Member Blogs

I came across this interesting discussion on getting the CEO's attention that I think is especially relevant to promoting greater understanding of intangible capital. Every year the Conference Board does a survey of CEOs around the world on what they see as the biggest issues facing them. In this video Bart Van Ark discusses the most recent CEO Challenges survey. The number one issue facing CEOs is human capital. But he makes the point that CEOs are now focused more on the utilization of that human capital focused on serving the customer - rather than on simply trying to hire the right people. I think this points to an entry point for discussions on the broader intangibles framework with CEOs who are already making the link between workers (human capital) and customers (relational capital).

https://www.youtube.com/watch?v=qdt_VFEI8UA

Mary Adams and I will be hosting a webinar on "Maximizing your IP" for the consulting company Oxfirst. 

Intellectual Property (IP) is a critical strategic asset for corporations. But there are enormous differences in the value of IP stemming from the ecosystem that supports commercialization of the IP. What are the elements of the IP ecosystem? Can they be modeled and measured? The answer is yes. This talk will introduce basic concepts about how to model, measure and maximize the potential of IP through a sound broader ecosystem of intellectual capital (IC).  Open source tools will be provided to help participants implement these concepts in their own businesses. 

Registration is open to all and available at https://attendee.gotowebinar.com/register/2293074742946252802

I had the opportunity to Skype into several sessions  of a wonderful program put on by SmarterCo partner Melanie Sutton of i-innovate in South Africa  (including the recent closing session seen in this Facebook album)

The program was called i-mix and included students at the beginning of their careers. Melanie used the intangible capital framework to guide them on how to think holistically about developing their purpose, skills and relationships. While I was on the line, the students went around the table and shared some of the things they learned. I jotted down quick notes so these paraphrase a few of the comments but you’ll get the gist:

• I came here expecting to be given answers but realized that what IC teaches us is to explore and think for ourselves. We create the answers.
• You cannot be innovative without an environment that sparks innovation.
• Work is not a job description. It’s a team sport.
• Culture and collaboration go hand in hand. You can’t bee collaborative without a good culture.

Changing business is hard when you focus on people who have been doing things in the same way for decades. These young people can’t help but be agents of change as they go out into the workforce. Thank you Melanie!

Giving into pressure from activist shareholders, Timken recently split in two companies. There was a detailed profile of the situation in the New York Times on Sunday.

I was struck by one of the early unqualified statements by author Nelson D. Schwartz:

As in all publicly traded companies, TinkenSteel’s board and top executives have a fiduciary duty to shareholders to maximize both profits and investor returns.

This wasn’t qualified or referenced, just given as a statement of fact. Yet it’s a very narrow definition of the fiduciary obligations of the board and top executives. Returns vs. profits. Today vs. tomorrow. There are a million nuances. Schwartz goes on to provide a compelling alternative. He explains that in the 1980’s, the company spent $450 million on a new plant:

… supported these huge capital expenditures even though it meant lower profits in the short term and less capital to return to shareholders. The wager in the 1980s paid off in the long run, allowing Timken to innovate, dominate the market for high-margin, specialized steel, and stay ahead of rivals in South Korea, Japan and Germany.
In battling demands to split the company Timken executives talked about the long-term viability of the combined companies,

Timken executives fought back, making the case for keeping bearings and steel under one roof. Bearings require specialized steel that can, for example, withstand enormous pressure deep underwater in an offshore oil well. The metallurgical expertise the steel unit acquired in creating these advanced materials, they said, translated into products for other customers like medical device makers and drillers.

There were other structural reasons for the two companies to stay together. Because the steel business can be very profitable but is much more volatile, the bearings division served as ballast for the combined company. Excess cash from the bearing side smoothed out those peaks and valleys and helped pay for big investments like the huge caster.

But Mr. Larrieu and Relational maintained that if the money couldn’t be invested in the business now or in the foreseeable future, it should be returned to shareholders, who are, after all, the owners of the company. A few months after the transaction went through, one of the players making this argument, Relational Capital had sold their interest for a 75% gain. Long gone before any consequences of the transactions they provoked. So let’s go back to the opener. The unquestioned statement that it was the fiduciary obligation to maximize profit and investor returns. Not this kind of return. Not at the expense of longer term viability. Yet the game goes on.

People always nod sympathetically when I talk about intangible capital and the future of American business. Wouldn’t it be nice, they say, if we could make those intangibles real? Well, we can. And we should. Based on my outsider's read of the situation, it seems pretty obvious that Timken had significant long-term value prior to the split. Companies like this should have an ICountant to validate the importance of the people, the knowledge, the innovation capacity and the future outlook of their companies. Without hard information to battle the short-term thinking seen in this kind of transaction, our financial system will serve the needs of speculators rather than true investors.

I have just published a paper with my co-author Elena Shakina about the changing role of IC during the economic crisis. 

This study has been carried out in our International Laboratory 'Intagible-driven Economy' (ID Lab). 

The paper investigates factors of corporate success over the crisis period of 2008–2009. We advocate the idea that investments in intangibles allow a company to be better off, even if the markets go down. We have analysed a sample of more than 300 companies which operate in developed and emerging European markets, and belong to traditional and innovative industries. The result is that there is a robust significant link between the companies’ investment decisions and their performance before and during the crisis. This study provides empirical evidence that investment restriction is not the best response to an economic recession.

If you are interested you can download the paper at http://www.tandfonline.com/doi/full/10.1080/1331677X.2014.974918#tabModule. It is open to everybody.

I hope that the study result of interest and we would appreciate any comment.

There’s a great discussion of the secondary market for Nike in this NPR podcast (based on this 538 blog post).

It focuses on the secondary market for high end Nike sneakers. The company has a clear pattern of pre-launch hype and limited release. This ensures quick sell-out of a line. It also creates an opportunity for those who buy and the re-sell the sneakers. Here’s a fun graph from the post that shows how this market’s pricing patterns mimic the Nike swoosh.  The post ventures an estimate of the total profits from this post-sale trade:

….This suggests that resellers made $240 million last year, all but $10 million of it on Nike products. That $230 million is equivalent to 8.5 percent of Nike’s earnings in fiscal 2014. Knowing how difficult it is for a large company like Nike to add even 1 percentage point to its bottom line, Luber said, this isn’t a number to ignore.

So why doesn't Nike get greedy and try to capture more of this value for themselves? In contrast with JetBlue who made the decision last week to trade brand for cash flow, Nike presumably understands that this market creates a lot of buzz and demand for Nike’s product.  Nike couldn’t sell at the kind of prices sometimes collected by traders.  But they do get a brand boost from such passionate fans.

This is just another example of the intangible capital calculations that companies make every day. It's not always as clear as this one. In this case, Nike hasn't spoken about this publicly but the company seems to have someone who functions as an internal ICountantTM of sorts who can provide a counter-balance to the pure accounting view that dominates a lot of business decisions.

Here's a good explanation of ICountants.

When I have made plane reservations for my college student sons over the past few years, they never insisted on an airline but they always thanked me profusely when I booked them on JetBlue.

That may be changing. The company made the announcement on Wednesday of a number of changes:

NEW YORK, NY -- (Marketwired) -- 11/19/14 -- JetBlue Airways (NASDAQ: JBLU) today outlined a long-term plan to drive shareholder returns through new and existing initiatives aimed at enhancing the Company's product advantage and service-oriented culture while delivering improved financial results. The revenue initiatives are expected to collectively generate more than $400 million in annual operating income on a run rate basis beginning in 2017…

Robin Hayes, JetBlue's President, said, "We believe the plan laid out today benefits our three key stakeholders. It delivers improved, sustainable profitability for our investors, the best travel experience for our customers and ensures a strong, healthy company for our Crewmembers. As we focus on executing this plan, JetBlue's core mission to Inspire Humanity and its differentiated model of serving underserved customers remain unchanged."...

The press release went on to outline changes that included reducing leg room in new planes, ending free bags for some fare categories, charging for wi-fi, and creating more premium class offerings. That’s inspiring to Wall St. but not to “Humanity.” Hayes would have been better to have left out that last sentence. The only thing worse than not having a purpose is pretending to have one.

What will my sons and many other consumers think of these changes? That JetBlue is putting short-term shareholder interests over long-term stakeholder interests. And remember that it is stakeholders--customers, employees and partners--who determine what kind of value the company creates over time. The press release says that they are looking to the long term but they're assuming that stakeholders are passive servants to the shareholders' interests. Don't bet on it. 

The profit calculation is incomplete without a calculation of what a change like this will mean to the JetBlue’s intangible capital including reputation and brand. It should. Because intangibles are longer lasting assets than any airplane or luggage cart—unless you fail to take care of them. The accountants project $400 million in profit. What they need is an ICountant to help them figure out the loss in future revenues caused by its decline in brand equity. The only way to counteract Wall St’s short-term myopia is with solid data and communication about long-term value.

Who’s looking out for JetBlue’s intangible capital? Not the team that made this decision.

We spend a lot of time in this community talking about how to make companies smarter and more successful. But a few weeks ago, I realized that we have never really defined what we mean by "smarter companies." The answers are complex and rich and something we all need to continue to define. 

But as I thought about it, I came down to three key characteristics that shine through:

Intangibles Focus – Knowledge intangibles are at the core of how value is created in today’s economy. This includes the knowledge in peoples’ heads and in re-usable forms (process, software, data, designs, etc.). Companies that recognize the growing importance of knowledge in these many forms have moved beyond industrial-era approaches to management and measurement so they can focus on the knowledge that can give them a competitive advantage.

Sense of Purpose – Access to and use of knowledge is a collaborative, collective effort. The amount of knowledge available to an organization—and the value it can create—is directly related to its ability to attract employees, partners and customers who share its mission. Purpose involves elements of both profit and prosperity. Companies that recognize the relationship between attraction and collaboration embed this purpose in what they do, how they do it, and how they tell their story. 

Social Measurement – Traditional financial and quantitative approaches fall short in measuring the strength and performance of knowledge, collaboration and innovation. The use of social, qualitative measures is on the rise. It’s already used commonly for knowledge products like books, services like hotels and restaurants, and even for employers. Companies that recognize the importance of intangibles, attraction and collaboration spend time listening from the outside-in, not just measuring from the inside-out. They are turning measurement into a collaborative, social process.

Does this list speak to you? I welcome your feedback!

This summer I wrote about the great research on intangibles in the Chilean Wine Industry done by Mark Dutz and colleagues at the World Bank. And I promised to let everyone know when the full study was released. Here it is and I highly recommend it to anyone interested in intangibles: Public and private investments in innovation capabilities : structural transformation in the Chilean wine industry

We used some of the early versions of the data in our meetings in Chile in June set up by our Smarter-Companies partner AKLOE. It was wonderful to have data that was directly applicable to the country. One country down. A couple hundred to go!

What was so great about this paper? It used a “novel” approach to measuring intangibles at the corporate level: investment. Novel? Really? Well yes. We’ve known for a long time from the CHS macroeconomic data from The Conference Board that investment in intangibles eclipsed tangible investment in the U.S. over 20 years ago, with a similar pattern in the largest economies. But there is still virtually no information on the spending at the individual firm level. That’s because intangibles aren’t capitalized so they wash through the income statement year after year.

The investment approach was taken in a couple of earlier studies including by Nesta Investing in Innovation in the UK but what was great about this study is that it looked at the correlations between investments and the growth of individual firms and the industry overall.

In the period from 1990 to 2012, Chilean wine production (in liters) rose by 9% per annum. Much of this growth went to exports which went from $116 million to $1.78 billion, 13% per annum. What drove this shift? Was it just about producing more wine? No. That capacity already existed. It was about making a connection with new markets, telling an effective story to the market and controlling quality in a time of significant growth. All this required investment in intangibles.

As this graph shows, the growth story of Chilean wine exports is a story of intangibles investment. The study found that spending on knowledge-based intangibles was a statistically significant and economically important correlate of the growth in the industry and in individual firms.

When we wrote Intangible Capital in 2010, we called for a new report to record “i-capex,” spending on knowledge intangibles that is an investment in the future but not an investment that qualifies for capitalizing on the balance sheet. This simple accounting issue has led to the 80% gap between tangible net worth on balance sheets and corporate value in the public markets.

It’s past time to start measuring intangibles investment. This study is a great step in the right direction. Where should we take the next step?

The report exemplifies what makes OECD unique: the ability to cast a wide net and marshal diverse intellectual insights, across the OECD and within a large community of experts in government and academia. For national governments, OECD's analysis can be useful for overcoming path dependent, stovepiped, or politically constrained thinking. But in many cases, including the U.S. government, there is no logical port of entry for a report of this scope--for particular chapters, yes, but not the report as a whole.
. . .
OECD's vision of knowledge-based capital (KBC) covers investments in categories with diverse economic characteristics, some of which are difficult to measure. The kind of knowledge represented varies, as does the degree and nature of ownership and control. This diversity enables interaction with a wide range of policies that may ultimately enable or constrain investment in intangibles, but the linkages are less straightforward, more tangled, and decidedly less tangible than the familiar terrain of commodities, real property, and currency. The report is ambitious, connecting what can be quantified with what is emerging or unknown, gathering and developing insights that governments might not make on their own, and providing reference points and benchmarks for sophisticated policymaking.

In a compartmentalized crisis-driven government, how do policymakers engage with subject matter this complex, heterogeneous, and, indeed, intangible? Issues that sprawl across multiple departments, jurisdictions, and policy domains are easier to ignore than those firmly within the remit of an established bureaucracy and chain of command.

In many respects, Supporting Investment in Knowledge Capital, Growth and Innovation is OECD at its top of its form, probing economic frontiers for the benefit of its members and, increasingly, the global public. While it contains few new conclusions, it leaves governments better informed to develop their own in very murky territory. It invites further interaction with the secretariat and OECD peers.

Yet there are many in the U.S. who are skeptical of anything out of Paris and are convinced that the U.S. has little to learn from the rest of the world, let alone others in the OECD. While it has a small, ably staffed office in Washington, OECD lacks an enduring intellectual presence in the U.S. This is unfortunate in that the U.S. experience with new knowledge, innovation, economic competencies, and intellectual property often informs the experience and reactions of other countries--and the shaping of global consensus where that may be possible. It means that venturesome reports like this one do not get the traction they deserve.

Gospodarka Narodowa is a Polish academic journal dealing with current economic and economic policy issues. Published since 1931, Gospodarka Narodowa is one of the oldest economic journals in Poland with a well-established position on the market. It publishes work by leading Polish and foreign economists with different theoretical and empirical approaches. It just published interesting article entitled as this post. Here is its english summary:

The article discusses the theoretical foundations of a new approach to the financial analysis of the enterprise. This new approach is needed, the author says, because classical financial analysis fails to precisely diagnose intellectual capital resources controlled by knowledge‑based enterprises.
All disciplines of finance are currently facing the challenge of expanding their instruments to include new tools for recording, presenting and interpreting economic processes characteristic of knowledge resources (intellectual capital), the author says. The article discusses the subject and presents the main assumptions of financial accounting for competence assets and intellectual capital.
The author lists the most important tools of this new branch of accounting: “knowledge‑based balance sheets” and “books of competencies.” The article presents the methodology for a preliminary analysis of knowledge‑based balance sheets, which involves an examination of their fundamental structure and dynamics.
The author proposes a “basic indicator of post‑industrial financial analysis” called “return on knowledge” (ROK). He also defines the phenomenon of intellectual leverage and attempts to quantify it.
According to Niemczyk, the available range of classical financial analysis tools should be expanded to include “the structure of competence assets (intellectual capital), the nominal growth of competence assets (intellectual capital), the real growth of competence assets (intellectual capital), the self‑production of intellectual capital, return on knowledge, the degree of intellectual leverage, the profitability of competence assets, and the cost effectiveness of competence assets.”

A story that gets it -- from The Tennessean (Nashville): "Intellectual capital an undervalued asset":

In case you haven’t noticed, thousands of organizations are in some form of generational transition. All you have to do is look around your company, and you’ll see men and women actively contemplating or planning their exits.Millions of Americans are reaching retirement age with sufficient resources to retire comfortably, or perhaps, start another business adventure.Yes, Gen X’ers and millennials, this transition will open the door to you for upward mobility, but you should also be concerned. The individuals retreating from your organization are taking years of experience and knowledge with them — assets that are highly valuable to your company’s future success.In any business, we are what our people know, and not just what they know but also how they know it.This is a company’s intellectual capital.Intellectual capital is what gives a business its competitive advantage. But all too often, companies overlook it or misunderstand it when, instead, they should be striving to strategically capture it.. . .A crucial need in any business is to sit down with whomever has been important in the building of the business and listen to that person’s stories, both the good and the bad. Ask how they learned things, write down the stories and turn them into valuable policies, processes and decisions.You’d be surprised at the value of such an exercise. I estimate that capturing these “stories” is worth at least 10 percentage points of profit.

There’s a fascinating “Room for Debate” discussion at the NYTimes entitled Profiting Profits or Reinvesting Them  with the prompt:

Corporations have gone from reinvesting about 90 percent of their profits into their business in the 1970s, to about 10 percent today, William Lazonick wrote in a recent Harvard Business Review article. Profits are instead being used to pay dividends to investors and to buy back stock to boost its price, benefiting the company’s executives. Can this trend be reversed to help fuel growth that benefits everyone?

Bill Lazonick is a friend and I’ve been meaning to write about his great article at HBR that inspired this debate. So I was thrilled to see it be the basis of a really rich discussion. His case is very clear. And he feels that change must come from regulators.

Lynn Stout, Law Professor at Cornell, makes the case for changing the definition of shareholder value and Peter Thiel co-founder of PayPal feels the root of the problem is a failure of imagination of corporate leaders: “The reason that big corporations aren’t using their profits to do new things is simply because they’re out of ideas, and the C.E.O.-politicians who run them are the last people we should expect to think of new ones.”

Unfortunately, the representative from the MBA world, Bruce Greenwald of the Columbia Business School, clouds the issue. He makes a few confusing statements that capital investment today “largely entails intangibles like acquiring customers, training workers and increasing product portfolios, all of which tend to be buried in operating expense….High profits with low levels of identifiable investment should be with us for the foreseeable future.” which doesn’t make sense. If companies were investing, they would either have lower profits or higher investments, not both.

What do ICountants have to contribute to the conversation? I’ll offer a few ideas and welcome more:

• Greenwald is partially right about the accounting. Investments in intangibles hit the income statement. And there is no way to track the accumulated investment in intangibles. Think about an automated process at an insurance company or a manufacturing plant. These processes are around forever but they do not exist as long-term assets. Since they are invisible, no one is held accountable for the care and building of their intangibles.
• These intangibles are the source of innovation and growth. Would investors look differently at a company if they could see this intangible infrastructure? It’s a little early to tell. One exciting new effort along these lines is the new fund at GaveKal Capital that tracks companies with strong innovation investment patterns.
• And Bill’s point is that CEO’s getting three-quarters of their compensation from stock options and stock awards aren’t thinking about investing in the future.It’s this incentive that is a big driver of the failure of leadership described by Thiel.
• But it’s too simplistic to expect that brilliant founders (or any of these factors) are the main answer. The lesson of intangible capital is that it is a holistic system. A leader can be critical in the functioning of the system. But the power is in the many individuals gathered together to create a unique set of answers to pressing problems. Complex problems needs holistic solutions.

There are some very clear calls here from people trying to change pieces of the system from the top down. Our work at Smarter-Companies is to drive change from the bottom up. I believe that if we can empower individual knowledge workers to take control of their organizations and their information, we’ll have a better shot at reversing the trend and building a more prosperous and profitable future.

Welcome to our newest ICountants Curtis McLean, Nat Bulkley and Siobhan Harold Fink, all members of Innovation Places, a new Smarter-Companies licensee.

Innovation Places is an especially interesting group of consultants who found themselves working together inside a large pharma company over the years. The center of focus was managing real estate portfolios. But the intersection between innovation, workplace design, network analysis, performance and culture became a bigger and bigger part of their work.

I always tell people that the one thing that unites our diverse community is the desire to “connect the dots” within organizations. In the ICountant training for this amazing crew last week, we explored some new “dots,” and deepened my understanding of the inter-relationship between tangibles and intangibles.

The crew has some amazing case studies that I’m going to make sure they share. Reach out and welcome them aboard!

The first step will be to develop common terminology, so that lenders and businesses can talk the same language. The finance and IP worlds are both full of terms not readily understood by the lay person and which can be misused or confused. As a first step to developing a common understanding the IPO, working with businesses and the finance community, will develop a glossary of accepted definitions to be used when describing and valuing IP and intangible assets.

This common language will form a foundation on which we will develop templates and guidance which will help business accurately to document their IP assets in a way that supports the decision making of a potential lender. We recognise that most lenders already use standard templates or application forms for client businesses seeking finance. We will therefore seek to produce templates for IP related assets that can either be directly incorporated into this existing documentation or which can be used as a databank for information likely to be required by lenders.

Last week I had the enjoyable privilege of participated in a session at the Digital Government Institute's Government Knowledge Management Conference. The session was a lively discussion among the panelists and audience kicked off with brief opening remarks by the panelists. The full background set of slides upon which my remarks were based are now available on line at Measuring Intangibles as part of KM.

Bottom line: government needs to pay more attention to its intangible assets - and knowledge management activities of the federal government can help.

(Cross posted from The Intangible Economy)

Here is a new short video from OECD on knowledge-based capital.

Here in New England, a corporate drama is unfolding that illustrates so many of the core ideas that we hold in the ICounting/IC community.

The drama involves a family-owned supermarket chain called Market Basket. There’s a long story of conflict between two sides of the family: one that controls 51% of the company and the other that controls 49%. The long-time CEO Arthur T. Demoulas is from the minority shareholder group and was forced out by the majority group. There are primers on the situation at  BostonGlobe.com and News for Shoppers (the photo is from their post).

What happened then? There was a stakeholder revolt that is showing the direct connection between intangible capital and financial results. Here’s the play-by-play using an IC scorecard.

Human Capital – The company had a reputation of taking care of its people and there was a general feeling that this would end with the departure of Arthur T. Many of the employees took a stand and said they wouldn’t work for the company if he was fired. They walked off the job and picketed in front of the stores. They called for suppliers and customers to do the same. The fact that key personnel in the distribution centers walked off the job ensured that the shelves were empty anyway.

Relationship Capital – Market Basket customers have a reputation of being very loyal to the company as well. It manages to have low prices and provides selection (especially of ethnic foods) not to be found elsewhere. With empty shelves and all the bad publicity, the customers are staying away. Volume is next to non-existent in the stores. Customers have taken their business elsewhere. Suppliers are getting hurt too.

Strategic Capital - The culture, the vision and the business model were apparent to all the stakeholders, except maybe the majority shareholders. Their position was a clear message to the market that values and practices were going to change.

The fourth category of IC is Structural Capital. It’s unclear if/how this is affected by the battle. In theory, the systems and the data are intact. That’s because this is the one kind of intangible that is clearly owned and controlled by the company. But, of course, it and the stores themselves are no guarantee of success.

Only Structural Capital is owned by the company. The other three forms of capital are volunteered and co-created by the employees, customers and suppliers. What attracts these stakeholders? Yes, there’s money involved but there is also a sense of shared values, shared knowledge and purpose.

Because companies have a certain amount of control and power in these relationships, many managers and shareholders take them for granted. In interviews, it’s clear that the employees feel that they are fighting against a style of management that would devalue their contribution going forward. In one interview I heard on the radio yesterday, a 40-year veteran of the company said that it was time to stand up to the kind of short-term management encouraged by Wall St.

And that’s where the story stands today. The company has given employees until Monday to return to work. No matter what happens, it’s clear that an enormous amount of financial, tangible and intangible value has been lost. The intangibles are directly connected to the ability of the company to produce revenues and profits going forward.

In and a wonderful editorial by MIT Prof Thomas Kochan at WBUR Cognoscenti, he puts out the call:

It is time to teach the next generation of managers how to lead companies in ways that better balance and integrate the interests of all stakeholders — owners and executives, middle managers who might someday lead the organization, front line employees who are the face of the company to customers, and customers and communities that support the business

Short term profits and long term value are generated through the will of the stakeholders, including employees, customers, suppliers and the community. These relationships are the most significant asset any company owns today. And failure to steward these assets destroys profits and value. That's why smarter companies pay attention to their intangibles.

Would the majority shareholders have made a different decision if their Accountants were also ICountants and were showing them the full capital picture of Market Basket? Hard to say. But I share Dr. Kochan's view. There's a lot to learn here. And it’s time to use measures that matter.