Michael D. Moberly March 2, 2013 ‘A blog where attention span matters’.
It’s not a cliché…for some management teams, c-suites, and boards, the phrase ‘knowledge-based or intangible asset driven economy, or the notion that 65+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, sustainability, and profitability reside in intangible assets remains more cliché than reality or economic fact. Reluctance or reticence to recognize and act on these facts – realities are respectfully, but most assuredly, mistaken.
The truth does not lie somewhere in the middle…One would think those economic facts, standing alone, fiduciary responsibilities aside, would be sufficient inducement for management teams to act accordingly. Unfortunately, and for various reasons, not all management teams have achieved operational familiarity with intangible assets. Instead, experience suggests they find them unwieldy, sometimes challenging to engage and difficult to measure. That’s in part due to the adverse tri-fecta of…
- lacking a conventional sense of physicality
- the absence of being included in b-school curriculums, and
- not being reported on company balance sheets or financial statements, unless they’re bundled together as the catchall ‘goodwill’.
In today’s tightly wound, highly compressed, and increasingly aggressive and predatorial (global) business transaction environment, companies that continue to overlook, be dismissive of, or routinely hand-off intangible assets to legal counsel or accounting units, assuming they’re legal versus business management issues, then readers are respectfully obliged to read further!
Intangible assets, e.g., intellectual, structural, and relationship capital, brand, etc., can expand and mature very rapidly within an organization. If not recognized, unraveled, developed, safeguarded, and monitored from the outset, the probability they will be compromised, misappropriated, or literally meld into open – public domain sources is predictably high. And, once a company’s intangible assets, whatever form they may take, i.e., unique knowhow and/or competitive advantage enters the public domain, re-covering their real (full) contributory value and uncontested use will be both costly and unlikely. Having an experienced intangible asset specialist – strategist in place can go a long way toward mitigating, if not alleviating such problems.
How does this translate…? Stone v. Ritter in particular, (but also, In Re Caremark and In Re Disney) are three cases that uniquely draw attention to the importance, if not fiduciary responsibility for companies to have effective (intangible asset and IP) stewardship, oversight, and management practices (procedures, policies) in place.
Yes, these are Delaware cases, and yes, they are 2006 and 1996 decisions respectively, but they present relevant issues that warrant board and management team attention. Collectively, these cases, particularly Stone v. Ritter, elevate ‘the bar’ insofar carving a path of permanency to the stewardship, oversight, and management of a company’s intangible (non-physical) assets, not tangible (physical) assets.
Most importantly, in my view, these cases conveys much warranted clarity to the necessity that boards, management teams, and c-suites be kept apprised of what’s going on inside their company in the form of a (a.) good faith duty, and/or (b.) duty of loyalty to ensure their company has sufficient (intangible) asset monitoring and reporting (compliance) systems in place to routinely and properly keep decision makers – strategic planners appropriately apprised, i.e.,
- with timely and accurate information, that is sufficient to allow them (within their respective scope of responsibility) to
- reach informed judgments concerning a company’s compliance with law, and business performance.
In other words, absent specific and effective (communication, reporting) practices to ensure each of the above consistently occur, companies may well be (in light of the aforementioned court decisions) fail to satisfy the duty to be reasonably informed about the company and therefore, be held personally liable for problems that arise pertaining to the stewardship, oversight, and management of intangible and other assets.
The business rationale for engaging intangible assets is much deeper than Stone v. Ritter alone…admittedly, a significant, but unknown number of management team members, c-suites, and boards have yet to fully and consistently engage their intangible assets or realize it’s in their interests to do so. For them, let’s return to the basic economic fact that 65+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, sustainability, and profitability, do, in fact, originate in intangible assets! That irreversible 2013 business reality, should serve as a strong, stand alone motive for management teams, c-suites, and boards to not merely take notice, but to act, and act effectively.
A difficult theory of corporate law…it’s far from being rocket science to recognize that endeavoring to hold members of a company’s board (personally) liable for poor or the absence of oversight, stewardship, and management of a company’s intangible assets, is a difficult theory in corporation law to prevail. It is, nevertheless, essential, in today’s increasingly competitive, aggressive, predatorial, and ‘winner-take-all’ (global) business and transaction environment, that those bodies assume a more ‘hands on’ position with respect to the stewardship, oversight, and management of a company’s (intangible) assets.
Intangible asset strategists are impediment to productivity or efficiency….in Stone v. Ritter it was found that important and necessary information failed to reach the board because of ineffective internal asset controls, monitoring, or communication of those controls fell far short or were non-existent. So, the significance of this particular ruling is that personal liability may attach along with damages if there’s a failure to, (a.) implement an effective information dissemination system, and (b.)coupled with regular (system) monitoring to ensure boards have sufficient and correct information to make informed decisions.
Irrespective of this particular Delaware court decision, a company’s size, its revenues, or industry sector, it’s quite likely some management teams (and boards) will regard the (potential) contributions of an intangible asset specialist-strategist as being unnecessary or an impediment to achieving a company’s (strategic) goals and objectives, i.e., impeding productivity and efficiencies in favor of dispersing such responsibilities throughout a c-suite.
But, in my view, management teams and boards who continue the path of dismissiveness and/or table this managerial responsibility indefinitely are doing so at their financial and competitive advantage peril. That’s because there remains this pesky reality that 65+% of most company’s value, sources of revenue, and future wealth creation capabilities today are directly related to intangible assets.
So, when the proposition is framed in this factual economic context, management teams are remiss, at minimum, if they don’t objectively deliberate the following ‘is their company effectively positioned, insofar as possessing the expertise and skill sets…
- to consistently identify, unravel, nurture, utilize, bundle, and effectively and efficiently extract as much value as possible from its intangibles, and
- simultaneously safeguard and monitor those assets’ value, materiality, and risk.
So, instead of assuming satisfaction with past practice, or worse, assuming all things intangible are either legal or accounting decisions, not strategic business decisions, management teams and boards are obliged to critically and objectively assess ‘has the time come’?
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