Ignore intangibles at your peril

Your brand, your tech and your relationships are sources of great value - and therefore risk.

by Andrew Harding
Last Updated: 09 Apr 2018

Many successful modern companies now operate almost without any tangible assets. Uber, the world’s largest taxi firm, doesn’t own any cars. Airbnb, the world’s largest accommodation provider, doesn’t own any properties. Apple, arguably the world’s most valuable company, owns little physical property. It is these companies’ intangible assets - their technology, brand and customer relationships - that underpin their value.

Primary driver of value

It’s widely acknowledged that intangible assets are becoming more and more important to the success of a business. Intellectual property, customer relationships, brand, the knowledge of its workforce and its corporate strategy can all provide competitive advantage. These assets can be scaled up and generate synergies too, enabling a business to grow more rapidly and to a larger size, as in the case of Uber and Airbnb.  

This isn’t just a phenomenon for tech firms. In the 1970s, over 80% of a large company’s market value could be traced through to the financial statements. Today, less than 20% of a company’s market value can be accounted for by its financial and physical assets. It is intangible assets that now make up a majority of a corporation’s net worth.

Risk associated with intangibles

On the other hand, the value of intangibles can change rapidly, if not managed carefully. For instance, the value of a brand can be eroded overnight by a corporate scandal, as shown in the cases of Toyota, Kobe Steel, Volkswagen, and more recently Oxfam.

Likewise, the loss of key people could negatively impact the value attributed to a firm’s workforce. IT industrialist Narayana Murthy perfectly captured this, when he wrote: "Our assets walk out of the door each evening. We have to make sure that they come back the next morning."

In addition, intangible assets, unlike plant, machinery or property, may have little ready market value. This means that in a crisis their value may suddenly collapse. The recent spectacular collapse of Carillion or that of Bell Pottinger last year are object lessons in this.  

Incorporating intangibles into business decision making

Despite the fact that intangibles are both a primary driver of value and a key source of risk for business, it is disappointing that only 11% of executives have been able to make decisions using non-financial metrics. To add to that, executives have less than 30% confidence in their strategic information and business model reporting.

This demonstrates the scale of the corporate blind spot when it comes to the ‘intangible economy’. I’ve spoken to many CEOs and CFOs about this issue, and the widely held view is that non-financial information reporting is important in improving risk management and long term performance and competiveness. The issue is that businesses are at loss at how these assets can be evaluated, reported and managed. It is not easy to measure and report on the value of intangibles, but guidance in this field is growing through work by organisations like the International Integrated Reporting Council.

To begin with, the board should work more closely with its finance team. Management accountants understand both financial and non-financial risks within the specific context of the business and its external environment. Coupled with their understanding of the business model, they are well positioned to provide the board with insightful information on intangible assets and risks, and how to measure and manage them to drive growth and create value.

To make sure that boards get what they need, management accountants are stepping up to the plate and developing non-financial metrics, to both identify the value drivers and outcomes. Covering a company’s customers, employees, supply chain and environmental, social and governance factors, many of the metrics will be used on a sector-wide basis while others remain company specific.

What’s really interesting is how these measurements, in turn, will also start to shape business models, especially as boards start to adapt their corporate strategies in response to the metrics.

Our research found that executives believe that clear disclosure on their company’s business model is second in importance only to disclosure about their strategy. This recognises a fundamental shift in the corporate mentality. Businesses are no longer just made up of money, buildings and equipment, their very existence is often dependent upon how they are seen or viewed by customers. 

If nothing else is learnt from the recent crises, measuring and acting on non-financial data will not only make companies safer from unexpected risk, but also provide them with a great opportunity to drive long-term and sustainable growth.

Andrew Harding is chief executive, management accounting at the Association of International Certified Professional Accountants.

Image credit: alphaspirit/Shutterstock

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