively and proactively determine if any (asset) materiality changes, value erosion, and/or undermining, etc., are occurring and prevent and/or mitigate same.  Such exercises are now being recognized by management teams, boards, and c-suites alike, as useful and necessary ingredients to (a.) the effective stewardship, oversight, and management of their company’s intangible assets, and (b.) avoid costly and often times irreversible surprises!