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January 25, 2007
Intangibles and investing
This week's cover story at Business Week - Beyond The Green Corporation hits the proverbial nail squarely on the head:
Corporations disclose the value of physical assets and investments in equipment and property. But U.S. regulators don't require them to quantify environmental, social, or labor practices. Accountants call such squishy factors "intangibles." These items aren't found on a corporate balance sheet, yet can be powerful indicators of future performance.
One intangible that is growing in importance is "sustainability" -- what companies are doing to preserve the environment. These actions are generally seen as PR and "do goodism" that make it difficult for companies to justify to stockholders. That may be changing:
new sets of metrics, which Innovest and others designed to measure sustainability efforts, have helped convince CEOs and boards that they pay off. Few Wall Street analysts, for example, have tried to assess how much damage Wal-Mart's reputation for poor labor and environmental practices did to the stock price. But New York's Communications Consulting Worldwide (CCW), which studies issues such as reputation, puts it in stark dollars and cents. CCW calculates that if Wal-Mart had a reputation like that of rival Target Corp. (TGT), its stock would be worth 8.4% more, adding $16 billion in market capitalization.
In addition to making sustainability a bottom-line activity, putting a value on these intangibles is a major step forward. As I pointed out in my white paper, Reporting Intangibles:
Our business reporting system is, in many ways, not even adequate for the Industrial Age, let alone the Information Age. As a consequence, business, investment and economic policy decisions are being made “in the dark” (to quote the title of a recent study).
Fixing that problem will take a multi-prong approach. Better valuation measures of intangibles are one part. Better non-financial measures is another (for example, see the Enhanced Analytics Initiative and the Enhanced Business Reporting Consortium). But greater disclosure of qualitative factors is also needed. Some intangibles will always remain qualitative. Finding ways to communicate that qualitative information in a cross-comparable fashion (so that investors can compare different options) is important. Until then, intangibles will remain murky and hidden -- and in the dark.
[In the interest of full disclosure: the work of CCW on intangibles is carried out with Predictiv, LLC - one of whose principals (Jon Low) is a member of the Athena Alliance Board.]
Posted by Ken Jarboe at January 25, 2007 8:17 AM
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