Corporate Value Drivers –  Closing the Intangible Information Gap

Ocean Tomom Intangibles in S&P 500

The intangibles information gap isn’t going away. In fact, it keeps growing. It’s the undercurrent of a lot of conversations about corporate value drivers, integrated reporting and even ESG.  So I figured it was time to review the latest data.

By the way, I’ve been using this data for years but I’m often surprised by the number of people who haven’t seen it.

We have this great time series thanks to periodic updates from Ocean Tomo, an Intellectual Capital Merchant Banc firm (they deal in IP so, yes, their corporate description is trademarked!). The calculation is simple. They start with the total corporate value of the companies on the S&P 500 and compare it to the tangible net worth of these companies. The gap is intangible assets, or what I call the “intangible information gap.”

You can see that this gap has increased steadily over time. The biggest change came in the decade ending in 1995. This corresponded to the adoption of the personal computer (IBM’s first PC was released in 1981). This was the moment when automation of our mental work began to take off. Although it lead to a crash, the dot comm boom lead to further growth as all the PC’s became interconnected through the internet (the dot comm boom grew through early 2000). This accelerated the accessibility and creation of data.

All this means that intangibles are essentially knowledge assets. They represent an information gap because very little information is tracked that identifies. specific sources of value.  A small amount of these intangibles are on balance sheets (relics of past acquisitions). But most of these drivers of corporate value are resources like people, knowledge, process, data, IP, relationships and even rights to natural resources. Very little of the money spent on building these value drivers is capitalized. So these “capitals” are not on the balance sheet.

The IIRC multi-capital framework has done a great job identifying the types of resources we’re talking about. My version of the framework includes:

  • Purpose – Strategic capital gives your organization purpose. It is what you do to create value for your customers.
  • Property – Structural capital includes all the knowledge that stays behind when your employees go home at the end of the day or leave the company.
  • Partners – Relationship capital connects your organization with its stakeholders.
  • People – Human capital is the creative engine of every organization. It is the intangible capital that goes home at night, and also leaves the company with people who resign or retire.
  • Planet – Natural capital. Every organization is part of our natural ecosystem and companies earn the right to access/use resources like air, water and energy as well as many other natural resources.

ESG practitioners come at this from the outside in, aiming to understand external capitals like natural, relationship as  well as governance (part of strategic capital). This sustainability perspective is still kept separate from the financial perspective. But integrating the two is an important goal going forward as the financial community is starting to talk a lot about ESG as a driver of performance.

After identifying your value drivers, the next step is measurment, especially the connection with the financials. In Intangible Capital, we suggested a concept called i-capex (intangible capital expenditure). The idea is that if you track investments in the above types of assets, you’ll get a better idea of the distribution of value in an individual company. (Just to be clear, this would be a management accounting exercise–it’s too early to talk about capitalization on the balance sheet).

Want to get started on identifying your company’s value drivers?  Feel free to use our free value creation worksheet.

DOWNLOAD THE VALUE CREATION WORKSHEET

 

Graphic credit: Ocean Tomo