For my point of view, this problems is one of worker involvement. The lost knowledge issue deals with risk of important tacit knowledge disappearing. It is about preventing bad things from happening. The flip side is how to spot and exploit opportunities based on that tacit knowledge. What is need is what we used to call "high performance work organizations." This organizational structure stresses teams and worker participation. In doing so, it helps share tacit information.

That should be to goal - sharing tacit knowledge. HPWO and knowledge management are steps in the process.

Reputation as an intangible assets is something I have commented on before. But supply chain management has also become an important intangible assets. According to the speakers, capital markets are beginning to recognize the value of good risk management. For example, the credit rating agencies are now looking at how well companies manage their supply chain risk. Given the number of examples of companies who have taken big financial hits because of problems with their supply chains, this makes sense. If a company's revenues drop because they can't get their product to market because a fire at the factory of a key sole-source supplier, investors are rightfully going to ask "why didn't you have a more robust supply chain." Revenue loss is something the markets understand and analysis. Thus a company's market value takes a hit as well. So market players are beginning to look at whether or not the company has a risk-mitigation strategy in place. Financial markets are more willing to extend credit, possible at more favorable rates if the company has addressed their supply chain risks.

In addition to direct revenue impacts, there is the indirect impact on reputation. If bad things happen because of a supply chain problem (think Mattel), not only are short term revenues hit but long term reputation is at risk as well.

So add supply chain management as another key intangible asset.

Let it be noted that an Olympic gold medal's six grams of gold were worth about $165 at the Opening Ceremonies on Aug. 8. As of last week, they're worth about $160. Funny how the gold in Michael Phelps's eight-medal haul is materially worth $1,280, yet he's making tens of millions off its symbolism.

Not really so surprising. If you think about it, much of the value of many things nowadays is really based on their intangibles. A car is worth a lot more than the value of the metal (and plastic). A factory is the sum of multiple intangibles: the skills of the workforce, the organization, the knowledge that went into the layout of the factory, the knowledge that is embedded in the machinery, etc. etc. etc.

So, it should come as absolutely no surprise that the value of those medals is not in the gold but in the intangibles. Three Wise Guys, welcome to the I-Cubed Economy!

Coming after the Fed's beige book report of continued slow economic activity, the past report of a 3.3% GDP growth looks more and more like a mirage.

The government should insist that its loans get first priority and be used only for investment in new technology that can be shared with competitors, or in new plants and equipment that could be sold to other car companies in the event of a bankruptcy.

I also liked Pearlstein's answer to the question of how to do this during yesterday's online discussion:

Washington, D.C.: Steven, I really like your idea that any technology coming out of the program should be shared. But given the current state of intellectual property rights and government rules on IP, how can this be done? Should there be an automatic patent pool, for example?
Steven Pearlstein: Yeah, something like that. There is already such an agreement among the Big three, which have received technology grants under programs dating to the Clinton administration. They formed a joint venture called US Car or something like that, and it morphed into something like Freedom Car under a subsequent Bush program. So there are mechanisms to do this, if the will is there.

I was around when US Car was formed, so Steven is right: we have the mechanisms, we just need the will.

Simplicity for Children has had problems recently with its bassinets, with numerous recalls over the past few years. The company was bought in April by SFCA, an affiliate of Blackstreet Capital Management. The deal was supposed to shelter SFCA from the liability issues. As the Post story relates:

At the time, SFCA was aware of Simplicity's recall of 1 million cribs and voluntarily set aside resources to continue carrying it out. A May news release from Blackstreet said: "The Simplicity brand is well known for its exceptional value, innovative design and unparalleled focus on safety."

Clearly, this was a strategy to deal with the issue and move on.

However, a few weeks ago, the Consumer Product Safety Commission issued an order removing the bassinets from the stores. Here is the kicker as the Post story tells it:

SFCA had refused to issue a recall, saying it gained the right to sell products under the Simplicity brand but that it did not assume the liability of products already on the market, said Rick Locker, an attorney for SFCA.

Now, technically Mr. Locker may be right. SFCA bought the assets at auction and the liability may not confer with the sale. But the reputation does. It looked like those bassinets were coming off the market one way or another. By not being part of the recall, SFCA attempted to draw a distinction between those products and themselves. This may be a good tactic as part of asserting no liability. But from a reputation point of view, it doesn't appear to be a successful. Those products say "Simplicity" on them. Not dealing with the reputational threat to the brand weakens the brand, maybe fatally. Blackstreet back in May all but said they were buying the brand. Rather than attempt to bolster the brand by moving quickly to correct what was seems as a major problem, Blackstreet now appears to want to be moving away from the brand as quickly as possible. And if the owners don't stand behind the brand, what is it worth in the eyes of the consumer?

Bottom line, Blackstreet's strategy for deal with the liability issue may have dealt a death blow to the brand's reputation.

This is not to say that government should try to make these massive changes on its own. But in active collaboration with all stakeholders and interested parties — including corporate executives, institutional investors, banks, statisticians, and setters of accounting standards — agencies like the BEA must take the lead in defining and implementing the standards that would grant intangible assets the status they deserve. In the process, they would return some credibility to both U.S. economic data and, eventually, to the financial statements of U.S. corporations.

A first step in that direction may have just taken place. In June 2008, the National Academies’ Board on Science, Technology, and Economic Policy; the Committee on National Statistics; and the BEA convened a public meeting to discuss intangibles. Its agenda included what government statistical agencies are doing to gather data on intangibles and what government’s role should be in supporting markets and promoting investment in in­tangibles. With the right people and organizations in attendance and a rallying of political and institutional will, the gathering may have breathed new life into this languishing but critically important issue.

We all need to work to make that a reality.

By the dawn of the 21st Century, a revolutionary change had taken hold in the realm of value creation: physical and financial assets were no longer the key factors of sustainable competitive advantage. Instead, leading companies like Dell, GE and Procter & Gamble depended on the superior human and knowledge assets for their competitive edge.

The key advantage conferred by such firm-specific ‘organizational capital’ is the fact that these resources are mainly tacit: they are difficult to codify or directly transfer to other organizations. As the knowledge economy has expanded, so too has our definition of capital, to the point where the most valuable assets of leading innovation-based firms have no actual physical presence, nor a home on a traditional balance sheet.

These ‘intangible’ assets – which include reputation, brand equity, sustainability, security and customer relationships – are receiving increased attention, and for good reason: according to a study by the Brookings Institution, they now comprise between 60 and 80 per cent of S&P 500 companies’ market value. In some firms, the gap between book value and market value is modest, but in others it can be significant, leaving investors guessing as to how much this ‘unseen wealth’ is worth.

Financial reporting systems have failed to keep up with the changing nature of value creation, leaving us with the equivalent of an abacus for measuring the actual value of corporate assets (hence our cover image.) In this issue of Rotman, we aim to expand your understanding of today’s most valuable forms of capital and how they contribute to the bottom line

The issue contains number of great articles from a number of perspectives from thought leaders such as including Baruch Lev and Nir Kossovsky. These interviews/insights cover a number of perspectives from accounting to social capital and from brand equity to reputation. It also contains an interview with me on the I-Cubed Economy (on pages 84-86).
(Note: the link is to a PDF of complete edition of the magazine)

Well worth the read.

From the moment I was handed the single sheet menu at A16, an extremely fashionable and popular restaurant on Chestnut Street in the very cool Marina district of San Francisco close to the Golden Gate Bridge, my eye was caught by its very last line. This reads “© 2008 All rights reserved A16 restaurant” – the very first attempt that I have ever come across by the owners of an independent restaurant to copyright their menu.

. . .

One of the distinctive features of the restaurant business internationally is that in contrast to so many others, industrial espionage does not seem to exist and there are few trade secrets, if any. Recipes were shared even before the internet and head chefs welcome “stagiaires”, young chefs on a placements, with commendable enthusiasm. Could all this hugely beneficial sharing of information soon hit the legal buffers, I wondered?

Fortunately, my concerns were dismissed during a conversation with Cecily Engle, a highly respected London-based copyright lawyer. “I certainly don’t know of any cases in the UK relating to the copyrighting of menu descriptions or layout. The law in the UK is very clear about this and no artist, whether painter, writer or musician, needs to affix a small c to their work, as the copyright automatically belongs to them. In the same way the originality of the design and layout of a menu automatically belongs to the restaurateurs. Take the menu at The Wolseley, for example. As long as its owners have bought the design outright from whoever created it, then that menu is theirs. I’m sure that there is a fair amount of copying of menu ideas but every industry has its different attitudes towards this type of thing and it can probably be resolved without going anywhere near a court of law.”

I'm not sure that Mr. Lander should take comfort from this. US law is the same -- copyright exists automatically. The copyright symbol is just a devise to remind other of this fact and to warn off any possible infringers.

The key is what Mr. Engle notes: the attitude of the industry. There have been a couple of notable cases of copyright suits -- for example in New York about Pearl Oyster Bar versus Ed’s Lobster Bar (see earlier posting). But in that case, the copying was more than just the menu but the entire operation. And the case was settled out of court.

Cooking may be one of those areas that benefits from the "negative space" concept of IP (where sharing of ideas is controlled in ways other than from heavy IP (for more on negative space, see earlier postings on fashion and magic). Success is a combination of both ideas and skill in implementation. I can have the recipe in front of me, but coming up with the same thing as I would get in a top restaurant is another matter. Then there are all the other intangibles of atmosphere, service, etc. So I'm not sure that copyright will take over the restaurant industry.

I will note that the case which raised Mr. Lander's concern was in Northern California - where there is a great concentration of IP lawyers.

But this is more than one large heavy industry buying upstream manufacturing. It is also premised on taking advantage of the ability to create innovation from the combination. As the story mentions:

“In building a ship, the less you weld the less you spend,” says Lee Ku-taek, POSCO’s chief executive. “If we can tailor our ship plates to a specific ship, then costs can be saved.”

Changing the nature of ship building with customized plates looks like a great innovation to me.

The story is also about the importance role government can play in the process:

It was Enterprise Ireland, an Irish government agency charged with fostering innovation and technology links between multinationals and indigenous Irish companies, that brought the two together.

There was another part of the story that caught my eye, however:

At HP Labs, the company’s central research facility, it has an active programme to identify new uses for these old technologies. HP does not disclose how much it makes in annual royalties and fees from such arrangements, but it is believed to be about $500m(£272m).

Say what? HP does not have to disclose its royalty income? That can't be completely right. Somewhere that $500 million has to show up on the books. The fact that it can't be easily traced back to technology licensing (at least apparently by the FT) is an accounting and disclosure problem. And it is a problem that needs to be fixed.

The proposal to throw a lifeline to Detroit's auto makers could prove particularly challenging, and its future is unclear. Democratic presidential nominee Barack Obama has endorsed the plan, as has John McCain, his Republican rival. Both are battling to win Michigan in the race for electoral-college votes.

General Motors Corp. Vice Chairman Bob Lutz said Detroit's Big Three have been hit by a "perfect storm" of rising gas prices, a slumping economy and new fuel-efficiency rules that will force them to invest heavily in new technologies. "The American auto industry is deserving of loans to get credit that it may well need," Mr. Lutz said, noting that none of the auto makers would be able to get loans from financial institutions in today's tight lending markets.

But the White House remains cool to the idea. Tony Fratto, a spokesman for President George W. Bush, said the administration is "very reluctant to consider government intervention."

Last week, the Washington Post said basically the same thing: Car Makers to Press for Loans:

Automakers plan to urge Congress to support funding up to $50 billion in low-interest loans over three years to help them modernize their assembly plants and develop next-generation fuel-efficient vehicles.

Industry officials said the loans, which are twice the amount authorized in last year's energy bill, are a top priority when Congress returns next month because of the declining fortunes of Detroit's automakers and tightening credit markets.

Auto industry officials have argued that the loan program would not represent a bailout, but would be similar to aid lawmakers have given to Wall Street investment banks and struggling mortgage firms.

"We don't see it as a bailout. We see it as government assistance to help retooling tied to the production of these advanced technology vehicles," said Alan Reuther, legislative director for the United Auto Workers union.

This proposal generally would tie any financial assistance to creation and utilization of new energy technologies. Let me make two suggestions, however. First, that there are conditions similar to the Chrysler guarantee - which actually paid back the taxpayers after the company turned itself around.

Second, the US taxpayers get a part of the intellectual property. The companies should be required to put up their IP as collateral to the loan. This would both protect the taxpayers’ investment and give a jump start to the idea that IP is and should be treated as important collateral in financial transactions.

I would also require that there be some sort of technology transfer process on any new technology created as part of the program. I know that this will be unpopular with some - but it will be important to make sure that the technology does not get locked up.

If the taxpayers are going to assume the risk, the taxpayers should reap some of the benefits -- both financially and in the introduction of new technologies.

At least I got part of the issue right. The size and direction still surprise me, especially since the Fed's July 23, 2008 Beige Book (which covered June and the first two weeks of July) stated that, "Reports from the twelve Federal Reserve Districts suggest that the pace of economic activity slowed somewhat since the last report."

So I'm not sure we can take much solace from the new GDP numbers. They will, however, certainly spice up the political debate. At least for a week, since all eyes are more likely to be glued on the release of the latest Beige Book next Wednesday.

The transition will have some impacts that may jar the system slightly. For example, as the Wall Street Journal points out, earnings will be affected:

Jack Ciesielski, an accountant and publisher of the Analyst's Accounting Observer, says accounting under IFRS tends to lead to higher earnings. He examined filings from 137 foreign companies whose shares traded in the U.S. in 2006. That was the final year that U.S. regulators required these companies to translate their books into GAAP from IFRS. Mr. Ciesielski says 63% of the companies reported higher earnings under the international standard, and the median increase was 11.1%.

As I noted earlier, much of the differences have to do with treatment of things like taxes, pensions and financial instruments. Intangibles do play a part - mainly due to IASB's rules for amortizing rather than immediately expensing R&D costs.

Accounting for intangibles may also eventually benefit from the shift -- as the IASB has seemed more willing to take on the issue of recognition of internally generated intangible assets and the harmonization process appears to have drawn resources away from that effort. As the switch to IASB moves along, there may be more resources available for the intangibles project.

At least we can hope so.