Reprint: R0406H
Intangible assets—patents and know-how, brands, a skilled workforce, strong customer relationships, software, unique processes and organizational designs, and the like—generate most of a company’s growth and shareholder value. Yet extensive research indicates that investors systematically misprice the shares of intangibles-intensive enterprises. Clearly, overpricing wastes capital. But underpricing raises the cost of capital, hamstringing executives in their efforts to take advantage of further growth opportunities.
How do you break this vicious cycle? By generating better information about your investments in intangibles, and by disclosing at least some of that data to the capital markets.
Getting at that information is easier said than done, however. There are no markets generating visible prices for intellectual capital, brands, or human capital to assist investors in correctly valuing intangibles-intensive companies. And current accounting practices lump funds spent on intangibles with general expenses, so that investors and executives don’t even know how much is being invested in them, let alone what a return on those investments might be.
At the very least, companies should break out the amounts spent on intangibles and disclose them to the markets. More fundamentally, executives should start thinking of intangibles not as costs but as assets, so that they are recognized as investments whose returns are identified and monitored.
The proposals laid down in this article are only a beginning, the author stresses. Corporations and accounting bodies should make systematic efforts to develop information that can reliably reflect the unique attributes of intangible assets. The current serious misallocations of resources should be incentive enough for businesses to join—and even lead—such developments.
