Friday, July 19, 2024

Building Market Capitalization With Intellectual Capital Assets


We have been hearing more and more over these last few years that the most important assets for both new economy and old economy businesses are not the tangible assets conventionally reported on the company balance sheet, but the intangible, Intellectual Capital Assets which are not reported in any financial statement.

How can we understand this emerging truth? How can we make these intangible assets, known as Intellectual Capital, actionable so we can use them to drive corporate valuation and stock price? Here is a simple way to think about the subject:

1) Corporate valuation is equal to market capitalization, which in turn is made up of two elements:

  • The tangible assets, quantified as book value, and reported on the company balance sheet.
  • The intangible assets, which go largely unreported in financial statements and comprise the rest of market cap.

2) Corporate valuation can be enhanced by leveraging enterprise assets to create value and drive growth through:

  • The efficient leveraging of the tangible assets comprising book value.
  • The strategic leveraging of the intangible Intellectual Capital Assets.

Therefore we can actually drive corporate valuation by optimizing and leveraging both the tangible and the intangible assets within the enterprise.

Over the last fifteen or twenty years, book value assets have been increasingly optimized in corporate America through the use of sophisticated management tools such as TQM, outsourcing, downsizing, right-sizing, and reengineering. We can thus assume that these assets are in good hands and well-optimized in most diligent enterprises.

But what about the knowledge-based intangible assets? Are they equally optimized? Unlikely. Learning to optimize the intangible assets is both the challenge and the opportunity before the executives and managers in today’s corporations.

Even after the tough market of the last two and one half years, the market cap of Fortune 500 companies exceeds their book value by two, three or even four to one. This means that for every dollar of value contributed by tangible assets, two to four dollars more are being contributed to enterprise value by the intangibles. This is true across both old economy and new economy companies. This means that the value being contributed by their intangible Intellectual Capital Assets is significantly greater than the value contributed by their largely optimized physical assets.

This fact bears powerful witness to the reality and power of such knowledge-based assets, and to the importance of identifying and managing these Intellectual Capital Assets to cultivate new sources of value and growth for the enterprise.

As we continue the shift into a knowledge-based economy, the success of businesses both in the marketplace and with investors will be based upon intangibles – Intellectual Capital Assets – such as Brands, Knowledge, Innovation, Human Capital, and Intellectual Property. Given the tremendous power of Intellectual Capital Assets to influence the valuation of an enterprise, it is critical that executives learn to employ these assets to improve profitability and increase shareholder value.

For most organizations, acting on this insight will begin by identifying their respective intangible assets and obtaining the specialized expertise that will make their management actionable and accountable for leveraging these assets effectively. Given the potential upside impact on the enterprise valuation, the management of Intellectual Capital Assets should be handled with the same due diligence long devoted to managing tangible assets.

Now that these Intellectual Capital Assets have come into focus, it is a fiduciary responsibility of enterprise executives to ensure that such assets are recognized, performance metrics established, and that they are successfully exploited. Given the fact that intangibles can grow exponentially relative to tangible assets, it only makes sense to pursue this path as both the best and fastest way to increase enterprise valuation.

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