reporting (6)

10468400088?profile=originalThe World Intellectual Property Organization (WIPO) recently released its World Intellectual Property Report 2017 under the title Intangible Capital in Global Value Chains.  The key finding of the report is that “one third of the value of the products you buy comes from intangibles such as technology and branding” with roughly 47% from labor and 20% coming from tangible capital.   

This is no surprise to those who study intangibles. But it’s great to see it documented in such detail by country and industry. The report is also strengthened by its deep examination of three industries: coffee, photovoltaics and smartphones.

I recommend this as another dataset [see other data here] that helps us understand the tectonic shifts in global and local economies in recent decades. For those in our community, I’d like to share some thoughts about how this data relates to the broader intangible capital and integrated reporting communities:  

The authors use a limited definition intangible capital – Traditional models of IC (like we used in our book Intangible Capital) include human, relationship and organizational capital.  This paper was produced by economists for whom labor is a known variable.  Thus,the authors do not include human capital/labor in their definition of intangible.

Intangibles are the undefined portion of the equation – The supply chain value calculations use data on wages, employment and tangible capital asset stocks to calculate labor and tangible assets. The remainder of a product’s value was then considered intangible. This essentially the approach taken in the Ocean Tomo stock market study which subtracts tangibles from corporate value to derive intangibles. (Their latest calculation shows tangibles now down to 16% of total corporate value).

By the way, these calculations of intangibles as the unknown in an equation will continue until spending on specific intangibles is measured more carefully (see my discussions on i-capex)

This is about income from capitals, not the capitals – This is an economic study that examines the income that accrues to the three kinds of capital (a flow) rather than the capital itself (a stock). Alternative measure of capitals use stock market data (like Ocean Tomo). Hopefully some day, we'll have accounting data that differentiates between investment and cost.


Value now comes less from the manufacturing process itself and more from pre- and post-production – In the industrial era, a big part of the value in manufactured goods came from production processes. This study affirms what is called the 21st Century smile, that is that more value in products now comes in pre-production such as R&D and design, as well as post-production activities such as branding and after-sale services.

There’s growing income from social and natural capital – For those of you interested in a fully-integrated model with six to seven capiitals, you’ll be wondering what happened to the externalities such as social and environmental footprints. You’ll be very excited to see how this approach identifies the growth in incomes for coffee industry segments where consumer demands for fairness and sustainability in supply chains is changing the ways of doing business.  And the value is showing up in these economic measurements!

The most important part of this study? It shows us a path to connecting the dots between the financial and non-financial aspects of the capitals. 


For more info on measurement of intangibles, please see Smarter-Companies Briefing Paper:

Accounting, ESG and the Intangible Information Gap

Read more…

Best Buy's Intangible Capital Secrets


I was reading a NY Times article this morning entitled, Best Buy’s Secrets for Surviving in the Amazon Age. Of course, I couldn’t help myself and I started tallying their intangible capitals in my head.  Thought I’d share my tally and the follow-up research I did about the company’s reporting to the marketplace.

In the article, author Kevin Roose identifies five secrets to the company’s success (quotes are from his list):

  1. “Price, price, price” – The decision to match Amazon’s prices was a foundational strategy (strategic capital)
  2. “Focus on humans” – The company realized that customer service was something that customers couldn’t get on line.  They focused on training and engaging their sales associates (human capital) and fixed the internal search system that gave them the most trouble in helping their customers (structural capital). The wisdom of this strategy is supported by the story of Circuit City’s disastrous firing of their associates ten years ago.
  3. “Turn brick-and-mortar into showcase-and-ship” – The on-line warehouse, distribution centers and stores’ inventory systems were integrated so that on-line orders are shipped from the closest, fastest source. This software is a great example of structural capital and shows how it helps leverage the return on manufactured capital (think GE’s digital industrial strategy)
  4. “Cut costs quietly” – The company found creative ways to lower costs (like re-engineering handling processes in the warehouse to decrease product damage) (strategic capital) and avoided large lay-offs. Roose quotes CEO Joly, “Taking people out is the last resource…Because you need to capture the hearts and minds of the employees” (human capital).
  5. “Get lucky, stay humble and don’t tempt fate” – Luck is luck.  None of us can take credit for that. Best Buy’s luck comes from their market segments (expensive electronics that people need help in buying) and the demise of their competitors. But this luck doesn’t guarantee success. The rest of this “secret” speaks to culture (strategic capital) quoted Joly again, “Once you’ve had a near- death experience, arrogance, if you had it in your bones, has disappeared forever.”

Clearly, this story has a lot to do with intangible capitals.  As I also like to do, I went to the company’s website and looked at how they tell their story to the markets. 

First destination: Investor relations site and the company’s annual report. This report is basically the 10-K with an eight-page cover letter from the CEO. In it, he talked about the success of their strategies and work to develop stronger relationships with customers (relationship capital).  As is traditional in this type of report, there is s strong focus on the financial results of the strategies.

The website has two more sections with a lot of rich information. Second destination: Sustainability. This is a very rich site with separate statements about human rights, carbon and energy, conflict minerals, chemical management, environmental and paper procurement. There’s also a full Corporate Responsibility and Sustainability Report and a report that the company was named to the Dow Jones Sustainability Index for the 7th Year.  This is all about natural and social/relationship capital.

Speaking of relationship capital, the company’s site also has a dedicated Community Relations section that includes right now articles on support for DACA and hurricane victims, among many others.

This separation of statements is the norm for U.S. companies so it’s hard to criticize. But the thesis of the integrated thinking and reporting movement is that investors, customers, employees, managers, stakeholders and the company itself would be better served if these separate messages (about internalities and externalities not reported in the financial view) were told as a holistic, coherent story about how the company is building value today in a way that ensures/enhances its ability to do so in the future.

Learn more about this kind of integrated model:

Integrated Value Creation

Read more…

10468399076?profile=originalThe stated goal of integrated reporting is to explain “how a company creates value over time.”

To date, a lot of the focus in practice (and theory) has been on identifying the key capitals that drive this value creation. But the question about how value and the capitals change over time, and how the capitals interact with each other has been too advanced for most practitioners.

I’ve been lucky to witness the development of a platform that endeavors to help business people map and model value creation in a dynamic way. It’s called VDMBee.

A few months ago, they approached me about including the open license Value Creation Worksheet tool that I developed into their platform.  It’s there now along with a number of other tools such as Alex Osterwalder’s Business Model Canvas. I can’t wait to dig in and test it out and hope to find a good test case (contact me if you’re interested).

A little bit of background: The connection between my intangible capital work and VDMBee goes back to shared ideas and work with Verna Allee. I can actually remember the airplane trip when I opened Verna’s 2002 book The Future of Knowledge. In it, Verna laid out powerful ideas about flows of value in networks. Her work and that of many others led to the formation of the Value Delivery Modelling Language™ (VDML™) managed by  Object Management Group® (OMG®), an international, open membership, not-for-profit technology standards consortium. As explained in the standard:

VDML is designed to address several critical business challenges: 1) It creates a robust way to model both tangible and intangible value flows; 2) It provides the capacity to model complex collaborations and business networks; 3) It provides a flexible way to model business activities to more readily support continuous transformation in environments of high variability; and 4) It supports more effective shared capabilities optimization and deployment. Table 1.1 highlights these challenges and VDML solutions

The VDMBee platform is the first software implementation using VDML. It’s a forward-looking tool to model how value gets created. But once in use, I can see how it will inform measurement of success against a plan.

Here’s how the integrated reporting community could use the platform:

  1. Identify the core capitals of the company (using the Value Creation Worksheet)
  2. Model how the capitals combine to create value over time
  3. Measure the value flows
  4. Create different cases to test how changes in one part of the system might affect others
  5. Compare projected versus actual performance

I’ve used earlier versions of the Value Network approach. It is an extremely robust way of modelling value. I think that we will all learn a lot from using tools like this. 


Read more…

The Drive for Integration


Today 100% of U.S. public companies provide accounting information publicly. It’s a requirement and an accepted practice. At the same time, over 80% of those companies are also disclosing some kind of sustainability data. This latter kind of disclosure is not yet a requirement in the U.S. and standards are still in development. But as the data show, the practice is already well underway.

These two kinds of presentations have traditionally been made in different reports offered on different sections of their websites with differing messages.

Now, however, the financial markets are awakening to the importance of Environmental, Social and Governance (ESG) issues as a source of risk and a driver of innovation and value. They are looking to connect the dots between these different messages. This creates a dilemma for companies. They have a business rationale for both their financial and their sustainability reporting. But they are not accustomed to telling a unified value creation story.

The International Integrated Reporting Council (IIRC) is leading the charge in creating a model that unites these differing perspectives (read an introduction here). Its Framework provides a way forward to creating holistic presentations that explain the multiple forms of capital that support a company’s value creation ecosystem. The IIRC model draws on the traditional accounting/financial reporting perspective, the sustainability/ESG movement and a third, less understood field of study, broadly referred to as intellectual or intangible capital (IC).

The IC field has been focusing for several decades on the rise of the knowledge economy. While IC practice is not as advanced as accounting and sustainability reporting, there is already significant research that suggests the size and importance of this class of capital to the success of companies in today’s economy.

Combining all three perspectives is powerful but challenging. Few people are trained in all three of the root disciplines. So we have to work together and learn from each other. But it's the right goal to support the kind of integrated thinking that empowers financially-sound decisions today that still preserve and build value for the future.


Read more…

I have been challenging myself to find ways to bring the richness of the intellectual/intangible capital field to the integrated thinking and reporting movement. 

The three papers shared here are the product of that thinking. We're on a journey together. I hope to hear your feedback and ideas on we all go from here.  

Part 1 reviews the data on the role of intangibles in corporate investments and valuation. Then it examines intangibles in the context of the multi-capital model from the IIRC. It ends up suggesting that all the capitals can and should be examined from three perspectives: accounting, internalities and externalities.  Read it now   

Part 2 builds on the data 10468398262?profile=originaland frameworks in Part 1, providing a four-step process to creating, managing and communicating using a multi-capital model. Examples are included from XPX, a network of business advisors, as well from as public company reporting. It ends with a review of the benefits beyond reporting of this kind of integrated approach. Read it now


This paper is i-capex _ intangible capital expenditurean excerpt from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization being re-released for readers from the integrated reporting movement. Read it now 
What do you think? I look forward to your comments!
Read more…

IIRC is moving ahead

 Another great article on the emerging reporting framework under IIRC. While the approach moves us into a new environment on statutory reporting I think it would benefit from a closer tie in with the work on intangibles. The potential links are there when you look at the six "capitals" that are discussed.

Read more…