Executive
Summary
Introduction
Policy
trends
|
Policy trends in Intangible Assets
Executive
Summary
Introduction
Policy
trends
|
It has been a clearly accepted evidence for years that not all elements of company wealth are of a physical nature and difficulties encountered in trying to establish the real wealth and value of an organisation have become a major challenge with the progress of the knowledge-driven economy.
Assets such as information systems, clientele and reputation, brands, competencies and knowledge, training, association to networks, represent an increasing share of company value and have become the most critical factors in the competitiveness of many organisations. Recent estimates suggest that 50-90 % of the value created by a firm come, not from management of traditional physical assets but from management of intellectual capital.
While the knowledge-driven economy is developing, our knowledge about the reality of economy is unfortunately decreasing, at the level of both firms and nations, as financial accounting methods and official statistics are still heavily based on a pattern dominated by tangible assets.
Since several years though, there has been a growing interest and demand for more information on the value of intangible assets and investments from different actors and many interest groups look at intangible assets: companies managers, shareholders and venture capitalists, accountants and auditors, banks, regional developers, securities regulators, national institutes of statistics, management consultants, academic researchers, etc.
More and more pressure is felt in order to develop instruments allowing to get a complete picture of the value of a company and of the economy as a whole.
However, there are still important obstacles and difficulties, related in part to the diversity of challenges for each category of actors concerned.
In particular, there is no globally accepted definition and classification of intangibles. OECD, which plays a leading role in that area, refers to "non-material factors that contribute to the growth and performance of firms or nations without being included in the traditional category of fixed assets", which is only partly helpful.
Indeed, it may be argued that definitions and perspectives rightly vary according to the interested groups (companies, public authorities, investors, accounting, etc.). Each group develops its approach in view of its mandate, objectives, constraints, as well as available data and reference methodology.
Against that background, public bodies are potentially directly involved in several of their capacities and responsibilities, e.g.: accounting rules, protection of third-parties and investors, tax, regional development, promotion of innovation, national statistics, etc.
Member States recognise the importance of the "knowledge-driven economy" and all have launched policies regarding intangible issues
The recognition of the importance of intangible assets has been translated into new or different public action.
In several countries, a diffuse move has been the reallocation of public regional development funding from hardware (hard infrastructure) to more soft infrastructure and environmental measures, as well as the provision of intangible resources. Most economic policies encourage intangible investments (training, RDT, business services), ensure the protection of intangible assets or (patents, brands, IPR) and favour the development of innovation networks.
At the same time, public authorities are starting to be confronted with another aspect, i.e. the growing necessity to identify and possibly diminish the risks potentially associated with a blooming intangible sector, as evidenced by the current (and probably future) difficulties in the ‘new economy’ sector.
But probably due to the very wide ranging of the concept, as suggested above, there have been (some but) few country-wide attempts at grasping the globality of issues at hand under public co-ordination and guidance.
Three groups of countries have emerged:
- The forerunners: Denmark, Sweden and Netherlands, which have demonstrated sustained interest for IA as an umbrella concept;
- The Challenger, United Kingdom, where there is at present an emerging agenda concerning an integrated approach to intangible assets;
- The undecided (France, Italy, Germany), where the survey has not identified an "intangible assets" agenda nor an institutional reflection, but rather an interest for addressing innovation, knowledge and human capital as key components of any policy.
All three groups of countries are now faced with a decision-making agenda. This is particularly true for the "forerunners" group, where the majority of programmes launched between 1995 and 1999 come to an end. The current phase is about evaluation, dialogue and preparation of follow-up action. But it is felt that public authorities will probably have to deliver sustained impulse because of lack of spontaneous continuation of the work done.
The importance of the international dimension
At the present time, and in spite of the influence from Nordic countries, dominant models are of US origin and concentrate on market-related issues. The same domination applies to available literature, resources centres on intellectual capital and specialised consultancy.
There may be a case for setting up a European model, building upon advanced steps reached by some European countries. Several Member States would actively second such an initiative, but it needs to be tackled jointly by the various institutional actors on an interdisciplinary basis.
It is the authors’ belief that the Commission could take the lead in Europe on IA issues, by adopting a global standpoint, launching co-ordinated actions with Member States and encouraging knowledge sharing and pilot experiments.
In practical terms, several action lines could be recommended, which may be split into four main categories: promote intangible investments ; further impulse the dialogue on those components of intangibles having an impact on the completion of the single market ; raise cross-fertilisation between national (and international) research initiatives; set up a dedicated agenda for SMEs.
The growing importance of Intangibles Assets in the knowledge-driven economy
It has been a clearly accepted evidence for years that not all elements of company wealth are of a physical nature. Already, more than sixty years ago, Archibald Bowman wrote a pleasant poem in the May 1938 edition of the Journal of Accountancy:
Though your balance-sheet’s a model of what balance-sheet should be,
Typed and ruled with great precision in a type that all can see;
Thought the grouping of the assets is commendable and clear,
And the details which are given more than usually appear;
Thought investments have been valued at the sale price of the day,
And the auditor’s certificate shows everything O.K.;
One asset is omitted - and its worth I want to know,
The asset is the value of the men who run the show.
(quoted in Timo Partanen thesis)Difficulties encountered in trying to establish the real wealth and value of an organisation have become a major challenge with the progress of the knowledge-driven economy. A new global economic order is emerging where the established norms of wealth-creation, investment and financial risk are called into question. As stated in the DG Enterprise publication "ICT investment in the intangible economy", "The defining trend is the shift from tangible to intangible factors of corporate value and competitive advantage and this, in turn, has led to the emergence of a discrete intangible economy in its own right".
Thirty years ago, industrial economies were dominated by sectors such as steel, bulk chemicals and power generation, which invested large amounts in plants and machinery. Competitiveness factors were based on the optimisation of tangible assets.
Today, economies are dominated by knowledge-intensive services and the manufacture and sale of knowledge-intensive products. Sectors such as electronics, pharmaceuticals and telecommunications invest more in R&D, software and information and communication technology, advertising and training than in fixed capital equipment. Assets such as information systems, clientele and reputation, brands, competencies and knowledge, training, belonging to networks, etc. represent an increasing share of company value and have become the most critical factors in the competitiveness of many organisations. Furthermore, since 3 or 4 years, for some companies of the New Economy associated with the Internet, intangible assets represent the most important if not the unique real asset as they hardly invest in fixed assets at all.
At the level of the firm, recent estimates suggest that 50-90 % of the value created by a firm come, not from management of traditional physical assets but from management of intellectual capital (Hope and Hope 1998).
Sources: IFAC (International Federation of Accountants)
" Hope and Hope 1998 "
At the macro-economic level, as early as 1992, the Dutch Government estimated that intangible assets accounted for more that 35% of the total public and private investments in the Netherlands. In the US, it was noted in 1992 that investments in intangible assets exceeded tangibles. Sweden also estimated that the share of investment flows geared to intangible assets is at 20% of GDP.
The growing gap between real values and represented values
While the knowledge-driven economy is developing, our knowledge about the reality of economy is unfortunately decreasing, at the level of both firms and nations.
In fact, financial accounting methods and official statistics are still heavily based on an economy dominated by tangible assets patterns:
- Financial statements which should in principle represent an organisation’s asset base and its ability to generate profits, continue to reflect traditional concepts typical of the industrial era and to disregard today’s most significant assets. Financial reporting does not provide adequate information on intangibles and does not reflect how much a company is worth: a recent British survey showed that, on average, 40% of the value of a company is not reflected in its balance sheet. Another key element is the growing gap between balance sheet and market values: the ratio of market values to book values of S&P 500 companies has ascended from one-to-one in the late 1970s to six-to-one today (Robert Litan in the Financial Times - May 24 2000).
- Macro- economic statistics are not able to measure the growing importance of Intangible Assets, assess country-specific "soft" investment data and therefore capture the essence of the economy of today and tomorrow. Already in 1996, at the Bologna Conference, bringing together all national statistic institutes, the latter have questioned the gap between economy and statistical representation.
There is a increasing hidden value of the firms and of nations and both managers and policy makers " operate in the dark ", as Thorvald Moe, deputy Secretary-general of OECD, said in his speech in Amsterdam in June 1999 on "Measuring and Reporting Intellectual capital: experience, issues and prospects".
"Operating in the Dark in the Knowledge Driven economy": the negative repercussions
As indicated above, the lack of information is problematic both at the micro level of the firms and the macro level of the nations.
Globally, the under-reporting of knowledge will have negative repercussions at three function levels (Evidenced in particular in the Dutch official Progress Report - see section on the Netherlands):
failure to render knowledge transparent is preventing management from making the correct strategic decisions, thereby in turn preventing knowledge from being optimally used within the organisation;
- Business-internal function:
the lack of adequate external information concerning intangible assets could be making it difficult for knowledge-intensive companies to attract external financing and be correctly evaluated by external players;
- Business-external function:
- Macro function:
there is also frequently a lack of insight into specific categories of intangible assets at macroeconomic level. The government’s own accounts are also heavily based on tangible investments. The lack of reliable statistical information and data on intangible investment makes it difficult to substantiate this phenomenon or to monitor its progress and assess its importance for competitiveness and growth of industries and national economies. It makes it difficult for the governments to conduct a policy relating to categories of intangible investments.Accordingly, the failure to properly chart intangible production factors could hamper the full utilisation of the growth potential of the knowledge economy.
How to make the invisible more visible?
In somewhat of a paradox though, intangible assets, in spite of their importance, are one of the main puzzles of the knowledge-based economy because there is no common agreement about how intangibles can or should be valued and many questions are still unanswered.
Since several years, many interest groups look at intangible assets: companies managers, shareholders and venture capitalists, accountants and auditors, banks, regional developers, securities regulators, national institutes of statistics, management consultants, academic researchers, etc.
More and more, governments are convinced of the necessity to better assess the place of intangible assets in the economy and society and to implement actions. The "open-doors" approach has essentially revealed the complexity of interwoven issues and the challenges that have to be met by public bodies in designing policies and tools enabling a better representation of economic value at micro and macro levels.
The rationale for launching a survey on these issues
Against that background, the DG Enterprise of the European Commission has decided to launch in February 2000 a study on "policy trends in intangible assets" in seven Member States: France, Germany, Italy, Netherlands, Sweden, Denmark and United Kingdom. This sample of 7 countries provides a fair representation in terms of:
- diversity of models of "economic and social development" and accounting traditions, rules and practices.
- degree of progress as regards research and practices on intangible assets.
The study’s objectives were to:
- provide the Commission with an overview of Member States policies on intangibles, through the identification and study of national plans and measures : policies supporting human capital, process capital, innovation capital, measures accompanying business environment, account reporting policies, etc.;
- make an inventory of promotional activities and initiatives aimed at raising awareness of public and private actors in the field of intangible assets (web sites, key papers, conferences, experts and working groups, etc.);
- present an overview of who's who and who does what, including their contact details.
- draft recommendations for actions at EU level
This study has been carried out by LL&A.
(Nota: In parallel to this study, DG Enterprise has also launched a High Level Expert Group. The HLEG is charged with examining systematically and in some detail a wide range of areas where existing public policies may be impeding or biasing the way the private sector thinks about and acts with respect to investments in intangible assets. The contact person at DG Enterprise for both studies is Ellen Pedersen - ellen.pedersen@cec.eu.int. Contact person for LL&A is Isabelle Chatrie - isa@ll-a.fr).
Undoubtedly, there has been a growing interest and demand since 5 years for more information on the value of intangible assets and investments from different actors. More and more pressure is felt in order to develop instruments allowing to get a complete picture of the value of a company and of the economy as a whole. However, there are still important obstacles and difficulties, related in part to the diversity of challenges for each category of actors concerned.
Conflicting views are not uncommon: a company head trying to attract funding will not have the same approach as an auditor trying to determine the minimum certifiable value of a company. In more general terms, approaches based on the assessment of company potential do not match the traditional approaches based on past performance.
The Accounting challenge: knowledge is still in its early days and debate is much alive
Today, financial reporting does not provide adequate information on intangibles assets and does not reflect how much a company is worth. As mentioned in the above introduction, a recent British survey showed that, on average, 40% of the value of a company is not reflected in its balance sheet. For the accounting profession, the current accounting framework does not allow to account adequately for intangible assets, in particular for those internally generated intangibles.
An increasing number of accounting professionals and regulatory bodies are now encouraging discussions and work on experiments as well as standards. Accountants have a role to play in this process. In 1998, IASC has published the "IAS 38 intangible assets" norm, considering that it is only a step forward towards the separate recognition of intangible assets for the better understanding by users of financial statements of investments on intangible assets, more work in the future being necessary.
In fact, knowledge about intangible assets is still in its early days and debate is very much alive. The International Federation of Accountants (IFAC) also considers that there is a great deal of room for experimentation in quantifying and reporting on the intellectual capital of the firm: developing comparable intellectual capital measures and reporting practices remains one of the key challenges for the accounting profession.
Accountants support and participate to the growing effort to understand the complexities of intangible assets management but recognise that there is a long way to go for generally accepted and endorse practices to evolve. The European Accounting Association as well as national organisations such as the Institute of Chartered Accountants in England and Wales express the need for better understanding of data and launched projects such as the 2020 Vision Project. Project chairman said in a recent declaration, that cultivating and measuring the "great intangible" of human capital was the next major challenge for both company boards and their accountants. He argued that a deliberate strategy is now required: "those businesses that fail to develop one will go the way of the dinosaurs". He also called on accountants to develop vital measurements of value in this area.
"Measuring intangibles like human capital may seem like a break with my profession's traditions but it's essential to building Britain's sustainable economic success. People are now the key drivers of profitability. However, this reality and its implications for the way we do business are poorly appreciated by British companies and accountants. The key is to promote informed discussion amongst investors and to create new measurements that confirm value".
In summary, some progress has been achieved but solving IA-related accounting issues remains one of the most challenging tasks.
The Business Challenge: insufficient knowledge, practical difficulties and a diversity of situations according to company size and sector
The incomplete picture concerning intangibles poses different problems for managers at different levels.
it may discourage them to invest in knowledge and human capital as they will have no good picture of their return on investment and will tend to consider money spent to create and improve these intangibles as "expense" instead of "investment".
companies are not in the best position to improve the management of their internal knowledge flows, internal processes and human capital, which can lead to management errors and misallocation of resources.
it is difficult for them to measure their performance with inadequate concepts and incomplete data. New strategic performance assessment systems could enhance both managerial understanding and control of a firm's value-creation process.
without a clear picture of the intellectual capital role, it is difficult for them to understand that competitive factors are based less on physical and financial resources allocation but more on the management of intellectual capital - from capturing, coding and disseminating information, to acquiring new skills through training and re-engineering business processes.
Also important from a business perspective, is the ability to measure IC for the purposes of attracting investors or obtaining loans. Today, companies that rely on "brain power" tend to miss out or they are charged more for their loans.
As financial analysts look more favourably on a liberal supply of (prospective) information, it should be noted that it is probably preferable for companies to publicise their own information themselves than for the outside world to speculate about it.
Therefore, there is a demand from managers that companies’ value be better measured and reported for planning, management, control, reporting and evaluation purposes. This demand is often made at the level of senior managers. Some business communities, especially in Sweden and Denmark, are active and some big companies have developed internal functions of "knowledge" or "intellectual capital managers". Consulting companies are also implementing new activities on knowledge management and performance measurement and develop models to better value the rising value of intellectual capital ("intellectual capital metrics"). Another indicator is - especially in the US - the flourishing of tools, information bases, knowledge portals and web sites, as well as knowledge management solutions.
However, there are some associated difficulties:
- the majority of European managers still have a limited vision or an unclear perception of " intangible capital ". Some surveys show that a majority do not understand the concept.
- there is a standing paradox insofar as company managers believe that the management of intellectual capital is an important factor in determining future company success and competitiveness but in the same time few executives conduct initiatives within their organisation that are designed to assist in managing intellectual capital. The key components of intellectual capital are poorly understood, inadequately identified, managed inefficiently, and are not reported within a consistent framework.
- risks associated with IA disclosure result in some reluctance to disclose IA information, in particular externally (competitors, raiders, tax departments, suppliers). Companies are still extremely reluctant to use these for external reporting, due to strategic reasons and the possible tax repercussions of providing insight into intangible assets.
- lack of methods and tools of companies to identify, understand and report on IC.
- the cost to companies incurred in developing and maintaining information on IC.
From the companies’ standpoint, it seems that internal reporting is better accepted by companies than external reporting because they recognise a value mainly for their internal management processes. In practical terms, it will only be possible to make new inroads with regard to external financial reporting if it is done as an extension to internal reporting. But ultimately, it may well be that pressure from external players (shareholders, financial analysts and banks) will force the publication of this information, as the driving force behind this trend effectively shifts from business-internal to business-external factors.
Some manufacturing sectors though, especially the "low-tech", as well as the SME community, seem to stay away from these trends.
The awareness gap, the lack of human and financial resources, the absence of standard and low-cost tools, the cost of using major consultancies and inadequate IA training of internal and external accountants are felt in a marked way in the SME community. It then comes as little surprise that most achievements take place in the larger companies.
The Investors challenge: avoid the misallocations of resources by over-evaluation or under-evaluation
Non-financial performance data are relevant to shareholder evaluations and investment decisions. Surveys demonstrate that approximately 35% of the investment decision is influenced by non-financial data and non-financial performance indicators. Therefore, more and more analysts and investors ask for information on intangible assets which will permit to better inform their decisions. High-Tech and "new economy" companies are also particularly interested in placing a value on intangible assets in order to secure financing and equity investment.
But:
- not all financial institutions feel concerned, and in particular the traditional banking sector is very quiet;
- the lack of standards results in sustained subjectivity in IC measurement, with associated scoring risks.
The Human challenge: a long-lasting debate and ethical issues
Taking stock of intellectual capital (of the employees) forms an important block for corporate strategy. Reporting on intangible assets may help the company to attract new talents as it demonstrates its capacity of developing knowledge.
Developing training, corporate culture and the "working place" could motivate staff for the benefits of both employees and managers.
A trend is currently visible, especially in the US, in which the provision of non-financial information concerning intangible assets is strengthening the position of employers on the labour market, which is short of knowledge-workers.
Also, while the knowledge account, as a component of the reporting pattern, may benefit training and personal and collective development in the workplace, there is a case for retaining the social-ethical account introduced in several countries, as a safety net for the weaker members of the labour market (see further developments in " Your knowledge – can you book it ? " - Danish Federation of Trade Unions).
However, despite this growing demand from both employees and managers to better assess human capital, there are still practical, theoritical and ethical difficulties, which has resulted in a long-lasting debate: the firm does not "own" its employees and some consider that employees cannot be treated as assets. Also, some practitionners consider that accounting for the worth of employees should not be encouraged as well as controlling and assessing their value for the company.
One can observe that few "social partners" bodies have been involved at present time. The leader appears to be Denmark with the "Working life initiative" of the Danish Confederation of Trade Unions - LO. Along the same lines, it appears that few training organisations are active, in spite of the CEDEFOP impulse.
Against that background, policy-makers are also confronted with many challenges.
In practical terms, public bodies are potentially directly involved in several of their capacities and responsibilities, e.g.: accounting rules, protection of third-parties and investors, tax, regional development, promotion of innovation, national statistics, etc. In addition, they have a key role in national education and training systems, which leads them to keep a wary eye on "human capital" developments, such as the "knowledge account", also because of its potential social implications. Finally, governments, as organisations, also have to develop their intangible assets and need to better assess and exploit them internally.
Intangibles are transforming the orientation of public policies. Government policies must recognise the fact that intangible investment is becoming the key element in bringing about durable growth and that they should attribute at least the same priority to intangible factors as to physical investment. Therefore, some concrete actions must be implemented in accordance with this new paradigm.
"Intangible assets" appears to be an umbrella concept for several key production factors coming on top of capital and labour, and it is now widely accepted that these new intangible elements play an ever increasing role in the enhancement of competitiveness.
It could be argued that encompassing all components under the same roof (the ‘intangible assets’ concept) is indeed a challenge and that the concept may be too wide. The rationale for at least trying a comprehensive approach is twofold: the level of interaction between the components, and the fact that they often appear as a global aggregation, namely the market/selling value of a given company.
Methodological difficulties appear from the very start as even the term "intangibles" is not commonly accepted and some countries tend to use "intellectual capital" or "immaterial capital" or even "knowledge capital". Some will find differences between these terms ; other will claim that they have the same meaning and describe the same reality.
Commonly-accepted definitions are still under discussion
There is no globally accepted definition and classification of intangibles. OECD, which plays a leading role in that area, refers to "non-material factors that contribute to the growth and performance of firms or nations without being included in the traditional category of fixed assets", which is only partly helpful. They generally include at least R&D, human resources, organisational capital, customer and suppliers networks, software. Other organisations and research groups suggest other classifications and sub-categories. The European project MERITUM has identified a wide range of classifications and is conducting benchmarking analysis (definitions of the International Accounting Standard IAS 38 definition, Brooking Institution, Intangible Research Center, Sveiby, Skandia/Edvinsson, Roos, Arthur Andersen, etc.. The European Commission has also worked on a model:
Source: European Commission - Enterprise DG
More recently, the High Level Expert Group implemented by DG Enterprise has proposed another scheme which introduces a distinction, within intangibles, between "intangible" goods and "intangible competencies".
Despite all these efforts, a generally accepted structure for intangibles is still lacking and heterogeneity and the absence of a common theoretical framework are a major characteristic. There seems to be few common points between the research carried out in the management of human resources, in marketing, in the evaluation of brand names, in law on intellectual property, in accounting and registering intangible assets or in the management of data systems or the impact of the new technologies. Research on organisational learning and more generally on knowledge and intelligence in the company, studies on confidence, quality, environmental protection, the citizen company, communication, etc. could also be mentioned.
Also, definition, coverage and classification vary according to the countries. Some are restrictive and consider only core components of intangibles (R&D, software). Other are more open and recognise the value of new intangibles For example, Sweden identifies three categories of intangibles: individual competencies (knowledge and capabilities); organisational competencies (databases, technology, routines and culture); relational (relation, reputation and loyalty).
It also appears that the concept of intangible investments is still evolving. It is an on-going process, in the light of studies, experience, measurement and realisation of its many facets.
Indeed, it may be argued that definitions and perspectives rightly vary according to the interested groups (companies, public authorities, investors, accounting, etc.). Each group develops its approach in view of its mandate, objectives, constraints, as well as available data and reference methodology.
IA measurement techniques are not well established and are multiplying
Measurement and valuation of IAs in a reliable and consistent manner would enable to appreciate the real worth of goods and services and the merits of the organisations that provide them, instead of just knowing about costs, prices and profits.
Unfortunately, the techniques for measurement and valuation of IAs are not well established, despite a surge of interest in the topic in recent years. In some cases they are primitive or non-existent; in other cases there are proposals to transfer and adapt techniques from other applications such as strategic management.
There are some specific technical issues that need to be addressed if further progress is to be made (nota: a detailed analysis of these issues is included in the " Grasping the Nettle " report by CRIC - Manchester University to the DTI). Examples include patents, designs and copyrights and how R&D expenditures are reported. The Ministry of Economic Affairs in the Netherlands has sponsored case studies by four accountancy firms (see Report on the Netherlands). There are also broad, general and multi-disciplinary perspectives that should be appreciated, such as the treatment of intellectual capital resulting from project team experience. Alliances and collaborative networks recognise the existence of expertise in partner organisations; the credibility to participate in certain networks might represent an intangible asset, and thus the measurement or mapping of relationships and networking intensity could become a measure.
In addition, environmental issues, quality management standards and professional and business ethics are all important external factors and they can be seen as constraints or as opportunities.
How much to measure is partly a technical question, dependent on what can technically be measured. It is also partly a practical question based on the priorities of the organisation and what it wants to measure for which uses. If measurement is semi-automatic (i.e. no administrative burdens) and if it gives good feedback then it might be welcomed.
There is a need for invention and innovation in measurement techniques across a diverse range of situations.
Because each set of users has different requirements, the design of new and improved techniques could be a complex process of balance, compromise and negotiation. It is necessary to develop a conducive climate and sufficient incentive for techniques to be developed (nota: also quoted from the " Grasping the Nettle " report). In all cases, measurement systems will need to be robust, so that it is possible to maintain comparability and continuity over times and places.
All Member States recognise the importance of the "knowledge-driven economy"…
All Member States surveyed recognise the importance of the "knowledge-driven economy", as intangible assets play a crucial role in innovation, productivity growth, and in organisational performance and competitiveness.
There is a high interest of policy makers and institutions in the influence of technology, organisational structure and processes, as well as knowledge on the development of the firm and the economy and therefore on intangible issues.
… and all have launched policies regarding intangible issues
The recognition of the importance of intangible assets has been translated into new or different public action.
In several countries, a diffuse move has been the reallocation of public regional development funding from hardware (hard infrastructure) to more soft infrastructure and environmental measures, as well as the provision of intangible resources. Most economic policies encourage intangible investments (training, RDT, business services), ensure the protection of intangible assets or (patents, brands, IPR) and favour the development of innovation networks.
At the same time, public authorities are starting to be confronted with another aspect, i.e. the growing necessity to identify and possibly diminish the risks potentially associated with a blooming intangible sector, as evidenced by the current (and probably future) difficulties in the ‘new economy’ sector.
… but the majority lack appropriate navigation tools and a minority grasp the globality of issues
Probably due to the very wide ranging of the concept, as suggested above, there have been (some but) few country-wide attempts at grasping the globality of issues at hand under public co-ordination and guidance.
The attitude of policy makers varies:
- Not all governments are conscious that they "operate in the dark", to quote the OECD chief, and consider the issue that there is a growing paradox and gap between the growth of intangibles, on the one hand, and the lack of capacities to identify, measure and manage them, on the other hand.
- Some policy-makers consider that investing in intangibles is enough and that there is no particular need to have a co-ordinated approach to this topic and/or to take steps to measure and report on intangible assets.
- Other policy-makers consider that specific public policies must be launched and look at intangible assets in order the "make the invisible more visible". In fact, if removing the bottlenecks surrounding internal business operations is primarily up to the companies themselves and the private sector, government, by addressing institutional conditions, can help to promote awareness among companies concerning the importance of IA for internal business management.
Three groups of countries have emerged…
- The forerunners: Denmark, Sweden and Netherlands
These three countries have demonstrated sustained interest for IA as an umbrella concept.
This public involvement is rather recent and dates back to the mid-90's: public bodies have started to launch studies and pilots schemes favouring openness with regard to IA on a standardised basis, building an Intangible Assets Agenda.
- the 1998 Dutch "Balancing Accounts with Knowledge" pilot project;
- the 1995 Survey on Intellectual Capital Accounts, followed by the 1998 "Danish Intellectual Capital Statements Project";
- Swedish governmental projects, comprising the preparatory work for the Swedish EU presidency which will include activities concerning human capital, as well as measuring and, reporting on, intangible assets.
These pilot projects and studies have several aims:
- to raise awareness of companies stakeholders;
- to work on definitions and methodologies;
- to build general principles and guidelines for reporting key indicators of intellectual capital and information on value creation at the level of the firm as well as of the nation.
The initial impulse originated from different sources: Parliament in the Netherlands, Government in Denmark and companies in Sweden. OECD played a key accompanying role, as well as statistics institutes (Statistics Sweden, Statistics Netherlands).
One common denominator between the three countries is that they set the topic at a high level of priority for the years to come. Sweden officially promotes itself at the highest political level as the "Vikings of Intellectual Capital". It promotes its "Intellectual Capital of nation" and Intangible Assets should be on the Swedish Presidency Agenda. Netherlands aims to take a leading role in Europe concerning disclosure of intangible assets. Declarations of the Prime Minister A. Jorritsma-Lebbink confirms that intellectual capital reporting is feasible and that Netherlands are well positioned to play an active leading role. It has hosted the OECD June conference in 1999 and is launching a comprehensive policy on this topic.
In these countries, IA leaders are ministries / agencies of industry and economic affairs as well as social and training affairs.
- The Challenger(s)
This group is represented by one country, United Kingdom, where there is at present an emerging agenda concerning an integrated approach to intangible assets. This stems from government's recognition of the growing importance of the intangible assets which was clearly evidenced in the Competitiveness White Paper published in December 1998 "Building the Knowledge Driven Economy" which includes a chapter on "intangible issues". Several shortcomings were identified and the government considered that "to compete effectively in the knowledge driven economy we need to overcome these shortcomings. Achieving that requires a new approach to public policy." Since then, following the lead taken by Netherlands and Scandinavian Countries, the UK Government has decided to launch consultations and to assess the feasibility to launch specific actions on the value and reporting of intangible assets. As a result, a "Value Creation in the Knowledge-Driven Economy" programme has been launched including three main sections: Accounting and Company law Project - Develop proposals for operating and financial review ; MARIA project - Company management and reporting of intangibles; Research Project - feasibility to conduct longer term research into the measurement and valuation of intangible assets.
- The undecided
In the other three countries surveyed (France, Italy, Germany), even if the increasing importance of intangible assets is recognised as a central feature of the knowledge-driven economy and as a source of added value and profitability for companies, the survey has not identified an "intangible assets" agenda nor an institutional reflection, but rather an interest for addressing innovation, knowledge and human capital as key components of any policy.
It can be noted that France had started very early to launch such a debate, with Commissariat Général au Plan in the 80's (Working Group Bonnaud). The group insisted on the fact that these (IA) concepts needed to be taken into consideration for future policies, in particular by proposing an analytical methodology to account for intangibles. However, these recommendations were not implemented and such a public-led debate was not reactivated since.
However, this group of countries demonstrates an interest in sharing experience gained in the more advanced countries.
.. but all three groups of countries are now faced with a decision-making agenda…
In the "forerunners" group, the majority of programmes launched between 1995 and 1999 come to an end. The current phase is about evaluation, dialogue and preparation of follow-up action. Several events are planned before the end of the year in order to present results.
But it is felt that public authorities will probably have to deliver sustained impulse because of lack of spontaneous continuation of the work done. For example, in the Netherlands, the Government feels that the initial impetus it has provided will not be enough to persuade the private sector to continue the initiative of its own accord. Moreover, if the topic has now become more and more widely discussed in academic circles, and is increasingly generating discussion and publications at both national and international level, it has not always resulted in more practical information for the companies themselves.
Also in the UK, a first delivery of evaluation reports and results has taken place. The Government is expected to announce some initiatives over the next few months.
Because of the momentum in neighbouring countries and in spite of many conceptual and practical difficulties, it is quite probable that less advanced countries will catch-up in future years.
4. Policies are mainly geared towards measurement and disclosure…
In the more active countries, application domains mainly cover:
- improving measurement methods and internal/external reporting on intangible assets at the level of the firm (companies accounting, disclosure rules, tax problems, etc.);
- company law and corporate governance;
- treatment of intangible in the national accounts, new statistics and indicators for a knowledge-based economy, referring less to technology and infrastructure and more to intangibles;
- measurement of innovation policies;
- protection of intellectual capital;
- orientation of R&D policies towards "soft" content.
In spite of substantial investment in education and training, still few countries focus on the measurement of human capital (human resource costing and accounting) and encourage the treatment of capital investment and investment in training on a equal basis, as recommended in the EU White Paper on teaching and learning.
… and dialogue, pragmatism and public-private partnership prevail
What is most often found is awareness raising and experiments, as opposed to direct intervention and new rules.
There is a need to establish close co-operation between actors concerned, i.e. companies, accounting bodies, standards setters, stock exchange operators, consulting groups, etc.
This is why the dominant modes are the launch of pilot projects, involving users groups, as well as consultations and workgroups (e.g. the Dutch Monitoring Group, the Danish Task Force, closed links between universities, Skandia Future Centre and the Government policies, etc.).
For reference purposes, it can be noted that the first Swedish approach had been of top-bottom authoritative nature. It has been rejected and it was further decided to implement a more pragmatic and consensus-based approach.
As a general rule, governments try not to impose new codes of practice to companies, but rather:
- They conduct IA awareness programmes;
- They provide practical guidelines and indicators;
- They suggest the adoption of the new tools on a voluntary basis;
- They disseminate best practices;
- They provide innovating tools, in line with the development of new ICT, such as internet-based real-time reporting).
The main motto is that institutional conditions must tie in with the perceptions, concerns and priorities of entrepreneurs. In other words, they must interface smoothly with internal applications relating to commercial management, otherwise they will be seen as an added burden.
It is very important for governments to understand the reasons for company resistance and to demonstrate the benefits that companies may receive in carefully-designed campaigns.
Public initiatives are still segmented and isolated
Despite the globality of issues at stake which could require a multi-disciplinary profile, bringing together members of long-established disciplines internally and externally (education and training, promotion of R&D and innovation, management consultants, auditors, etc.), public initiatives are still segmented.
Moreover, one can observe a limited international co-ordination, in spite of efforts by some organisations (see below), whereas the need for such concertation is clearly expressed by actors concerned.
…and few developments address the specific situation of SMEs…
Few governments have encouraged studies and initiatives targeted at SMEs whereas the latter are faced with specific difficulties and do not need to report in the same way and for the same purposes as large companies.
The Dutch Agenda though includes follow-up actions targeted at SMEs. According to the fact that the pilot study "Balancing Accounts with Knowledge" analyses large and medium-sized companies, there is a need to cover SMEs for which the topic of intangible assets has somewhat different implications (in particular for start-ups companies). The Ministry of Economic Affairs has decided in conjunction with NIVRA to commission the EIM to develop an assessment tool to measure the intangible commercial aspects of business management in a clear and objective way.
This will give both entrepreneurs and financiers a better insight into the intangible aspects of companies. This can then help make it easier for new and rapid secondary growth companies to attract financing. The aim is for the joint Ministry-NIVRA publication on intangible assets to be accompanied by an online assessment instrument. This instrument can help the entrepreneur to benchmark his score against the scores achieved by other entrepreneurs. Companies will then have a quick reference guide telling them what information finance providers value when considering an application for finance. The instrument can also help improve internal business management.
The Dutch government will promote these concepts widely in order to ensure that their use is more widespread. It will make entrepreneurs more aware of the importance of transparency within their organisation as a means of improving the way they operate.
Even if it is felt that in overall terms the IA issue has its specific dimensions as far as SMEs are concerned, it is nonetheless true that most companies heads concerned have a lot to accomplish in order to reach sound and sustained IA reporting practice. But for them to prioritise the issue probably requires quite tangible benefits, for example easier access to funds. In that respect, a parallel evolution of everyday scoring techniques and risk management approaches used by most banks is a key element.
There is a growing interest in the academic community, for subsets of intangible assets but also for IA globally, as an umbrella concept.
In fact, it could be argued that potentially everything of a theoretical nature that could be written on the subject has been published, but that all actions lie ahead. And truly, a lot of policy and developmental work will have to take place before any significant changes are likely to be made to existing reporting systems by most organisations.
Hence the need to invent new tracks of action-related research, which is in substance what is suggested in the research programmes formulated by the most advanced countries.
… with different key measurement theories and methods which tend to converge…
Theories and methods concerning the measurement of intangible assets (intellectual capital in fact – "IC") have been flourishing since the early 80’s, coming from the academic world or from the business community.
These methods can be grouped into two main categories corresponding to two main schools of thoughts: "External measurement methods" and "Internal and integrated measurement methods".
(a) External measurement methods: the first school of thought measures IC using current accounting data. They develop financial models and indicators on the basis of financial statements existing in the annual reports ("market-to-book values" method, "Tobin's Q" method, etc.). These approaches are already well developed but considered as offering a rather restrictive perspective.
(b) Internal and integrated measurement methods: the second school of thought proposes integrated systems for measuring Intellectual Capital. Rather than analysing the external reporting data already produced in financial statements, they tend to develop internal models allowing companies to identify, value, report and manage their intangible assets. These methods have developed in the 90's, especially in Northern America and Northern Europe.
This second school combines two main inspirations:
Initially, these two approaches were rather opposed, the former being promoted by researchers and practitioners in human resources and accounting, the latter being developed in relation to the improvement of the management of the company. The first one suffers to be not grounded in business strategy and seen as too social and/or academic. The second approach is often criticised as being a gadget for managers.
At present time, both approaches tend coincide, as a result of Swedish influence, in particular thanks to Edvinsson’s Skandia Business Navigator.
The development of the knowledge society makes it increasingly difficult to oppose "human capital" and "management performance". In accordance, one can see the emergence of a new generation of approaches and tools dedicated to IA measurement, based on a clear recognition on the human factor in company performance and competitiveness. This trend demonstrates a major evolution in the economic and social scene and will probably be reflected in future economic policies.
… but the research community is still very much segmented
As it appears, the IA issue addresses all sectors, all aspects of business management and the society as a whole. In that respect, any initiative in the area clearly requires a multi-disciplinary profile, bringing together researchers from different disciplines.
However, the on-going trend is to tackle IA components separately instead of recognising the need for a comprehensive approach.
Although many questions remain unanswered and there is no questioning the appropriateness of more action-focused research, debate and discussion, many researchers express the need for a co-ordinated, networked and multidisciplinary research agenda.
6. The importance of the international dimension
The strong interest already evidenced at the international level…
- OECD: work launched in the 80's, major symposium in Amsterdam in June 1999, etc. OECD plays a leading role at the international level;
- European Commission (including different Directorates General activities, Eurostat and Cedefop): several actions have been launched, including studies and research projects, but its role is not well defined at present time;
- Some international or European specialised organisations such as the UN-initiated Voorburg Group on statistics, the Nordic Industry Fund (the "Nordika project") started to be active;
- Important Research Programmes and pilot projects in the US, Canada, Australia, New-Zealand, Israel, Norway, etc. have been launched;
- International accounting organisations (IASC, IFAC, European Accounting Association, etc.) have started to work on this topic.
… will only increase…
Even if intangible assets must be discussed at the national level because of the specificities of economic and social development patterns, as well as traditions, rules and practices, it is clear that the international dimension is of crucial importance and will only grow in the future:
- the knowledge-based economy is global: companies work at international level and need to report on their activity at a global level, using with internationally accepted standards and rules;
- National accounts and national statistics must allow international comparisons, including same definitions and methodologies concerning intangible investments and assets.
- A strong will to co-operate, as all parties are reluctant to implement national norms or rules that would represent an array of constraints for companies. In addition, successful achievements by some countries or organisations may benefit others and prevent from reinventing the wheel.
… and is subject to the domination of North-American models.
At the present time, and in spite of the influence from Nordic countries, dominant models are of US origin and concentrate on market-related issues. The same domination applies to available literature, resources centres on intellectual capital and specialised consultancy.
Some European countries, however, wish to elaborate and promote a European model
There may be a case for setting up a European model, building upon advanced steps reached by some European countries. Several Member States would actively second such an initiative.
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