Michael D. Moberly December 21, 2010
This post is about explaining a persistent challenge that I routinely experience insofar as influencing management teams, boards, and investors to take some relatively straightforward, unintrusive, and inexpensive steps to improve the financial and competitive health of their companies.
Largely, that challenge, evolves around the importance, if not fiduciary responsibility, to put in place practices for the stewardship, oversight, and management of the intangible assets, or non-financial (value, revenue, competitive) drivers that company’s routinely produce and, in most instances, already possess but continue, for a variety of reasons, to be overlooked, dismissed, or neglected.
In 2004, and again in 2007, Deloitte produced two very relevant and much needed reports. The first was a survey, conducted in cooperation with the Economist Intelligence Unit, titled ‘In The Dark: What Boards and Executives Don’t Know About the Health of Their Business’. The second, published in 2007, was a follow-up report, similarly titled, but with one important caveat, ‘In The Dark: What Many Boards and Executives Still Don’t Know About the Health of Their Business’.
Both papers convincingly expressed the view, which I’m in total agreement, that conventional financial statements do not provide a complete or comprehensive picture of a company’s ‘soundness’. Management team, board, and investor belief that conventional financial statements are the only, or even the best tool for demonstrating-conveying a company’s soundness, should certainly be questioned, particularly in the rapidly progressing knowledge-based (business) economy in which 65+% of most company’s value, sources of revenue, and ‘building blocks’ for future wealth creation lie in – evolve directly from intangible assets or non-financials.
There’s little doubt, continued (sole) reliance on the conventional, does influence management teams, boards, and investors alike, to be skeptical, dismissive, neglectful and, in some instances, utterly blind to the economic fact-reality that the underlying and/or foundational sources and drivers of most company’s value, revenue, and wealth creation is their non-financials or intangible assets.
Let there be no doubt though, conventional financial statements (balance sheet) emphasis on identifying whether or not financial targets have been achieved, remain necessary, no argument here, and something which this blog post is not advocating doing away with.
But, as both Deloitte reports unequivically conveyed in 2004 and 2007 respectively, its was a prudent business practice then, and it must be the foreseeable future, for management teams and boards to work diligently, and I might add, quickly, to strike a better balance between the oversight, stewardship, and management of financials and non-financials. Lest this not be misconstrued, such action does not – need not entail paying less attention to one over the other. Rather, it requires paying a more balanced attention to both!
So why is more ‘balance’ necessary? The key reason in my view, which was also conveyed in the Deloitte reports, is that conventional-traditional financial measures are simply not designed to capture (describe) the many necessary (critical, essential) qualitative aspects that we now matter-of-factly know, are directly and consistely related to businesses success, i.e., those found in a company’s intangibles (non-financials) such as the quality and strength of a company’s relationships with constituencies up and down its respective value-supply chain.
It’s become a managerial ‘no brainer’ now that tracking/monitoring non-financial aspects of company performance, i.e., its intangibles, is not a time-resource luxury, rather a necessity and fiduciary imperative.
Fortunately, according to Deloitte, and which my own experiences certainly bear out, there are several factors which are now at work influencing (driving) boards and management teams to pay more attention to ‘monitoring key non-financial – intangible asset performance indicators’. These include, among others:
1. increasing global competition, irrespective of company size, sector, or maturity.
2. the growing influence/importance of ‘relationship capital’, i.e., customers/clients relationships up and down a company’s value-supply chain.
3. management team and board heightened awareness of the real and foundational value of a company’s reputation and the attendant risks and potential for hard hitting and sometimes irreversible and almost instaneous company wide cascading effects that can occur if certain risks actually materialize.
4. rapid-accelerated product innovation-launch times (globally speaking) before real competitive advantage erosion and/or undermining will occur.
5. the globally boundaryless speed which information (assets) can spread-be disseminated through the Internet.
6. the increasing importance – influence of human capital, i.e., employees internally, as well as employees dispersed externally throughout the value-supply chain.
7. greater scrutiny by various global – virtual media forums and outlets on matters/issues other than solely a company’s financial performance.
8. increasing government regulatory agency emphasis (globally and country specific) on reporting, measuing/accounting businesses non-financial performance ala intangibles.
It would be most desireable if management teams, boards, and investors begin to regard the oversight, stewardship, and management of non-financial (intangible asset) metrics not merely as some altruistic endeavor, rather as an important, necessary, and prudent business practice integral to sustaining and enhancing their company’s value, revenue, profitability and competitiveness!
The ‘Business IP and Intangible Asset Blog’ is researched and written by Michael D. Moberly, president and founder of Knowledge Protection Strategies – http://kpstrat.com. The intent of Mr. Moberly’s blog is to provide insights and perspective to aid in a cross-disciplinary approach for identifying, assessing, valuing, protecting, utilizing, and extracting value from intangible assets. Your comments regarding my blog posts are welcome at firstname.lastname@example.org.