IR is all about valuations.
If investor relations is all about valuations, then valuations is all about assessing correctly the worth of intangible assets.
Intangibles are vitally important corporate assets and value drivers in a knowledge-based economy. While estimates vary, the proportion of corporate value associated with intangibles is widely considered to be over fifty per cent of a company's value.
For example, the most valuable assets of an innovative company today, such as intellectual property, software investments, staff and managerial expertise, research and development, advertising and market research, and business processes -- have no natural place on the balance sheet. And as the nature of doing business has changed, the list has grown.
They can be recorded as expenses or sometimes, in the case of intellectual property, as liabilities, however frequently they do not make their way onto the books at all.
Each company therefore makes its own valuation of intangibles, guided only by very general accounting standards. Yet today's investors are focussing greatly on intangibles, and a growing number of companies are scrambling to find the methods that will help them better use, develop and communicate about them. In particular, investors have been looking at how social and environmental issues translate directly to market value.
There is no standard, internationally recognised way of making that valuation. None of the existing approaches such the triple bottom line, or the balanced scorecard (used according to Bain and Co by about 57 percent of international companies) have been adopted as a standard by the official financial accounting bodies. But it is perhaps only a matter of time until they are.
Meanwhile, communicating the half of a company’s value proposition that cannot be accurately measured remains an IR challenge.
Intangibles are vitally important corporate assets and value drivers in a knowledge-based economy. While estimates vary, the proportion of corporate value associated with intangibles is widely considered to be over fifty per cent of a company's value.
For example, the most valuable assets of an innovative company today, such as intellectual property, software investments, staff and managerial expertise, research and development, advertising and market research, and business processes -- have no natural place on the balance sheet. And as the nature of doing business has changed, the list has grown.
They can be recorded as expenses or sometimes, in the case of intellectual property, as liabilities, however frequently they do not make their way onto the books at all.
Each company therefore makes its own valuation of intangibles, guided only by very general accounting standards. Yet today's investors are focussing greatly on intangibles, and a growing number of companies are scrambling to find the methods that will help them better use, develop and communicate about them. In particular, investors have been looking at how social and environmental issues translate directly to market value.
There is no standard, internationally recognised way of making that valuation. None of the existing approaches such the triple bottom line, or the balanced scorecard (used according to Bain and Co by about 57 percent of international companies) have been adopted as a standard by the official financial accounting bodies. But it is perhaps only a matter of time until they are.
Meanwhile, communicating the half of a company’s value proposition that cannot be accurately measured remains an IR challenge.
posted by Mark Hynes @ 3:51 pm
3 Comments:
At 4:01 pm,
Roberto Iza Valdés said…
Compliments
At 8:12 am,
Richard Young said…
Half? I seem to recall that tangible assets represent much less than that in terms of overall market value (sorry, I'm vaguely remembering the numbers rather than checking!). Interestingly, when I interviewed a bunch of FDs a few years ago about the concept of accounting valuations for brands, I was met with a lot of skepticism. "So you have an inflated balance sheet - so what?" was the most memorable quote.
The main problem is that you can slice intangibles a number of different ways. Replacement value? Transfer value? Liquidation value? At least property and plant have independent market valuations. And what accountant would accept a value on the balance sheet for "talent" when it can simply walk out of the door? Yes, IP, staff, brands and relationships all have a value that a business would do well to evaluate in order ti manage internal investment decisions. But can you imagine an auditor signing off on the discrete value of a particular patent that might be rendered worthless tomorrow by a change in technology?
This, I think, is one of those areas that forces analysts and investors to actually earn their keep by making their own judgments.
At 7:35 am,
Mark Hynes said…
Richard - many thanks for this. Totally agree, especially on your last sentence.
I also think it makes IRO's 'earn their keep'; providing analysts enough information to allow intelligent assessment of the value, is by no means an easy task.
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