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The new New Economy Analyst
Report – November 30, 2002
Juergen Daum’s new New
Economy Best Practice service
©2002 Juergen Daum. All rights reserved.
A European Peer Discussion: “Measuring and
Managing Intangible Values in Today’s Economy”
News categories: The
New Economy Economics, Finance and Acounting, Performance Management and
Controlling, Investor and Stakeholder Relations
At 6 November 2002 a group of around 30 European
experts, representing the academia as well as consulting and business
organizations (from the services, financial services, and software industry)
met near Zurich in Switzerland at the Swiss Re Rüschlikon Center of Global Dialogue
to discuss the implications of the growing significance of intangible values
for enterprise management, corporate reporting and communications, and
corporate governance.
This ‘peer discussion’, organized by the Swiss Re
Rüschlikon – Center for Global Dialogue in cooperation with the Engineering
Centre for Economic Development, tried to address the latest thinking on the
importance of intangible values as well as resulting risks and opportunities.
Additionally, actions to introduce a new generation of value measurement and
value management have been considered.
Many people in the accounting and business communities
believe that financial reporting, which represents still the information
foundation for our enterprise management
systems and for our corporate governance
systems as well as for the external rating of companies by investors and
business partners, no longer reflects economic realities accurately. This view
is rooted in the belief that our accounting systems have failed to keep pace
with radical shifts in the sources of value creation and that there is a need
to correct this by recognizing intangible assets in corporate reporting. But to
do that represents a real challenge, because the nature of intangible assets is
so different compared to physical or financial assets. They are hard to grasp,
no standards do yet exist, how to report on
them. Their value can vanish
over night, because the risk involved with intangible values is usually much
higher than the one related to physical
assets. And they behave economically
different – forcing managers to act in the dark, because their tools (financial
and management accounting) were designed for a different world
(the world of industrial mass
production) ruled by
different business economics,
than the one that they are
facing today (the global
knowledge economy).
During the discussion, which was moderated by Peter
Hoppler, Head Marketing and Projects of Swiss Re Rüschlikon Center and kicked
off by Fritz Gutbrodt, Head of Swiss Re Rüschlikon Center, seven topics had been
addressed through brief expert presentations followed by discussions and short
breakout workshops. These topics included:
·
Investor and
Stakeholder Requirements and Expectations
·
Corporate
Governance
·
Valuing
Future Business
·
Risk and
Vulnerability Management
·
New Models,
Measurements and Maps
·
Reporting
and Communications Developments
Here some of the conclusions:
The solution might be based on the insight of many
companies after the dotcom bubble (with its focus only on intangibles)
has burst , that they have to treat intangible and physical assets in an
integrated way. The smartest companies in the future might be the ones who
manage to transform, not by getting rid of physical assets but by working with
them differently.
The principal intangible value for companies is
reputation. Companies are not able to create value with their other intangible
assets if they do not manage to protect their reputation.
Volatility of share price increases with the degree of
intangible assets of the total value of a company. The reason is both, that
there is a lack of transparency for outsiders and that intangible values are
associated with higher risks (but also with a higher value creation potential)
than physical assets. Therefore risk
management (which is limiting the downside
of this higher volatility) is becoming more important. The capability of an
organization for sound risk management will become itself an important
intangible asset.
Because corporate reporting is still
founded on a
financial and management accounting model which had been developed for the
industrial economy, it is not able to deal with today’s knowledge economy,
where most of corporate value creation is based on knowledge and information
assets rather than on physical
assets and financial capital. These
new assets remain not only unrecognized in financial statements, but they
behave in many respects differently from an economic point of view than
physical assets or resources. This is changing the business economics of
today’s enterprises (see
figure 1). Organizational
capabilities for example, also called “structural
capital”, that allow a
company to multiply for example individual
knowledge (“human capital”) for the organization and its customers, is becoming
one of the most important corporate assets.
The black box
"company" has to become
(again) transparent for
investors and other company stakeholders.
To make that happen, they have
to understand, how a company is creating value
.
Figure 1: Extract from Juergen Daum’s presentation at the Peer Group Discussion (new Business Economics)
Therefore a new approach to accounting, enterprise management, and corporate reporting and communication is required that comprises all value creating activities of a firm, is recording their results and is reporting on them - also the ones based on its intangibles (see figure 2).
One suggestion was,
to look to physics to move forward
in solving the measurement problem with intangibles.
200 years ago, scientists have grappled to explain things for which they had no
model yet - such as energy, gravity etc.. But they nevertheless succeeded. May be
we have to look how they did it and apply similar methods and procedures to the
problem of measurement of intangible values in economics.
It became clear, that the traditional corporate reporting and enterprise management practice is far to much focused and limited to the financial perspective. But financial capital is not the scarce resource of today’s leading companies. Very often its human capital, talented people, that is the most scarce resource. But with our current performance models we are just measuring how efficiently a corporation is in using its financial capital.
Figure 1: Extract from Juergen Daum’s presentation at the Peer Group Discussion (new Corporate Reporting and Communications Framework)
After the shareholder value wave of the last decade, with its emphasis on financial capital efficiency, we have to shift the focus back to the essentials of a business: people, customers, business partners, operational excellence and the necessary business processes, the company’s reputation, the degree of trust of important business partners etc. – that is to its intangible assets. And intangible assets are real! We just have to measure them from their respective perspective, without trying to ‘translate’ everything into a financial view.
> Read here the conference highlights and key statements
>
Conference programme
> Juergen H.
Daum's presentation
at the Peer Discussion about:
“Corporate
Reporting and Communications Developments”
> Access to all presentations (Bengin download site)
Managing Intangible Assets
“The importance of intangible
assets, the immaterial value of
companies such as relationships with business
partners, brand awareness and new
business ideas, but also
know-how, corporate culture, and the ability to
innovate, has greatly increased in the last two
decades. One clear indication
of the trend is that the portion of a company’s total market value that exceeds
its book value has increased from 40 percent of in the early 1980s to over 80
percent at the end of the 1990s. Unfortunately traditional accounting and
management instruments are not able to capture these new values and report on
them. But what you can’t
measure, you cannot manage ! At the beginning of the
20th century, industrial mass production served as the motor to generate
value;
this required more complex cost
accounting, beyond the abilities of previous
accounting practices, to enable management to control and optimize these new
value creation processes. In the same way, we must now expand
accounting,
controlling- and management systems to a new
level, to enable companies to
optimize, manage and report on today’s new value creating activities and
processes”.
Juergen H. Daum
visit: Intangible
Assets and
Value Creation (J.H.D.s
thoughtleading book)
J.D.'s
Insights Article "Value Drivers Intangible Assets" | Interview
with J.D. on Intangibles | A European Peer Discussion…| Intangible Assets and
Intellectual Capital Management | Interview with David
Norton | Interview
with Leif Edvinsson | Interview with Baruch Lev
|
Additional material about intangible
assets and the enterprise management and reporting challenge of today:
Intangible Assets and Value
Creation, a brand new book
written by Juergen H. Daum, which focuses on the
new accounting, measurement and management system companies require to thrive
in the knowledge economy of today
Juergen Daum’s Website about the enterprise management challenges and solutions for the
knowlege based economy - with regularly
new articles and reports
Intangible
Assets: The Art of Creating Value
– Interview with Juergen Daum by
sapinfo.net
"Value Drivers Intangible
Assets"
article by Juergen Daum
Performance
Management and Business Controlling in the 21st Century Presentation held by Juergen
Daum at SAP's European mySAP Financials Conference, June 2001, Strassbourg /
France
Approaching the next
level of shareholder value management (part 1) by Juergen Daum
Interview
with Baruch Lev: Accounting,
Reporting and Intangible
Assets
Interview with Leif
Edvinsson: Intellectual Capital: the new wealth of corporations
Interview with David P.
Norton: Intangible Assets and the Balanced Scorecard
Corporate Performance
Management: Managing profitability and growth in the new environment – article by Juergen Daum
Performance Management Beyond
Budgeting: Why you should consider it, How it works, and Who should contribute
to make it happen – article by Juergen Daum
The new FASB rules for reporting on Intangible Asset - The European versus the U.S. way - Report about the new US-GAAP rules for Goodwill and Intangible Assets as the American way to deal with Intangibles. In addition the new Danish rules are presented, which oblige companies with significant Intellectual Capital to report about them through a Intellectual Capital Supplement in addition to its financial reports
A revolution in
stakeholder oriented corporate disclosure – case study: The Shell Report by Juergen Daum
eXtensible Business
Reporting Language (XBRL) is moving forward by Juergen Daum
How accounting gets more
radical in measuring what really matters to investors – article by Juergen Daum
Today’s #1 management
challenge: How to better exploit intangible assets to create value –
article by Juergen Daum
Business Management in the
new, New Economy - How to exploit Intangible Assets to Create Value
- Presentation held by
Juergen Daum at SAP's European mySAP Financials Conference, June 2001, Basel / Switzerland
Moving Beyond Fixed Budgets
“Fixed
budgets don’t work today. A
budget is a too static
instrument and locks managers
into the past - into something
they thought last year that it
was right. To be effective in
a global economy with rapidly
shifting market conditions and
quick and nimble competitors,
organization have to be able
to adapt constantly their
priorities and have to put
their resources where they can
create most value for
customers and shareholders. In
order to do that, they need
the right concepts, management
processes and tools –
concepts such as the Beyond
Budgeting Management Model. The
introduction of new management
instruments such as the
Balanced Scorecard, which help
to better align the entire
organization with corporate
strategic objectives and to
focus it on the essentials,
has created the right
foundation. Because if
corporate strategy and the
objectives are clear for all
people in an organization, one
can principally react faster
to changing market conditions.
But then the fixed
budget comes into their way
and prevents them from really
doing the right things. Though
what is often missing is a
more flexible operational
planning and control model.
The Beyond Budgeting model
wants to fill exactly this
gap.”
Juergen
H. Daum
New!
-
visit J.H.D.'s
Beyond Budgeting Info Center
-
including latest BB insight
materials, interviews with BB
pioneers etc. - here an
extract:
| J.D.'s
insight article "Beyond
Budgeting" | Interview
with Lennart Francke, CFO of
Svenska Handelsbanken
| Panel
Discussion with Borealis,
Nestlé, and Unilever
| Interview
with Jeremy Hope –
co-founder of the Beyond
Budgeting Round Table
|
Interview with J.D. on
finance and IT
|
More about New Economy Economics and Management
Best Practice in general, and about other related topics will be continued here
in this new New Economy Analyst reports (see for
example this report).
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