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The value 

of Intangibles 

to overcome 

the systemic 

crisis 

In collaboration with: 

145 

ISSN: 1128-3483 

Marzo 2010

I Quaderni Aiaf n. 145 

The value of Intangibles to 

overcome the systemic crisis 

Consigliere referente 

Giorgio Zancan 

Mission Intangibles Study Group - 

Authors: 

Andrea Gasperini 

(Co-ordinator) 

Responsible for the credit line area of Gruppo 

Banca Leonardo S.p.A. 

EFFAS Commission on Intellectual Capital 

member 

AIAF member 

Associazione 

Italiana degli 


Costituita nel 1971 

Consiglio Direttivo 

Presidente: Gregorio De Felice 

Vice Presidente: Antonio Tognoli 

Consiglieri: Sergio Lamonica (tesoriere), 

Giovanni Camera, Maria Giovanna Cerini, 

Dario Colombo, Luca D’Onofrio, 

Maria Isabella Mastrofini, Secondino Natale, 

Andrea Nattino, Alfonso Scarano, 

Giorgio Zancan 

Collegio dei Revisori 

Presidente: Marco Fabruzzo 

Paolo Citoni, Bianca Laura Volterra 

(effettivi); 

Laura Vitale e Claudio D’Esposito 

(supplenti) 

Collegio dei Probiviri 

Presidente: Teodoro Loverdos 

Daniela Carosio, Angela Monti 

(effettivi); 

Paolo Balice, Antonio Mansueto 

(supplenti) 

Andrea Casadei 

Executive Director of BilanciaRSI ® Research 

Centre and lecturer in "Business Ethics and 

Accountability", University of Bologna 


Filippo Amadei 

Coordinator of research area at BilanciaRSI ® 

Research Centre and tutor in social 

accountability, University of Bologna 

Marta Degl’Innocenti 

Department of Management, University of 

Bologna 


Lorenza Menicucci 

Employee at Confartigianato Servizi s.r.l. 

Sede e Segreteria 

Segretario Generale: Franco Biscaretti di Ruffìa 

Segreteria: Ivana Bravin, Katia Diani, 

Monica Berto, Sabrina Napoli 

Via Dante, 9 - 20123 Milano 

Tel. +39 0272023500 r.a. 

Fax +39 0272023652 

sito Internet: www.aiaf.it - e-mail: info@aiaf.it 

Sezione Romana 

Responsabili: Maria Isabella Mastrofini, 

Andrea Nattino 

Segreteria: Paola Lavagetti 

Banca Finnat Euramerica - Palazzo Altieri 

Piazza del Gesù, 49 - 00186 Roma 

Tel. +39 0669933317 

Fax +39 066784950 

AIAF Formazione 

e Cultura Srl Unipersonale 

Presidente: Gianni Ferrari 

Vice Presidente: Gregorio De Felice 

Consiglieri: Silvio Ceretti (amministratore 

delegato), Giovanni Camera, Sergio Lamonica, 

Andrea Nattino, Antonio Tognoli, Marina 

Verderajme 

Segretario del Consiglio: Franco Biscaretti di 

Ruffìa 

I Quaderni Aiaf 

Direttore Responsabile 

Franco Biscaretti di Ruffìa 

Chiuso in redazione il 31/03/2010 

Il contenuto del presente Quaderno 

esprime l’opinione 

del Gruppo di lavoro 

Progetto Grafico 

Armando e Maurizio Milani 

Fotocomposizione e stampa 

Quadrifolio SpA, Azzano S. Paolo (Bg) 

Editore 

AIAF Associazione Italiana Analisti 

Finanziari 

Reg. Trib. MI n. 73 – 20/02/2009 

© Copyright 2010 AIAF Associazione 

Italiana Analisti Finanziari 

Organismi internazionali 

EFFAS 

European Federation 

of Financial Analysts Societies 

Secretariat: Claudia Stinnes 

Einsteinstrasse 5 Postfach 10.10.30 

D - 63303 Dreieich - Frankfurt 

Tel. 0049 6103 583348 

Fax 0049 6103 583335 

sito Internet: www.effas.com 

e-mail: claudia.stinnes@effas.com 

ACIIA ® 

Association of Certified 

International Investment Analysts 

Company Secretary: Fiona Tween 

Feldstrasse 80 Buelach CH 

8180 Switzerland 

Tel. 0041 448723551 

Fax 0041 448723532 

sito Internet: www.aciia.org 

e-mail: tween@aciia.org 

Soci Sostenitori: Banca Aletti, Beni Stabili, Borsa Italiana, Enel, Eni, Fondiaria SAI, Intesa Sanpaolo, Italcementi, Mittel, UBI Banca, 

UniCredit Group

index Executive Summary 5 

1. The origin of the project 6 

2. The evolution of intangibles 9 

2.1 Historical context 9 

2.2 Intangibles: definition and some models of classification 11 

3. Identifying and reporting intangibles 16 

3.1 The lack of information on intangibles: effects and changes 16 

3.2 Self - fulfilling prophecies and emotions 18 

4. Intangible liabilities: The management of corporate risks 20 

5. Statements 24 

5.1 Intangible Assets Lost in a Crisis - Quantitative analysis of sample banks 24 

N. Kossovsky and P. Gerken 

5.2 Rebuilding Trust in the Post Financial Crisis Era: The Role of Intangiblesq 27 

J. Low 

5.3 The IC Crisis: An Open Source Manifesto 30 

M. Adams 

5.4 Identification of Intellectual Capital in the Telecoms sector 32 

S. Thévoux-Chabuel 

5.5 Extra-Financial Evaluation during a systemic crisis 37 

C. Duerndorfer 

5.6 The effects of the crisis on the prevailing economic paradigm: ENI’s response 44 

R. Bordogna 

5.7 The Montepaschi Group’s approach to the strategic management 47 

of non-financial intangible assets 

G. Papiro and F. Mereu 

5.8 Restructuring: it is time to think differently! 50 

C. Daverio 

5.9 The Corporate Social Responsibility and Intangibles Relation 54 

within the Financial Markets Crisis 

M.P. Marchello 

5.10 Stop counting what doesn’t count! Focus on future value driver 57 

K. Krolak - Wyszynska 

5.11 It’s never to late to learn 61 

P. Hofman-Bang 

5.12 AREOPA’s observations about the actual situation of systemic crisis 62 

L. Pyis and J.G. Claeys 

5.13 Overcoming the Crisis: Rewarding Human Capital Development 66 

for Sustainable Business Performance 

L. Sforza 

5.14 Executive compensation and intangible assets 68 

P. Marchettini 

5.15 An Expanded Intellectual Capital Framework 73 

D. Talisayon and V. Leung 

Conclusion 76 

Bibliography 77 

3

Executive Summary 

As suggested by several researchers, the 

bigger size of many firms (banks, 

insurance, and real estate companies, ...) 

particuraly compared to that of 

Small/Medium Enterprises 1 (SME) has 

been a major cause for moral hazard 2 

over the last few years that has driven 

them to excessive risk taking because 

they believed they were “too big to fail” 

and that Government intervention 

would in any case protect investors. 

Nevertheless, the SMEs 

cannot expect to receive similar 

Government rescue as a last chance. 

Such companies depend solely on their 

own strategies and must try to survive 

the ongoing crisis of the financial 

markets, of a whole business model 

and of regulation and control systems 

by relying on their own resources, most 

of which are intangible 3 . 

Unlike many larger companies, which 

can usually rely on tangible assets such as 

property, plants and equipment, SMEs 

often have a larger amount of intangible 

assets that are identifiable and carry a 

specific economic value but remain 

nonetheless invisible in the financial 

statements: according to the most 

important international sources and 

conventional schemes, these assets are 

represented by human, structural and 

relational capital. 

Each entity owns / has access to 

intangible assets that fit into all of the 

above three categories although one of 

them may often be more significant than 

the others, depending on the company’s 

business model and/or sector, and only 

their mutual relationship can represent a 

significant value driver to market 

competitiveness - a distinctive feature 

vis-à-vis other competitors - and can play 

a strategic role for growth 4 . 

However, a more in-depth analysis reveals 

a quite different situation, which is almost 

a paradox for the recognition of their 

value, which often remains unexpressed in 

traditional accounting reports. In this 

scenario, the contribution of Intellectual 

Capital to corporate success is indeed 

partially evaluated and the strategies of 

management are often not explained in 

the financial reports. Furthermore, little 

emphasis is placed on the risks resulting 

from the inability to identify intangible 

assets or, even if properly identified, to 

manage them and achieve a continuos 

accumulation and improvement. 

The recent events in the financial market 

have shown that intangible assets may 

become intangible liabilities which cause a 

value erosion in terms of reputation, 

higher transaction costs with stakeholders, 

lack of attraction from investors and lower 

market penetration of products/services. 

Such risks can therefore be defined as the 

negative impact that unpredictable events 

have on the targets of an entity, namely 

the possibility of losses due to uncertainty 

over the achievement of corporate 

targets. 

Although the literature argues that 70% 

or more of the market value of a 

company as well as its sustainability and 

future ability to create wealth are directly 

linked to these resources why have 

5 

The value 

of Intangibles 

to overcome 

the systemic 

crisis 

intangible assets only rarely been 

considered and appreciated at least to 

mitigate the negative impact of the 

current systemic crisis which caused the 

collapse of so many entities? 5 

NOTES 

1 Commission Recommendation - 2003/361/EC, 

“….have between 10 and 249 employees, a 

turnover up to € 50 mm and total assets up to 

€ 43 mm”. 

2 The term “moral hazard” comes from the 

insurance sector. Policy holders can sometimes 

be led to hazardous behaviors if they think 

insurance companies will be unable to verify 

potential fraud or negligence. 

3 For further details see M.Moberly and J.P.Cheon, 

“Use Intangible assets to weather the financial 

crisis” Intellectual Asset Management Magazine, 

January / February 2009. 

4 T. A. Stewart, (2002) “… a three-star restaurant 

is successful mainly because of the human capital 

embodied in its chef, a franchise such as Burger 

King relies on the capital structure of its recipes 

and proceedings, a small local restaurant is 

successful thanks to its customer capital - the 

waitress calls you by name and knows that you like 

coffee no sugar with a dash of milk”. 

5 An analysis carried out by M. M. Blair shows that 

in 1982 the percentage of tangible assets of 

industrial companies consisting of real estates, 

plants and equipment was 62.3% of their total 

market value but that ten years later this figure 

had already dropped to 37.9%, highlighting a 

situation whereby over 50% of the capital 

invested by a company was in intangible assets 

although their value often remains undisclosed in 

the company’s Balance Sheet (M. M. Blair (1995). 

A similar survey carried out by Prof. Baruch Lev 

at the New York University in 1999 shows that 

this trend has intensified because the average 

value of the market to book ratio of companies 

in the S&P 500 index (total market value divided 

by book value meaning the value of the physical 

and financial assets less liabilities resulting from 

the financial statements) stood at 6.25. For hightech 

companies this ratio is even higher (B. Lev, 

"Knowledge and Shareholder Value, 

http://pages.stern.nyu.edu/ ~ blev / January 2000). 

The same survey repeated by Prof. Baruch Lev in 

March 2001 shows that the relative impact of 

intangible assets, totalling 83.3%, is subject to a 

decline because of the implosion of the new 

economy bubble, though remaining very high 

(B. Lev (2001) Kaplan and Norton show that in 

2002 the impact of intangibles on the 

stockmarket capitalization of companies was 75% 

(R.. S. Kaplan, D. P. Norton, 2004).

On one hand this phenomenon can be 

explained by the fact that many 

companies still have to implement a clear 

management and disclosing strategy of 

this type of resources and are afraid of 

disclosing confidential information about 

their competitive advantages. On the 

other hand, while knowing these issues, 

institutional investors, private equity fund 

managers and financial analysts, as well as 

analysts of Socially Responsible 

Investments (SRI) do not perceive the 

analysis of intangible assets as a key factor 

to strongly guide their investment 

decisions and, moreover, little attention is 

placed by the business media on this 

subject. 

Managers still tend to overlook the 

importance of intangible assets as a major 

source of corporate value and for the 

successful leadership and management of 

companies, especially in this period of 

systemic crisis where decision makers are 

less likely to express interest in intangible 

assets when their company could be one 

of those facing financial collapse and 

therefore they do not realistically consider 

NOTES 

6 For further details pls. see note Nr. 3. 

7 Mission Intangibles ® is a working group of Aiaf 

(Italian Association of Financial Analysts) whose 

responsible is Andrea Gasperini whose goal is to 

lead, motivate and stimulate critical discussion on 

the methods to measure, assess and disclose 

intangible assets and to exploit intellectual capital. 

8 BilanciaRSI ® is a Centre for Studies on issues 

related to Corporate Social Responsibility 

(CSR) and Sustainability, whose responsible is 

Andrea Casadei, integrating different 

experiences and skills to support the creation 

and the development of corporate value in the 

long term. Website www.bilanciarsi.it. 

9 A. Gasperini and G. Fasciolo, “Le risorse intangibili 

nelle strategie di asset allocation” Rivista 

Controllo di Gestione, Ipsoa, July 2009. 

10 Tom Peters, “Thriving on Chaos. Handbook for a 

Management Revolution” HarperCollins 1987. 

11 IFRS 3, IAS 36 and IAS 38. 

The origin 

of the project 

them worth using, nor do they give them 

high priority among the measures to be 

implemented to monetize them and to 

obtain additional value. 

Intangible assets are therefore 

underestimated in the establishment of 

corporate strategies and there is often a 

lack of consensus on the definition of 

standard non-financial indicators by 

sector to measure them. In times of 

economic prosperity it is hard to list the 

issue of intangibles among the priorities 

of CEO/CFOs, it is thus clear that this is 

even harder when a company is in a 

downsizing and cost cutting phase, when 

it is reconsidering marketing strategies 

and outsourcing processes, with banks 

cutting down on lending 6 . 

In spite of the above circumstances, we 

believe the current systemic crisis is 

boosting attention - not only in the 

academic environments but also on a 

professional level - on how to use and 

monetize those intangible assets that are 

increasingly essential for a company’s 

corporate value, its profitability, market 

position, competitive advantages and 

sustainability in general. Indeed, it has 

become relevant for managers to: 

1. identify the potential intrinsic value of 

these resources; 

2. maintain control of the competitive 

advantages that can be attributed to 

intangible resources and the ability to 

seize their value. This is a top priority 

to get out of the current systemic 

crisis. 

Indeed, the time has come for 

CEO/CFOs, General Managers and 

people in charge of business units to 

identify internally-generated and 

externally-acquired intangible resources 

and to determine how they can better 

be managed, exploited and monetized 

6 

so as to soften the negative impact of 

the current financial crisis. 

1. The origin of the project 

This research project is sponsored by 

the AIAF Working Group “Mission 

Intangibles ® ” 7 in cooperation with 

BilanciaRSI ®8 . Starting with an analysis of 

the systemic crisis that led to the 

collapse of a large number of companies 

and considering the evolution and 

impact of intangible assets and liabilities 

in the current economic-financial 

scenario, both in terms of markets and 

of individual companies, the project is to 

pursue two priority goals, namely: 

stimulate companies to engage in 

processes for the identification, 

management and disclosure of 

intangible assets; 

provide a substantial contribution to 

encourage institutional investors, 

private equity fund managers, venture 

capitalists and financial analysts to 

consider the analysis of corporate 

intangibles as an opportunity and a 

new and powerful incentive to expand 

the return on investment strategies 

by identifying the best mix of 

intangible assets fitting each sector 

and which are likely to generate extra 

financial returns 9 . 

Following a consolidated axiom 

proposed by Tom Peters 10 , who insisted 

that only “what gets measured gets done”, 

in traditional reporting systems decision 

makers usually focus primarily on 

tangible assets, whereas intangibles are 

often overlooked in light of the fact that 

they can hardly be measured and 

checked because of the several 

restrictions imposed by accounting 

principles on the reporting of internallygenerated 

resources, 11 nor can they be

used as collateral in funding 

transactions 12 . 

As for the specific features of intangible 

assets, this kind of approach apparently 

prevents decision makers from 

identifying the most appropriate 

strategies to support the current 

upsurge from the systemic crisis, 

because current measurement and 

assessment methods widely lack 

accuracy and standardization in 

themselves, unlike those adopted for 

tangible resources. It is therefore 

essential for what is immeasurable to 

become measurable by identifying the 

characteristics the new metric and 

non-financial indicators should possess 

to be considered useful also by 

institutional investors and financial 

analysts 13 . 

Once intangible resources have been 

identified for each economic sector, 

corporate managers will have to find 

answers to the following questions: 

Does the company optimize the use 

and control of such resources? 

What is the relationship between 

intangibles and corporate risks? 

What value can be assigned to these 

resources? 

How can they be disclosed to the 

market? 

What are the standard non-financial 

indicators for each sector? 

The assessment of intangible assets and 

the implementation of specific 

strategies can reduce huge losses of 

competitive advantages and also serve 

as a practical (and not only theoretical) 

basis to achieve greater sustainability 

through the sharing of goals in joint 

ventures, cooperation agreements, 

partnerships and networking between 

companies. In light of the above, the 

following activities are under discussion 

based on a method of analysis 

proposed by M. Moberly and J. P. 

Cheon 14 and are presented below: 

1. strategic planning of intangible assets - 

the traditional patterns for the 

strategic planning of business 

processes tend to focus primarily on 

corporate tangible assets, while often 

neglecting intangible resources. It is 

time to include such resources in 

strategic planning processes so as to 

draw out the value that can be 

attributed to them while keeping 

their control and the possibility to 

use them. 

The planning process should: 

generate awareness of the 

importance of intangibles in 

programs relating staff selection, 

training and evaluation; 

include monitoring activities aimed 

at insuring that the ownership, use 

and control of intangibles are 

subject to periodical assessment 

and disclosure; 

develop a corporate map of 

relevant intangible assets 

(generators, positioning, value, 

links, contributions and functions) 

thus avoiding to spend time and 

money trying to support assets 

that have already proved definitely 

damaged, obsolete and/or 

depreciated; 

include long-term, non-financial 

metrics in executive compensation 

plans and submit them to the 

compensation committee. 

2. assessment of intangibles - In order to 

achieve an effective strategic use of 

intangible assets it is necessary to 

define an assessment procedure that 

should not be regarded as a mere 

7 

review of the sole intellectual 

property. It should rather be a 

structured activity to identify the 

intangible assets, the 

accumulation/exhaustion processes 

and the implementation processes 

whereby companies are able to bring 

out hidden value drivers and 

NOTES 

12 Two examples are outlined hereunder, although 

the use of patents as collateral in funding 

transactions is very limited because of the high 

legal and market risk and of the risk of technical 

and economic obsolescence associated with 

technology investments as well as clear 

problems in assessing such assets: 

Development Bank of Japan, a Japanese 

Government financial institution, has 

developed a funding system using the 

intellectual capital of companies as collateral, 

including patents and copyrights, issuing more 

than 250 credit lines that are commensurate 

to the cash flows expected from these 

resources. 

The German bank Landesbank Rheinland-Pfalz 

has used technical documentation on the 

research projects of medium-size companies 

as additional collateral for those companies 

applying for a loan. 

13 For several years the European associations of 

financial analysts have been investigating the 

importance of intangible assets for their job. In 

2006 they joined forces under the coordination 

of the EFFAS (European Federation of Financial 

Analysts Societies) and formed a special 

committee called CIC (Commission on 

Intellectual Capital) which in 2008 developed 

ten principles that should be followed for an 

effective disclosure of intellectual capital. These 

principles describe the characteristics of the 

indicators of intangible resources, specified for 

each target sector in order to be really useful to 

the financial community. EFFAS Commission on 

Intellectual Capital (CIC), “Towards Valuation, 

Measurement and Disclosure, Principles for 

Effective Communication of Intellectual Capital”, 

website: http://www.effas.com. Andrea 

Gasperini, representing the Italian Association of 

Financial Analysts (AIAF), is a full member of the 

CIC commission for Italy. 

14 This method of analysis was drawn from M. 

Moberly and J. P. Cheon, “Use Intangible assets to 

weather the financial crisis” Intellectual Asset 

Management Magazine, January / February 

2009: pls see this publication for further details.

Author 

N. Kossovsky 

P. Gerken 

J. Low 

M. Adams 

S. Thévoux- 

Chabuel 

C. Duerndorfer 

R. Bordogna 

G. Papiro 

F. Mereu 

C. Daverio 

M. P. 

Marchello 

K. Królak- 

Wyszyńska 

P. Hofman-Bang 

L. Pyis 

J. g. Claeys 

L. Sforza 

P. Marchettini 

S. D.Talisayon 

V. Leung 

Title 

Intangible Assets Lost in a Crisis – 

Quantitative analysis of sample banks 

Rebuilding Trust in the Post Financial 

Crisis Era: The Role of Intangibles 

The IC Crisis: An Open Source 

Manifesto 

Identification of Intellectual Capital in 

the Telecoms sector 

Extra-Financial Evaluation during a 

systemic crisis 

The effects of the crisis on the 

prevailing economic paradigm: ENI’s 

response. 

The Montepaschi Group’s approach to 

the strategic management of nonfinancial 

intangible assets 

Restructuring: it is time to think 

differently! 

The Corporate Social Responsibility 

and Intangibles Relation within the 

Financial Markets Crisis 

Stop counting what doesn’t count! 

Focus on future value driver 

It’s never to late to learn 

AREOPA’s observations about the 

actual situation of systemic crisis 

Overcoming the Crisis: Rewarding 

Human Capital Development for Sustainable 

Business Performance 

Executive compensation and intangible 

assets 

An Expanded Intellectual Capital 

Framework 

8 

Organization 

Executive Secretary of the Intangible Asset 

Finance Society - IAFS 

Senior Vice President with Steel City Re 

Founding partner of Predictiv LLC 

Co-founder of I-Capital Advisors and 

Trek Consulting 

SRI analyst at ODDO Securities 

Partner at The Value Group Gmbh 

Sustainability Reporting Manager 

at ENI SpA 

Head of Business Development Monte 

dei Paschi di Siena 

Head of Corporate Social 

Responsibility Monte dei Paschi 

di Siena 

Coordinator for the SRI research 

activities in Italy of VIGEO’ 

Programme Officier Forum per la 

Finanza Sostenibile 

Partner at Innovatika 

VP Strategic Alliances 

Actcell Intellectual Capital Corporation 

Founder & President AREOPA Group 

Int. 

VP Global Operations AREOPA Group 

Int. 

Head Research and EU Affairs, Hewitt 

Associates 

Managing Partner of Adelaide 

Consulting 

Centre for Conscious Living 

Foundation 

Co-Founder of PREDICTIV Asia 

Country 

USA 

USA 

USA 

USA 

France 

Germany 

Italy 

Italy 

Italy 

Italy 

Italy 

Polen 

Japan 

Belgium 

Belgium 

Swiss 

Philippines 

China and 

Hong Kong

consolidate their competitive 

advantages. 

Under a procedural viewpoint, 

an assessment activity should not 

strictly reflect a vision that has been 

predetermined or processed as a 

general framework. On the contrary, 

such an activity should include a 

flexible inquiry system that is to 

identify the knowledge management 

processes that are the basis of 

competitive advantage, that is, the 

various areas where intangibles are 

generated internally rather than 

acquired externally. 

The management and control of 

intangibles should be proactive and 

not be delegated to people lacking 

proper understanding of their 

contribution to corporate 

productivity and profitability. 

The assessment of intangible assets 

should pursue the following targets: 

identify intangibles that are the 

basis of a company’s core skills, 

mission and vision; 

define the most efficient strategies 

to use such intangibles and the 

immediate operational steps to 

exploit them; 

mitigate the risks that may 

increase the vulnerability 

of these resources, whose 

assessment is often still based on 

personal opinions, while several 

metrics express values only at a 

given time, providing decision 

makers with little additional 

information to mitigate 

uncertainty; 

evaluate the impact of self-fulfilling 

prophecies; 

link information on intellectual 

capital with specific risk factors and 

The evolution of 

intangibles 

the internal system of risk 

management. 

3. disclosure of intangible assets – 

through an appropriate “Tableau de 

Bord” the CEO/CFO and Senior 

Management should identify a set of 

standard non-financial indicators so 

as to be able to: 

make an accurate assessment 

of the intangible assets upon 

which the creation of value 

depends, that is, they must 

be able to manage 

such resources; 

evaluate the contribution of 

intangible assets to the overall 

value of the company, to its 

turnover and future wealth and - 

together with its image - to its 

reputation, brand, relational capital 

as well as to its ability to attract 

human talents, in other words to 

the sustainability and profitability 

of corporate processes; 

estimate the impact of processes, 

products and services on natural 

resources in terms of environment 

protection and of those relative to 

safety and health at work, the 

respect for human rights and 

participation to the community 15 ; 

disclose the contribution of 

intangible assets to the corporate 

business model and understand 

how they can best be used to 

draw out as much value as 

possible. 

In order to provide a more pragmatic 

view of the targets of the present 

research, we report the experience of 

a few “thought leaders” on the issues of 

intellectual capital and that of entities 

having a longstanding background in 

value creation 16 . 

9 

2. The evolution of 

intangibles 

2.1 Historical context 

According to traditional accounting 

systems, corporate assets, to qualify as 

such, must be identifiable and hence 

separable from the company without 

jeopardizing its future existence; the 

company must also be able to keep 

control of these resources in order to 

acquire from them the expected future 

economic benefits. 

Based on the above premise, the word 

“asset” usually refers to production 

systems, plants, machinery, financial 

resources and to identifiable intangible 

assets that may be acquired externally 

such as patents and trademarks. 

It is however more complex to identify 

(and hence handle as assets) other 

intangibles that do not meet the above 

standards, such as know-how, skills, 

brand identity, culture and organizational 

NOTES 

15 The 30 OCSE countries and other 12 nonmembers 

countries have currently signed the 

“OCSE Guidelines for Multinational Enterprises” 

These giudelines are a relevant contribution to the 

process at work by stating the principles of 

responsability for a sustainable management of the 

enterprises. The italian government also signed the 

OCSE guidelines and constituted the national 

contact point (punto di contatto nazionale 

www.pcnitalia.it) with the Minister of Economic. 

16 The opinions under this white paper are 

expressed solely by single authors and should not 

be construed to reflect the opinions, policies or 

positions of any entity other than the single 

authors. These opinions do not represent a 

recommendation for any particular security 

strategy or investment product. References to 

specific securities and issuers are not intended to 

be, and should not be interpreted as, 

recommendations to purchase or sell such 

securities.

procedures, corporate image and 

reputation with the stakeholders, as well 

as databases and all other internallygenerated 

intangible assets. 

These intangibles often can not be 

measured directly; an assessment has 

therefore to be made based on estimates 

or on the impact they have, for example, 

on corporate processes, which can 

instead be measured. 

Consequently, the need has arisen in 

recent years to elaborate new methods 

to measure and report the intangible 

assets of a company. 

Despite the fact that such reporting forms 

can have different names and follow 

different measurement methods, their 

common primary target is that of filling 

the gap caused by the limits of traditional 

economic and financial systems and 

enable a more complete description of a 

company’s ability to create value through 

the use of indicators that can be deemed 

suitable for this purpose, both from a 

quantitative and a (non-financial) 

qualitative point of view. 

A first-generation structured pattern is 

represented by the so-called “Skandia 

Value Scheme” that was adopted by the 

Swedish company Skandia AFS, a pioneer 

in the 1990’s in working out a pattern for 

intellectual capital reporting, which gives 

priority to a static view of intangible assets 

following a well-known breakdown of the 

company’s market value (see Table 1). 

This conceptual breakdown has played a 

major role in that it has clearly and 

systematically identified the intangible 

components that may influence the 

market value of a company, opening the 

door to the establishment of a new 

reporting form which is to understand 

and improve the knowledge of such 

intangible variables 17 . 

In terms of processing approach, it must 

be noted the structure of the intellectual 

capital statement developed by the ICS 

Project Group (AK-WB) 18 . 

This model has two advantages: firstly, it 

provides an assistance in decision-making 

since it identifies the various aspects 

contributing to business success. Secondly, 

it can be used as a tool to evaluate the 

intellectual capital used in the enterprise. 

The starting point is the vision and 

strategy of the organisation with a view to 

the possibilities and risk encountered in 

the business environment. The 

organisation derives from this a number 

of measures to describe how intend to 

NOTES 

17 A description of the main Intellectual Capital 

reporting is presented in: A. Gasperini and A. 

Del Bello “Il valore del capitale intellettuale. 

Aspetti teorici e casi aziendali di reporting ”, Ipsoa 

Editore / Milan, July 2006. 

18 Federal Ministry of Economics and Labor 

“Intellectual Capital Statement - Made in 

Germany” August 2004 www.bmwa.bund.de Source: website Skandia AFS 

10 

Table 1 - Skandia Value Scheme 

use the various dimensions of intellectual 

capital, namely human, structural and 

relational capital. 

In this process, human capital includes 

employee competences, skills and 

motivation. Structural capital includes all 

structures and processes which are 

required by employees in order to be 

generally productive and innovative, in 

other words structural capital refers to all 

intelligent structures which remain when 

employees leave the organisation at the 

end of a working day. The relational capital 

constitutes the relationship with 

customers and suppliers, as well as with 

other partners and the public. 

The interaction of business and 

knowledge-based processes, together 

with the other tangible and financial 

resources which are not observed in the 

intellectual capital statements, leads to 

business success. From this result, the 

organisation receives some indications to 

changes the vision and strategies.

Table 2: The intellectual capital statement developed 

by the ICS Project Group (AK-WB) 

Source: Intellectual Capital Statement – Made in Germany pg. 15 

One of the most innovative, secondgeneration 

reporting patterns is instead 

represented by the Intellectual assetbased 

management of the Japanese 

Ministry of Economy, Trade and Industry 

(METI). 19 

A company is identified from a 

mathematical point of view as a function 

expressed by ƒ and is a system designed 

to handle input factors represented by x1, 

x2, x3, ... ... xk, ... ... xn which determine the 

Commercial environment 

(possibilities and risks) 

Intellectuoal capital 

Initial situation Human Structural Relational Other 

External 

capital capital capital resources 

impact 

Vision 

Intellectual 

capital 

statement 

business 

strategy 

Measures 

Business processes 

Knowledge processes 

Table 3: Intangible assets and corporate value 

generated value that is identified with y. 

The function can be expressed in this way: 

y = ƒ (x) 

The xn input factors formerly included 

tangible corporate assets, which are 

important elements in corporate 

production processes. However, with the 

beginning of the knowledge-based 

economy, their relative importance has 

decreased significantly over time 

compared to the higher importance of 

Source: METI, “Interim Report by Subcommittee on Management & Intellectual Assets” August 2005. 

11 

Busines 

succes 

intangible assets, divided into three 

categories, i.e. human, structural and 

relational capital (see Table 3) . 

The system, called Intellectual Asset Based 

Management (IABM), is then divided into 

three stages, as described below: 

1. identification by the management of 

intangible resources and definition of 

their best use in business processes 

according to corporate strategies; 

2. effective disclosure to the market; 

3. recognition, by assessment bodies, of 

the information that has been disclosed 

to the market. 

The ways in which the various input 

sources are used, i.e. the management 

system of the contents of function ƒ, have 

become one of the main targets 

companies have to pursue because, for 

example, if a company has top technology 

and skilful human resources but is unable 

to use them properly, no efficient output 

can be expected. 

In other words, the way in which 

resources (processes under ƒ) are used is 

as important as the intellectual capital (the 

contents of xn). 

If the resources under xn are correctly 

exploited through function f , then an 

increase in terms of output-y can be 

expected. 

2.2 Intangibles: definition and some 

models of classification 20 

Over the last few decades, analysts have 

recognized the importance of intangible 

assets (or intangibles) for the 

determination of the competitive 

strength and sustainable growth of firms. 

NOTES 

19 www.meti.go.jp/ 

20 In this project produced by the working Group 

Aiaf “Mission Intangibles ® ”, the author of this 

paragraph is Marta Degl’Innocenti, Department 

of Management, University of Bologna.

The international literature agrees that 

creation and management of intangibles 

may affect significantly the firm value. 

Therefore, these assets seem to be an 

important source for the increase in 

shareholder value (Gupta et al., 2004) 

and corporate wealth (Riahi-Belkaoui, 

2003). In particular, they may create 

competitive advantages due their unique 

nature, especially when competitors have 

equal access to physical assets. The 

increase in the relative importance of the 

intangibles has been facilitated by the 

ever-increasing intensity of business 

competition and the commoditization of 

physical assets (Lev, 2005). Despite the 

benefits in terms of competitive viability, 

these assets are hardly accounted for and 

usually untraded in active and 

transparent market. For these reasons, 

many accountants disqualify intangibles 

from being considered as assets in 

corporate balance sheets (Lev, 2005). 

Scholars and practitioners have grappled 

with the classification and identification of 

indicators to measure the intangibles. 

These have been widely investigated in 

the economic literature, with particular 

reference to the concept of innovation 

(Cohen and Levine, 1989). Neoclassical 

theories have traditionally analyzed firm 

productivity and economic growth as a 

consequence of growth in labor and 

capital (Solow, 1957). According to 

Denison (1967), the portion of 

economic development not explained by 

NOTES 

21 The last revision of IAS 38 was done in July of 

2009. 

22 P.12 Canibano, Garcia-Ayouso e Sanchez, 1999. 

23 Goodwill can be defined as the firm’s ability to 

generate future earnings or as a set of assets 

that are not included in the financial statement. 

24 For a review of literature see Canibano, Garcia- 

Ayouso e Sanchez (1999). 

these two input factors should be 

attributed to technological progress and 

intangibles. The literature has identified 

several input factor in term of 

productivity: human capital (Becker, 

1975), innovation such as technological 

change (Freeman, 1982), and intellectual 

investments (Romer, 1986; Lucas, 1988; 

Barro and Salai Martin, 1995). Ducharne 

(1998) summarized the contribution of 

the above theories in order to investigate 

the overall process of economic growth 

and development. Finally, David and 

Foray (1995) analyzed knowledge-based 

economies as a stage of an evolutionary 

process, in which intangible investments 

represent fundamental determinants of 

economic growth. 

The official definition of intangibles assets 

has been provided by IAS 3821 . In 

particular, it describes intangible assets as 

those identifiable non-monetary assets 

without physical substance. In addition to 

the International Accounting Standard 

Board, researchers have proposed 

several definitions of intangibles in order 

to better describe their accounting 

nature. For example, the Intangibles 

Research Center of the Stern School of 

the New York University have defined 

intangibles as nonphysical sources of 

future economic benefits to an entity or 

alternatively all the elements of a 

business enterprise that exist in addition 

to monetary and tangible assets 22 

.White, 

Sondhi and Fried (1994) ascertained that 

in most cases, goodwill 23 

and other 

intangible assets arise as residuals in 

purchase method acquisitions, and they 

represent the portion of the purchase 

price that cannot be allocated to 

alternative, tangible assets. Belkaoui 

(1992) and Cohen (2005) distinguished 

the intangibles into two categories: 

12 

identifiable (patents, copyrights, 

trademarks) and not identifiable, such as 

goodwill. In particular, “an intangible asset 

is identifiable when it is separable 

(capable of being separated and sold, 

transferred, licensed, rented, or 

exchanged, either individually or 

together with a related contract) or 

arises from contractual or other legal 

rights, regardless of whether those rights 

are transferable or separable from the 

entity or from other rights and 

obligations” [IAS 38.12]. A major 

problem with intangible assets is that 

they are often difficult to identify 

separately, and thus, may not match one 

of the fundamental requirements for 

accounting recognition. In this context, 

Scicluna (1994) argued that intangibles 

assets can be sold only as a whole and 

not separately. In particular it is difficult 

to separate intangible assets from other 

intangible assets and from current 

expenditures. 

From an economic viewpoint, there is 

no theoretical basis upon which a clear 

distinction between tangibles and 

intangibles assets can be made. 

Intangibles and tangibles are both 

connected to the future economic 

benefits which arise from past 

transactions or events. In contrast to 

tangible assets, intangibles assets lack 

physical substance. For this reason, the 

future benefits produced by intangibles 

are hardly quantifiable. Moreover, the joint 

nature of intangibles represents an 

important challenge to their evaluation. In 

fact, they often generate benefits in 

conjunction with other assets. 

Although intangibles have been largely 

investigated in the existing literature there 

is no agreement as to the best way to 

classify them 24 . For example, Lev (2005)

introduced a classification of intangibles 

based on four categories: 

products/services (software products, 

knowledge, R&D, patents, etc), customer 

relations (brand names, promotion, 

advertising, cultivation of clients), human 

resources (employee incentives, 

resource policies, and compensation 

systems), organizational capital 

(organizational design, business process 

etc). Instead, Mortensen, Eustace and 

Lannoo (1997) proposed other 

categories of intangibles, namely: 

innovation capital (R&D), structural 

capital (intellectual capital and 

knowledge assets, organizational 

coherence and flexibility, and workforce 

skills and loyalty), contracts (operating 

licenses and franchises, media and other 

Table 4: Classification Intangible Liabilities 

Potential intangible 

liabilities 

Process issues 

Human issues 

Informational 

issues 

Configuration 

issues 

Source: Harvey and Lusch, 1999. 

Internal intangible liabilities 

- Weak strategic planning process 

Inadequate R&D 

- Process antiquated manufacturing 

process system 

- Poor new product development process 

- High employee turnover 

- Discrimination among employees 

- Inadequate training/development 

- Inexperienced top management team 

- Lack of adequate information 

infrastructure 

- Inability to turn data into information 

(lack of analysis) 

- Organizational structure (lack of 

flexibility) 

- Lack of patents/copyrights 

- Inadequate geographic location of 

plants, warehouses, etc. 

broadcast licenses, agricultural and other 

production quotas in regulated 

industries, maintenance, servicing and 

environmental liabilities, etc.), market 

capital (brands, trademarks and 

mastheads), and goodwill. While there is 

no consensus in the extant literature 

about the most effective macro 

categories and indicators for intangibles, 

it is, however, possible to identify some 

common factors). In particular, 

intangibles present the following 

features: 

may be either assets or liabilities 

(sources of probable future economic 

profits or losses); 

are relevant for firm value, despite 

they lack physical substance; 

may have financial or non-financial 

13 

nature; 

may either be investments (cash 

outlays) or deferred charges in the 

case of financial ones; 

may either be acquired or produced 

internally. 

The liabilities can be generated by 

inappropriate and inadequate business 

processes, by bad working conditions, or 

by deterioration of reputation. Harvey 

and Lusch (1999) provided a 

comprehensive classification of potential 

intangible liabilities as shown in Table 4. 

In particular, the authors identified four 

major categories of potential liabilities: 

processes, human resources, information 

processes and organizational structure. 

On the other hand, Cravens et al. (2003) 

introduced different clusters for 

External intangible liabilities 

- Poor product/service quality 

- Low commitment/trust of 

suppliers/distribution system 

- High turnover of customers, suppliers and 

distribution system 

- Potential litigation of gov’t not meeting 

regulations/laws 

- Bad word-of-mouth among customers 

- Potential product liability suits from 

customer 

- Law based loyalty/awareness among growth 

market segment 

- Negative brand/product information (recall) 

- Decreasing corporate reputation 

- Successful litigation against company 

- Unfavorable stock analyst report on 

company/industry 

- Inadequate distribution channels to achieve 

growth 

- Lack of strategic alliances to leverage re 

source base 

- Inefficient location of production facilities

intangible liabilities: inadequate research 

and development processes, lack of 

adequate information infrastructure, lack 

of flexibility in organizational structure, 

bad word-of-mouth among customers, 

inadequate distribution channels. 

Despite the several definitions of 

liabilities, the literature agrees on the 

negative impact of these intangibles on 

the risk exposure of firms. Thus, they 

should be included in the financial 

statements since they may affect the 

firm`s prospective performance. In this 

context, assets and liabilities should be 

included in the balance sheet only if 

they respect certain criteria for their 

accounting recognition and disclosure, 

as established by SFAC 5 (FASB, 1984). 

In particular, the following four 

requirements are required for either 

assets or liabilities: 

I) qualification as an element of 

financial statements; 

II) relevance and reliability of 

measurement; 

III) relevance of the information 

content of balance sheet items that 

NOTES 

25 Retrieved from 

http://www.valuementors.com/pdf/Measures%2 

0that%20Matter.pdf on 01/03/10. 

26 Ernst & Young Center for Business Innovation 

submitted a survey to 275 portfolio managers 

representing 14% of the target population from 

all major types and classes of institutional 

investors and funds. They required respondents 

to simulate their allocation decisions using both 

financial and non-financial information for four 

companies in each of four major industry 

groups: pharmaceuticals, oil and gas, computer, 

food/consumer products. 


http://www.eoy.at/Publication/vwLUAssets/The 

DriversofFinancialReputation/$FILE/TheDrivers 

ofFinancialReputation.pdf on 01/03/10. 


http://www.oecd.org/dataoecd/16/17/1947847. 

pdf on 01/03/10. 

influence the decisions of investors; 

IV)accuracy, verifiability and neutrality 

of information. 

As suggested by Lev (2005), the 

intangibles are difficult to assess due to 

their partial excludability, high risk and 

non tradability. Thus, they often do not 

satisfy the requirements necessary for 

their inclusion in the financial statement. 

In recent years, researchers and 

accounting experts have advanced 

several models for the identification of 

key measures for intangibles. Here only 

some models are proposed as 

examples. The Ernst & Young Center for 

Business Innovation (1997) 25 has 

investigated non-financial indicators 

that investors may view as crucial in 

their decision-making. In particular, ten 

non-financial measures affecting share 

price have been identified 26 : 

I) strategy execution, 

II) management credibility, 

III) quality of strategy, 

IV) innovativeness, 

V) ability to attract talented people, 

VI) market share, 

VII) management experience, 

VIII)quality of executive compensation, 

IX) quality of major processes, 

X) leadership in research. 

The results of the interviews suggest 

that analysts seem to have greater 

interest in customer and productrelated 

factors (market share, customer 

retention, marketing) rather than in 

internal and employee-related factors 

(production, efficiency, empowerment, 

incentive compensation) and in 

innovation-related factors (training, 

R&D and product development). 

Moreover, the non-financial data appear 

to have a more important role for hightech 

and service growth companies, 

14 

whose market valuations and 

profitability levels depend heavily on 

intangible assets and employee skills. In 

2009, Ernest and Young 27 conducted 

interviews with 80 equity and debt 

analysts in UK, U.S., France and 

Germany. The results highlight an 

increasing level of evaluation by 

investors for trust and credibility, as 

shown by several and well-known 

corporate failures in recent years. In 

particular, post financial turmoil, the 

quality and transparency of accounting 

and the quality of financial governance 

have gained equal importance as 

financial performance and financial 

strength. The findings show that 76% of 

respondents have agreed on the 

importance of financial reputation. The 

key drivers of financial reputation from 

an investor perspective appear to be 

the following: 

I) high-quality of financial reporting, 

II) communication/transparency 

(openness and transparency) 

III) performance and financial strength, 

IV) reputation of the board and 

management (for reliability and 

integrity). 

The deterioration of these key drivers 

weakens and damages the financial 

reputation which “must be protected at 

all costs”. 

KPMG (1999) 28 advanced a method to 

measure the value of a company’s 

intangible assets in terms of their future 

earning potential. In particular KPMG 

introduced a definition of the 

company’s core competencies in terms 

of the intangible assets of which they 

consist: 

I) competencies and implicit 

knowledge (know-how, 

competencies),

II) technology and explicit knowledge 

(patents, manuals, procedures), 

III) assets and endowments (client 

relations, image, networks), 

IV) culture and values (client focus, 

reliability, quality), 

V) management processes (leadership 

& control, management 

information, communication). 

The following five indicators (“added 

value”, “competitive advantage”, 

“potential”, “sustainability”, 

“robustness”) have been applied to 

test the strengths and the weaknesses 

of core competencies. 

Some indicators for intangibles have 

been introduced also by policy makers. 

The OECD 29 (Croes, 2000) in 

collaboration with Statistics 

Netherlands has provided international 

estimates for intangible investments 

based on the data for fifteen OECD 

countries for the years 1985-1997. In 

particular four main areas have been 

proposed in order to identify the 

intangible assets: technology (e.g. R&D, 

innovation and payments for foreign 

technology), marketing (e.g. advertising 

and market research), information 

technology (e.g. software) and finally 

organization (e.g. education).The 

OECD defined intangibles assets for a 

country as: “Expenditures for all new 

goal-oriented activities within a 

country or disembodied tools used in 

a country” 30 . The assets are connecting 

with stock of knowledge, power on the 

market or strength of the internal 

organization. The list of indicators 

proposed by OECD is the following 31 : 

I) purchases of know-how and other 

professional services, 

II) number of applications for patents, 

purchases of patents, 

III) number of applications for 

registrations of design, licenses, 

trademarks, 

IV) number of applications for 

copyrights, purchases of databases, 

V) expenditure for R&D and 

innovation, 

VI) expenditure for advertising and 

market research, 

VII) software expenditure, ICT 

expenditure, 

VIII)expenditure on education and 

training, number of firms in 

professional services sectors. 

However, due to the heterogeneous 

and non-physical nature of intangibles, 

there is not yet a common framework 

to measure intangibles on a structural 

basis for policy purposes. 

Overall, the difficulties connected with 

the measurement and accounting 

treatment of intangibles represent a 

limitation for the disclosure of these 

assets in the financial statements. 

Although some studies (e.g. Lev and 

Zarowin, 1999) have argued that 

intangibles should be treated as merely 

tangible asset, the question of their 

evaluation appears to be still 

controversial. As highlighted by 

Eckestein (2004), the International 

Accounting Standard (No. 38) has 

strongly contributed to the 

harmonization among different 

accounting systems. However, there is 

not still unique accounting treatment 

for these assets, as emphasized by 

Stołowy et al. (2001). Indeed, the 

treatment of these assets is not 

internationally homogeneous but is 

subject to specific criteria set by 

different accounting systems. For 

example, until the recent introduction 

of AASB 138 Intangible Assets in 2005, 

15 

the Australian GAAP provided less 

restrictive reporting requirements for 

goodwill and other intangible assets 

than other countries, such as the USA 

and UK. However, the growing 

importance of intangibles and the 

increasing differences between book 

and market value of firms due to the 

accounting treatment, led the AASB 

Committee to apply more restrictive 

criteria for their recognition in financial 

reports 32 (Dahmash et al., 2009). The 

differences among accounting systems 

reflect the fact that scholars and 

practitioners do not agree on the 

economic nature, definition and 

classification of intangibles. In addition, 

there is no consensus on how these 

assets affect the firm value and on the 

criteria to be adopted for their 

recognition, measurement and 

depreciation. Since the intangible assets 

largely affect firm value, there is an 

increasing need to establish common 

rules for the identification and 

valuation of either these assets or 

liabilities. 

NOTES 


http://www.cbs.nl/NR/rdonlyres/B8CD6247- 

DF0C-4828-8B2E- 

3783408CDA0C/0/OECDezRapp.pdf on 

01/03/10. 

30 These activities concern change or extension of 

existing knowledge, or acquisition or 

improvement of existing goods, or acquisition of 

completely new knowledge. 

31 The report provide an international estimates 

for intangible investments based on the data for 

fifteen OECD countries for the years 1985- 

1997. 

32 For further information, see AASB, “Intangibles 

assets”, (2007). Retrieved from 

http://www.aasb.com.au/admin/file/content105/c 

9/AASB138_07-04_COMPapr07_07-07.pdf on 

01/03/10.

3. Identifying and reporting 

intangibles 

3.1 The lack of information on 

intangibles: effects and changes 33 

Several studies have shown a positive 

and significant relationship between the 

value of intangibles and shareholder 

value (Anand and Khanna, 2000; 

Nakamura, 2001; Fernandez, 2002; 

Suarez, 2002; Gruca and Rego, 2003, 

Fornell et al., 2006; Madden et al., 2006). 

Nevertheless, the lack of detailed 

information in the financial statement on 

these assets affects the evaluation of 

their impact on the business variables. 

Lev (2007) ascertained that the frequent 

underestimation of the actions and 

business strategies of firms with 

substantial investments in intangibles has 

been generated by the dearth of 

information contained in the accounting 

reports on the links between input and 

output variables. In particular, he argued 

that the results from investments in 

intangibles (Table 5.) have an impact on 

the aggregate corporate profitability and 

cash flows only if they are properly 

Table 5. Input-Output Linkages 

Resources (Investments) 

R&D and acquired technology ➞ 

Brand Enhancement ➞ 

Workforce trainining ➞ 

and incentives 

Alliances and joint ventures ➞ 

Internet initiatives ➞ 

Capital Expenditures ➞ 

Restructuring ➞ 

Source: Lev, 1997 

Identifying and 

reporting intangibles 

accounted for in the financial reports. 

The empirical results show that the 

partial estimates of intangibles in the 

financial report may alter, even 

significantly, the assessment of the future 

firm value. This contributes to the 

inefficient allocation of resources in 

capital markets. Moreover, it seems to be 

a likely cause for the growing differences 

between market value and book value 

for firms in several markets. Since the 

early 80s the difference between book 

value and market value of companies has 

been progressively improved. This 

discrepancy may be partially attributed 

to the investment in intangibles assets. In 

fact, the information of financial 

statements appears to explain the 

current financial position and future 

prospects of firms only partially (Lev and 

Zarowin, 1999). With regard to this, a 

number of researchers (Eccles and 

Mavrinac, 1995; Amir and Lev, 1996, Lev 

and Zarowin, 1999) have shown that: 

the relevance of accounting 

information with respect to intangibles 

assets appears to be decreasing 

significantly over time; 

16 

Intermediate Output 

Patent and citations ➞ 

Trademarks and brand values ➞ 

Employee turnover ➞ 

and productivities 

Patents, trademarks ➞ 

Hits, n. of transactions ➞ 

Increased capacity productivities ➞ 

Efficiencies ➞ 

the association between accounting 

information and stock prices differs 

significantly by type of industry, rate of 

growth and firm size. 

The empirical evidence highlighted that 

there has been a systematic decline in 

the strength of the link between market 

values and the accounting variables and 

especially with respect to revenues and 

cash flows. For example, Pantzalis and 

Park (2009) 34 noted that human capital is 

not fully evaluated in financial accounting. 

In particular, the results on a sample of 

5653 firms in the period 1978-2002, 

show that the portfolio with a low 

market valuation of human capital 

monthly outperform for 1, 34% 

compared to the portfolio with a high 

market valuation for these intangibles. 

The authors argued that in an efficient 

market there should not be a systematic 

relationship between the market 

valuation of human capital and future 

economic returns of firm. They suggested 

that this difference is caused by a partial 

representation of the risk associated with 

intangibles or by the wrong perception 

of the market with respect to these 

Ultimate Results 

Innovation revenues, cost 

savings 

Market share, price premium 

Cost savings 

Innovation revenues 

Cost savings 

Output increases, cost savings 

Cost savings

esources. Thus, the partial 

representation of intangible assets affects 

the measurement of profitability and 

corporate value, which are mostly 

underestimated by the accounting 

model. In this context, investors have 

partial estimates on the firm’s present 

wealth and its ability to create value over 

the medium-long term. 

Due to the lack of regulatory controls 

(Guthrie and Petty, 2000), the disclosure 

by companies of the perceived value of 

intangibles is irregular (Ambler et al., 

2002), subjective (Backhuijs et al., 1999), 

selective (Wyatt, 2002) and, often, 

informal (Stołowy and Jeny - Cazavan, 

2001). Whitwell et al. (2007) argued that 

the measurement of intangibles has 

been skewed and even the leading cause 

of business crashes as WorldCom and 

Enron in the United States, and SAI and 

One.Tel in Australia. Biondi et al (2009) 

suggested that recent failures (Lehman 

Brothers, for example) highlighted the 

need for specific knowledgement with a 

trade-off between independence and 

business skills for the members of the 

boards responsible for monitoring the 

firm’s activities. In this way, as suggested 

by the authors, the specificity of complex 

and innovative business with high 

intangibles can be more efficiently and 

quickly examined by controllers. This 

may contribute to the effectiveness of 

monitoring and control activities since 

the disclosure of intangibles in 

accounting reports is limited. Also the 

reactions of investors to unexpected 

crashes have marked the need to ensure 

more detailed and precise information 

about the nature and value of the 

intangibles (Lim and Dallimore, 2002). 

As reported by Millman (2009), citing 

Baruch Lev, Professor of Accounting and 

Finance, Philip Bareds New York 

University and the Institute Director 

Vincent C. Ross for Accounting 

Research, an efficient reporting system 

may better help to distinguish the cases 

in which the difference between market 

and book value is attributable to 

intangibles assets from those in which 

this discrepancy is generated from illegal 

or fraudulent activities. 

Despite the relevance of intangibles, we 

do not find empirical studies on the 

pivotal role of these assets for exit from 

financial crises. The disclosure of 

intangibles may have a positive effect on 

profits and increase competitive viability 

of the firm. Consequently, the strength of 

the resources and strategies of the firm 

may be identified better by the 

investors, especially during financial crisis. 

The existing literature has essentially 

emphasized the importance of 

consistency and timeliness of corporate 

communication in periods of crisis (Allen 

and Caillouet, 1994; Strong, Ringer, and 

Taylor, 2001). Several researchers have 

shown that correct and complete 

accounting information on intangibles 

are relevant factors for the full 

estimation of firm value and reputation. 

In particular, the credibility and reliability 

of firms result on being highly evaluated 

with respect to the amount, timeliness 

and consistency of information in 

reports (Dutton and Dukerich, 1991; 

Sillince, 2002). In this context, 

Anthonissen (2008) argued that the 

intangibles (brand strength, customer 

satisfaction, clarity of corporate 

strategies, service quality, and perception 

of strength and integrity of 

management), contribute to the 

corporate reputation which influences, 

in turn, the stock price. Therefore, the 

17 

deterioration of intangible assets and 

corporate reputation may accelerate the 

financial implications of the crisis with 

consequent impact on the stock price. In 

order to consider these facts, the 

current accounting model should be 

expanded by encouraging 

communication on a voluntary basis 

with respect to the impact of intangibles 

on the firm’s prospective profitability. To 

this purpose, the International 

Accounting Standards Board (IASB) has 

issued a proposal of a ‘Management 

Commentary’ which should facilitate the 

evaluation of the performance, of the 

overall business risk profile, and of the 

firm strategies by stakeholders. It offers a 

non-binding framework and limited 

guidance on its application, which could 

be adapted to the legal and economic 

circumstances of individual jurisdictions 35 , 

as highlighted by IASB. 

The framework proposed by the Board 

aims to be flexible and understandable 

in order to encourage companies to 

include relevant information with quality 

requirements of detection, accuracy and 

representativeness 36 . In particular, the 

guidance“ prescribes a framework for 

the preparation and presentation of 

NOTES 

33 In this project produced by the working Group 

Aiaf “Mission Intangibles ® ”, the author of this 

paragraph is Marta Degl’Innocenti, Department 

of Management, University of Bologna. 

34 The authors estimate the market value of 

human capital as the ratio between the market 

value of equity per employee and the average 

ratio in the industry. 

35 The Management Commentary has been 

proposed by the International Accounting 

Standards Board (IASB) and its partner national 

standard-setters recommended in October 

2002. 

36 The Board has not established the frequency 

with which the Management Commentary must 

be filled.

management commentary to assist 

management in preparing decision-useful 

management commentary to accompany 

financial statements prepared in 

accordance with International Financial 

Reporting Standards (IFRSs)” (p. 8, 

Management Commentary) 37 . The 

document requires management to take 

into account events and circumstances 

that may alter the consistency of 

economic resources and related 

transactions. In addition the management 

should explain in a special section the 

financial and non-financial resources 

available for firms and their own 

orientation to the future. On balance, 

although the circumstances and facts 

affecting businesses are numerous, the 

Commentary provides a general guideline 

to include essential information on: 

I) the nature of the business, 

NOTES 

37 International Accounting Standards Board, 

Management Commentary, Exposure Draft, 

ED/2009/06. 

38 W. I. Thomas, F. Znaniecki, “Il contadino polacco in 

Europa e America”. Milano, Comunità, 1968. 

39 Merton, 1949, Social Theory and Social Structure, 

Free Press, “….Cartwright Millingville is a typical 

bank and like all banks, it has some liquid assets 

(cash), but most of its assets are invested in 

various ventures. Then one day, a large number of 

customers come to the bank at once - the exact 

reason is never made clear. Customers, seeing so 

many others at the bank, begin to worry. False 

rumours spread that something is wrong with the 

bank and more customers rush to the bank to 

try to get some of their money out while they still 

can. The number of customers at the bank 

increases, as does their annoyance and 

excitement, which in turn fuels the false rumours 

of the bank's insolvency and upcoming 

bankruptcy, causing more customers to come 

and try to withdraw their money. At the 

beginning of the day - the last one for Millingville's 

bank - the bank was not insolvent. But the 

rumour of insolvency caused a sudden demand 

of withdrawal of too many customers, which 

could not be answered, causing the bank to 

become insolvent and declare bankruptcy”. 

II) the objectives of management and 

strategies for their implementation, 

III) the level of key resources, risks and 

relationships, the results of 

operations and targets, 

IV) the pivotal performance measures 

and financial and non financial 

indicators that management uses to 

evaluate the achievement of 

corporate strategies. 

The IASB seems to focus mainly on 

information relating to the risks and 

opportunities arising from the 

environment, on the entity’s structure and 

its economic model, on the quality and 

reputation of management, and on 

significant relationships with stakeholders. 

However, the document does not 

explicitly mention the Environmental, 

Social and Governance (ESG) and 

Corporate Social Responsibility (CSR) 

factors. In particular, there are no 

references to the firm profile and 

corporate governance (finance ethics, 

social impact, etc.). The IASB provides 

prudently general indications on the 

information content of the Management 

Commentary. The lack of references to 

macro KPIs, especially for non-financial 

indicators, reflects the dearth of 

consensus on main intangibles that 

satisfied the requirements of quality, 

relevance and representativeness. 

In conclusion, the lack of detailed 

information on intangibles in the financial 

statement may alter the evaluation of 

firm’s performance by analysts and 

investors. Recently, the IASB has provide 

a proposal of a ‘Management 

Commentary’ in order to encourage the 

management to include in the financial 

statement more descriptions, essentially, 

on overall business risk profile, non 

financial indicators and strategies. In fact, 

18 

the recent financial crisis has highlighted 

both the shortcomings of the regulatory 

and supervisory framework and the need 

for greater transparency and disclosure 

by companies. The disclosure of 

comprehensive, timely and consistent 

information appears to be relevant for 

the optimal allocation of resources in 

capital markets. Otherwise, the 

speculation and the lack of accounting 

transparency may increase at the 

expense of the entire business 

economies as shown by recent events. 

3.2 Self-fulfilling prophecies and 

emotions 

The “self-fulfilling prophecy” concept was 

coined by the American sociologist 

Robert Merton who introduced it in 

social sciences in 1948, drawing it from 

the work of William I.Thomas, another 

American sociologist who formulated a 

theory in 1928 known as the “Thomas 

Theorem”. 38 

“If men define situations as real, they are 

real in their consequences” 

The above statement means that the 

expectation of an event to take place in a 

certain way rather than in another can 

influence individuals’ behavior. In other 

words, the interpretation of a situation 

causes the action, that is, people react 

based on their perception of a situation, 

rather than on the basis of the situation 

itself. 

R. Merton has applied this concept to 

social behavior. An example of selffulfilling 

prophecy is the so-called “bank 

run” which is very much connected with 

the financial collapse several banks 

experienced last year 39 . 

By applying these concepts to the issue

of intangible assets during the market 

systemic crisis, a few assumptions can be 

made to at least outline the reasons why 

some companies have a ratio of market 

value vs. book value close to or less than 

1. The scenario can be further 

deteriorated by conservative and partial 

disclosure of intangible assets in 

traditional reporting systems, by the lack 

of a well-established taxonomy and of 

recognized standard non-financial 

indicators for each industry. 

If we assume that the difference between 

market value and net book value 

expressed with an index greater than one 

reflects the expectations on a company’s 

future profitability, it is likely that, with the 

same book value, in a period of general 

crisis and great uncertainty over the 

future, this difference tends to decrease 

because of low investor confidence and 

to be expressed in values near or even 

below 1. 

This situation could be attributed to a 

number of interrelated causes that have 

generated a vicious circle of their single 

effects, thus producing: 

a significant erosion of company 

market values; 

a general loss of confidence by the 

market that gave way to negative selffulfilling 

prophecies; 

poor and inadequate corporate 

processes for the identification and 

management of intangible assets, 

which failed to soften the generation 

of intangible liabilities such as, for 

example, the deterioration of 

corporate reputation; 

failure to manage business risks 

through appropriate risk management 

models that also include intangible 

assets; 

exaggerated emotions that 

sometimes led investors to give an 

irrational assessment of corporate 

stock prices and market trends. 

With reference to the latter point, it 

must be stressed that emotions are a 

risk for investors, who tend to be 

influenced by the pessimistic/optimistic 

messages of the media. 40 In order to 

test how emotions can lead investors 

to rather irrational judgments, 

increasing stock volatility, Italy’s Consob 

(Commissione Nazionale per le Società 

e la Borsa) has recently conducted a 

research that shows how investors 

make constant mistakes both in terms 

of reasoning and preference, in contrast 

to a rationality of choices that should 

be the basis of classical financial 

theories 41 . 

The research shows how, as 

experienced in recent years, small 

investors and in some cases even 

professional investment managers, do 

not follow traditional models of 

economic analysis but rely on more 

personal models, stating that, to avoid 

giving judgments on irrational opinions 

and estimates, regulators should apply a 

few concepts of behavioral finance to 

better protect investors from their own 

mistakes. 

The emotional factor is therefore a key 

element that should be carefully 

considered in times of crisis such as the 

current one. Indeed, without clear and 

complete information to limit investors’ 

emotions and allow them to express 

correct and more rational judgments 

and assessments on the future value of 

a company and if companies still have 

to implement effective reporting 

standards to disclose the value 

generated by intangible assets and the 

risks connected with intangible 

19 

liabilities, financial markets tend to 

penalize this incomplete information by 

working out an opinion on future cash 

flows based on the deduction of a risk 

premium due to the lack of 

transparency, penalizing corporate 

stock 42 . 

In other words, because of these 

deficiencies, the market lacks a general 

trust in companies which further 

deteriorates as a consequence of the 

economic crisis and of a sort of “jungle 

telegraph”, as well as the “rumors” 

described by R.Merton: these reactions 

take huge proportions, becoming 

irrational, a true self-fulfilling prophecy 

to the point of generating a company 

market value that is far below its book 

value. 

It should be emphasized that a selffulfilling 

prophecy does no necessarily 

arise from a mistaken assumption in 

itself: the increase in unemployment 

benefits, an extremely slow rise in 

consumer spending and the recession 

in the real estate market are some of 

the factors that in February 2010 

confirmed that the systemic crisis is still 

ongoing and frustrated the illusion of a 

NOTES 

40 Driven by emotions, investors tend to invest in 

times of euphoria and growing markets, when 

prices are already at their peak, and to divest in 

despair, when prices are at a record low. A 

decision driven by fear may therefore cause the 

lost of an opportunity to obtain good long-term 

yields and depreciate the value of market to 

book value should these feelings spread on a 

large scale. 

41 Consob, “Errori cognitivi e instabilità delle scelte 

d’investimento dei risparmiatori retail. Le 

indicazioni di policy della finanza 

comportamentale” Quaderno di finanza n. 

66 Studi e Ricerche by Nadia Linciano, January 

2010. 

42 Robert Kaplan, Robert Merton, Richard Scott, 

Testimonianze, Il Sole 24 Ore, Aug 19, 2009.

quick economic recovery 43 . Under 

these circumstances, the fear for a 

probable extension of the crisis is a 

normal reaction. However, when 

expectations actually coincide with fear, 

economic stagnation is perceived as a 

looming reality. The assumption is all the 

more convincing the larger the number 

of people sharing it. Moreover, according 

to the cognitive dissonance and selfperception 

theories, people change their 

attitude to match what they profess in 

public. 

In parallel, the lack of confidence in a 

company’s future potential as value 

generator, amplified by the negative 

impact of widespread pessimism, is also 

fueled by the poor ability of such 

companies to effectively manage the 

risks arising from intangible liabilities 

which are not recorded but which do 

affect the value of the company itself. If 

not appropriately managed, such 

liabilities can negatively influence and 

hence erode this value. 

Reference is particularly made to the 

lack of confidence by investors caused 

by the market crisis and amplified by 

incomplete corporate disclosures which 

have become a real intangible liability. 

Companies being unable to introduce 

effective tools to mitigate risks have let 

this situation get worse until the 

probable start of a vicious cycle of selffulfilling 

prophecies. 

What should be the response? What 

processes should be implemented by 

NOTES 

43 W. Riolfi , “I tre fattori di stress dei mercati 

finanziari”, Il Sole 24 Ore, n.35/146, Feb 5, 2010. 

44 pls see note Nr. 5. 

45 For a more in-depth analysis on the subject, pls 

see A. Gasperini, “Gestire le risorse tangibili per 

mitigare i rischi” from which this paragraph was 

drawn, IPSOA, Feb 2010. 

Intangible liabilities: 

the management 

of corporate risk 

entities and operators? 

According to Merton’s theory, the only 

way to break down the circle of selffulfilling 

prophecies is to redefine the 

premises on which the hypothetical 

assumptions are originally based. It 

would therefore be necessary to change 

the perception of things. 

Improved disclosure, particularly by 

those companies whose intangibles are 

key corporate assets from which the 

value that they can generate is 

depending, could allow investors to put 

them in the best condition to earn the 

right degree of confidence that is 

needed to take more rational and 

conscious decisions, reducing the fear of 

failure and the danger of generating 

negative self-fulfilling prophecies. 

Like the two opposite sides of a coin, 

self-fulfilling prophecies may also have 

positive effects, which in this case are 

relative to the importance intangible 

assets have in terms of corporate value. 

Several studies 44 in fact show that in 

today’s global economy a significant 

percentage of corporate value can be 

attributed to intangibles: this belief is a 

positive self-fulfilling prophecy in itself. 

Nonetheless, it is still not so widespread 

on the market, since up to now no ideal 

standard non-financial indicators have 

been detected to identify intangible 

assets and to measure the value they 

have been assigned because entities 

have still to voluntarily adopt 

appropriate reporting forms or, again, 

because institutional investors and 

financial analysts cannot fully understand 

the importance of the disclosure of 

intangible assets. It can however be 

supposed that the positive assumption 

about the importance of intangible 

assets for entities, if disclosed to the 

20 

market and understood by investors, 

could trigger a virtuous cycle whereby a 

company gets used to first identify, 

manage and measure intangible value 

drivers and then increase their visibility 

by disclosing these drivers to the 

market, encouraging a better evaluation 

vis-à-vis its competitors; this would 

enable the company to reduce the cost 

to access capital sources, stimulating 

further efforts in terms of disclosure and 

transparency on a key element of the 

corporate value. 

4. Intangible liabilities: 

the management 

of corporate risk 45 

It is therefore widely recognized that 

intangible assets are important 

competitive factors influencing supply 

quality, customer satisfaction, innovation 

and hence profitability as well as the 

ability to exploit market opportunities - 

in short, companies’ growth and a 

sustainable value creation. Under a 

systemic crisis scenario it is insufficient to 

consider only the potential benefits 

resulting from the availability of these 

corporate resources, many of which are 

invisible in traditional financial 

statements; great emphasis must also be 

placed on the risks resulting from the 

inability to identify, manage and submit 

them to the processes of accumulation 

and continuous improvement. 

It is evident that these risks are also 

part of business processes and it is 

necessary to be aware of the fact that 

all corporate assets are subject to risks, 

both public and private, which 

sometimes make it impossible to 

implement them, jeopardizing future 

results, and these threats are most likely

to occur. As for human capital, for 

example, a company should consider 

the possibility that employees may leave 

the company, and the more this estimate 

is high, the more it can be considered a 

threat. However, the degree of risk also 

depends on how much the person in 

question is crucial to the company. The 

risk is high if the person who may resign 

has knowledge/experience that is 

particularly significant to the entity 46 . 

These risks, known as intangible liabilities, 

can then be defined as the negative 

outcome that uncertain events have on 

the objectives of an entity, namely the 

possibility of losses in case of a failure to 

meet business targets. Only a few 

companies outside the banking sector 

have implemented a systematic risk 

management and those operating in the 

industrial sector certainly also face 

strategic risks which could be even more 

difficult to measure and manage than 

financial risks. 

These entities invest heavily in tangible 

and intangible assets which suddenly 

become worthless if customers stop 

appreciating the goods and services that 

are produced with them; since tangible 

assets are not recorded at their book 

value and there are still significant 

technical difficulties and constraints 

imposed by accounting principles to 

report a large number of internallygenerated 

intangible assets, a possible 

value reduction shows its effects over a 

very long period of time. 

Corporate risk management 

Risk is not negative in itself and a large 

number of risk management methods 

include internal management processes 

through which risks are accepted rather 

than reduced, hedged through the 

recourse to financial markets and 

transferred to third parties. In particular, 

companies have to implement adequate 

strategies to reduce unnecessary risks 

and focus resources only on risks they 

deem acceptable and which determine a 

higher yield as shown in Table 6. 

Risks that cannot be exchanged have to 

be either transferred through contracts 

or frozen in business units that are later 

subject to sale. 

At the same time companies can focus 

on the management and even 

acquisition of those risks that may give 

them significant competitive advantages. 

The definition and management of a 

dynamic risk portfolio has become a top 

priority in corporate strategic plans, and 

companies managing to do so are able 

to generate higher returns on 

investments. 

21 

Table 6: Management of corporate risks 

NOMURA SECURITIES co. Ltd Tokyo 

A 

The management of risks representing a 

potential advantage generates higher 

returns and does not require hedging or 

transfer transactions. Conversely, risks 

carrying no competitive advantage 

should be mitigated when the markets 

on which those risks are transferred do 

not prove efficient. 

Yoko Ohta «Value Creation through Intellectual Asset - Based Management and Business Risk Quantification», SAAJ may 2007 

( 

A 

Risk Management Processes 

A risk management system can be 

defined as the reverse side of the coin in 

a management system of intangible 

assets and it is very difficult to 

implement an effective technique if a 

company is unable to identify, manage 

and disclose its intellectual capital. 

NOTES 

46 A.Gasperini and N.Raso “Capitale Umano e 

performance di business - misurare il ROI del 

capitale umano” Rivista Amministrazione e 

Finanza ORO, Ipsoa editore, Milan, Feb 2008.

According to an established definition, 

the term “risk management” includes 

the concept of the ability of managers 

to govern uncertainties and identify 

how they can have a negative impact 

on the chain of corporate values. 

As a result of the recent systemic crisis, 

of the problems caused by many 

business models and of inadequate 

regulation and control system, 

companies with more sophisticated 

internal control methods have begun 

to place greater emphasis on 

Enterprise Risk Management processes 

(ERM). This is no news, since attention 

to risks rises considerably in times of 

economic crisis, becoming less 

significant when market conditions 

turn again to prosperity. 

According to a definition of the 

Japanese Ministry of Economy (METI), 

an ERM process is a management 

technique aimed at maximizing 

performance and improving corporate 

value by basing risk management on 

rational and ideal methods 47 . 

In other words, an ERM system is 

intended as a management system 

whereby core risks boosting 

corporate performances are accepted, 

whereas non-core (unnecessary) risks 

are avoided. To this end, it is therefore 

NOTES 

47 METI, Report of the Risk Finance Study Group, 

“Toward the Prevalence of Risk Finance”, 

www.meti.go.jp/english/report/.../0607riskfinancer 

eport.pdf, March 2006. 

48 This subject was drawn from Yoho Ohta “Value 

Creation through Intellectual Asset - Based 

Management and Business Risk Quantification”, 

CMA Senior Researcher, Quantitative Research 

Department, Nomura Securities co. Ltd, SAAJ 

May 2007: pls see this publication for further 

details. For other information pls. see Nomura 

Securities co Ltd, “Analyzing risk IR using business 

risk disclosure” (2008 version). 

necessary to identify and classify the 

various corporate risks and assess 

their impact on the value-generating 

ability of companies. 

An ERM system according to a research 

by Nomura Securities co. Ltd 48 

According to a research by Yoko Ohta, 

Senior Researcher at Nomura 

Securities co. Ltd’s Quantitative 

Research Department, an ERM system 

can be split into five different stages 

involving (see Table 7): 

1) a clear definition of the concepts and 

goals of the ERM throughout the 

company’s structure, with reference 

to the degree of uncertainty the 

company can tolerate in case of 

negative events affecting investment 

choices (risk tolerance), rather than 

the level of risk exposure the 

company is willing to accept and 

maintain (risk appetite); 

2) an identification of internal and 

external risk factors and their 

division by type of risk belonging to 

each business unit (positive / 

negative / both); 

3) a risk assessment: 

quantitative (probabilistic - VaR - 

and non-probabilistic methods 

such as sensitivity analysis, 

indicators and analysis scenarios); 

qualitative, for each business 

process; 

4) the subsequent change in the 

analysis perspective that is defined by 

individual business units to the whole 

group, given the management’s global 

risk strategies covering all business 

processes and hence establishing the 

strategic indicators. These activities 

involve: 

an estimate of the chance certain 

22 

events have to occur and the 

resulting impact (risk mapping); 

assessment of residual risks; 

assessment of the relationship 

among risks (connected risks); 

definition of the strategies to 

increase corporate value; 

assessment and allocation of risk 

capital. 

At this stage a company should also 

evaluate and implement indicators to 

identify risks on the basis of their 

probable impact, after they have 

been assessed in the third stage. 

5) the consequent repetition of the 

process as part of daily business 

activities, when the process is 

redefined and improved to a fifth 

stage through control and 

monitoring actions, establishment of 

IT processes, of roles and 

responsibilities. 

The link between intangible assets and 

Risk Management 

It is therefore possible to build a model 

for each company by identifying its 

specific risk factors and by linking them 

to information on intellectual capital as 

shown in Table 8, where risks having an 

impact on operating profit are divided 

into two categories: 

a. the first category includes “public risk”, 

which has the same degree of impact 

on the competitiveness of companies 

and is beyond their full control, 

although some risks can be mitigated 

by resorting to the financial market 

and the management may consider 

hedging measures based on the size 

of these risks and of the costs they 

involve; 

b. the second category includes “private 

risk” and is typical of any company

Table 7: Management of intellectual assets – the process of ERM 


Table 8: Identification and structure of risk factors 

● 

● 

● 

4 


23 

inasmuch as these risks are due to 

unavailable adequate intangible 

resources, rather than to poor 

management of those to which the 

company has access. These risks can 

be monitored directly by the 

company through an appropriate 

management and disclosing strategy. 

With reference to the many risks that 

are beyond the control of individual 

companies, the so-called black swans, 

according to R.S. Kaplan these risks are 

not worth quantifying, yet some sort of 

analysis of the scenarios must be made 

to identify unusual events that could 

cause a strategy to fail or even a whole 

company to go bankrupt if they do 

occur. For example, it is impossible to 

foresee whether the future will bring 

about hyperinflation rather than 

deflation; it is therefore necessary to try 

to assess the results of a company’s 

strategy and that of its competitors in 

both scenarios 49 . 

With reference to private risks that may 

be associated with intangible assets 50 : 

The following ones are likely to be 

connected with the category of the 

structural capital 

inadequate documentation on 

business processes; 

lost of know-how; 

inadequate internal control systems; 

weak and/or insufficient corporate 

procedures; 

inadequate protection of intellectual 

property. 

NOTES 

49 R.S. Kaplan, “La gestione del rischio in un mondo 

nuovo”, in Rapporto Speciale-Obiettivo Risk 

Management, Harvard Business Review No. 11, 

novembre 2009. 

50 For further details see M. Adams, “Intangible 

Assets, Tangible Risks – Options for Assessing 

Threats to Your Intellectual Capital” July 2006.

The following risks can instead be 


human capital 

unstable and vulnerable management 

and staff turnover; 

wrong interpretation and processing 

of information; 

lost of know-how acquired from 

previous experiences; 

decisions based on personal 

opinions; 

dependence on key staff; 

inadequate level of competence 

and/or limited circulation within the 

company; 

failure to create an environment 

willing to accept change. 

Finally, the following are a few risks 


relational capital: 

vulnerability related to the possible 

loss of customers and partners; 

loyalty of relationships to individuals 

but not to the company; 

threats that may undermine the 

value of the brand. 

Overall, both risk categories have an 

impact on the level of operating 

performances. However, only a proper 

implementation of an IABM process 

can enable a company’s management 

to handle private risks connected with 

the different categories of intangible 

assets by anticipating signs of critical 

situations. 

NOTES 

51 Dr. Kossovsky. Contact him at 

secretariat@iafinance.org or visit the Society at 

www.iafinance.org. 

52 Mr. Gerken. Contact him at 

pgerken@steelcityre.com or visit 

www.steelcityre.com. 

53 MISSION: INTANGIBLE is a registered 

trademark of the Intangible Asset Finance 

Society. 

Statements 

5. Statements 

5.1 Intangible Assets Lost in a 

Crisis - Quantitative analysis of 

sample banks 

Co-authors: 

Nir Kossovsky Executive Secretary of the 

Intangible Asset Finance Society, Pittsburgh, 

PA, USA 51 

Peter Gerken Senior Vice President with 

Steel City Re, Pittsburgh, PA, USA 52 

Intangible assets are the primary drivers 

of enterprise value today. This is because 

collectively they comprise 

approximately 70% of the market 

capitalization of the average public 

company. The operational activities that 

create risk and conversely value in the 

intangible assets are numerous. We look 

at the top six that contribute the most 

to the outward manifestation of 

intangible asset value-reputation. 

Executives today are acutely aware of 

compelling reasons to ensure an ethical 

work environment, drive innovation, 

assure quality, uphold safety, promote 

sustainability, and provide security. But 

they may lack an essential element: 

Many have a clear vision of an 

integrated solution, yet lack the 

resources to implement it. Others have 

a deep understanding of their 

operational areas of control, yet lack the 

ability to orchestrate an integrated, 

enterprise-wide solution in 

coordination with their colleagues. 

Some C-suite executives responsible for 

leveraging enterprise resources may not 

appreciate how the aforementioned 

activities create intangible asset value. 

And some Directors charged with 

management oversight and protection 

of corporate assets may not appreciate 

that their duties encompass the 

intangibles. Nor may they appreciate 

24 

that damage to that value may be 

catastrophic. 

The Intangible Asset Finance Society 

(IAFS-www.iafinance.org) engages in 

education, standards development and 

advocacy to promote best practices for 

intangible asset financial management. 

The Society recently prepared the 

book, Mission: Intangible ®53 . Managing risk 

and reputation to create enterprise value, 

to enable executives to respond to 

intangible asset management challenges. 

Banking sector firms in particular need a 

holistic view of risk and reputation 

management. The brief analysis of the 

banking sector that follows is based on 

the principles addressed in the book. 

Banking Sector 

The banking sector includes a diverse 

group of financial services firms, 

including investment banks and 

brokerages, diversified commercial 

banks, and custodial banks and asset 

managers. Worldwide assets of the 

largest 1,000 banks grew 16.3% in 

2006/2007 to reach a record $74.2 

trillion. EU banks held the largest share, 

53. US banks held around 14%, and 

Japanese banks held 10%. Most of the 

remainder was from other Asian and 

European countries. 

Reputation Crisis of 2007-2009 

Reputation is the collective perception 

held by stakeholders of how a company 

manages its intangible assets. In the 

banking sector, those intangible assets 

underlying reputation comprise three 

types of risk management-operational, 

market and credit. “In a market system 

based on trust, reputation has a 

significant economic value,” noted Alan 

Greenspan, a former chair of the US

Federal Reserve Board. In the absence 

of trust following the loss of reputation, 

liquidity is at risk. During the 2007-2009 

financial crises, stakeholders perceived 

failures in one or more of those risk 

management processes and 

precipitated the liquidity crisis. 

The sequence of events exposed 

failures in credit risk management as the 

banks suffered a run on credit lines. 

First, the lowest quality firms turned to 

credit lines rather than long-term debt 

as commercial spreads widened. 

Second, as the crises deepened, those 

firms drew down their credit lines out 

of fear that the weakened health of 

their financial institution might affect the 

availability of the funds going forward. 

These precautionary draw-downs were 

motivated, in part, by the firms’ 

perception that their banks were at risk 

of default. These runs on credit lines 

then weakened banks further, curtailing 

their ability to effectively fulfill their role 

as financial intermediaries. Interbank and 

money market fund lending ceased, and 

liquidity vaporized. 

Among the consequences of the past 

three years are new financial regulations 

in Germany. According to BaFin - 

Rundschreiben 15/2009 (BA) vom 

14.08.2009, BTR 3 Liquidity risks: 

The Institute is to ensure that an 

emerging shortage of liquidity is 

detected early. For this purpose, 

establish procedures, the adequacy 

should be checked regularly. Effects of 

other risks to the liquidity of the 

Institute are, for example, reputational 

risk into account in the process. 

Reputation Quantification 

Risk management and compliance 

monitoring of specified business 

processes help protect value. The 

mission of the Society includes 

promulgating standards for intangible 

asset value creation. Key to both areas 

of the Society’s activities are tools to 

measure value. One of the more 

recently developed tools available to us 

is an analytic matrix developed by Steel 

City Re comprising its Corporate 

Reputation Index. 

The Steel City Re ® Corporate 

Reputation Index helps put numbers 

to the behavioral consequences of 

reputation management. The Steel City 

Re Corporate Reputation Index (tm) 

also offers predictions based on the 

impact of reputation on operating 

Exemplary Capital Markets Sector Metrics 

25 

expenses, credit costs, and net income. 

Describing the expected effects of 

reputation gain (or loss) in the 

language of financial statements can 

make the business case more 

accessible to executives and board 

members who are devout adherents of 

Peter Drucker’s manage what you can 

measure philosophy. 

Figure 1. Corporate Reputation Index 

ranking for the period 8 December 2008 

– 11 December 2009 and the 

corresponding economic returns for the 

individual companies and for the 75company 

Capital Markets sector. Data 

Source: Steel City Re. 

Figure 1a. BlackRock Figure 1b. Goldman Sachs 

Figure 1c. Deutsche Bank 

Figure 1e. Bank of America 

Figure 1d. Morgan Stanley

Table 1. One year Corporate Reputation Index metrics trends and volatility measures for five exemplary Capital Markets sector 

institutions. Data source: Steel City Re. 

BLK GS DB BAC MS 

BlackRock Goldman Deutsche Bank of Morgan 

Sachs Bank America Stanley 

Index Trend Decreasing Increasing Increasing Decreasing Decreasing 

Index Start 1 0.92 0.68 0.53 0.45 

Index End 1 0.94 0.68 0.47 0.2 

ROE Trend Outperform Outperform Outperform Underperform Outperform 

Excess ROE 

Magnitude 

32% 91% 61% -41% 45% 

Volatility 

Trend 

Decreasing Decreasing Decreasing Decreasing Increasing 

Volatility 

Metric 

4 4 5 4 5 

Figure 2. Three year economic returns for the five exemplary Capital Markets sector institutions. Data Source: Bigcharts.com. 

Data Analysis 

The data show that there is a strong 

association between reputation and 

long-term economic returns. The rank 

order of 3-year returns for BlackRock, 

Goldman Sachs, Deutsche Bank, and 

Morgan Stanley corresponds to their 

rank order reputation metrics and 

inversely to the volatility value and vector 

of that metric. The odd company is Bank 

of America, which accepts deposits, is 

more heavily regulated, and is struggling 

economically with its acquisition of 

Merrill Lynch. The data also show that the 

short term distortions of extraordinary 

returns following extraordinary losses do 

not skew the reputation metrics. Firms 

that have superior reputations are more 

resilient, will fall more slowly in periods 

of upheaval, and therefore have less 

ground to regain. The bright side of this 

relative lack of short-term upside is that 

the lower volatility translates to lower 

cost of capital. 

26 

Financial Implications of Superior 

Reputations 

As implied by the above and discussed 

at length in the book Mission: Intangible, 

firms that establish reputations for 

valued behaviors (their intangible assets) 

are rewarded five ways: (i) greater 

pricing power, (ii) lower costs of 

operations, (iii) higher net incomes, (iv) 

higher earnings multiples, and (v) lower 

costs of credit. A precipitous reversal in 

reputation, as demonstrated during the

2007-2009 period, could rapidly reverse 

one or more of the above benefits and 

foment an acute change in cash flow. 

5.2 Rebuilding Trust 

in the Post Financial Crisis Era: 

The Role of Intangibles 

Jonathan Low founding partner of Predictiv 

LLC 54 

“Those of us who have looked to the selfinterest 

of lending institution’s to protect 

shareholders’ equity (myself especially) 

are in a state of shocked disbelief.” Alan 

Greenspan, former US Federal Reserve 

Chairman, October 2009 

Alan Greenspan, who championed 

many of the deregulatory and 

‘business-friendly’ policies that caused 

the financial crisis later expressed a loss 

of faith in business decision-making. In 

doing so, he added his voice to a 

growing chorus. Companies still appear 

conflicted about addressing the 

negative perceptions this set of 

behaviors caused. Confidence in 

financial records and projections has 

been shattered. Managing and 

reporting intangibles may be the best 

hope for rebuilding trust in business. 

Global Loss 

of Trust in Business 

Prior to the adoption of conventional 

accounting methods in the late 19 th 

century, a person’s reputation - the 

ultimate intangible - was the basic 

building block of business acceptance. 

Ironically, in the hyper-connected but 

wary global economy of 2010, this 

intangible, reputation, is once again a 

crucial determinant of success. 

Survey results suggest widespread 

disillusionment with businesses and 

business leaders. 

Reclaiming that trust will not be easy 

and the lost faith has already produced 

a financial impact. AIG, the global 

insurance giant in attempting to sell its 

highly profitable aircraft leasing 

business to raise cash to pay down 

debt received bids of less than $5 

billion for a unit with a book value of 

$7.5 billion, reflecting the company’s 

uncertain governance. Trustees for the 

Madoff Company, trying to sell its 

trading unit, had received estimates 

from valuation experts that it would 

fetch bids of $200 - 400 million based 

on trading volume. Instead, the best bid 

they received was for $15 million, a 

figure they said was “depressed by the 

stain his (Madoff’s) fraud had left on its 

reputation.” 

Intangibles are frequently taken for 

granted and not accounted for on 

traditional balance sheets or income 

statements. And yet, research suggests 

that more than 50 percent of a 

company’s market value may be 

attributed to them. 

Since the market crash, global markets 

have refocused their emphasis on 

higher standards and greater 

transparency. They are requiring 

institutions to provide more data 

about their allocations of people and 

capital. The markets are further 

demanding that the efficacy of these 

investments be demonstrated. In this 

acutely competitive environment, 

perceptions matter. The sustainability of 

an organization - its very license to 

operate - may depend on how markets 

value the impact of off-balance sheet 

and income statement data. 

This change in attitudes about what 

factors matter has affected businessto-business 

relationships and has also 

27 

influenced the factors determining 

corporate reputation 

Fortune magazine’s annual Most 

Admired Companies survey displays 

these results. 

Fortune Magazine’s 

Most Admired Companies: 

Primary Factors Driving 

Selection Cited by Survey 

Respondents 

2008 2009 

Innovation Strong, Stable Strategy 

Leadership Global Talent 

Financial Strength Leadership 

In the Fortune survey, there are several 

notable changes: Innovation, deemed 

the leading reputational factor in 2008, 

disappears in 2009. Among the reasons 

for this is in the post financial crisis 

world, survivability is viewed as more 

urgent than innovation. ‘Innovations’ in 

the design of new financial instruments 

are credited with much of the wealth 

destruction that occurred, so suffers 

from that association as well. 

For Fortune’s survey participants in 

2009, a strong, stable strategy takes the 

forefront. In second place, leadership 

NOTE 

54 Jon is a founding partner of Predictiv LLC, a 

consulting firm that measures the impact on 

financial results of brand, reputation and other 

intangibles. He is the co-author of the book 

Invisible Advantage, two other books and 

numerous articles. He has presented his findings 

to the SEC, the Federal Reserve Bank and the 

European Commission. Jon served as Deputy 

Assistant Secretary (Acting) for Work and 

Technology Policy at the US Department of 

Labor from 1993-1996. He served on the SEC’s 

Steering Committee on the Future of Financial 

Reporting. He is a graduate of Dartmouth 

College and Yale University’s School of 

Management.

falls as its attributes are tarnished by 

the unfortunate example set by 

financial services, automotive and, 

perhaps, by concern about excessive 

executive compensation packages in 

every industry. Financial strength is 

eliminated from the Fortune list 

because participants do not believe 

the numbers – and can not count on 

that in a global financial meltdown in 

any event. 

Why does this matter? Because 

judgments influencing customer 

purchase decisions to investment 

portfolio allocation are based on a 

range of data, much of it related to 

intangibles. When mistrust dominates 

public thinking, customers are less 

willing to spend money until their 

concerns have been alleviated. 

The significance of this for companies is 

unmistakable; until faith in the financial 

system is restored, intangibles must be 

identified, managed and disclosed. 

Changing fundamentals of 

business reputation 

To maintain or gain entrée to the 

global value chain a business must 

convince customers, suppliers, 

investors and lenders of its reliability. 

To do that, companies must identify 

and communicate information about 

their processes, procedures, standards 

and governance; their ability to 

innovate, the quality of the training 

their employees receive (and, now, the 

rigor of the background checks to 

which potential employees are 

subjected before hiring) as well as 

the quality of their products based on 

recognized international standards. 

None of these factors is 

required by accounting standards. 

Intangibles must be recognized and 

managed as business assets even if they 

do not yet qualify as financial ones. In 

fact, it is not clear that the so-called 

GAAP or international standards are 

particularly meaningful anymore; 

companies continue to search for 

beneficial ways in which to disclose 

information while supposedly ‘clean’ 

audits of firms like Lehman Brothers 

and Bear Stearns did not prevent their 

collapse. 

This message is reinforced by broader 

results from 2009 surveys conducted 

by the Reputation Institute. The leading 

factors are remarkably similar to those 

above: 

Emerging Factors in Post-Recession 

Corporate Reputation 

Quality 

Treatment of Employees 

Trust 

Transparency 

Financial Prospects 

Reputations that have been damaged 

will only be restored by a more 

28 

Trends in Disclosure 

assertive approach to how companies 

define and deliver on their promises, 

with trust as the foundation on which 

they are based. Financial statements 

are only as useful as are perceptions of 

the honesty, probity and self-discipline 

of those who created them. 

Transparency and dialogue; 

new imperatives 

for corporate disclosure 

The loss of trust and increase in 

reputational risk for corporations 

contributes to a trend that began 

during the dotcom boom and 

accelerated after its collapse. There is 

demand for greater transparency 

about many aspects of corporate 

decision-making, including intangibles 

like strategy design and executive 

compensation. Complementing that 

trend is the increasing assertiveness of 

those outside the corporate boundary 

who are demanding both greater 

‘permeability’ and more of a dialoguedriven 

rather than management-driven 

discussion of corporate issues. 

The comparison between the two 

columns highlights the contrast 

between the traditional ‘out-bound’ 

Common Practice Emerging Trend 

Communications 

One Way Communication Multi-Stakeholder Dialogue 

Single Company Progress Report Industry Benchmarking 

Public Relations Corporate Governance 

Voluntary Reporting Mandatory Reporting 

Standards 

Verification as an Option Third Party Assurance 

Inputs and Outputs Models and Strategy 

Ad Hoc Standards Global Standards 

Corporate Boundary Definition Dialogue-Set Definition

form of communication and the 

emerging demand for stakeholder 

input regarding what information is 

deemed sufficient by those outside the 

corporation. Similarly, the historic 

approach to standards, in which 

corporations decided to which 

standards they would adhere based 

what was in their best interest is giving 

way to a new model through which 

customers, investors and others are 

asserting their own interest in 

comparable metrics on a grander, 

often global scale. 

An enlightened view might be that 

corporations now have the 

opportunity to engage with 

stakeholders on a broader set of 

principles. Recent experience suggests 

that returns to transparency outweigh 

returns to secrecy. Better information 

leads to more informed decisionmaking, 

more committed customers 

and investors, more satisfied 

employees and more reliable business 

partners. As we have seen, 

the near-death experience of the 

financial collapse and its aftermath has 

left many stakeholders’ embittered 

and mistrustful. The opportunity 

to re-engage through fuller 

disclosure may well contribute 

significantly to future growth. 

The internet and business; 

a new and uneasy 

relationship 

For corporations these elements of 

distrust and dialogue converge most 

forcefully on the internet and 

specifically in the realm of social media. 

Traditional media like newspapers, 

radio and television have seen their 

revenues plunge as advertisers follow 

their customers to the web. As 

information consumers have moved to 

the web to gather news, opinion and 

data – increasingly through their cell 

phones or PDAs - the influence of 

traditional media has declined while 

that of social media commentators 

appears to have increased. 

The numbers around social media 

impact are compelling. Internet 

penetration has reached approximately 

75% in the US, somewhat less in 

Europe and far less in Asia. However, 

48% of the total population in the US, 

36% of the population in Europe and 

11% of the population in Asia access 

social media. 

Even more impressively, recent research 

from Burson Marstellar reports that in 

the US alone, there are now 20 million 

bloggers, some 2 million of whom are 

paid something for their efforts and 

almost 500 thousand of whom blog full 

time for a living.To put that in 

perspective, more people in the US 

make their living as bloggers than as 

computer programmers or firemen. 

This means that a growing though not 

yet dominant element of the population 

is forming its views based on sources 

which are not traditionally filtered or 

necessarily expert. In addition, the 

demographics on social media 

participation are shifting: in the US, 52% 

are women. Women over age 40 are the 

fastest growing segment. 

This wave of information, data and 

opinion –with its correspondingly 

receptive audience, both feeds and 

benefits from the trends towards 

multi-stakeholder dialogue, particularly 

as individuals seek to inform 

and make up their own minds in the 

post crisis era. 

29 

Implications 

and conclusions 

To regain trust, businesses must be 

more transparent and willing to engage 

rather than simply transmit their own 

point of view. The fundamentals of 

business management will continue to 

evolve, but more emphasis than ever 

before must be placed on the desires – 

both actual and perceived – of those 

outside the corporate boundary. 

Government bodies like the European 

Commission, the US Securities and 

Exchange Commission and the 

Financial Accounting Standards Board 

are not going to take any action until 

they see more private sector support 

for management of intangibles. 

This suggests that measures and 

metrics will be best developed, 

refined and perfected as useful 

business management tools before 

advancing them to the public policy 

arena. 

Will companies do this? As the relative 

‘restraint’ demonstrated by some 

bankers with regard to compensation 

in early 2010 suggests, the dawning 

realization that intangibles like trust 

can influence financial performance 

and operational independence 

make it increasingly likely that 

corporations will begin to measure 

and manage intangibles simply 

because they determine that it is 

in their competitive best interest 

to do so. 

The onus is on business to 

demonstrate that they are working to 

earn the confidence of those whose 

interests they claim to serve. 

Intangibles are the medium through 

which those precepts are most 

effectively conveyed.

5.3 The IC Crisis: An Open Source 

Manifesto 

Mary Adams co-founder of I-Capital 

Advisors and Trek Consulting 55 

The global community has been facing 

the crisis of a severe economic 

downturn. Within our smaller IC 

community, we are anxious to be part of 

the solution to the challenges that face 

our world, our countries, our regions 

and our organizations. We are academics 

and practitioners around the world who 

believe in the concepts collectively 

referred to as IC, intellectual capital, 

intangible capital and innovation capital. 

We see our concepts as critical to 

innovation and future growth. 

Our concepts have been heavily 

documented. The work of trailblazing 

early thought leaders and authors has 

led to a flood of writing on the subject. 

There are dozens of books, hundreds 

(maybe thousands) of articles and a 

business journal specifically dedicated to 

IC. There are numerous conferences 

held around the world. And countless 

bloggers that talk about aspects of IC or 

the asset class in its totality. 

And, yet, almost everyone in our 

community would agree that we labor in 

obscurity. The average manager has only 

a vague understanding of IC. Even those 

who have tried to apply the concepts 

NOTE 

55 Mary Adams is an Intangible Capitalist. She is the 

co-author of Intangible Capital: Putting 

Knowledge to Work in the 21st Century 

Organization, in markets from 

Praeger/Greenwood Press in May, 2010. She is 

also the author of the Smarter Companies Blog 

and the initial creator of the IC Knowledge 

Center, an on-line community with open 

resources and discussions about intangible 

capital. Prior to starting her consulting business, 

she had a fifteen-year career as a high-risk 

lender at Citicorp and Sanwa Business Credit. 

struggle to make the connection 

between intangibles and their financial 

bottom line. 

To those of us in the community, this 

situation is incomprehensible. We repeat 

over and over the statistics that 

demonstrate the importance of 

intangibles in today’s economy and in 

individual businesses, hoping that 

somehow the message will get through. 

Many choose to focus on a specific asset 

class (brands, human capital, intellectual 

property) or metric (reputation, 

valuation or, more generally, key 

performance indicators). But the overall 

message of the asset class continues to 

get lost in the crush of business fads and 

ideas. 

Context 

In our quest for mindshare and 

attention, the IC community is not that 

different from any other community or 

business today. We are industrial-era 

people trying to succeed in a new age, 

the knowledge era. And, as enlightened 

as we are in our chosen areas of 

expertise, we are as hobbled by our 

backgrounds as any other 

businessperson. You see, almost 

everyone in our community was 

educated in educational systems and 

concepts originally designed for the 

industrial era. And our default way of 

thinking is from the top down. Although 

the shift to the knowledge era is already 

very far along, the structure of our 

learning institutions, the curriculum of 

our schools and the practices of our 

businesses are still decidedly influenced 

by industrial-era practices. As an 

example, academic journals continue to 

be exclusive by nature of their practices 

as well as their cost. 

30 

So when our community presents 

solutions to intangibles management, 

they often have a surprisingly industrial 

feel to them. How many books, 

programs and methodologies are there 

that suggest “the” complete system for 

managing IC with extensive 

documentation, detailed methodologies 

and process maps? Value Measurement 

& Reporting Collaborative counted 80 

approaches as of 2005. This number has 

only grown since then. 

Some of these approaches have been 

developed privately and many more 

have been funded publicly. The European 

Union and most individual countries in 

Europe have funded studies and/or 

programs to promote the application of 

IC thinking in small and medium-sized 

enterprises. The Japanese government 

has been supporting this field for many 

years and China has also begun to invest 

in it to a significant degree. There are 

also a number of efforts at an 

institutional level to address the 

challenges and opportunities of 

intangibles; accounting and regulatory 

entities regularly discuss whether or not 

they should consider the question of 

“intangibles.” Frequently, they decide to 

postpone such discussions based on a 

“lack of interest” among their 

stakeholders. When they do decide to 

consider the subject, they do it in closed 

meetings and exclusive organizations 

where the entities at the table have paid 

to be there. 

Each of these programs provides a 

slightly different approach to the same 

problem. Most provide a full-scale 

solution that addresses and 

encompasses the entire intangible side 

of business. The assumption is that a 

business must make time and space in its

day-to-day routine for a whole new 

activity, the managing of intangibles. Is 

there anything wrong with all of these 

efforts? On the surface, no. They are all 

well done and well intentioned. The 

thinking is very sound and I, like many, 

have learned a lot from reading them. 

The problem is that in creating “boxed” 

solutions to the challenge of managing 

intangibles, we have missed the 

opportunities that exist in today’s Web 

2.0 world for collaboration and bottomup 

solutions. 

The Missing Lessons 

One of the basic lessons of IC and, 

indeed, of the knowledge era is that 

knowledge is distributed across an 

organization’s internal and external 

networks. This knowledge must be 

allowed and encouraged to flow from 

the bottom up and the outside in to 

support efforts at innovation, improved 

performance and competitive 

advantage. This opportunity is now being 

turbo-charged by new developments in 

networking platforms (often called Web 

2.0 or just 2.0). We are witnessing an 

explosion of conversations, communities 

and collaboration. 

It is all happening so fast that it can be 

hard to internalize the lessons from this 

dynamic new world. In my own 

consulting work, I spend a lot of time 

trying to get managers to listen to and 

solicit contributions from employees and 

external stakeholders. And I fear that, 

although we are experts in the trends 

and tools of the knowledge era, our IC 

community has failed to see the promise 

and opportunity of these new tools to 

gain wider understanding and adoption 

of our ideas. 

This is a lesson that we need to take to 

heart in the IC community. We need to 

create environments where 

businesspeople can try out, discuss and 

collaborate to develop the approaches 

to IC that are most relevant to their 

own work. We need a Web 2.0 strategy. 

Some will immediately correct me on 

this point. There have already been a 

number of efforts in our community to 

create forums for collaboration and 

discussion. But there was something 

missing in the efforts I have seen. One 

forum I visited was “open” to anyone 

but it was on a site of an organization 

with closed membership. Indeed, when I 

visited the forum in 2009, I found that 

hackers had found it a haven for posting 

graphic pornographic photos - a fact no 

one in the network had even noticed. I 

notified the webmaster who 

immediately took the forum off line. 

Other sites I have seen with 

collaborative platforms in place keep 

them closed to their own geographic or 

member community. 

IC 2.0 and the Open Source 

Opportunity 

Why do we need a 2.0 strategy? 

Because it would be hypocritical for us 

to not have one. And because we 

cannot continue to sit in ivory towers 

and send out detailed pronouncements. 

And, lest anyone take offense at my 

criticism, I want to say that I have 

learned much of what I know from 

reading the writings of the many smart 

people contributing to our field (the rest 

I have learned by trying to apply these 

ideas in my client work). And I myself 

have written extensively in our field. 

I am not saying that any of us should 

stop our current work. But I do believe 

that our current work is not enough. We 

31 

need something else. We need to face 

up to the lack of understanding in the 

general business community. Not (just) 

by publishing more systems and 

methodologies. We need to engage the 

general business community in a 

conversation. To make IC concepts 

readily available in a digestible form. To 

be open to hearing how the concepts 

work for them and to adapt the 

concepts based on these real world 

experiences. The process I am describing 

is called, in other contexts, open source 

development. 

Open source is a concept best known in 

the software world. Many very 

successful software platforms are open 

source including Linux, Apache and 

Mozilla Firefox. There are a few 

examples of open source hardware such 

as Arduino and the OpenSPARC T1 

Multicore processor. A fascinating 

experiment in open source car 

manufacturing was documented in the 

February 2010 cover story in Wired 

magazine. There are fewer examples of 

open source content; Wikipedia is the 

wildly successful exception. 

In his excellent book called The Success 

of Open Source, Steven Weber states: 

Open source software represents a key 

artifact of a community that existed to 

solve problems together for the common 

good. (p. 47) 

This should be the rallying cry of our 

community. 

Towards an Open Source IC 

Where to start? First, we need to 

create a full community on line. Today 

the expertise of our community is 

spread across every geography and 

every discipline. We encounter each 

other individually or in the occasional

conference. Yet we have at our 

fingertips the tools to build 

an electronic community 

that connects us all. 

Once we are assembled in a virtual 

community, we can begin to “solve 

problems for the common good.” 

There are two reasons to do this. The 

first is that we all agree that IC 

concepts hold answers to the many 

challenges facing businesses and 

economies around the world. But 

there is more to this than pure 

altruism. The second reason for doing it 

is to create a critical mass and speed 

the maturation of our market. Greater 

understanding and larger demand is a 

compelling business reason for us each 

to join in a global community. 

The community needs to face head on 

the question of the lack of 

understanding of our field by the 

mainstream business community. And 

find ways to engage everyday 

managers in our conversation. 

Ultimately, I believe that create a set of 

“open source” IC management 

tools-tools that provide a baseline 

of what basic intangibles management 

looks like. 

To get this going, a group of IC 

practitioners recently launched a site, 

NOTE 

56 The author of this article is SRI analyst at 

ODDO Securities. After spending 10 years on 

the TMT sectors, both on the sellside or the 

Buyside, Sébastien joined the SRI Research team 

of ODDO in 2008 and he is particularly in 

charge of developing Intellectual Capital 

analyses. Being the last remaining independent 

French broker, Oddo Securities specialises in 

providing investors with independent and outof-the-box 

investments ideas. Building on a long 

history in the French stock market, Oddo 

Securities has clients from all over Europe and 

North America. 

the IC Knowledge Center (ICKC). We 

built it on Ning, a platform for 

community sites created by, among 

others, Marc Andreessen, co-founder 

of Netscape. There are already two 

million networks built on this platform. 

The ICKC is open to anyone. Our 

initial members are primarily 

academics and consultants although 

there are a few businesspeople 

represented. The idea of the site is to 

unite the many people in the IC 

community across geographies as well 

as disciplines in conversation. Over 

time, we hope to also begin to 

collaborate to build answers to 

business challenges using IC concepts. 

Crisis or Opportunity? 

IC can provide many answers to help 

the global economy move up and out 

of the current crisis. But the success of 

the IC community in playing an active 

part in the solution is going to be 

determined by the extent to which it 

can solve its own crisis. We need to 

make a stronger connection with the 

mainstream business community. The 

opportunity is there for us to take. Are 

you ready to join of IC 2.0? Join us at 

www.icknowledgecenter.com and help 

us make the connection between IC 

and the future of global business. 

5.4 Identification 

of Intellectual Capital 

in the Telecoms sector 

Sébastien Thévoux-Chabuel SRI analyst at 

ODDO Securities 56 

Introduction 

Just ten years ago, stock markets of 

developed countries were about to 

reach a peak that would never be 

attained again. Among other things, the 

32 

main reason for such a disappointing 

outcome was the accumulation of 

massive excesses of all kinds in the 

overheating engine of the preceding 

bull market, i.e. the TMT bubble. 

Too much debt had been put on the 

shoulders of weak companies with 

fancy but unrealistic business 

positioning. Fast forward and you 

would realise that it took almost a 

decade to unwind this excessive debt 

and for the weak players to exit the 

markets they should not have entered 

in the first place. 

Due to stubborn structural oversupply, 

this process led to price deflation, 

anaemic growth and corporate pains. 

Without trend growth, all the players 

had to prove adaptive enough to 

change their game plan and comply 

with new business rules. 

Now the dust has settled, one lesson 

can be drawn for the financial sector 

for decade to come. Most of the TMT 

champions, which survived the crisis 

and thrived, share one trait: they have 

demonstrated a knack for managing 

what remains mostly invisible but 

utterly critical when growth is scarce: 

Intangible Assets. 

In the Telecom sector, shareholder 

value creation is not derived 

exclusively from the state of being 

licensed to operate network 

infrastructure to serve subscribers. 

The main source of value creation lies 

elsewhere. In this section, we analyse 

how and why the sound management 

of intellectual capital plays a key role in 

value creation for a telecom operator. 

In the interests of simplicity, 

we use the terms “intellectual capital” 

and “intangible capital” 

interchangeably.

Intangible assets contribute more to value creation than physical assets 

■What are the principal value-creation drivers for a telecom operator? 

The following chart shows the principal valuation drivers that we have identified: 

Shareholder value creation 

Revenues 

Operating 

Expenses 

Capex 

Chart 14 - source: oddo securities 

Number of 

Subscribers 

Revenue per User 

Mix of Subscribers / 

Scale Economies 

New Services 

Introduction 

Churn Rate 

Subscriber 

Acquisition Costs 

Subscriber 

Retention Costs 

Network Costs 

R&D expenses 

G&A expenses 

Network 

Maintenance 

Network 

Expansion 

The starting point of our analysis is 

that only growth and return on capital 

employed (ROCE) create lasting 

shareholder value. Accordingly, we have 

completely excluded the weighted 

average cost of capital (WACC), which 

is affected by skews 

(over-indebtedness/underindebtedness 

cycles, overly subjective 

risk premium assessment). Given the 

33 

SALES GROWTH RATE (%) 

OPERATING PROFIT MARGIN (%) 

CAPITAL 

INTENSITY 

SHAREHOLDER VALUE CREATION 

severe growth constraints imposed by 

the regulatory framework and 

competition, we see four possible ways 

for operators to increase sales: 

Grow the subscriber base: with 

penetration at maximum levels in 

many service areas (mobile and 

fixed-line telephony, corporate 

services, etc.), growth in the 

subscriber base is now dependent 

on market share gains. 

The low-hanging fruit phase 

(market development on the back 

of sales to first-time users) is over. 

Luring customers away from a 

competing operator requires the 

implementation of smarter 

strategies, whose benefits are 

\usually felt over the long term. 

Increase ARPU (average revenue 

per user): here, too, the past ten 

years are not an appropriate 

reference because consumers’ 

priorities have since shifted massively 

towards mobility and high-speed 

connections. Furthermore, the 

decline in mobile per-minute rates 

was previously long offset by volume 

growth. Today, unlimited offerings 

have become the norm and volumes 

are no longer paramount in the sales 

equation, although they have a real 

impact on network utilisation rates. 

Add new services that subscribers 

will be willing to pay for: the fate of 

the various initiatives launched since 

SMS shows how difficult it is to 

implement this type of service 

expansion. The model applied by 

French ISP Free, consisting of 

continual service additions and stable 

pricing, is slowly taking hold 

elsewhere. MMS (Multimedia 

Messaging Services) and Mobile TV,

for example, have failed to inspire 

willingness to pay among consumers. 

ARPU growth momentum now 

seems dependent on e-mail 

functionality and selective internet 

surfing, as provided by the famous 

BlackBerry so beloved of whitecollar 

employees. 

Reduce the churn rate: although 

some subscriber loss is inevitable 

(relocation, death, etc.), churn rates 

across operators are markedly 

uneven. A reduction in churn not 

only improves growth, but also 

lowers costs. 

We can use the example of churn 

to demonstrate the impact of these 

growth drivers on value creation. 

In the case illustrated in the chart 

below, assumptions are a total 

customer acquisition cost of € 100 

at the outset and annual free cash flow 

of € 50 per subscriber until the 

subscription is cancelled. Given an 

8% discount rate, this means that the 

halving of the churn rate (to 10% from 

20%) would increase the value of each 

subscriber for the operator 

by 136% (NPV of € 218 vs € 92). 

Although highly theoretical, this 

exercise shows that the operator 

could more than double its market 

value by cutting churn by 50%. 

The following chart also suggests a 

probable “efficiency frontier” for 

subscriber profitability. 

Reducing churn means making efforts 

that may involve direct costs. 

Although a reduction in the churn rate 

to 10% from 20% would generate 

a positive financial return in the vast 

majority of cases, there is no doubt a 

threshold beyond which it is better to 

let go of a subscriber. 

NPV per subscriber at various churn rates 

Operators need to know who their 

most profitable subscribers are, 

virtually in real time, and to be alert to 

the risk of defection. The subscribers 

can then be contacted and their 

contracts realigned with their new 

preferences. 

Analysis of key intellectual 

capital management 

indicators for the 

Telecom sector 

This section examines the importance 

of intellectual capital for the Telecom 

sector. Given growth constraints 

(regulation, subscriber saturation, 

fierce competition, etc.) and changes 

in communication methods, an 

approach based on the analysis of 

operators’ intellectual capital permits 

the identification of numerous 

strengths and weaknesses 

that are revealed much later in 

34 

500 

400 

300 

200 

100 

0 

-100 

-200 

1 33.3% 20.0% 14.3% 11.1% 9.1% 7.7% 6.7% 5.9% 5.3% 4.8% 4.3% 4.0% 


NPV per subscriber at various Churn rates 

companies’ financial accounts. 

Alongside sector-specific 

considerations, we focus as much as 

possible on France Telecom, 

a pioneer in the field of intellectual 

capital-oriented business management. 

In 2007, France Telecom introduced a 

new management method 

underpinned by a wide range of 

indicators consistent with analysis 

beyond the financial confines of 

traditional management accounting. 

With stakeholder analysis (including 

external environment factors) as its 

starting point, France Telecom bases its 

management decisions on a 

“Balanced Scorecard” comprising 

four components: business segment 

indicators, financial information, 

indicators concerning changes in its 

intellectual capital and indicators 

concerning changes in its human 

capital. With an eye to constant

enhancement, the operator uses these 

indicators to detect trends, analyse 

deviations from objectives 

and perform comparisons founded 

on internal and external 

benchmarking. 

In our opinion, the quality and 

effectiveness of corporate decisionmaking 

is determined to a great extent 

by the management tools used. Judging 

by the comments made by France 

Telecom’s CFO, Gervais Péllissier, at a 

public presentation in July 2008, the 

company’s “Balanced Scorecard” 

appears well designed and 

operationally effective. 

According to Mr Péllissier, 

the “Balanced Scorecard” is gradually 

becoming a widely used management 

tool and a guide for the discussion 

of the Group’s strategic 

development issues. 

The key indicators used by France 

Telecom are to a large extent 

concerned with: 

the Orange brand and purchase 

intentions, according to country 

and communication efforts over 

a given period; 

service quality, both real and as 

perceived by customers 

(via satisfaction surveys); 

innovation, with an emphasis 

on the contribution of growth 

initiatives to the revenue base. 

■ Intellectual capital has three 

constituents 

Although the concept of intellectual 

capital is very similar to that 

of intangible capital, we present 

in the chart below the constituents 

of a company’s intellectual capital. 

Main components of intellectual capital 


The three main constituents of 

intellectual capital are found: 

at the company level, with the 

company as an entity in itself and 

relatively independent of the 

individuals of which it is 

composed at any given time. 

Here, it is a matter of organisational 

capital, which comprises 

technological capital, intellectual 

property, innovation capacity, 

explicit and implicit internal 

processes, corporate culture and 

language, the ability to adapt 

operating rules rapidly to changes in 

conditions, etc.; 

35 

Skills: 

Managers/ 

Employees 

Process / 

Culture / 

Adaptability 

Human Capital 

Capital 

Motivation & 

Loyalty: 

Managers/ 

Employees 

Organisational 

Capital 

Capital 

Intellectual 

Capital 

Capital 

Technological 

Capital / 

Intellectual 

property 

Client Capital 

Ecosystem 

Capital 

Capital 

Supplier capital/ 

partners 

Brand Capital 

at the individual level and 

throughout the organisation. 

We call this constituent 

a company’s human capital, 

which is dealt 

with later in this study; 

in the interrelationships woven 

between a company and its 

customers, suppliers and partners. 

Here, we are dealing with the 

measurement of a company’s 

ecosystem capital, i.e. the company’s 

position and momentum within an 

interdependence-based network 

characterised by predator-prey 

interactions.

The following table summarises the relationship between value creation drivers and intellectual capital management for operators. 

Summary of links between intellectual capital and value creation 

Value creation 

driver 

Number of 

customers 

ARPU 

Subscriber mix 

Addition of new 

services 

Churn rate 

Subscriber 

acquisition costs 

Subscriber retention 

costs 

Network operating 

costs 

R&D spend 

Capex 

Table 17 - source: oddo securities 

Conclusion 

When we first looked at the Telecom 

sector in 2008, we drew a chart 

comparing our IC scoring for each 

player of the food chain and their Price 

Intellectual capital 

constituent 

Brand capital 

Customer capital, brand 

capital 

Customer capital 

Technological capital, 

innovation culture 

Customer capital, brand 

capital 

Brand capital, partner 

capital 

Customer capital 

Technological capital, 

supplier capital 

Technological capital 

Supplier capital, 

technological capital 

to Book ratio of the previous year. See 

the chart below. The correlation seemed 

high and significant, at 39.5% between 

the two series. Based on 2009 numbers, 

the updated data shows that this 

36 

Key performance indicator 

Brand financial value, market share, 

spontaneous recognition, transfer price for 

brand utilisation, internationalisation 

capacity, etc. 

ARPU, standard deviation in ARPU, 

quality and quantity of available 

information on individual customers, etc. 

% of EBITDA generated with customers 

representing the top 20% of sales, etc. 

New-service development cycle, % of 

sales generated by offerings launched less 

than 12, 24 and 36 months earlier, etc. 

Number of bundled offerings, Δ (selling & 

marketing expenses/sales)/Δ churn rate, 

service quality measurement, satisfaction 

index, etc. 

Selling & marketing expenses/subscriber, 

number of handsets offered, cost of 

handsets, % of customers acquired online, 

% of sales generated by in-house 

distribution channels, etc. 

Churn rate, service quality, capacity to 

provide bundled offerings, “club effect”, 

average customer support costs per 

subscriber, etc. 

Number of technologies deployed (X25, 

ATM, IP, 2G, 2G+, 3G, 3G+, etc.), 

number of suppliers, etc. 

R&D spend as a % of sales, number of 

internally- developed services/offerings, 

internally-developed services/offerings as 

a % of sales, R&D organisation and R&D 

integration at other divisions, etc. 

Capex/sales, Δ capex/Δ sales, etc. 

coefficient of correlation is now closer 

to 30%, mainly due to some outliers. As 

a reminder, the median performance of 

all the stocks in this Telecom sample is - 

73% over the last ten years.

9.0 x 

8.0 x 

7.0 x 

6.0 x 

5.0 x 

Price to book ratio 2007 

For the decade to come, we would dare 

to make a bet: among Financial 

Institutions, which have been severely 

impacted by the recent crisis, the 

winners will be those that start focussing 

on their Intellectual Assets, and this 

should bring about some stock market 

outperformance for them overtime. 

5.5 Extra-Financial Evaluation 

during a systemic crisis 

The research approach of The 

Value Group 

C. Duerndorfer Partner at The Value Group 57 

Until now there have been only a few 

academic studies in Germany which 

have examined the relationship between 

extra-financials and company value. 

Many studies in the area of extrafinancials 

have been conducted for US 

companies and the results are based on 

time series in US listed companies. The 

Value Group concentrates on the 

identification and recording of extrafinancials 

for German and European 

Intellectual Capital : coeff=39.5% 

4.0 x 

3.0 x 

Belgacom 

KPN 

Telefonica 

Oberthur 

Tandberg 

Cisco 

Nokia 

OTE 

2.0 x 

Bouygues 

FT 

BT 

Gemalto 

1.0 x 

0.0 x 

Sprint 

Motorola 

Verizon 

Deutsche Telekom 

AT&T 

Telecom Italia 

Alcatel-Lucent 

Vivendi 

Ericsson 

Vodafone 

Intellectual Capital 

25.00 35.00 45.00 55.00 65.00 75.00 

companies and examines to what extent 

research results from the US can be 

transferred to Europe. The knowledge 

gained and correlations identified are 

integrated on an ongoing basis into the 

valuation approach and company 

ranking system of The Value Group. 

Conversely, The Value Group also 

provides data to European companies 

relating to extra-financial indicators, 

which serves as a basis for further 

theoretical, but also practical, analysis. 

Method: Quantification 

and comparability ensure 

the objectivity of results 

The analysis and valuation of extrafinancials 

is subject to particular 

requirements. It is incomparably more 

difficult than the analysis of financials, as 

there are no market prices available for 

extra-financials, standardised valuation 

methods are largely lacking and some 

extra-financials only disclose their impact 

in combination with other factors. 

A highly quantitative and objectively 

37 

Mobistar 

Maroc Telecom 

Iliad 

comprehensible procedure 

characterises the research of The Value 

Group and the valuation of 

extra-financial information conducted 

therein. The background and motivation 

of all analysis is the identification of 

individual indicators and combinations of 

indicators in the area of extra-financials, 

which have been proven to have a 

relationship with both share 

performance and company success in 

the sense of fundamental growth. 

With an individual database and on the 

basis of a total of approximately 120 

criteria, the substantial extra-financial 

characteristics of companies in the areas 

of corporate governance, human capital, 

innovation capital and image & brand, as 

well as in the areas of stakeholders and 

corporate risk, are recorded and 

summarised in standardised valuation 

tables. These are intensively examined in 

terms of statistics, and consolidated and 

expanded on an ongoing basis. 

NOTE 

57 The Value Group (TVG) is an independent 

company, specialising in asset advisory in the area 

of extra-financial research and the development 

of financial products. It is characterised by a 

unique approach to company valuation in the 

area of extra-financials. The research data is 

examined in relation to its effect on performance, 

and thus supports investors and analysts in the 

valuation and selection of companies for the 

purposes of investment decisions. The 

development of valuation standards for extrafinancials 

and the examination of their relevance 

to the capital market are advanced in close 

reference to theory.TVG is, among other things, 

project leader of a research project of the 

German Federal Ministry of Education and 

Research (BMBF), supported practically and in 

terms of content by a joint research group made 

up of departments from the areas of finance, 

financial services, accounting and controlling from 

various German tertiary education facilities. The 

focus of this research is also the examination of 

the relevance of intangible assets to the capital 

market.

Table 1: Extra 

Financial-Screening 

Source: The Value Group 

The focus of the data collection lies in 

the consideration of criteria oriented 

towards the capital market. Thus, for 

example, the criteria applied to the 

valuation of companies in the area of 

corporate governance are considerably 

stricter and more oriented towards the 

capital market than simply the 

fulfilment of the German Corporate 

Governance Code. 

Information is taken from audited 

data sources 

The information is sourced primarily from 

company publications. The following 

publications are drawn upon as a data 

basis for the company analysis: Company 

reports, sustainability reports, corporate 

responsibility reports, corporate 

governance reports, compliance 

statements, form 20-Fs, internet reports 

and statements and SEC filings. 

Further information sources are company 

positions in so-called lead tables and 

rankings, databases (e.g. patent databases) 

as well as external data providers. All data 

is publicly available, and can thus be 

reproduced and examined at any time. 

In some particular cases, The Value Group 

also approaches the company directly – as 

a rule, the Investor Relations department. 

Such an enquiry will be necessary if 

statements or reference values in relation 

to company data are missing. Interviews 

are not conducted and internal 

information only accessible to some 

individuals is not considered, in order to 

38 

guarantee the highest possible degree of 

comparability and objectivity of the data. 

Industry-specific valuation and 

consideration of growth over time 

For each company analysed, a ranking 

according to individual indicators, as well 

as an overall ranking on the basis of all 

indicators, is available. Each company is 

compared to the industry average and 

the average of all analysed companies. 

Thus, important company characteristics 

and strength and weakness profiles can 

be displayed with individual extrafinancial 

indicators and in the overall 

ranking. 

It is not only company figures at the time 

of valuation which are incorporated in 

the analysis. The development of extrafinancials 

in the preceding financial years, 

and the growth momentum in 

comparison to competitors, are also 

considered. In this process growth can 

be arranged on a time axis, thus enabling 

more precise judgments of relative 

competitive strength. 

European Large Caps: Sector Monitor - Deviation of industries in individual indicators 

(from the average of all observed companies) 

Sector Companies Overall Corporate Governance Human Capital Innovation Capital External Stakeholder Image & Brands Corporate Risk 

Automobiles 6 -0,21 0,16 -0,25 -0,98 0,02 1,65 -1,87 

Banks 14 -0,08 -0,44 -0,06 0,27 -0,44 0,08 

Chemicals 6 0,10 0,13 0,22 -0,02 0,19 0,10 -0,04 

Retail 5 -0,15 0,19 -0,30 -1,15 -0,45 0,79 

Utilities 10 -0,26 -0,69 -0,11 -0,84 0,56 -0,63 -0,03 

Financial Services 3 -0,57 0,80 -0,38 -1,37 -1,26 -0,81 

Health Care 3 0,58 0,68 0,28 0,89 0,14 0,84 0,66 

Basic Resources 2 0,13 -0,06 0,27 0,38 -0,09 -0,63 0,89 

Personal & Household Goods 5 0,12 0,07 -0,27 0,32 -0,73 0,76 0,63 

Industrial Goods & Services 11 -0,01 -0,07 -0,26 0,44 -0,38 0,23 0,19 

Construction & Materials 6 0,25 -0,10 0,63 -0,15 0,41 -0,43 0,86 

Food & Beverages 5 0,47 0,49 -0,31 1,37 0,00 1,06 0,59 

Media 3 0,05 0,51 0,99 -0,55 -0,30 -0,98 0,33 

Oil & Gas 4 0,12 -0,41 1,38 -2,02 0,88 -0,10 0,39 

Travel & Leisure 1 0,42 0,78 1,56 -1,12 -1,67 2,39 

Technology 3 0,90 0,93 1,01 1,61 -0,18 0,59 1,39 

Telecommunications 5 0,16 0,06 -0,17 0,60 0,81 -0,27 -0,09 

Insurance 8 -0,50 0,10 -0,86 -0,10 0,30 -2,11 

100 

Source: The Value Group

European Mid Caps: Sector Monitor – Deviation of industries in individual indicators 


Sector Companies Overall Corporate Governance Human Capital Innovation Capital External Stakeholder Image & Brands Corporate Risk 

Automobiles 4 0,48 0,35 -0,04 2,34 0,07 0,90 -1,16 

Banks 8 -0,37 -1,05 -0,10 0,18 0,28 -0,96 

Chemicals 4 0,35 0,08 -0,10 0,60 0,30 0,54 0,29 

Retail 6 -0,21 0,13 -0,69 -2,16 -0,23 0,34 -0,28 

Utilities 2 0,08 -0,96 0,75 1,00 -0,68 0,49 

Financial Services 17 -0,34 -0,27 0,34 -0,39 -0,89 -0,29 

Health Care 8 -0,46 -0,93 -0,27 -1,00 -0,48 -0,56 -0,03 

Basic Resources 5 0,18 -0,31 0,82 -0,92 0,48 -0,51 1,23 

Personal & Household Goods 4 0,56 0,59 -0,05 -1,37 0,10 1,40 1,99 

Industrial Goods & Services 27 0,06 -0,07 0,06 0,37 -0,23 0,18 -0,16 

Construction & Materials 7 0,39 0,94 -0,30 -0,77 0,82 -0,02 1,16 

Food & Beverages 5 -0,54 -0,50 -0,58 -0,86 -0,50 -0,81 -0,33 

Media 5 -0,24 0,72 -0,13 -0,30 -0,60 -0,69 

Oil & Gas 7 0,62 0,38 0,53 0,42 0,66 0,89 0,70 

Travel & Leisure 3 0,03 1,86 -1,01 0,48 0,57 -1,54 

Technology 7 0,40 1,26 -0,39 0,31 0,08 0,10 0,96 

Telecommunications 1 -0,72 0,13 -1,38 -2,64 0,29 3,69 -4,81 

Insurance 4 0,03 -1,04 0,95 0,40 -0,48 0,49 

124 


The research results of The Value Group 

are compressed into company rankings 

and detailed company and industry 

reports. Through the systematic and 

quantitative collection and evaluation of 

data, the extra-financial valuation results 

can be ideally combined with the results 

of traditional financial analysis and 

methods of company analysis. 

The comparison of the largest European 

companies shows that the Health Care, 

Food & Beverage and Technology 

industries exhibit above-average values 

in most of the extra-financials observed 

here in comparison to all European large 

caps. Companies involved in Utilities, 

Financial Services and Insurance do not 

achieve above-average values in most of 

the indicators. 

The comparison of European mid cap 

companies shows that the Chemical, Oil 

& Gas and Technology industries exhibit 

good values in extra-financials. 

Companies involved in Financial 

Services, Health Care, Food & Beverage 

and Media are ranked at the bottom 

end of the evaluations of extra-financials. 

Relative positioning in industry 

context and in time comparison 

The observation of the relative 

positioning of a company in its relevant 

industry context and on the time axis 

generates particularly insightful results. 

Points of differentiation of a company 

can thereby be identified and relative 

39 

position gains or losses in relation to the 

competition can be revealed. Not 

infrequently, these are results which 

function as leading indicators of 

subsequent financials. They are reflected 

in financial results in the medium term 

and also in changed market prices on 

the capital market. 

European Large Caps: Deviation of countries in the Overall 

Evaluation and in the Corporate Risk Indicator 


Country Companies Overall Corporate Risk 

Austria 1 -0,59 -0,61 

Belgium 4 -0,85 -1,06 

Finland 3 0,35 2,06 

France 31 0,15 0,28 

Germany 21 0,05 -0,32 

Greece 2 -0,67 -0,61 

Ireland 2 0,47 2,39 

Italy 10 -0,14 -0,29 

Luxembourg 3 -0,19 0,39 

Netherlands 12 -0,02 -0,51 

Portugal 1 -0,64 -2,01 

Spain 10 

100 

0,05 0,27 

Source: The Value Group

Ranking of European companies 

In searching for companies with the 

highest levels of extra-financial 

excellence, that is companies which 

exhibit a particularly high number of 

top values in the evaluation of extrafinancial 

characteristics, country-specific 

differences are particularly interesting. 

With regard to large and mid caps 

within the euro zone, French 

companies are generally characterised 

by a high level of extra-financial 

excellence. Italian and Austrian 

companies find themselves below the 

country average. 

Corporate Risk 

Risks to the company are important 

extra-financial factors in the analysis of 

companies. The direct relationship 

between opportunity and risk and its 

role in assessing investment 

opportunities has been known even 

before Modern Portfolio Theory 

established itself in finance. It is argued 

that a functional relationship exists 

between an expected return and the 

risk connected with it. 

While assessing the opportunities of a 

company, it is important to also search 

for its risks – both the obvious and 

easily quantifiable as well as the hidden 

ones. If additional risks surface, this has 

direct implications for the risk 

expectations of the investors. For this 

reason, the assessment of the particular 

risk situation of a company is of special 

importance in extra-financial research. 

There are two categories of corporate 

risk: External Risks and Internal risk:. 

External risks consist amongst others of 

political, economic and hazard risks. 

Examples of external risks are the 

market risk, sector risk, changes in the 

government legislation and so on. 

European Mid Caps: Deviation of countries in the Overall 

Evaluation and in the Corporate Risk Indicator 


Country Companies Overall Corporate Risk 

Belgium 4 -0,42 0,09 

Germany 55 0,05 -0,29 

France 23 0,33 0,60 

Italy 6 -0,54 -0,04 

Netherlands 8 0,23 0,47 

Austria 17 -0,09 -0,50 

Spain 9 

122 

-0,37 1,37 


Internal risk consists of the factors: 

Business Risk (Strategy, Organisation, 

IT, Employees, Risk Committees, 

Pensions etc.) 

Operational Risk (Products, 

Innovations, R&D, market area, etc.) 

Financial Risk (Investment Risk, Credit 

Risk, etc.) 

An example of a risk factor from future 

obligations is pension risk. This internal 

factor can put especially investments in 

a company’s future at risk. Many 

companies established company 

pension schemes in the past, which 

40 

were either voluntary or legally 

mandatory, and in part remain so. 

Pension schemes consist of the 

pension obligation on one hand and 

the funding of the payment obligations 

with very long durations on the other. 

For the hundred largest European 

companies this amounts to 

€ 69,000 per employee on average, 

but can be as high as € 200,000 per 

employee. For a company, this can 

result in payment obligations with a 

cash value in the billions of Euros. 

Both the assumptions with regard to 

the structure of the obligations 

(discount rates, mortality tables, 

growth rates, etc.) as well as the 

current amount of the pension fund 

being accumulated for this (including 

the assumptions regarding future 

returns) have an important impact on 

the future cash flow positions of the 

company. This has direct implications 

for the verdict on the future prospects 

of a company, since in a worst-case 

scenario a severe negative impact on 

cash flow would result in a lack 

of capital for investments in the 

company’s future, as the cash flow 

would have to be used to pay 

obligations from the 

company’s past. 

Long term country comparison 

With regard to large caps within the 

euro zone, Finnish, French, German 

and Irish companies are generally 

characterised by a high level of extrafinancial 

excellence in most time 

periods, whereas Austrian, Greek, 

Italian, Luxembourgish, Portuguese 

and Spanish companies often have 

below-average values in extrafinancials.

European Large Caps: Changes in the deviation of countries 


Austria 1 -0,59 -0,76 -0,08 

Belgium 4 -0,85 0,42 0,55 0,54 0,38 

Finland 3 0,35 0,77 -0,15 1,14 0,84 

France 31 0,15 0,03 0,00 -0,09 -0,09 

Germany 21 0,05 0,03 0,09 0,07 -0,03 

Greece 2 -0,67 -0,65 -1,24 

Ireland 2 0,47 0,46 0,53 0,17 0,50 

Italy 10 -0,14 -0,32 -0,35 -0,33 -0,21 

Luxembourg 3 -0,19 -0,72 -0,77 

Netherlands 12 -0,02 0,48 0,42 0,35 0,42 

Portugal 1 -0,64 -1,17 -0,64 

Spain 10 

100 

0,05 -0,08 -0,03 -0,18 -0,19 


Country Companies Rating08 Rating07 Rating06 Rating05 Rating04 

Italian Companies 

The following two tables show the Value 

Group Extra-Financial Ratings of 

selected Italian large and mid cap 

companies. 

Top companies are not only 

successful in one category: 

Extra-financial excellence is 

achieved when top results are 

attained in multiple categories 

It is possible to determine isolated 

champions in the observation of 

individual extra-financial indicators, but it 

is only the overall synopsis of the 

company, taking into account all 

indicators, which provides a 

comprehensive picture of the company. 

Italian Large Caps: Changes in the Value Group Extra-Financial Ratings 

In order to emphasise that an increase in 

the number of observed indicators leads 

to an improvement in information, the 

rankings of two extra-financial indicators 

were combined in a number of cases. 

For each combination of indicators, a 

plane appears which is separated into 

41 

four quadrants. 

Three examples show the additional 

information gain for an investor where 

multiple criteria are combined, and 

extra-financials aggregated. In this 

Companies Sector Rating08 Rating07 Rating06 Rating05 Rating04 

ASSICURAZIONI GENERALI Insurance BBB BBB BB BBB- BBB- 

ENEL Utilities BBB BBB- BB BBB- BB 

ENI Oil & Gas BBB+ AA- BBB+ BBB BBB+ 

FIAT Automobiles BBB+ BBB- BB 

INTESA SANPAOLO S.P.A. Banks A+ A- BBB- A- BBB 

MEDIOBANCA Banks BBB BBB BBB- 

TELECOM ITALIA Telecommunications A- BB+ A- A A- 

UBI BANCA Banks BB BB 

UNICREDIT Banks A A- A- BBB A- 


context, we differentiate between three 

groups (for this, see the following graph): 

1. Companies which perform better 

than average in relation to both 

indicators 

2. Companies which perform better 

than average in relation to one

Italian Mid Caps: The Value Group Extra-Financial Ratings 

AZIMUT HOLDING Financial Services BB 

BANCA CARIGE Banks BB 

CATTOLICA ASSICURAZIONI Insurance BB- 

CREDITO VALTELLINES Banks BB 

HERA Utilities BB 

SARAS Oil & Gas BB+ 


Companies Sector Rating 2008 

indicator and worse than average in 

relation to another (this applies to 

two quadrants) 

3. Companies which perform worse 

than average in relation to both 

indicators. 

In the first comparison, the factors Image 

& Brand and Human Capital are 

observed for European large caps, in 

special consideration of Italian companies: 

Table 2: European Large Caps 

(esp. Italian companies) 

8 

7 

6 


Companies which perform worse than 

average in both indicators are, for 

example, UBI Banca and Unicredit, while 

most of the other Italian companies 

perform well in the Indicator Human 

Capital and worse than average in the 

indicator Image & Brand. 

The scores of the European mid caps 

(with special regard to Italian 

companies) of the indicators External 

Stakeholder and Human Capital are the 

basis for the following matrix: 

One example for a company with 

above-average scores on both indicators 

6 7 8 9 

is Saras, while most of the other Italian 

companies only achieve relative good 

results with regard to the indicator 

Human Capital. 

42 

Table 3: European Mid Caps 

(esp. Italian companies) 

8 

7 

6 


Extra-Financial Leaders in Times of 

Crisis 

Due to a systematic collection and analysis 

of extra-financial factors possible changes 

and impacts on enterprise development 

can be uncovered. This may be a valuable 

information lead for analysts and investors 

alike to reveal return opportunities and 

minimize risks more effectively. 

The development of extra-financials over 

time in particular provides information on 

the relative competitive strengths and the 

development potential of enterprises. 

To investigate whether firms with an 

improved extra-financial management 

prove resilient in the financial crisis, the 

performance of a portfolio consisting of 

German Large-Caps that improved their 

extra-financial rating was compared to a 

portfolio of German Large-Caps that 

deteriorated in their rating over the timeperiod 

2005-2008. 

As the figure (see Table 4) shows, during 

the investigation period 31.12.2007 to 

30.04.2009 companies that improved 

their extra-financial management over the 

6

Table 4: Extra-financial rating 

Source: The Value Group Source: The Value Group 

years were able to generate an excess 

return of around 7% when compared to 

the DAX 30 index (the DAX contains the 

30 largest German listed companies). The 

downgrade portfolio on the other hand 

has to cope with a return of -49%, which 

marks an underperformance of 8% in 

comparison to the benchmark. 

Despite large losses the rating upgrade 

portfolio proves to be resilient in the 

economic crisis and recorded significantly 

lower losses than the DAX. With an 

annualized volatility of 32% the rating 

upgrade portfolio also promoted a lower 

volatility compared to both the DAX 

(37%) as well as the downgrade portfolio 

(43%), indicating a lower exposure to 

price fluctuations. 

Extra-Financial Evaluation during a 

systemic crisis 

The DAX-Extra-Financial-Monitor 2009 

for the fiscal year 2008 focuses the 

attention on the changes of the DAX 

companies (the DAX contains the 30 

largest German listed companies) with 

respect to their extra-financial figures. The 

results are based on the company 

analyzes of the past financial year and the 

whole assessment period 

2005-2008. The monitor illustrates the 

major shifts in the evaluation and ranking 

of the companies. 

As the figure shows, during the timeperiod 

2005-2008 the top-performing 

companies according to extra-financial 

criteria remained generally unchanged. 

Extra-Financial leaders such as BASF, SAP 

and Siemens were constantly found to be 

among the best rated companies. Despite 

the financial crisis these firms were able to 

even improve their extra-financial ratings 

during this difficult time period. 

Especially in the financial service sector 

ongoing extra-financial excellence pays off. 

Sector leaders such as Munich RE or 

Deutsche Bank were able to cope 

significantly better with the turmoil in the 

markets than their lower-rated peers. 

These results can also be determined at a 

European level, as the sector leaders 

remain also generally unchanged over the 

time-period 2005-2008. Companies such 

as Nokia, Unilever, Total, Banco Santander 

or BNP Paribas were constantly found 

under the extra-financial leaders of the 

43 

Rank 2008 2007 2006 2005 

1 

2 

3 

4 

5 

BASF Deutsche 

Bank 

SAP BASF Deutsche 

Bank 

BASF Deutsche 

Bank 

SAP 

Henkel SAP SAP Siemens 

Münchner 

Rück 

Extra-Financial Leaders 

Daimler Siemens BASF 

Siemens Henkel BMW Merck 

100 biggest European enterprises and 

were even able to enhance their extrafinancial 

evaluation in 2008. 

Increasing gap between firms 

market and book values 

Especially the growing gap between 

companies market and book values reflect 

the increasing importance of intangible or 

extra-financial assets, without getting 

evident in balance sheets. Even though a 

concrete percentage quotation of the 

intangibles` contribution to this gap is not 

possible, it seems that intangibles, beside 

other factors (e.g. bubbles, global 

economic crises), have a considerable 

impact. 

A study 58 among 500 European 

companies shows that the gap between 

firms` market and book values increased 

strongly in the last 20 years. While in 1985 

the quotient of market and book values 

NOTE 

58 Manuel Wittmann, Winfried Schwarzmann, Klaus 

Röder, Martina Dürndorfer (2009): Lohnt die 

Analyse von Intangible Assets bei der 

Aktienanlage?, in: Forum Betriebswirtschaft 

München, Vol. 1, P. 32-45.

was 1,37 in average, this ratio rose to 1,98 

in 2007. Meaning that on average only 

50% of a company’s market value can be 

explained by its financial equity. 

Considering the 30 DAX-companies, a 

strong decrease of the market-to-book 

ratio between 2007 and 2008 can be 

detected. This sliding is particularly due to 

the actual financial and economic crises 

and the associated decline in share prices. 

But regarding the strong rebound in 2009 

and the analysts` forecasts, a noticeable 

increase of the m/b ratio for 2009 and the 

following years is already observable. 

The table above displays the 

development of the market-to-book 

ratio for several sectors in the years 

2007 to 2009. While in 2007 none of 

the 30 DAX-firms had a m/b ratio less 

than 1, in 2008 10 companies (2009: 7 

companies) showed a m/b ratio less 

than 1 (automobiles: 2; banks: 2; health 

care: 1; industrial goods: 1; insurance: 1; 

technology: 1; other sectors: 2). 

5.6 The effects of the crisis on the 

prevailing economic paradigm: 

ENI’s response 

Raffaella Bordogna, Sustainability Reporting 

Manager at Eni Spa 59 

The firm belief is now established, that 

what originated the crisis that shook 

harshly the financial markets in 2008, and 

that triggered the deepest post World 

War Two recession, was an economic 

Market-to-Book Ratio 

Sector Companies 2007 2008 2009e 

Automobiles & Parts 3 1,67 1,38 1,02 

Banks 2 1,08 0,34 0,66 

Chemicals 4 3,53 2,10 2,47 

Health Care 3 1,85 1,31 1,33 

Industrial Goods & Services 4 2,57 1,37 1,57 

Insurance 2 1,20 0,98 1,04 

Personal & Household Goods 3 3,96 2,24 2,99 

Technology 2 3,91 2,32 - 

Utilities 2 2,81 1,96 2,22 

Other Sectors 5 3,35 1,48 1,76 

Average over all DAX-Companies 


30 2,72 1,58 1,74 

NOTE 

59 Raffaella Bordogna joined Eni, the main Italian 

oil&gas company, in 2006, since then she has 

been involved in sustainability issues. She was 

part of a task force born to set up Eni 

Sustainability Management System, now fully 

developed. She has a long experience in the 

development of innovative tools to value 

corporate efforts with respect to economic, 

environmental and social sustainability as she 

worked 4 years at the research institution 

Fondazione Eni Enrico Mattei in the field of non 

financial reporting. 

and entrepreneurial culture aimed at the 

short term, which pushed the main 

economic actors to use analysis tools 

aimed almost exclusively at assessing 

short term profitability, neglecting a 

longer term economic and financial 

solidity. The long term outlook that 

differentiates sustainable action was put 

aside as opposed to the immediate 

individual benefits. 

At a time when sustainable 

development was discussed with great 

interest, the sustainability of the 

economic model adopted by the 

industrialized countries in the past few 

years failed. Enterprise is risk, decisionmaking 

skills, and hard work, and 

pursuing profit should be within a 

44 

context of rules that guarantee fair play 

and transparency. Therefore, many civil 

society subjects asked increasingly that 

the enterprises contribute to building a 

new business ethics based on the 

transparency of processes and 

economic relations, able to develop a 

new type of leadership, capable of 

integrating the expectations arising from 

respecting fundamental ethical needs 

into everyday decision-making 

processes. 

The crisis changed also the individual 

preferences in terms of consumer 

models, rapidly increasing the number of 

“critical” consumers that pay special 

attention to innovation, quality of 

products, respect for social values, and 

communication. 

Moreover, there was also a growth of 

the awareness that access to energy, 

sensible use of shared resources, transfer 

of skills and new technologies in 

developing countries are essential for 

the accomplishment of a new global 

economic equilibrium. We cannot talk 

about development without holding into 

account the needs of the developing 

countries. The expectation, with the 

large multinational corporations, is that 

they contribute to the growth of the less 

developed countries, not through 

subsidiary means, but by applying new 

ways of cooperation that support 

growth, progress, and the achievement 

of their own potential. 

Eni, thanks to the experience deriving 

from a well-established approach to 

sustainability, deals with the dynamics of 

these changes by focusing on 3 key 

elements: the ability to create trust in 

the markets and among the citizens, the 

will to strengthen the partnerships with 

the various stakeholders of reference,

and the decision to increase its nature of 

integrated energy company, able to 

operate in a sustainable way toward all. 

This is made possible, on one side, by 

Eni’s history and business culture, and on 

the other side, thanks to the company’s 

current strategic guidelines. These 

guidelines answer the long-term major 

global challenges with a vision that puts 

innovation in all its inflexions at the 

center of doing business: this involves 

technology and industrial processes, and 

the relations with producer countries, 

local communities, employees, 

customers, shareholders, and civil society 

in general. The will and ability to actually 

contribute to a sustainable development, 

and be active part in finding innovative 

solutions, translates into commitments, 

actions and tangible results that affect 

transversely all Eni’s activities. 

The intangibles as 

competitiveness incentives 

in the energy sector 

In the past, the international oil 

companies supported the countries 

that had hydrocarbon reserves and 

their national companies (National Oil 

Company) in developing and marketing 

their resources. Nowadays the NOCs 

are taking a leading role in the oil 

industry. As a matter of fact, they are 

constantly improving their technical and 

managerial skills, and they are closing 

the gap with the international 

enterprises in terms of managerial and 

operational procedures and of growing 

attention to profitability and efficiency. 

Many upstream projects are now 

managed by the NOCs independently, 

or by involving service companies only. 

Besides safeguarding their own 

domestic market, the NOCs are 

expanding their activities abroad in view 

of widening and diversifying their 

activities. 

Additionally, another deep change is 

currently taking place in the oil world. 

The Asian countries, notably China and 

India, in their unstoppable drive toward 

providing a permanent and sustained 

development to their own economies, 

aim at securing a lasting supply of 

hydrocarbons. These countries, that lack 

sufficient oil resources in their own 

national territories, besides buying 

supplies from the big producers such as 

Russia and Saudi Arabia, are tending 

toward the exploitation of the oilfields, 

such as those of the African Continent. 

Chinese and Indian companies are 

competing more and more with the 

international oil companies for oil 

drilling rights, and they are more and 

more capable of offering adequate 

technical support to the governments 

of the developing countries, besides 

being willing to invest financially for the 

production of the oil resources. 

In this growingly competitive context, 

creating value can no longer be 

independent from a strategic 

management of resources and 

distinctive abilities. It becomes therefore 

necessary to identify and manage 

sources of competitive advantage, linked 

to intangible aspects. These aspects refer 

to assets such as the human, intellectual, 

social, symbolic and organizational 

resources of an enterprise. The 

awareness is now widespread that only 

rare, valuable, hardly imitable resources, 

configured so as to be effectively used 

within a given organization, can provide 

a positive performance differential 

compared to the competition. These 

characteristics rely on the intangible 

45 

resources, which stand at the base of 

value generating processes in the 

modern economies. The definition of 

cooperation models, for instance, 

becomes fundamental to achieving 

strategic agreements that allow a 

balanced sharing of risk and profitability 

of exploration and production activities. 

The ability of being innovative, from the 

viewpoint of research and technology, is 

a discriminating element to reaching 

extreme and so far unexplored 

environments. The commitment in 

attracting and valuing the people, the 

satisfaction of customers and 

consumers, the ability of the energy 

companies to create an effective dialog 

and to understand the needs of local 

communities and civil society 

organizations, count more and more 

significantly in terms of chances of 

success and appreciation within the 

market, in a sector characterized by a 

growing need for security and stability. 

All these aspects that refer to intangible 

assets affect deeply a company’s 

conduct in terms of competitiveness 

and reputation, and they are distinctive 

and characterizing elements of 

successful enterprises. 

Proper management of intangible assets, 

besides giving competitive advantages, 

allows creating value for the 

shareholders, and improving the 

relations with the stakeholders. In 

particular, measuring the intangibles, 

followed by outward communication, 

provides the stakeholders with: a 

thorough assessment of the quality of 

the company’s management, a chance 

to evaluate the company’s likely growth, 

besides an overall knowledge of the 

company’s competitive strength and of 

the basis of its future success.

Eni’s approach to intangible assets 

Eni has been developing for a long time 

a strategic awareness on the need to go 

beyond the economic-financial results, 

so as to provide a valid picture of 

entrepreneurial success, its innovative 

and competitive correlated potential, 

and of the connected ability to establish 

long-term business processes and 

relations with the stakeholders. For this 

reason, a process was started in 2006, 

aimed at carrying out a progressive 

strategic and organizational integration 

of the sustainability subject matters, 

which provided a definition of an 

integrated and transversal sustainability 

management system. Thanks to this 

management system, all the topics 

related to the intangible capital 

(Governance and Company Ethics, 

People, Environment, Territory and 

Community, Suppliers and Consumers, 

and Technological Innovation) are well 

safeguarded at every organizational 

level. The two elements of success of this 

system are the sharing of strategies and 

actions with all the business units, and 

the consequent approval by the top 

decision-making levels. The creation of 

sustainability processes such as Planning, 

Accomplishment, Control, and 

Involvement of the stakeholders brought 

to the definition and the achievement of 

important targets concerning several 

aspects of Sustainability. To support this 

system, over 1000 non-financial 

indicators were defined, to represent the 

effectiveness of the actions carried out 

within the scope of the company’s 

intellectual, relational and structural 

capital. Following their monitoring, 

corrective actions were carried out, 

which allowed achieving levels of 

excellence in some areas. See for 

instance the corporate governance and 

the excellent results achieved in terms 

of spreading the code of ethics, of anti 

corruption policies, and involvement of 

the minority shareholders. Alongside the 

planning and control activities, the 

reporting and communication processes 

provided information and awareness to 

inside and outside stakeholders on the 

importance of sustainability and, 

consequently, on the value of the 

intangible capital. In fact, the intangible 

capital hides an intrinsic value that, if 

properly communicated, is able to guide 

the choices of the different stakeholders, 

strengthening and improving the relation 

with the company. In dealing with the 

stakeholders, for instance, the ability to 

communicate the value of the 

intangibles allows stabilizing a company’s 

market value. 

The gap between the company’s market 

value and its book value hides a value 

surplus that is referable to the intangible 

capital and is in favor of, among others, 

the company’s shareholders. If the 

company does not communicate 

properly the contribution of the 

intangible assets in generating value, the 

market could not recognize this surplus 

and the company’s value would be 

dramatically diminished. Vice versa, if the 

company provides evidence of the 

correlation between company value and 

intellectual capital, the market will keep 

this surplus unchanged, avoiding the 

wipe out of value for the shareholders. 

Moreover, the adequate management of 

the intangibles in the long-term is a 

guarantee of success for the enterprises; 

for this reason a good external 

communication can attract the capital of 

those looking for long lasting security 

and stability. 

46 

By recognizing the importance of its 

own intangible capital, Eni decided a 

while back to communicate its attention 

toward these assets by way of the 

Sustainability reporting. 

Thanks to its rich and articulated 

reporting system that covers all topics of 

sustainability, Eni obtained major 

successes and acknowledgments in the 

last few years. In 2009, Eni was awarded 

the “CSR Online Award Global Leaders 

2009” for the best web communication 

on the social responsibility of enterprises 

and in Vigeo’s latest classification, Eni 

ranked first among European companies 

for the transparency and 

comprehensiveness of the sustainability 

reporting. 

Aiming at a constant improvement of its 

sustainability reporting system, Eni 

started a process of enhancement of its 

intangible capital aimed at a systematic 

collection of indicators that provide 

evidence of the value generated by the 

different types of intangible assets. 

In particular, concerning relational assets, 

that is to say the total of relations that 

the company established in the market, 

including, as an integral part, the relations 

with the governments, institutions, 

organizations, customers, business 

communities, an internal survey was 

carried out that involved about 300 

managers in key positions in the outside 

relations management. The investigation 

highlighted some parameters 

representative of the quality of the 

relations and of their spin-off on the 

activities. 

In reference to the structural assets, that 

is the company’s ability to innovate, 

thanks to developing and managing 

knowledge and technical skills, consistent 

with the company’s strategies and

culture; studies are being carried out 

aimed at determining the spin-off on the 

business of technological innovations 

developed through internal research. 

Concerning the intellectual assets, that is 

the totality of behaviors, skills and 

aptitudes of the personnel’s organization 

in all its components, indicators have 

already been identified, that represent 

the structure of the staff and the 

professional experience developed 

among the various professional 

qualifications. 

The indicators representative of the 

value of the intangible assets’ three 

spheres, besides integrating the 2009 

Sustainability reporting, will be used to 

guide the company’s investment choices 

on key matters of relations, innovation 

and human capital management. 

5.7 The Montepaschi Group’s 

approach to the strategic 

management of non-financial 

intangible assets 

Co-authors: 

G. Papiro - Head of Business Development 

Banca Monte dei Paschi di Siena Spa 

F. Mereu - Head of Corporate Social 

Responsibility Banca Monte dei Paschi di 

Siena Spa 

Non-financial Environmental, Social and 

Governance (ESG) issues are long-term 

sustainable value growth drivers for all 

stakeholders that generate intangible 

assets capable of better measuring the 

intrinsic value of a company and its 

potential for “social capital” 60 generation. 

This means internal resources, such as: 

management quality indicators; business 

margin and operating income solidity; 

reputational soundness; human 

resources development and 

engagement; performance indicators to 

measure the efficiency of business 

processes, customer care and relative 

customer satisfaction; social and 

community investments. These assets 

shall conventionally be called “CSR 61 

Intangible Assets”. 

They are correlated with each other and 

can trigger a virtuous circle that will help 

enhance long-term corporate 

performance. For example, employees 

can best contribute to customer service 

quality if they are skilled and motivated; 

the implementation of a consistent set 

of shared corporate values generates 

customer trust and retention and 

enhances the ability to attract talented 

individuals. All of this contributes in turn 

to improving customer satisfaction, 

47 

 

 

 

 

 

 

 

 

& & 

 

 

 

 

brand value and employee productivity 

and finally reverberates positively on the 

trend of the company’s economic 

performance. 

Dealing with CSR Intangibles, therefore, 

does not only or primarily mean 

supporting a set of moral principles and 

behavioural rules pertaining to the field 

of business ethics but, rather, enhancing 

the mechanisms whereby these assets 

may contribute to the value (including 

the economic value) of a company as 

long as it is long-lasting. 

NOTE 

60 Long-lasting improvement of social and 

environmental wellbeing. 

61 Corporate Social Responsibility.

If it is indeed true that value creation for 

stakeholders is necessarily conditional 

upon the company’s prospective ability 

to generate cash flows (which ultimately 

goes back to the company’s economic 

fundamentals), it is similarly true that for 

the generation of value to be effective 

and long-lasting, one should focus on 

long-term sustainable growth. If we 

confine ourselves to measuring the 

economic impact of corporate actions in 

the short term, we are often likely to 

find out that those activities which 

maximize the interests of one class of 

stakeholders (for instance, shareholders) 

may clash with the interests of one or 

more classes of stakeholders 

(customers, employees,etc.), thus 

exposing the management to moral 

hazard and situations of conflict 

between stakeholders. But if we move in 

the long term timeframe to assess the 

effects of activities, one would notice 

that these conflicts disappear. 

Current accounting practices and/or 

corporate performance measurement 

systems are not yet in a position to 

capture all of the sustainability-related 

intangible assets appropriately. This is due 

to a number of limitations attributable to 

the existing codified rules and 

accounting/operating practices that 

govern those systems. By way of 

simplification, the aforementioned 

limitations may be classified into three 

main categories: 

Positive/negative externalities – 

associated with corporate activities 

(i.e. environmental footprint, 

contributions to social inclusion, etc.) 

that have significant spillover effects in 

terms of sustainability but are not 

taken into consideration by current 

accounting systems and are therefore 

not factored into the conventional 

performance metrics. 

Donations and liberalities – are indeed 

accounted for by traditional 

accounting systems but often take the 

wrong sign when compared to value 

of sustainability objectives, such as 

social sponsorships. 

Sustainability – activities whose 

economic impact will be tracked by 

accounting systems and will in fact 

take the right sign, but only in 

subsequent financial years, sometimes 

many years after their inception (for 

example, customer care solutions and 

investments, training, reputation). 

As to the latter topic, one may object 

that it is not possible to account today 

for future economic effects that are only 

assumed to take place, and that this 

practice is incorrect. However, this 

objection is not absolute but, rather, it is 

influenced by the constraints of current 

accounting conventions. As a matter of 

fact, the new accounting standards (IFRS 

– IAS) already tend to discount at an 

earlier time the future effects 

foreseeable from the valuation of a large 

number of items in the financial 

statements. This holds true for financial 

assets, loans and intangible assets, such as 

goodwill, whose assumption for 

recognition lies in the company’s 

projection (tested annually to assess 

potential impairments) that the 

underlying assets will generate cash 

flows in the future. By simply changing a 

few accounting conventions so as to 

extend to CSR intangibles some of the 

principles that are already in use for 

other items in the financial statements, 

important sustainability issues would be 

factored into accounting and reporting. 

In this respect, it can be said that the 

48 

evaluation of CSR-related Intangible 

Assets would help better quantify the 

impact that company strategies have on 

the process of sustainable value creation, 

if all revenue and cost items were 

appropriately tracked and tested for 

sustainability. 

Hence the need for companies to adopt 

a comprehensive and consistent 

measurement system for these assets, 

enabling them to anticipate the potential 

sources of value creation and 

destruction at the very moment when 

certain activities are put in place and 

make a prior assessment of the future 

consequences of actions under way and 

projects to be implemented. 

The Montepaschi Group is working in 

this direction. We are developing an 

integrated strategic management 

accounting system, which we have called 

“The Sustainability Tree”. Its objective is 

to: 

measure the value of relevant CSR 

Intangible Assets, 

assess the impact of corporate 

strategies on CSR Intangible Assets, 

assign corporate objectives to develop 

sustainable performance, 

monitor the progress on -and 

achievement of- these objectives, 

link the company’s reward system to 

sustainable performance indicators. 

The main features of our system are: 

subdivision into three theme macroareas, 

reflecting the three main drivers 

of strategic relevance: ‘Employee 

Satisfaction’, ‘Customer Satisfaction’ 

and ‘Environment & Society’; 

a tree-structured layout enabling 

reconciliation of a set of microindicators 

based on which a number 

of objectives can be defined, which 

could either be assigned to specific

company functions or -if the indicators 

are wider in scope- to higher levels of 

corporate responsibility, and may 

progress up to the definition of a 

global synthetic index; 

assignment of a specific weight to each 

macro- and micro-indicator, so as to 

factor the specific relevance of each 

issue into the global synthetic index as 

appropriate; 

identification of a set of check 

indicators to make sure that, with 

regard to the most relevant and hardto-measure 

indicators (i.e. Employee 

Satisfaction and Customer 

Satisfaction), actual correspondence 

exists between data collected and the 

actual situation; 

segregation of the data-owning 

company function in charge of 

measuring the micro-indicators from 

the function accountable to achieve 

the objective set on the basis of that 

micro-indicator; 

inclusion of CSR indicator-based 

objectives in the Business Plan and 

annual budgeting process; 

connection between the achievement 

of CSR objectives and the reward 

system 

Indicators quantified as value 

measures that can help estimate the 

extent to which CSR Intangible Assets 

contribute to the process of 

sustainable value creation. This enables 

the integration of the traditional 

performance indicators into a 

synthetic index that captures all 

aspects relevant to the process of 

sustainable value creation. 

With regard to the latter aspect, it is 

now possible to trace the conceptual 

‘evolutionary path’ of corporate 

performance indicators which have 

moved from typical accounting 

measures to indicators adjusted not only 

for the risk and opportunity cost of 

capital but also for the company’s net 

corporate contribution to sustainability: 

I. Traditional accounting profitability 

49 

II. Cost of capital 

IV. Sustainability‐ Social Return on 

Risk Adjusted Capital 

ROE = 

EVA Spread = 

III. Risk RORAC = 

The effort we have undertaken is 

expected to generate short-term 

internal efficiency benefits. However, for 

it to be fully appreciated by our 

stakeholders, we will have to wait for 

Net Income 

Shareholders’ Equity 

Net Income – Ke *Shareholders’ Equity 

Shareholders’ Equity 

EVA 

Economic Capital 

EVA ± Net Corporate Contribution to Sustainability 

SORORAC = 

Economic Capital 

.

‘demand’ to have built up, which will 

need to be stimulated by new and more 

appropriate standards and practices of 

accounting and reporting. In other 

words, the need is there for a level 

regulatory playing field that should 

provide guidance on corporate ethics 

and set effective targets and obligations 

for transparency and reporting. This 

would enable companies to operate 

with a higher degree of certainty, with 

no prejudice for the development of 

their individual competitive strategies. 

5.8 Restructuring: it is time to 

think differently ! 

Cristina Daverio, Vigeo62 The heavy financial crisis is going to 

affect the future growth of economy. 

Companies are announcing that they will 

reduce headcount or accelerate 

outsourcing. Human capital is considered 

a cost easy to cut in the short term even 

though in the long run people constitute 

a critically important company asset. A 

NOTES 

62 Graduated in Environmental Sciences at 

Università degli Studi in Milano, Cristina Daverio 

has worked for the Fondazione Eni Enrico 

Mattei, carrying out studies in the field of 

environmental and energy resources. In 2000 

she has been employed with Avanzi, leading 

think tank encouraging sustainable change and, 

in 2002, when Avanzi SRI Research was created, 

she specialized as a SRI analyst. In 2006, Avanzi 

SRI Rsearch merged with Vigeo 

(www.vigeo.com), leading European Corporate 

Social Responsibility (CSR) rating agency based 

in Paris. It assesses the environmental, social and 

governance (ESG) performance of companies 

and organisations. In Vigeo, Cristina assumed the 

role of coordinator for the SRI research 

activities conducted in Italy. 

63 Molina, Ortega, ‘Can Effective Human Capital 

Management Lead to Increased Firm 

Performance?’ 2002 

64 Patel, Narain, ‘Can intangible assets act as a 

cushion in a downturb?’ 2009 

study by Molina and Raquel 63 is one of 

many that have concluded that effective 

human capital management can lead to 

increased firm performances. 

In 2009, Watson Wyatt published an 

analysis 64 examining the impact of 

company’s intangible assets prior to the 

global economic crisis on its stock prices 

during the crisis. Results showed that, on 

average, a firm’s human capital appears 

to have exerted a strong effect on stock 

returns during the crisis. In its CSR rating 

model, Vigeo dedicates one out of its six 

domains of analysis to assess the 

relations between firms and their human 

resources, highlighting the risks (and 

opportunities) faced by companies 

depending on their level of engagement 

to manage them. In detail, Vigeo 

evaluates companies’ efforts to: promote 

labour relations, encourage employees’ 

participation, support career 

management and employability, ensure 

responsible labour conditions, improve 

health and safety and manage 

restructurings responsibly. 

Starting from the information gathered 

during the rating process on collective 

restructuring in Europe, in 2009, Vigeo 

Restructuring: the crisis catalyst 

Source: SG Equity Research, ERM 

50 

has partnered with Société Générale to 

analyze any eventual link between 

companies’ efforts to responsibly 

manage reorganization processes and 

their results in the financial markets. 

Restructuring, including layoffs, is, indeed, 

a theme inevitably and increasingly faced 

by investors, in varying degrees of 

intensity. Corporate restructuring with a 

downsizing component has become a 

recurring process as European 

companies strive to adapt to changes in 

their business environment. However, it 

is usually seen from either a purely 

financial perspective or a purely social 

perspective. The aim of the work done 

by Vigeo and Société Générale is to 

show that the two perspectives must be 

combined to be of benefit to both 

investors and employees. 

The panel 

For the purpose of this research, a 

coverage universe of 206 European 

companies has been built. These are 

listed companies, included in the Dow 

Jones STOXX 600, belonging to 21 

different industrial sectors. So as to avoid 

disproportionate interference from the

financial crisis, it has been decided to 

withdraw banks, insurance companies 

and financial services from this universe. 

Looking at all of the 206 companies in 

this universe, it was found that 60% of 

them have announced restructuring 

plans from January 2007 to March 2009, 

with an increasing number of job cuts. 

The restructuring risk - When 

companies decide to restructure? 

In our analysis we found that 

restructuring is triggered mainly by the 

evolution of EBIT compared to staff 

costs. We have, therefore, developed a 

ratio based upon EBIT forecasts and last 

known annual staff costs, which, in our 

view, gives an excellent indication for the 

strategic choices of companies. 

Restructuring Risk = 

Staff costs / EBIT 

EBIT is the ultimate compass for both 

managers and investors. This is so for a 

very simple reason: investors do not 

earn money from sales but from 

operating income to start with, whereas 

employees are at risk as soon as their 

wages and salaries - usually a permanent 

cost for the company for a given period 

of time - tend to become too important 

versus the residual money that is the 

company’s operating profit. If so, there is 

a very likely risk that the management 

will tend to adjust staff costs to 

operating profit in line with long-term 

trends. 

Moreover, it is quite clear that while a 

certain quantity of staff costs are needed 

to generate a certain level of EBIT, any 

reduction of staff costs will mechanically 

deliver additional EBIT proportionally to 

the staff costs / EBIT ratio. That will be 

critical for companies and investors, and 

Restructuring Plans and Staff costs/EBIT parallel evolution 

Source: SG Equity Research, Datastream/IBES for EBIT forward estimates - coverage: common universe SG-Vigeo, 

sample median, elimination of non significant data (negative EBIT) 

conversely for employees. 

When calculating average multiples for 

staff costs and sales to EBIT, the sector 

comparison will clearly differentiate 

some sectors from others. 

Staff costs to Sales & EBIT: sector view 

Staff costs / sales 

Source: SG Equity Research 

All sectors on the right side of the chart 

have a very important multiple, since 

staff costs are high in comparison with 

EBIT. With an economic slowdown 

coming ahead, this may have devastating 

51 

60.0% 

50.0% 

40.0% 

30.0% 

0.0% 

Pharmaceuticals & 

Biotechnology 

Health Care Equipment & 

Services 

effects. It will come in two steps: first, the 

sales figures will deteriorate, 

mechanically reducing EBIT and then 

increasing strongly the staff costs to EBIT 

ratio. When the ratio is deteriorated 

Commercial Services & 

Supplies 

Hotels Restaurants & Leisure 

Media 

Capital Goods Transportation 

Household & Personal Products 

AVERAGE Technology Hardware & 

20.0% Consumer Durables & Apparel 

Equipment Automobiles & Components 

Energy 

Materials 

Semiconductors & 

Telecommunication Services 

RetailingSemiconductor 

Equipment 

Food Beverage & Tobacco 

Food & Staples Retailing 

10.0% 

Utilities 

Real Estate 

Software & Services 

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 

Staff Costs / EBIT 

because of vanishing sales, reducing 

structural costs will be unavoidable to 

restore margins, and the staff will be in 

the first line to the degree that the ratio 

of staff costs / EBIT is particularly high.

Restructuring skills - How does 

Vigeo measure responsible 

restructuring? 

Vigeo does not provide an opinion on 

the strategic relevance of a management 

decision to restructure, however, it 

assesses the company’s ability to prevent 

layoffs and propose appropriate 

collective and individual solutions, in 

collaboration with employee 

representatives. More precisely, in Vigeo 

rating model the criterion ‘responsible 

management of restructuring’ assesses 

companies’ efforts to achieve the 

following goals: 

to inform and consult employee 

representatives before / during the 

restructuring process 

to put in place practical measures to 

prevent and limit redundancies 

(notably financial resources, processes 

and reporting) 

to implement measures to mitigate the 

negative effects of redundancies on 

employees, notably reemployment 

measures 

Vigeo measures a company’s ability to 

achieve its social responsibility goals, on 

three dimensions. At Leadership level, it 

assesses the relevance of policies designed 

by the company to manage a specific 

issue, at implementation level it evaluates 

the significance of measures and 

processes implemented and at results 

level it monitors performance indicators 

and the existence of allegations reported 

by stakeholders. Therefore, the final score 

of a company is an average of the scores 

of the three dimensions (leadership, 

implementation and results). The 

assessment is based on publicly available 

information (disclosed by the company or 

its stakeholders, or obtained by Vigeo 

through specific questions addressed to 

the company and its stakeholders). 

Vigeo’s research found that European 

companies demonstrate weak overall 

performance in terms of responsibly 

managing restructuring activities with few 

companies going beyond legal compliance 

and handling the issue in a reactive/crisis 

management rather than pro-active 

manner. 

Companies fail to anticipate 

restructuring and framework policies 

for management are rare. While 

companies are constantly engaging in 

restructuring processes, it is still largely 

handled as a crisis management issue. 

Companies fail to go beyond legal 

requirements for restructuring, with 

efforts largely focused on the 

restructuring process rather than the 

results (i.e. key performance indicators 

on the number of redundant 

employees that have found new 

employment). 

National origin has a higher impact than 

sector on company performance. 

Vigeo found a link between a company’s 

ability to responsibly manage restructuring 

and its ability to foster strong labour 

relations, as well as to support career and 

skills development. It found that a 

company which benefits from a 

constructive social dialogue environment 

is more likely to succeed in the 

consultation and negotiation with 

employee representatives and prevent 

layoffs. In addition, a company that ensures 

the employability of workers promotes 

professional mobility, and matches 

employment needs and skills 

requirements is more likely to be able to 

anticipate employment trends, and 

achieve internal and external 

re-employment of workers made 

redundant. 

52 

Introducing a risk management 

approach to restructuring 

Vigeo’s conviction is that with 

restructuring being part of the 

permanent industrial landscape, 

companies that are the most prepared 

and adapted to face restructuring in a 

proper and responsible manner will 

recover better, with limited damages to 

their internal and external reputation as 

well as to employees’ motivation and 

commitment. It is, therefore, time to 

adopt a risk management approach and 

adjust the restructuring risk by the quality 

of management observed in the 

restructuring area. Combining the 

restructuring risk (measured by the level 

of staff costs to EBIT) by the restructuring 

skills (Vigeo’s score on the criterion 

‘responsible management of 

restructuring’) we obtain 

the so called Net Restructuring Risk. 

Net Restructuring Risk = 

Risk (Staff costs / EBIT) / 

Restructuring skills 

(qualitative score) 

High values of Net Restructuring Risk 

imply either an unfavourable EBIT margin 

compared to staff costs or that the 

company’s restructuring skills are poor. 

When staff costs outweigh EBIT, it 

becomes obvious that the sector will 

permanently have to adapt its workforce 

to industrial changes. For employees, a 

high social performance score is not at all 

a guarantee of a better future but rather 

the hope that they will not be let go 

without a minimum of consideration, 

financial or otherwise. And for long-term 

oriented investors, the doubt may be 

raised about the sustainability of their 

investment in high-risk sectors.

Net restructuring risk: a sectoral view over 2001-2008 

Restructuring Performance(Vigeo score) 

55.0 

50.0 

45.0 

40.0 

35.0 

30.0 

25.0 

20.0 

15.0 

10.0 

Source: SG Equity Research 

Utilities 

Semiconductors & 

Semiconductor Equipment 

Household & Personal 

Products 

Telecommunication Services 

Auto mobiles & Co mpo nents 

Technology Hardware & 

Equipment 

Energy Pharmaceuticals & 

Biotechnology 

Materials 

AVERAGE 

Foo d & Staples Retailing Ho tels Restaurants & Leisure 

Media 

Co nsumer Durables & Apparel 

Food Beverage & Tobacco 

Health Care Equipment & 

Services 

Capital Goods Transportation 

Software & Services 

Retailing 

Managing restructuring risk adds 

to financial performance! 

For each sector we have ranked the 

companies according to their position 

versus the sector average on restructuring 

skills (Vigeo’s score). We have applied the 

same process versus the average 

restructuring risk, so at the end we can 

assign the company a specific position in 

the social risk performance matrix, and 

calculate four net restructuring risk 

baskets, as well as four central baskets: 

Low restructuring risk basket 

High restructuring risk basket 

Low restructuring skills basket 

High restructuring skills basket 

Low restructuring risk / low 

restructuring skills basket 

Low restructuring risk / high 


High restructuring risk /low 


High restructuring risk /high 

restructuring skills basket. 

For the purpose of this report we have 

calculated the financial performances of 

the different baskets that we have backtested 

from 31/12/06 up to 31/05/09. 

The conclusions at first sight are positive 

Commercial Services & 

Supplies 

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 

Restructuring Risk (Staff Costs / EBIT) 

for investors. Over the last two years, 

investing in companies with either a good 

restructuring skill or a low restructuring 

risk could outperform the general sample 

used for this report. 

We have then carried our research 

further to try to assess if mixing up the 

sector restructuring risk with the sector 

restructuring skill could deliver an even 

better performance (see chart below). A 

positive link is again observed, especially 

for the low risk - high skill basket, strongly 

53 

outperforming the general sample by 

+5.5%, a very encouraging sign for 

companies, long-term investors and 

employees. 

Clearly also, the high risk - low skill basket 

is strongly underperforming, as ‘expected’, 

mirroring the ‘good basket’s’ 

performance. Yet, the high-risk - high skill 

basket (in pink) is slightly-below the 

average, declining rapidly at the end of 

the period, which tends to demonstrate 

that the level of risk outweighs at the end 

the quality of restructuring skills 

(performance). The same observation can 

be made for the last basket, stocks with 

high risk and low skills, which eventually, 

despite a peak in Q4-2008, tends to 

underperform. 

Our financial conclusions then are the 

following: restructuring skills play a role 

Backtest 2007-2009: restructuring risk and skills (performance) 

Source: SG Equity Research, Vigeo 

with regards to financial performance, but 

restructuring risk – at least during the 

period of our back-test – tends to play 

the dominant role, as it follows a 

consistent set of results. But lastly, the 

very encouraging sign for long-term 

investors is that a basket including

Detailed back-test: 2007-2009 

Source: SG Equity Research, Vigeo 

companies with the best social 

performance in terms of restructuring 

and a low restructuring risk profile tends 

to deliver a superior financial 

performance, the best of all our baskets! 

NOTES 

65 She graduated in Economic Sciences at Bocconi 

University in Milan and holds a Master degree in 

Management and Control of the Environment 

from the University Sant’Anna of Pisa. Since 

2004 to 2009, she has been employed at 

Fondazione Eni Enrico Mattei, carrying out 

studies on corporate social responsibility and 

sustainable management within the energy, 

financial and public sectors. At the end of 2009, 

she assumed the role of Programme Officer at 

the Italian Sustainable Investment Forum, 

following the research and dissemination 

activities. 

66 The Italian Forum per la Finanza Sostenibile is a 

not for profit association with the aim to 

promote the culture of social responsibility 

within the investment practices in Italy. Pursuing 

this aim, the Forum disseminates knowledge and 

information on sustainable finance through 

challenging proposals toward the financial 

community, policy makers and citizens, the 

improvement of professional skills and culture, 

the dialogue promotion among stakeholders. 

The opinions expressed in this paper do not 

necessarily reflect the position of the Forum per 

la Finanza Sostenibile 

5.9 The Corporate Social 

Responsibility and The 

Intangibles: Relation within the 

Financial Markets Crisis. 

Maria Paola Marchello 65 , Forum per la Finanza 

Sostenibile 66 

Intangibles represent a major source of 

value creation within companies. Across 

time, a lot of efforts have been made 

paid to measure such intangibles 

resources, and nowadays some 

progresses have been realized by the 

scientific and business community. As a 

consequence of the current financial and 

economic crisis, changes of key values 

and principles in favour of a long term 

view of the enterprise should occur. 

These might encourage the 

acknowledgement of the importance of 

Intellectual Capital – categorized as 

human, structural and relational capital. 

From a sustainability perspective, 

Corporate Social Responsibility can 

stimulate the Intellectual Capital creation 

(Branco and Rodriguez, 2006), the 

development of know how, and the 

achievement of a corporate culture. 

54 

Such a relation is especially meaningful 

within the human and relational capital. 

Structural capital might be also related 

to Corporate Social Responsibility: every 

organizational and technological 

innovation producing environmental and 

social improvements is a concrete 

example of this connection. 

The comparison between Corporate 

Social Responsibility and Intangibles is 

particularly interesting with respect to 

the current financial and economic crisis. 

Though a complete range of studies 

does not exist yet on this matter, it is 

possible to collect some records on the 

reactions among the financial markets, 

investors and regulators. 

Overview 

A recent study published by OECD 

(2009) analyses the effects of the crisis 

on innovation, focusing on research and 

development (R&D), human capital and 

environment. 

Historically, the investments on R&D and 

patent filing followed the GDP trend. 

Within the current economic downturn, 

the decrease in R&D long term 

investments is due to the increased risk 

aversion within the financial markets and 

the consequent lack of fund raising 

sources for the enterprises. On the 

other side, new business models may 

rise during the crisis, supporting a 

renewed economic growth. A successful 

business model should be dynamic and 

flexible; crucial priorities are represented 

by the quality of human capital, the 

creation of strategic alliances and the 

investment in R&D, together with the 

implementation of internal efficiency 

programs (Ernst&Young, 2009). 

Because of the crisis, many skilled 

workers became unemployed; among

the industrial sectors, layoffs affected the 

hi-tech and knowledge intensive industry 

too. If a prolonged recession might 

depreciate the human capital value, such 

skilled unemployed may represent an 

important source for those businesses 

affected by a shortage of qualified 

workers or even stimulate the creation 

of highly innovative entrepreneurship. In 

this context, training and education gain 

a significant role. 

The efforts accomplished toward the 

achievement of an economic model 

based on renewable energy and 

sustainable production – at 

environmental, social and economic level 

– might be compromised during the 

crisis. Main causes can be traced back on 

the declining prices of oil and raw 

materials, the lower propensity to buy 

more expensive products with high 

technological contents and the reduced 

lending capacity by banks. On the other 

hand, the crisis might represent an 

unique opportunity for policy makers to 

promote energy efficiency programs and 

favour the transition toward a low 

carbon economy, through the support 

to research and development, the 

promotion of new energy technologies, 

and the approval of special incentives 

programs. 

The reactions of financial markets 

and investors 

Responsible investments (or SRI – 

Socially Responsible Investments) 

represent a useful mean to stimulate the 

integration of the extra-financial issues 

into the enterprise’s core business. 

Tipically, whether the aspects related to 

Corporate Social Responsibility and to 

Intellectual Capital are assessed within 

the extra-financial analysis. 

According to the Eurosif data (2008), 

the European SRI market has increased 

of 102% from €1.033 in 2005, to €2.665 

in 2007 – and of 42% on an annual basis, 

thanks to the investment preferences 

mainly operated by the institutional 

investors. In 2007, the SRI assets 

represented 17,6% of the asset 

management industry in Europe. 

Some considerations emerge looking at 

Table 1: performances of the Italian SRI funds 

the sensitive growth of responsible 

investments within the retail markets, 

experienced during the current 

economic downturn. The data presented 

by Vigeo (2009) show an annual growth 

of 27% in the offer of retail SRI funds, at 

European level, and of 9% in the related 

assets, from €48 to €58 billions, the 

most impressive growth since 2001. The 

assets managed through SRI funds 

represent 1,1% of the total assets 

managed through the collective 

investments 67 . The good results obtained 

in a difficult period for the overall asset 

management industry is an important 

signal about the increased sensitiveness 

among the retail investors toward a 

transparent and responsible 

management of the social and 

55 

environmental issues (Dal Maso, 2010; 

SIF, 2010). 

The competitive advantage of the retail 

SRI funds in the current crisis is also 

remarkable with respect to 

performances. The analysis conduced by 

Morningstar in 2009 shows a substantial 

improvement in the rating of 200 SRI 

funds available in the Italian market with 

respect to their mainstream categories. 

Performances Standard deviation 

1 year 2 years 3 years 1 year 2 years 3 years 

SRI Funds -34,55 -13,35 -1,84 27,57 19,76 17,21 

Category: 

Eurozone Large-Cap 

-35,22 -13,56 -1,53 27,93 19,79 16,89 

SRI Funds -3,66 -0,62 1,80 6,72 4,84 4,43 

Category: 

Prudential Balanced Funds 

-6,01 -1,71 1,10 5,58 3,97 3,54 

SRI Funds -15,68 -5,98 0,20 12,97 9,32 8,15 

Category: 

Moderate Balanced Funds 

-15,21 -5,99 0,05 10,73 8,06 7,19 

Source: Morningstar Italia, 2009 

Similarly, a study carried out by SIF 

(2010) on 160 US retail SRI funds, 

revealed as 65% of them obtained 

better performances with respect to 

their benchmarks; these results are 

confirmed independently from the asset 

class of provenience. 

The analysis conduced by Jones and 

Little (2000) on the stock market 

crashes in 1987 and 1989, shows that in 

1989 – when the market faced a less 

severe, sudden and unexpected 

downturn – the stock prices of 

companies with better reputation 

experienced a lower drop than those of 

NOTE 

67 Undertakings for Collective Investments in 

Transferable Securities (UCITS)

the other companies. These results 

would sustain the idea that a good 

reputation represents a reservoir of 

goodwill, protecting the company against 

the decline of the market in time of 

economic downturns. 

Nowadays, sustainability indexes have 

gained a strategic value for companies, 

thanks to the reputational advantage 

deriving from the inclusion into the 

investable universe; the company’s 

inclusion within a sustainability index is 

especially meaningful for those investors 

characterized by a low risk profile and a 

long-term approach. 

The Domini 400 Social Index was the 

sustainability index firstly introduced on 

a global scale by Kinder, Lydenberg and 

Domini, in 1990. Recently, new indices 

have been introduced, thanks to the 

progressive interest of companies and 

investors. The offer of sustainable indices 

comprises a wide range of options: 

Calvert Group, Dow Jones, ECPI, Ethibel, 

FTSE4, Humanix, Jantzi, KLD Analytics e 

Vigeo (Fowler and Hope, 2007). 

The reactions of regulators 

In the current debate on the financial 

system reform, top managers’ 

remuneration is one of the issue at 

stake, thus influencing the human capital 

and governance sphere. In fact, 

remuneration involves the soft balances 

within the corporate governance 

system. It represents a key factor in 

human capital development and in the 

company success. 

In spite of the challenges placed in a 

reform of the remuneration systems, a 

research by Hewitt New Bridge Street 

reported that “in 2008 approximately 

one fifth of FTSE 100 companies paid 

out over 90% of the maximum possible 

Table 2: main characteristics of sustainability indices 

Index 

Calvert Group: 

The Calvert Social Index None 

Dow Jones/SAM: 

Dow Jones Sustainability Index 

Ethibel/S&P: 

Ethibel Sustainability Index 

FTSE: 

FTSE4Good 

KLD Analytics: 

Domini 400 Social Index 

Vigeo: 

Advanced Sustainability Performance 

Indices (ASPI) 

bonuses in a year, while the maximum 

potential bonus increased to 175% of 

salaries for the highest paid directors” 

(Eurosif, 2010). 

With the publication of the “Principles 

on Compensation” by the Financial 

Stability Forum and the subsequent 

endorsement by G20 leaders at 

Pittsburg in 2009, new rules will be 

applied to the top managers and anyone 

56 

Benchmark 

Dow Jones Global Index 

S&P Global 1200 

Fortune 500 

Fortune 500 

Source: adapted from Fowler and Hope, 2007 

DJ EURO STOXXSM 

Methodology 

Negative and positive screening 

Excludes companies operating in the 

following sectors: arms, tobacco, 

alcohol, gambling, gaming. 

Includes the best performing 

companies on governance and ethics, 

environment, workplace, product 

safety and impact, community 

relations, international operations and 

human rights, indigenous people 

rights. 

Positive screening 

Includes companies having achieved 

the highest core, according to a 

complex list of sustainability criteria. 

Positive screening 

Evaluates companies according to 

four main criteria: internal social 

policy, environmental policy, 

external social policy, ethicaleconomic 

policy. 



following sectors: tobacco, nuclear 

systems, weapons systems and 

uranium. 

Includes the best performing 

companies on: environmental, social 

and stakeholder, human rights, supply 

chain labour standards, countering 

bribery. 



following areas: alcohol, tobacco, 

firearms, gambling, nuclear power 

and military weapons. 

Includes companies having positive 

social and environmental records on 

the following records: community 

relations, diversity, employee 

relations, human rights, and product 

quality and safety, environment and 

corporate governance. 

Positive Screening 

Companies are classified for each 

stakeholder theme or criteria and 

theme according to a three step 

methodology which assesses the 

commitment to: leadership, 

implementation, results. 

with the power to make decisions over 

a bank’s balance sheet (Draghi, 2009). 

With the aim to reduce an excessive 

risk-taking approach, the pursuit of 

short-term profit and to promote an 

adequate disclosure on remunerations, 

the proposals of the Financial Stability 

Forum – presented by Draghi in 2009 – 

focus on: the definition of a variable basis 

in the remuneration structure

“dependent on the bank’s performance, 

but with payment deferred for at least 

three years and in the form of securities, 

and with a claw-back clause in the event 

of unsatisfactory performance by the 

bank or the executive”. 

The key principles evidenced by Eurosif 

and EIRIS (2010) for a transparent and 

accountable remuneration framework 

comprehend: 

the disclosure of information on 

companies’ remuneration policies and 

the related performance targets and 

criteria; 

the opportunity for a shareholder 

vote on the remuneration policy at 

the general meeting; 

the disclosure of individual directors’ 

remuneration packages and the prior 

approval of share and option schemes 

by stakeholders; 

the link of a significant part of variable 

remuneration to the achievement of 

long term performance objectives. 

Concluding this brief paper, it can be 

observed that, in conjunction with 

extreme economic events - whom 

reasons may be traced back in the 

exacerbation of short-term profit and 

the lack of transparency in the financial 

system – the extra-financial aspects – in 

the Corporate Social Responsibility and 

Intellectual Capital spheres – are gaining 

more attention among investors and the 

market as a whole. At the same time, the 

settlement of new rules by the financial 

and monetary authorities on aspects 

previously not regulated calls for a 

deeper rethinking on the effectiveness of 

self-regulation systems at corporate 

level and of Corporate Social 

Responsibility as a whole. 

What about companies? Companies, 

whether belonging to the financial or to 

other economic sectors, should consider 

the evolution of their own mission, vision 

and values, moving from a moralistic 

attitude toward an effective engagement 

in long-term sustainability; on this 

perspective, the achievement of a 

renewed concept of firm, aimed to the 

creation of welfare for the society and 

the environment is a pivotal issue. 

5.10 Stop counting what doesn’t 

count! Focus on future value 

drivers. 

The importance of intellectual 

capital for the economy and 

companies 

Katarzyna Królak-Wyszyńska, MBA Thinkdom 

of Business Innovators, Innovatika 68 

1. Abstract 

Traditional reporting standards are not 

enough aligned to the current 

economy and companies. GDP or 

financial statements fail to measure 

progress in sustainable development 

and growth. While economists and 

practitioners commonly consider 

innovation as the growth driver, there 

is the need to find the best possible 

measure covering that. The main 

missing part in the current reporting 

standards is intangibles that are 

responsible for future growth, 

performance and success. Measuring 

and effective managing of intangibles is 

at the heart of area called intellectual 

capital. The companies benefit from 

managing and reporting IC as it builds 

up trust and confidence of 

stakeholders (f. ex. partners, 

customers, investors), increases 

effectiveness and helps business grow. 

On the side of capital market analysts, 

IC reports are considered to be 

valuable supplementary information 

57 

necessary for making good investment 

decisions. The challenge is to work out 

the standards for measuring (assessing) 

and reporting intellectual capital on 

different levels – macro, mezzo and 

micro, to make ranking or 

benchmarking possible and to provide 

credible strategic tool. 

2. Why do we need to report “nonreportables”? 

Long-term thinking is desired now 

more than ever before. And it is gaining 

more and more attention, which can 

be tracked in political disputes, in 

companies’ operations and in capital 

markets’ interests. 

The European Commission 69 

announced that the overarching 

priority of the European Union is 

sustainable development which 

balances social, environmental and 

economic progress the indicators need 

to be able to measure progress in each 

of these areas. This creates the need 

for a new reporting standard as the 

traditional ones do not allow to show 

the whole picture needed. 

When it comes to company level, we 

can observe new priorities driving the 

business – it is slowly changing from 

full focus on short term profits to long 

NOTES 

68 Katarzyna Królak-Wyszyńska is partner at 

Innovatika – Thinkdom of Business Innovators, 

Innovatika – a consulting firm focused on 

product and business innovation, as well as 

organizational innovation. Innovatika has proven 

record of successful implementation of 

innovation initiatives and programs in various 

organizations. Innovatika developed a unique 

approach to stimulate groups (small and large) 

and make them engaged in developing and 

introducing new products, strategies or business 

models. kkw@innovatika.com. 

69 European Commission.

term sustainability. For example, major 

U.S. banks want to have bankers’ 

remuneration more closely tied to longterm 

performance rather than shortterm 

trading profits and decided to pay 

their top executives’ bonuses in stock 

rather than cash. It is widely known that 

bonuses can account for as much as 

several times base salary of a banker so 

banks want to make sure the bonuses 

will bring return and can be considered 

investment instead of being just one year 

costs. 

The reason for this considerable shift of 

focus from “instant” profits to long-term 

thinking is not barely the crisis. The crisis 

was just the trigger which revealed that 

the need is much deeper and much 

more affecting the future: measurement 

systems that were used and considered 

reliable for years fail to capture the most 

important aspects of growth and 

development. The Report by the 

Commission on Measurement of 

Economic Performance, chaired by 

Joseph Stiglitz, published in 2009 argues 

that market participants and 

government officials were not focusing 

on the right set of statistical indicators. 

Practically no early warning was 

delivered by any accounting system, be it 

private or public. 70 . 

What is needed is a comprehensive 

picture of assets, debts and liabilities – 

going beyond traditional accounting and 

statistical systems. That refers to both 

macro and micro-economy. 

NOTES 

70 Stiglitz J., Sen A., Fitoussi J-P. (2009) ”Report by 

the Commission on the Measurement of 

Economic Performance and Social Progress”, 

Paris, 2009 

71 http://www.statsamerica.org/innovation/index.html, 

January 2010 

3. Intellectual capital as a missing part 

of GDP and financial statements 

One of the eye openers for national 

and regional decision makers can be 

tracing the real growth drivers on the 

economic map of a country or a region. 

The Report on Intellectual Capital of 

Poland is an example of how to present 

and measure issues that make the 

difference for the society and the 

country. Intellectual capital is seen as a 

crucial component of every-day life of 

each of us. At the same time, the report 

gives a statistically proven 

benchmarkings within a group of 16 

European countries and it concludes 

with seven recommendations making it 

a valuable source for policy makers. (see 

the report on: 

http://www.slideshare.net/Polska2030/re 

port-on-intellectual-capital-of-poland). 

Another interesting example comes 

from the US where regional investment 

decision makers can better understand 

the regional development process 

thanks to the Regional Innovation Index. 

It compares regional performance to 

the United States and is calculated from 

4 sub-indices: Human Capital, Economic 

Dynamics, Productivity and 

Employment, Economic Well-Being. It 

gives a picture of factors that have the 

greatest influence on economic growth 

of the region and thus supports 

strategic discussions about where to 

invest scarce resources to build 

prosperity for the next generation 71 . 

Long-term sustainability is the must for 

policy makers as well as for company 

leaders. The key to success seems to be 

a new set of evaluation metrics that are 

understandable and build trust of 

citizens, investors and employees. Trust 

ignites the engagement, support and 

58 

sacrifice. Indicators that take an 

increasing part in the company value 

creation in the long-term are intangible 

resources such as: experience, 

competences, supplier relations, new 

market potential, manufacturing 

processes, launching new products and 

ability to utilize those. All these 

resources may have different names but 

the same meanings: intangible resources, 

intangible assets, intellectual assets, 

intellectual capital etc. These resources 

are a hidden source of competitive 

advantage. They are not shown on the 

income statement nor on the balance 

sheet, although they affect economic 

effectiveness. 

Intellectual capital (IC) becomes the 

measure of sustainable growth and 

success of the company, its employees 

and its management board. Assessment 

of IC is needed to make a good 

background for better management and 

development of the company. 

Shareholders, investors and analysts are 

obviously as much interested in 

company’s sustainable growth as top 

managers are. The capital markets need 

their access to measures that go beyond 

income statements and balance sheets 

and are much more future-oriented. At 

the same time, indicators constitute 

basis for most of analysis but indicators 

themselves do not provide enough 

information as they don’t give the real 

story that is behind the data. The story 

in most cases brings the added value 

that is needed for building confidence in 

the company. The recent findings of 

Edelman Trust Barometer 2009 show 

that continuous conversation with 

stakeholders, characterized by agility, 

timeliness, and contribution – not 

control – is what really matters. The

challenge becomes even bigger as the 

credibility of all information sources has 

declined strongly in most markets. The 

interesting conclusion is that although all 

corporate channels lose trust, 

conversations with company employees 

are considered reliable sources of 

information. The employees, who stand 

for a substantial part of IC, seem to be 

“most wanted” conduits of company 

information for investors, analysts as well 

as customers and partners. The 

Barometer measures the actions that 

informed publics take based on how 

much – or how little – they trust a 

company. 91% of respondents say trust in 

the company was decisive for buying its 

product or service, while 26% of 

respondents claim they bought shares of 

the company they trusted (see Figure 1.) 

Figure 1 Trust has tangible benefits 

Source: 2009 Edelman Trust Barometer 

The observations show that the 

voluntary disclosure of information on 

intangibles is rather rudimentary. The 

most often practice is voluntary 

disclosure restricted to only basic data 

given on a corporate level, even in 

industries and business systems that are 

intangible-driven. In a recent study, one 

third of the companies did not give any 

kind of information, despite the fact that 

their top management declared 

intangibles to be of significantly higher 

importance for long-term success than 

were tangible assets. 72 One of the reasons 

may be seen among insecurity on 

measurability of intangibles. 

The fact is, intellectual capital which was 

coined some 30 years ago, has got no 

single method of measurement or 

evaluation. Therefore, IC methodology is 

Thinking back over the past 12 months, have you taken any of the following actions 

in relation to companies that you trust? 

Have you taken any of the following actions in relation to companies that you do 

not trust? 

Personal actions taken with... 

A distrused company A trusted company 

77% 

91% 

Refused to buy their products/services Chose to buy their products/services 

72% 

76% 

Criticized them to a friend or colloque Recomandedthem to a friend or colloque 

56% 

Paid a premium for their products/services 

34% 

42% 

Shared negative company opinions/experiences online Shared positive company opinions/experiences online 

17% 26% 

Sold shares Bought shares 

Informed publics ages 25 to 64 in 20 countries 

59 

not easy to be applied as a standard for 

policy planning and evaluation. 

However, the intellectual capital 

methodology can significantly improve 

the picture of the economy as well as 

the company and should be used as the 

supplementary method for financial 

perspective. 

4. How companies can benefit on IC? 

IC reporting is not obligatory in 

business but there are considerable 

efforts made by governments and 

European Commission to make it a 

living standard. Some initiatives worth 

mentioning include obligatory IC 

reporting for higher education in 

Austria, or European projects like 

MERITUM (1998-2001) which focused 

among others on producing guidelines 

for the measurement and disclosure of 

intangibles. On the governmental level – 

in Denmark the Intellectual Statements 

Guideline was published in 2002 and its 

aim is to help individual companies or 

public organisations develop knowledge 

management strategies and 

communicate the results in external 

intellectual capital statements 73 . 

Strategy implementation demands 

answering many questions. Top 

managers like to follow structured clear 

methods that are easy to use and bring 

valuable results. This is where the IC Self- 

Assessment of the Warsaw Stock 

Exchange method can be a support. It 

was developed to help answering the 

most important questions related to the 

NOTES 

72 See, e.g., the results of the empirical study 

PricewaterhouseCoopers et al. (2003). 

73 http://en.vtu.dk/publications/2003/intellectualcapital-statements-the-new-guideline/ 

(browsed 

7.03.2010)

future – to what extent the company is 

ready to achieve each of its strategic goals. 

Thanks to that perspective, intellectual 

capital becomes a strategic management 

method. It also becomes a more and 

more important topic included in external 

communication as the evidence shows 

that it helps build trust and make business 

grow. 

Johnson & Johnson in 1982 had 

considerable crisis related to poison 

which was found in Tylenol, a drug 

relieving pain and reducing fever. The 

company was not able to say what 

happened, which factories the poisoned 

medicines come from, how many series 

are affected. This made the company 

withdraw 31 mln capsules from the 

market and costed it 30% drop in its share 

price and loss of trust for a long time. The 

story unexpectedly repeated in 1986. But, 

by this time, J&J had already invested in its 

quality management and logistics 

processes. That allowed the company to 

track each product all the way long from 

the production line up to the pharmacy 

shelf. The J&J management could easily and 

instantly point the two factories from 

where the poisoned medicines were 

coming, as well as the distribution center 

where they were stored. The company 

could assess the scale of the threat very 

quickly and reliably. The adequate 

communication was prepared and the 

company did not need to withdraw all the 

medicines from the market. In resulted in 

customers confidence that everything was 

under control and no panic was observed 

NOTE 

74 EFFAS (THE EUROPEAN FEDERATION OF 

FINANCIAL ANALYSTS SOCIETIES), 2008, 

Principles for Effective Communication of 

Intellectual Capital. Towards Valuation, 

Measurement and Disclosure 

at all. What is even more astonishing – 

investors revealed no single sign of panic 

either. On the contrary, investors 

appreciated the changes that had been 

undertaken in structural capital in 

previous years and thanks to that the 

share price did not move down at all. It 

even rose, as J&J managed to build its 

credibility. 

J&J is not en exception. The research 

shows that ROCE among big companies 

that implemented formal procedures and 

tools for knowledge management is 15 

percentage points higher than in ones that 

do not invest in knowledge and 

intellectual capital management. 

5. How capital markets can benefit on 

IC? 

Intellectual capital method was initially 

used in the corporate sector to explain 

the difference between market value and 

book value of a company. The difference 

became more and more significant and it 

was explained as the price that investors 

pay for intangible assets which have 

potential to generate value in the future. 

Intangible assets reporting is a widely 

researched area nowadays. In December 

2008 European Financial Reporting 

Advisory Group (EFFRAG) has invited 

comments on paper prepared by 

Australian Accounting Standards Board, 

which proposed future path of changing 

accounting standards to better measure 

corporate intangible assets. It seems that 

after two or three decades also the very 

conservative profession of accountants is 

ready to change international accounting 

standards to better account for the value 

of corporate intangibles. 

Financial analysts are more advanced in 

debate on intellectual capital. They have 

no doubt that in developed economies 

60 

today the most important factors 

associated with corporate 

competitiveness and growth are 

invisible. 74 They argue that if IC is not 

given a due attention, the cost of capital 

could remain inadequately high for many 

companies (particularly for those 

innovative, highly knowledge-intensive 

ones), investors and lenders might risk 

missing out on potential opportunities, 

and the economy on potential growth. 

EFFAS (European Federation of Financial 

Analysts Societies) has agreed on ten 

principles on reporting IC by companies. 

All of those recommendations were 

followed by Warsaw Stock Exchange and 

Innovatika while developing the method 

for IC reporting and ranking. The needs 

of capital market analysts and investors 

were researched in the project in order 

to provide a product (IC method) that 

meets all the important and unsatisfied 

needs of future users. 

The findings showed initially that analysts 

and investors highly value measures 

related to business model, relational 

capital as well as human capital, but they 

have relatively small interest in the 

structural capital of companies. Further 

research provided the explanation – 

traditional financial statements never give 

information that would allow to better 

understand or compare structural 

capital. That is one of the main reasons 

why analysts are not used to look for this 

kind of information. Along the process of 

common work and development of the 

best measures, they realized structural 

capital is the component which is most 

needed for sustainable growth and value 

creation. It builds organizational memory 

and learning, it helps increase the scale of 

operations, it protects the interests of an 

organization. Secondly, they saw that

information about processes helps them 

better understand the company’s situation 

and its activities that are future-oriented. 

6. Intellectual capital as the new strategic 

tool for companies, capital markets and 

economy 

In recent years intellectual capital 

methodology applications can be found in 

five main areas of measuring IC: countries, 

regions and communities, cities, 

universities and companies. 

Intellectual capital as the measure of 

future growth is a powerful tool which 

provides the bigger and more 

comprehensive picture of the current 

situation and the potential of future 

success. It should be implemented on 

both country level and company level to 

increase the understanding of citizens, 

organizations, enterprises and capital 

market players in future growth drivers. 

The challenge is to work out the 

standards for measuring (assessing) and 

reporting intellectual capital on different 

levels – macro, mezzo and micro, to make 

ranking or benchmarking possible and to 

provide credible strategic tool. 

5.11 It is never too late to learn 

Peder Hofman-Bang vice president of 

international business expansion at Actcell 

Corporation 75 

The fundamental reason for the financial 

crisis taking its toll on us, spells intellectual 

capital. We keep hearing about greedy 

financial players, impenetrable financial 

products and questionable marketing of 

these products: in other words poor 

corporate culture, deceitful structural 

capital and low competence. 

If intellectual capital is to blame, why 

would we say that it is also the solution? 

Basically, the answer is management. 

Much of the crisis is due to poor 

management of intangibles, due, in turn, 

to lack of insight in the importance of 

intangibles, lack of competence in how to 

manage them, and the absence of 

instruments that help companies manage 

these crucial non-financial assets. 

An interesting observation is that once a 

recession hits us, the automatic response 

is to cut costs. The majority of the cost 

cutting is focused on intangibles because 

that is where you find the most obvious 

costs (R&D, employees, branding etc.); 

costs, or rather investments that you can 

be without. In the short run. In reality you 

are cutting down on your future revenue 

potential. Sure, if it is the only way to 

make your company survive the fiscal 

year perhaps it is a necessity, but how do 

you choose which intangibles to cut? 

As mentioned above we need to make 

people aware of this paradox. We need 

to develop and implement tools that can 

help us understand the value of all the 

different intangibles that the company 

possesses. We need to educate in 

intangibles management. 

The community promoting the 

importance of intangibles has been 

around for twenty and some years now. 

Its biggest challenge is to prove the 

connection between intellectual capital 

and financial outcomes. Although a quite 

obvious relation for many, it is much more 

difficult to show it in real numbers. And 

real numbers seem to be necessary in 

order to convince the powerful traditions 

and regulations that govern corporate 

life. 

Intellectual Capital Sweden and Actcell 

Corporation in Japan have been working 

on these challenges since 1997. With IC 

Rating more than 400 companies on 

five continents have been helped to 

61 

prioritize their intangible investments; to 

build on their strengths and improve their 

weaknesses; to develop the right actions 

that build long term value as well as short 

term results. Would IC Rating and 

other intellectual capital tools – if 

implemented everywhere – have 

prevented the financial crisis? 

Companies would have been more 

prepared to deal with the recession, that I 

am sure of. But we would not have been 

able to hold it back completely. Why? 

Because intellectual capital management 

is still early days and people, institutions, 

government bodies etc., need to get 

involved in the development of the right 

insight, competencies and tools. 

Let us take a step back to an earlier crisis 

situation. In Sweden where my company 

has its origin, you could already in the 

early 90ies see IC sneaking in at the 

corporate level. Leif Edvinsson and his 

Skandia were first and then the IT 

industry was fast at their tail. The listed 

companies of the IT industry realized that 

they needed to convince the stock 

market that they had the right people 

and the right relations to grow rapidly. 

They were in the intellectual capital 

NOTE 

75 Actcell Corporation is a Japanese consulting firm 

specializing in Intellectual Capital Management. 

The focus is on strategy transformation of large 

corporations using various techniques for 

growing their intangibles.As a co-founder of 

Intellectual Capital Sweden, Peder’s focus has 

been on the global roll-out of the Intellectual 

Capital Partner Community (ICPC), currently 

with 28 partners in 30 countries. He is also the 

chief developer of IC Rating. To learn more 

about the work of Peder and Actcell, why don’t 

you follow us on Twitter 

www.twitter.com/pederhb, see what happens at 

ICKC 

http://www.icknowledgecenter.com/profile/Pede 

rHofmanBang and read about our work at 

www.actcell.com.

usiness. The problem was that they 

could not show the correlation between 

growing in numbers of employees and 

growing in numbers of customers. A big 

piece of the IC puzzle was missing – 

namely structural capital. 

When this suddenly became evident, the 

bubble burst. And in tech savvy Sweden, it 

was a very big bubble. A severe stock 

market crash was a fact. In Sweden many 

financial hotshots lay some of the blame 

on intellectual capital – this fad, this 

woolly non-fact based valuation scheme. 

In a sense they were right – not that IC 

was a fad, but that it was the lack of 

intellectual capital that made the stock 

market turn. However, it was the lack of 

the structural capital component that was 

the problem, not the lack of intellectual 

capital as a whole. 

Ever since that crisis, you have had to be 

very careful when propagating 

intellectual capital development or 

measurement as a solution to 

NOTES 

76 This document is a contribute for Aiaf research 

and none of the materials supported in this 

document and its appendices can be used for 

other purpose, re-written, copied or otherwise 

made available to parties, without the legal 

consent provided by AREOPA Group 

International. 

77 AREOPA was founded in 1992 as a 

management consulting firm. AREOPA has built 

up a strong reputation over the years in the 

development of methods, models and tools in 

such areas as “Risk Assessment”, “Change 

Management”, “Intellectual Capital” and 

“Knowledge Management and e-Learning” and 

the provision of consulting services making use 

of these methods, models and tools. Today we 

are a leading edge knowledge and practice 

provider. We have +20 years experience with 

+400 case references from around the globe, 

with multinationals and SME’s, as well as in the 

public sector. For further contact or inquiries: 

Joris.Claeys@AREOPA.com or Prof. Stefano 

Zambon (zambon@economia.unife.it) 

organizational difficulties in Sweden. 

In Japan, the intellectual capital 

terminology did not become known until 

after the dotcom-bubble; thus, compared 

to Sweden, intellectual capital 

management has had quite the opposite 

trend curve. Many claim that the Japanese 

economy has been in a recession all 

through this decade; now intellectual 

capital seems to be getting an interesting 

role in the turn-around process. 

A key word for many large Japanese 

corporations is transformation. They built 

successful businesses on the old financial 

paradigm of running companies, but it 

only took them this far. When they have 

finally realized the necessity to transform, 

they want to do it all the way – with a 

new paradigm – the one with intellectual 

capital as a base. 

Successful companies usually build their 

strategy on scarce resources and for 

many years such resources were tangible; 

the necessary intangibles were 

commodities. Now, we have the opposite 

relationship in many industries, thus the 

strategic focus must find its way to 

intangibles instead. 

As for the execution of the strategy, for 

most companies it is still about steering 

people towards following the corporate 

plans without deviations. In the new IC 

paradigm it is about giving the employees 

the right tools to navigate an ever 

changing innovation process; the plan is 

that there is no plan. The overall 

objectives are clear, and you must train 

people to innovate their way to achieving 

those objectives. 

Even in the old paradigm change is a key 

word. However, change is based on 

spying on the best and adjusting 

accordingly – so called best practice 

learning or benchmarking. Companies 

62 

looking to really transform need to view 

change in the intellectual capital context; 

since the business landscape is utterly 

unpredictable, you must know your 

intangible uniqueness and use that to 

change the way you run your company. 

The experiences from the Swedish 

development in combination with the 

transformation happening in Japan have 

made Intellectual Capital Sweden and 

Actcell a perfect match. We are now one 

company and the aim is to adjust the 

uniqueness of our Intellectual Capital 

Management approach to the unique 

market conditions of other countries. We 

already have established licensed 

partners in 30 countries and with that we 

have a strong foothold. Still, we have 

much to learn. We are convinced that 

intangibles have become – and will 

continue to be for a very long time – the 

scarce resources of many companies in 

many countries. 

Together with other IC missionaries and 

professionals we will make sure 

everybody realizes that. That way we all 

can learn from this crisis and do the right 

thing before the next one is knocking on 

our doors. 

5.12 AREOPA’s observations 

about the actual situation of 

systemic crisis76 . 

Co-authors: 

Ludo Pyis - Founder & President - 

AREOPA Group International 

Joris g. Claeys - VP Global Operations - 

AREOPA Group International77 How to turn around lower 

market value to the book value? 

Relevance of the intangible 

assets! 

A way to estimate the IC value of a 

company is to use the “Tobin’s Q” 

method, which suggests that the

difference between the book value and 

the market value (what a buyer is 

willing to pay for it) is the IC value. The 

issue with this method is that if the 

market value is less than the book 

value, you would have a negative IC. 

Conceptually this is something that 

cannot exist! 

We call this the “casino principle”! Let 

us clarify this: 

While a company has - let say - the 

same people (human capital), the same 

products (customer capital), the same 

organization (structural capital) and 

the same subcontractors (partner 

capital) at the time of sale, an 

evaluation may be influenced by 

external emotions as less valuable. This 

is a strange way of calculating, or better 

this has nothing to do with calculation, 

it is guessing. 

We don’t accept the “Tobin’s Q” 

method. AREOPA has developed the 

principles of calculating IC value from 

each of the “added value creating 

phenomena“. We do that by using our 

77 formulas, which are quantifying the 

total IC value of an organization. 

No more guessing, but real calculation. 

This approach is reflected in the 4-leaf 

model. We than put that into the IC 

accounting concept (IICARUS) which 

will produce IC balance sheets and 

P&L statements, which can be audited 

based on the IAS 38 (edition 2010). 

AREOPA’s 4-Leaf Model, our 

methodologies applied and the IC 

calculation using the 77 formulas, will 

give a complete other view on the 

value of organizations. Brick and 

mortar organizations will have up to 5 

times their financial assets in IC. 

Companies in the knowledge 

economy will have up to 12 times the 

financial assets value in IC. This we 

can call now the real hidden wealth! 

AREOPA’s methodology of 

identification, measurement and 

communication of the intangible 

assets 

Information and knowledge are the 

thermonuclear competitive weapons 

of our time. Knowledge is more 

valuable and more powerful than 

natural resources, big factories, or fat 

bankrolls. In industry after industry, 

success comes to the companies that 

have the best information or wield it 

most effectively. Wal-Mart, Microsoft, 

and Toyota did not become great 

companies because they are richer 

than Sears, IBM, and General Motors, 

on the contrary. But they had 

something far more valuable than 

physical or financial assets. They had 

Intellectual Capital. 

A business or government 

organization not only transmits input 

into output through a process of 

knowledge, it also creates or destroys 

knowledge. Most management 

research and consultancy services 

have been focusing on how to 

increase the input-output ratio, often 

called efficiency and effectiveness 

improvement, but have often ignored 

the explicit value of knowledge 

processing and knowledge creation 

within an organization. 

The creation of Organizational 

Knowledge – either privately or 

publicly owned – refers to the 

capability of a company as a whole to 

create new knowledge, disseminate it 

throughout the organization and 

embody it in products, services and 

systems. It is through the specific use 

63 

of knowledge and continuous 

innovation that organizations create 

competitive advantages over other 

organizations. Intellectual Capital is 

considered as the resource that 

creates invisible or intangible sources 

of competitive advantages such as 

networks and organizational systems. 

The value of any organization is 

constituted of: 

(1) the physical tangible and financial 

capital which one finds on the 

balance sheet of a company ; 

(2) the intangible assets of a company 

which are usually described as 

“goodwill” on the balance sheet. 

A company’s Intellectual Capital or 

Knowledge Base is usually 

determined as the sum of its human 

capital (talent), structural capital 

(intellectual properties, 

methodologies, software, documents, 

and other knowledge artifacts), and 

customer capital (client relationships). 

These intangible assets or Intellectual 

Capital are to a high extent related to 

relationships with the customers and 

suppliers, and with the employees 

and partners of the company. “Good 

will” does not fully encompass the 

real value of IC as we understand it. 

Sometimes IC is interpreted as the 

difference between the book value – 

i.e. the historic value of the assets of a 

company not yet amortized – and 

the market value which equals the 

perceived present value of the future 

cash flow of a company. 

Intellectual Capital is the sum of 

everything everybody in a company 

knows that gives it competitive edge. 

Unlike the assets with which business 

people and accountants are familiar – 

land, factories, equipment, cash –

Intellectual Capital is intangible. It is 

the knowledge of a workforce, the 

training and intuition of a team. It is 

the collaboration – the shared 

learning – between a company and its 

customers, which forges a bond 

between them that brings the 

customers back again and again. 

In one sentence: Intellectual Capital is 

intellectual material – knowledge, 

information, intellectual property, 

experience – that can be put to use 

to create wealth. 

Making the Link 

If Intellectual Capital equals 

intellectual material which is used to 

create wealth, then all efforts and 

investments, including IT projects, 

should be evaluated with respect to 

their contribution to increasing this 

intellectual material. In other words, 

when evaluating the real added value 

of an IT project, instead of looking at 

the traditional evaluation methods, 

such as ROI, one might want to start 

looking at the degree to which the 

project adds to the knowledge, 

information, intellectual property and 

experience of an organization, which 

will contribute directly to the wealth 

creation capacity of that organization. 

If a method or methods could be 

developed to measure the level of IC 

before and after the implementation 

of an IT project, then the ‘real’ value 

of that project could be made much 

more explicit. One could even 

contemplate the next step: if such a 

method or methods would exist, then 

the thru value of any investment – be 

it a training program or the 

implementation of an ERP system, the 

outsourcing of a business process or 

the introduction of a new data 

warehouse – could be calculated 

upfront and the effort to convince 

the senior management of an 

organization to go ahead with an 

initiative might become much easier. 

In all the discussions around IC, most 

of the efforts so far have been 

concentrated on definitions and 

concepts. Some groups tried to come 

up with metrics and measurements, 

but most do not go much further 

than very partial calculations very 

often limited to performance 

indicators and ratios. 

If IC wants to make it into the 

business world a method or methods 

will have to be worked out where the 

entire IC value of a company can be 

expressed in monetary terms (Euros, 

dollars or whatever currency is 

required), preferably in a format 

similar to what accountants and 

CFO’s understand easily, i.e. a balance 

sheet. 

It is all a matter of finding the right 

econometric translation of all the IC 

components and their links with 

other IC elements as well as the 

‘tangible’ assets and liabilities of an 

organization. In these econometric 

formulas, quite a number of 

parameters and variables will have to 

be defined, but once known they can 

be recorded and followed up leading 

to a consistent calculation of the IC 

value of the organization. Then, and 

only then, will IC break through and 

become a management tool. 

AREOPA’s Methodology to 

Measure Intellectual Capital 

AREOPA has developed such a 

model for identifying and quantifying 

64 

intangibles as components of 

Intellectual Capital (IC). This model 

serves to evaluate a company’s return 

on all the capital it employs, helping 

to explain the difference between 

book and market value. It also 

provides guidance as to how and 

where management should put its 

attention to grow the organization’s 

overall IC. 

AREOPA positions Intellectual Capital 

calculation as a management tool and 

not as a simple financial calculation of 

the intangible assets of the 

organization and thus explaining the 

difference between book value and 

market value. Management wants to 

understand the value of the 

Intellectual Capital of their 

organization. By giving a monetary 

value to the Intellectual Capital, 

management starts to understand the 

value and the impact. 

AREOPA’s 4-Leaf Model ® identifies 

the sources of added value and 

competitive advantage in businesses 

and in particular of virtual 

organizations - collaborative 

networks of otherwise independent 

economic entities - that build their 

business models around the internet 

using minimal financial assets. 

The Four IC Classes 

The four base classes are Human, 

Customer and Structural Capital, plus 

Strategic Alliance Capital. 

The latter gives recognition to the 

fact that partnerships, alliances and 

networks are increasingly important 

factors of business in the New 

Knowledge Economy. The strength of 

the alliance or network significantly 

impacts the leverage any one

company may have in its market, and 

therefore affects its value. 

A second crucial observation is that, 

apart from Structural Capital, the 

base IC classes are in fact shared 

capital. For instance, Human Capital 

(HC) is shared with its ‘owners’: when 

a staff member decides to leave the 

organization, he/she takes his/her 

skills and competences, reputation 

and potential along. Similar rules 

apply to both Customer Capital (CC) 

and Strategic Alliance Capital (SAC): 

when the customer takes his business 

elsewhere or an alliance breaks up, 

the customer’s revenue potential and 

partnership’s leverage are gone. 

However, not all may be lost in such 

extreme but realistic scenarios since 

at least the customers’ name may 

remain on the company’ reference 

list, and a former partner may still 

perform as an ‘at arm’s length’ 

Table 1: AREOPA’s 4-Leaf Model ® 

supplier: these indicate that some CC 

and SAC has become structural, and 

is therefore unaffected by the 

departure of a customer, resp. 

strategic alliance. 

The consequence of this is that 

Intellectual Capital may flow from 

one sector into the next. And this is 

where management of IC comes into 

play. It is important for companies to 

realize where their IC is situated, and 

which actions need to be taken to 

convert IC that is at risk of being lost 

into IC that has become structural, 

i.e. to structuralize its Human, 

Customer and Strategic Alliance 

Capital to the maximum extent 

possible. 

The IC calculation (ICC) developed 

by AREOPA contributes to improve a 

better understanding of the intangible 

assets of an organization and its 

related management issues. 

65 

The End of Assets 

The knowledge company travels light. 

When information has replaced 

stockpiles of inventory and when it 

has left its material body and taken 

on a business life of its own, a 

company ultimately becomes a 

different kind of creature. A 

traditional company is a collection of 

physical assets, bought and owned by 

capitalists who are responsible for 

maintaining them, and who hire 

people to operate them. A 

knowledge company is different in 

many ways. Not only are the key 

assets of a knowledge company 

intangible, it’s not clear who owns 

them or is responsible for caring for 

them. 

Indeed, a knowledge company might 

not own much in the way of 

traditional assets at all. Just as 

information replaces working capital, 

intellectual assets replace physical 

ones. It is characteristic for 

knowledge companies to strip their 

balance sheets of fixed assets. The 

knowledge company doesn’t care 

about owning assets. In fact, the fewer 

assets, the better; so long as it has 

intellectual capital, the company can 

get the revenues without the burden 

and expense of managing and paying 

for assets. 

Making allowances for thousands of 

exceptions, one could say that 

businesses are moving to one or the 

other side of a dividing line: assetowners 

versus assets-renters. This 

creates enormous opportunities for 

companies offering services in areas 

such as strategic or business process 

outsourcing, hosting, shared services, 

and the like.

5.13 Overcoming the Crisis: 

Rewarding Human Capital 

Development for Sustainable 

Business Performance 

Leonardo Sforza 78 , Head Research and EU 

Affairs, Hewitt Associates 79 

The analysis of the European Central 

Bank (ECB) about the lessons that can 

be drawn from the crisis that over the 

last 30 months continues to occupy 

bankers and other decision makers on 

both sides of the Atlantic is rightly 

shared at large, although opinions 

sometime differ on the scope of the 

cure. 

NOTES 

78 Avenue des Cerisiers, 15 bte 2, 1030 Brussels, 

Belgium, Email: leonardo.sforza@hewitt.com 

79 Hewitt Associates provides leading 

organisations around the world with expert 

human resources consulting and outsourcing 

solutions to help them anticipate and solve their 

most complex benefits, talent, and related 

financial challenges. Hewitt works with 

companies to design, implement, communicate, 

and administer a wide range of human 

resources, retirement, investment management, 

health care, compensation, and talent 

management strategies. With a history of 

exceptional client service since 1940, Hewitt has 

offices in more than 30 countries and employs 

approximately 23,000 associates who are 

helping make the world a better place to work. 

Hewitt Associates is a company listed at the 

New York Stock Exchange (NYSE:HEW).For 

more information on Hewitt studies and 

services, e-mail: 

humancapitalconsulting@hewitt.com, or consult 

our website at : www.hewitt.com 

80 Speech of Jean-Claude Trichet, at the annual 

conference organised by the Asociación de 

Mercados Financieros, Madrid, 23 November 

2009. 

81 European Commission, Europe 2020 – A 

European strategy for smart, sustainable and 

inclusive growth, COM (2010) 2020 of 3 March 

2010 

82 Hewitt Associates (NYSE: HEW), has offices in 

more than 30 countries and employs 

approximately 23,000 associates. For more 

information visit: www.hewitt.com 

The fragility of the international financial 

system, that has impacted almost all 

market segments or category of players, 

the limit of short term macro-economic 

policies, and the inadequate appraisal of 

systemic risks accompanying the wider 

transmission of financial instability 

throughout our economies, require 

reinforced -and often concerted- actions 

for improving the future functioning of 

financial systems and restore trust within 

the markets and among policy makers 

and public opinion at large. 

As often reminded by the leaders of the 

European Union institutions, these 

actions should focus on global 

governance, and on financial and 

structural reforms. In each of these 

areas, from enhanced transparency and 

supervision of financial products to 

greater alignment of incentives to longterm 

value creation for market 

participants, to national labour markets 

reforms, to mention just a few of the 

remedies under review, human capital 

leadership, management and 

development remain essential preconditions 

to “exit” the crisis and “enter” 

into a new path of growth. This is well 

summarised in a recent statement of 

Jean-Claude Trichet, the president of the 

ECB, when he underline that the “main 

asset for growth and development in 

our societies is human capital“ 80 . Along 

these lines is the objective set by José 

Manuel Barroso, president of the 

European Commission, in the “Europe 

2020” strategy, proposing an EU policy 

agenda that aims to a “smart, sustainable 

and inclusive economy delivering high 

levels of employment, productivity and 

social cohesion“ 81 . 

The take-up by the EU member States 

of the new agenda and the political will 

66 

of the Commission to carry out an 

active follow-up of its implementation 

remain to be seen. Hopefully their 

individual and joint commitments will be 

more effective than what happened in 

the past decade for the “sister” plan 

known as the Lisbon Agenda. But, as the 

European Commission itself 

acknowledges in its strategy paper, 

economic realities are moving faster that 

political realities. Many corporations, 

often affected by the gap between the 

speed of the market and the delay and 

inadequacy of policy response, have 

been already adapting or transforming 

their business and management models 

to face the adverse market conditions 

while coping with longer-term 

challenges. These spans from 

globalisation to the pressure on the 

availability and use of resources, from 

ageing of the work force to the shortage 

of talents. Hewitt Associates, that 

provides leading organizations around 

the world with expert human resources 

consulting and outsourcing solutions, has 

been helping them anticipate and solve 

their most complex benefits, talent, and 

related financial challenges. With a 

history of exceptional client service 

since 1940, Hewitt works with 

companies to design, implement, 

communicate, and administer a wide 

range of human resources, retirement, 

investment management, health care, 

compensation, and talent management 

strategies 82 . 

Despite a tough business environment, a 

still fragile economic recovery and 

moderate expectations of improvement 

for 2010, a number of companies are 

navigating beyond mere survival mood. 

According to the 5 th European HR 

Barometer, a study designed and carried

out for the European Club for human 

resources (EChr) by Hewitt Associates, 

corporate growth plans are focusing 

more on selected human capital 

development measures - including the 

prospect of newly created qualified jobsand 

on the opportunity to measure and 

leverage HR’s value to the business 

more effectively. On the downside 

however, concerns remain regarding 

productivity gaps, workforce adequacy, 

and rigorousness in people management 

policy implementation 83 . 

This study involving seventy European 

HR leaders from sixteen nationalities 

shows that 2010 is emerging as a true 

year of transition during which 

companies are looking to improve their 

competitiveness and prepare for a postcrisis 

environment. This is leading to a 

greater balance between more 

“defensive” measures –such as those 

aiming to reduce production, workforce 

costs and capacity– and “growth” 

initiatives aiming to upgrade productivity, 

talent and leadership capabilities, or to 

explore new opportunities for mergers 

and acquisitions. 

The top three priorities on the HR 

agenda for the period 2010 to 2012 

remain stable with an even greater 

emphasis on core human capital issues, 

namely: leadership development 

(mentioned by 46%), employee 

engagement (39%) and talent retention 

(32%). As a fourth priority, the focus will 

be on improving the assessment of what 

HR does and how it adds value to the 

business. This is also the area where HR 

leaders seem to be most keen to have 

further support and fill their current gap 

in terms of delivery capacity. 

When judging its own performance 

against business expectations, HR 

recognises that there is large scope for 

improvement in HR strategy and 

execution, and in all other 26 different 

people-related activities under analysis. 

In sixteen of these activities –they were 

eleven in last year’s survey– the majority 

of respondents admit to performing 

below business expectations. The most 

frequently mentioned areas of 

excellence continue to be those related 

to statutory compliance issues, such as 

health and safety at work, employee 

data-privacy, industrial relations and nondiscrimination. 

But also in these best 

performing fields, in particular in relation 

to non-discriminatory practices, the 

proportion of companies acknowledging 

the gap has increased from 15% last year 

to 36% this year. 

The weakest fields where HR assesses 

itself as delivering below target are in 

relation to: HR metrics (77%), work/life 

balance programmes (75%), 

management of intergenerational 

diversity (62%), consistency of HR 

policies across countries (62%), and 

employee communication (59%). All 

areas that require well defined valuation 

tools, a forward looking mindset 

combined with new capabilities for a 

thorough appraisal of the business 

context and of its implication from an 

HR perspective. 

The traditional range of people and 

internal “customer” tools are generally 

preferred by HR to measure the impact 

of their activities on business results. 

Employee engagement surveys emerge 

this year as the most commonly used 

tool. However, the proportion of 

companies that due to lack of resources 

do not use HR metrics at all has 

increased from 8% last year to 18% this 

year. Meanwhile, there are 35% of 

67 

respondents that are still looking for 

relevant quantitative tools. The solution 

to this problem may well reside in a 

more open and co-operative approach 

that involves in hose and external HR 

advisors and third qualified parties from 

research institutes, management schools, 

and business analysts. 

One of the most compelling case of 

possible enhancement or deterioration 

of business value linked to human capital 

assets is evident in the context of 

corporate transactions. The recent 

Hewitt’s quarterly M&A pulse survey of 

278 organizations around the world 

shows that 72 % expect to increase their 

deal activity over the next two years. 

Although corporate transaction activity 

is expected to increase in 2010, yet 

many acquiring companies around the 

world say they fall short in meeting their 

deal objectives. Almost half (47 %) said 

their past transactions did not achieve 

their intended financial and strategic 

objectives. Further, while almost twothirds 

(65 %) of companies indicate that 

leadership and key talent retention are 

critical to the success of a deal, nearly 

half (49 %) of these organizations report 

they have lost critical employees at the 

same rate or at an even higher rate than 

non-critical employees 84 . 

Hewitt analysis shows that the loss of 

critical employees can have a devastating 

impact on corporate transactions. Based 

on a sample of 96 companies 

representing more than $568 billion 

(USD) in total deal value over a twoyear 

period, Hewitt’s analysis found that 

NOTES 

83 Hewitt Associates – Echr, 5th European HR 

Barometer, February 2010 

84 Hewitt, "Leaders and critical talent drive deal 

success", The Deal magazine, 22 February 2010

more than $54 billion (USD) – or 10% 

– of a deal’s value depends on the rate 

at which critical employees separate 

during or immediately after corporate 

transactions. To explore this point 

further, Hewitt compared the survey 

responses of companies that exceeded 

deal objectives (Overachievers) versus 

those organizations that did not achieve 

their deal objectives (Underachievers). 

In its analysis, Hewitt found a clear link 

between deal success and investment in 

leadership and key talent issues. 

“Overachievers” and “Underachievers” 

both say leadership and talent strategies 

are important to the success of a deal 

(69% versus 62%, respectively). 

However, less than a third of 

“Underachievers” report their 

leadership and key talent strategy in 

transactions as being effective, 

compared with 70% of 

NOTES 

85 Hewitt Top Companies for Leaders Study, 2009. 

86 Piero Marchettini has thirty years experience in 

the insurance, law and consulting fields and 

during his career, he has practiced law at the 

Milan Bar and worked as a Senior Consultant 

with Towers Perrin in the Paris office before 

becoming a founding partner of H.R.C. 

International and Managing Director of Watson 

Wyatt Italy, H.R.C. Italy.He is a frequent speaker 

at national and international conferences and 

author of several articles in leading reviews on 

benefits and compensation issues. 

87 Adelaide Consulting is a consulting boutique 

founded in 1996, based in Geneva and Milan, 

and specialized in Corporate Governance and 

Executive Compensation. 

88 Tomas B. Wilson, Innovative Reward System for 

the Changing Workplace, New York 2003, II 

Edition, p.75 and p. 90. 

89 R. Kaplan and D. Norton The Balanced Scorecard 

- Translating Strategy into Action, Boston 1996, 

mentioned by Tomas B. Wilson, Innovative 

Reward System for the Changing Workplace, 

p.91-92. 

90 Report on Eurotop 100 Direct Remuneration, 

Hewitt 2009, p.19 and 24. 

“Overachievers”. The latter are also 

twice as likely to effectively identify and 

retain leaders (81% versus 42 %) and 

assess critical talent (73% 35%). 

In conclusion, Hewitt research and daily 

practices consistently demonstrate a 

direct link between leadership, talent 

management and business 

performance 85 . A greater focus on 

operational performance and on 

relevant and reliable metrics to assess it 

are always more essential. However, a 

rigorous and timely execution of HR 

policies is not enough to guarantee long 

term sustainable performance. The 

competitive advantage of an 

organisation will also depend on its 

ability to articulate innovative people 

management policies in anticipation of 

emerging business paradigms that affect 

the world of work and change the way 

business operate. 

5.14 Executive compensation 

and intangible assets 

Piero Marchettini 86 Managing Partner of 

Adelaide Consulting 87 

In the design of an executive 

compensation policy the choice of the 

performance measures plays a critical 

role. As it has been noted “Measures give 

relevance to rewards; rewards give meaning 

to measures”. In fact “While organizations 

develop a variety of measures, they tend to 

fall into the areas of finance, internal 

business, innovation and learning, and 

customer satisfaction” 88 . More specifically, 

on the basis of the Kaplan and Norton 

Model of the “Balanced Scorecard” the 

performance measure could be 

structured taking into account the 

following criteria (see Table 1). 89 

1. Resource focused -These are measures 

that imply the use of the benefits 

68 

received from the resources of the 

organization. 

2. Process focused - These are measures 

that relate more directly to how things 

are done in the organization. 

3. External – driven - These are measures 

that reflect the market place in which 

the organization operates. 

4. Internal – driven - These are the 

measures that are more likely in the 

control of the organization. 

On the basis of these criteria 4 

categories of performance measures 

have been identified: 

1. Financial Metrics, subdivided into Value 

Creation and Stakeholder Return. 

2. Customer Metrics, subdivided into Time 

to Market and Customer Satisfaction. 

3. Operational Metrics, subdivided into 

Operational Efficiency and Resource 

Utilization. 

4. Capabilities Metrics, subdivided into 

Human Resource Capabilities and 

Internal Effectiveness. 

Unfortunately in many companies 

several of the specific measures included 

in these 4 categories have been totally 

ignored and, in any case, the top 

management has been traditionally 

rewarded only on the basis of the 

Financial Metrics. As a recent survey 90 

shows over 90% of the performance 

measures of stock option and long term 

incentive plans are based on Financial 

Metrics (mainly Total Shareholder Return 

and Earnings per Share). Even in the 

annual bonus plans about 2/3 of the 

performance measures are based on 

Financial Metrics (mainly Annual Profit). 

(see Tables 2 and 3). 

What is the reason of the focus on only 

one of the 4 quadrants of the Kaplan and 

Norton Model? In our opinion the focus 

on Financial Metrics is connected with

Table 1: Categories of performance measures 

External-Driven 

Internal-Driven 

FINANCIAL METRICS 

Value Creation 

Revenue growth 

Revenue (product) mix 

Profit margins 

Revenue per employee 

Economic value added 

Market capitalization 

Shareholder Return 

Return on equity/assets/capital 

Cash flow return on investment 

Earning per share 

Total shareholder return 

OPERATIONAL METRICS 

Operational Efficiency 

Budget to actual expenses 

Product/process quality 

Reliability/rework 

Accuracy/error rates 

Safety rates 

Cost per unit/transaction 

Resource Utilization 

Resource-Focused 

Process improvements 

Inventory turns 

Cost reduction 

Project/plan implementation 

the progressive gap between the growth 

of economy and the growth of the 

financial market. As it has been shown by 

the Observatoire de la Finance of Geneva, 

from 1964 and 1984 the pace of growth 

of the U.S.A. stock market was very 

much aligned with the pace of growth of 

the U.S.A. economy and with the profits 

of the U.S.A. corporations. Vice versa, 

from 1984 on the stock market started 

to grow at a faster pace than the 

economy and the corporate profits grew 

at a lower pace. The gap between stock 

market growth and corporate profits 

growth remained relatively narrow for 

about a decade, but from the mid ’90s 

on it became huge. 91 (see Table 4). 

It is now interesting to observe the 

relationship between this gap and the 

evolution of the executive 

compensation during the past 50 years 92 . 

20 years of executive pay escalation 

For a long period of time (basically from 

the early 60s to the beginning of the 90s) 

the scenario concerning executive 

compensation was reasonably stable and 

predictable. More specifically: 

chief executive pay was a “reasonable” 

multiple of rank & file employee pay 

(about 40 times in U.S.A., much lower in 

Europe and in Japan); 

the average growth of the stock market 

was in line with the growth of the 

69 

CUSTOMER METRICS 

Time to Market 

Process-Focused 

On-time delivery 

Cycle time external 

New product development 

Customer satisfaction 

Market share 

Customer feedback 

Account penetration/n° of services 

Customer retention 

Quality of customer treatment 

CAPABILITIES METRICS 

Human Resource Capabilities 

Employee satisfaction 

Turnover/absenteeism/safety incidents 

% implementing PM process 

Succession plan utilization 

% of employees with requisite 

competencies 

Internal Effectiveness 

Service/quality index 

Cost of time per hire 

Project/plan implementation 

Response time to resolve issues 

Source: Innovative Reward System for the Changing Workplace, Thomas B. Wilson, New York, 2003, II Edition, p.92. 

G.N.P. (about 3% per year in real 

terms); 93 

financial industry compensation levels 

were very much in line with other 

industries. 

This scenario changed dramatically with 

the deregulation taking place in many 

previously regulated industries in most 

Western countries and, particularly, in the 

financial industry which had a great 

impact. Starting from the mid 1990s the 

economy and the executive 

compensation experienced a season of 

excesses: 

in the U.S.A, chief executive pay rose 

from about 40 to over 400 times the 

pay of a rank-and-file employee (mostly 

due to stock option plans); 94 

the average growth of the stock 

markets became in several countries 

significantly higher than the growth of 

the G.N.P. (mostly thanks to the 

internet & structured financial products 

bubble); 

financial industry compensation levels 

bypassed by about 60% levels of other 

industries, though employment in 

95 96 

finance has not significantly grown. 

Executive compensation become more 

and more dependent on share plans 

(stock options, stock grants, 

NOTES 

91 Pierre-Alexandre Sallier, Chercheurs et banquiers 

denouncent les derives d’une finance toutepuissante, 

Le Temps, 24 October 2009. 

92 Piero Marchettini, Executive Remuneration and the 

Latest EU Recommendation, Benefits & 

Compensation International, November 2009, p.3. 

93 Gary Becker and Kevin Murphy, Do no let the 

“cure” destroy capitalism, Financial Times, 20 

March 2009. 

94 N. R. Narayana Mutrthy, Greed is not good, World 

Business, April 2006, p. 15. 

95 Martin Wolf, Cutting back financial capitalism is 

America’s big test, Financial Times, 15 April 2009. 

96 Myret Zaki, Les salaires contestés de la finance, Le 

Temps Lundì Finance, 9 February 2009.

Table 2: Performance measures in options plans and ltips 

Options 

performance shares…), thus 

contributing to increase the so-called 

“long term incentive” (LTI) component of 

the executive pay cake. Currently LTIs 

represent about 2/3 of the total direct 

compensation of a CEO in U.S.A. and 

about 1/3 in Europe. 97 (see Table 5). 

Under this scenario it is not surprising that 

NOTES 

97 Report on Euro top 100 Direct Remuneration, 

Hewitt 2009, p.8. 

98 As it has been observed “The problem is acute in 

the US, where fear of litigation has led to a culture 

of box-ticking. E&Y signed off on repo transaction 

that published billions of dollars’ worth of Lehman’s 

assets off-balance sheet not because it believed 

they served a real commercial purpose, but 

because accounting rules allowed this. It focused on 

the form, not the substance, of the deals. 

It is easy to see how this has evolved. It is far easier 

for an accountancy firm to retain a lucrative 

relationship with its clients if it does not sit in 

judgment on their activities, but simply adheres to 

a set of blind rules. Auditors can more easily defend 

lawsuits when things do go wrong if a rule book 

can be appealed to. But this is precisely why the 

whole system is so frustrating from the investors’ 

perspective. The more rule-driven auditors are, the 

less valuable their work is as due diligence.” 

(Accounting failure: Auditors need to remember 

who their costumers really is, Financial Times, 16 

March 2010). 

the overwhelm majority of the 

performance measures of stock option 

and long term incentive plans is based on 

financial metrics such as Total 

Shareholders Return. Clearly financial 

measures presented a few significant 

advantages: 

first of all they are based on numbers 

and numbers are considered by 

definition “objective”; 

second, financial numbers are certified 

70 

LTIPs 

EPS TSR Share Price Other Measure None EPS Combination TSR Combination 

Share Price Combination EPS TSR Combination Other Combination 

Source: Source: Hewitt (Report on Eurotop 100 Directors’ Remuneration, 2009) 

by the big 8 (now big 4) international 

audit firms and the reliability of their 

reports is given for granted. 

Unfortunately many financial scandals in 

the recent and less recent past (Enron, 

Worldcom, Parmalat, Royal Ahold, Vivendi, 

U.B.S.,...) have shown that numbers are far 

from giving on objective picture of the 

enterprise value. Some of these scandals 

has also shown that audits made by the 

big international firms have been often 

too complacent, without understanding 

that “the client” is not the management, 

but the shareholders and the 

stakeholders. 

Nearly a decade ago Enron brought 

Table 3: Performance measures in annual bonus plans 

Source: Hewitt (Report on Eurotop 100 Directors’ Remuneration, 2009) 

down Arthur Andersen and now Ernst & 

Young has been criticized in connection 

with the Lehman failure to question or 

challenge off-balance sheet transactions 98 . 

The European Union and the 

Financial Stability Board reaction 

to pay excess 

The Golden Age of executive 

compensation ended abruptly with the 

2008 U.S.A. financial crisis, which became

Table 4: Growth of Economy, stock market and corporate 

profit - (U.S.A 1964-2008) 

Indice, base 1964 = 1 point 

60 

Marché boursier (indice S&P 500) 

50 

40 

30 

20 

10 

0 

Produit intérieur brut américain 

Croissance des profits des enterprises américaines 

Rendment offert par les bons du Trésor US à 10 ans 

1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 

Source: Observatore de la finance, Geneva 

Table 5: Median target total direct compensation, highest pay 

executive wihev 

Source: Hewitt (Report on Eurotop 100 Directors’ Remuneration, 2009) 

in 2009 a worldwide economic crisis. As 

expected, public opinions both in Europe 

and in U.S.A. made a link between 

excessive pay (specifically in the financial 

industry) and the economic crisis. They 

have also identified several responsible 

parties: greedy executives, weak 

remuneration committees, complacent 

consultants, inadequate regulators and 

inattentive and inactive shareholders. In 

fact: 

remuneration committees have failed in 

controlling the escalation of executive 

pay (specifically as far as stock plans and 

golden parachutes were concerned); 

compensation consultants ignored 

71 

obvious conflicts of interest by working 

at the same time for the top 

management and for the remuneration 

committee; 99 

non executive board members in the 

financial industry have been unable to 

grasp 100 the relationship between 

company risk and traders/financial 

specialists incentive schemes; 

institutional investors have poorly 

performed in assessing the board 

members skills and the boards 

effectiveness. 

This failure is also due to the fact that 

shareholder value (represented by 

quarterly dividends and share price gains) 

was considered the main strategic goal, 

not a result of the long- term growth of 

the company. 101 Consequently, as long as 

shareholder value was apparently going 

up, non executive board members have 

been very reluctant to challenge poor 

corporate governance practices. 

In this scenario both the European 

Commission and the Financial Stability 

Board decided to intervene by enacting a 

Recommendation concerning the 

remuneration of directors of listed 

companies (2009/385/CE) 102 and a series 

of Principles concerning the remuneration 

NOTES 

99 Gretchen Morgenson, International Herald 

Tribune, 6 December 2007. 

100 Paul Strebel, Time to bring real shareholders back 

on board, Financial Times, 13 February 2009. 

101 Even Jack Welch, considered as the prophet of 

“Shareholder value” recently said: “Shareholder 

value is a result, not a strategy” (A need to 

reconnect, Francesco Guerrera, Financial Times, 

23 March 2009). 

102 Commission Recommendation of 30 April 

2009 complementing Recommendations 

2004/913/EC and 2005/162/EC as regards the 

regime for the remuneration of directors of 

listed companies (2009/385/EC), Official Journal 

of the European Union, 15 May 2009.

policies in the financial sector. 103 Both the 

EU Recommendation and the FSB 

Principles concern inter alia the following 

areas: 

variable pay; 

termination indemnities; 

share programs. 

We will focus our attention on the most 

relevant and innovative features in these 

areas. 

1. Variable pay 

Variable pay should be linked to the 

long-term performance of the company 

and must be recognized only when 

assigned objectives are actually met. 

These objectives should be established 

on the basis of both financial and non 

financial criteria (such as improvement 

of intangible assets). 

A significant portion of the variable pay 

(specifically from 40 to 60 % in the 

financial sector) should be frozen, to be 

paid only after a certain period such as 

3-5 years, when short - term results 

could be considered as definitely 

delivered. Variable pay could be 

reclaimed, if paid on the basis of data 

manifestly misstated. 

2. Termination indemnities 

The era of golden parachutes is 

definitely over. The guidelines contained 

in the EU Recommendation and in the 

FSB Principles establish a maximum 

termination indemnity corresponding to 

2 years of base pay. 

No payment should be made in case of 

NOTES 

103 Compensation Principles and Standards 

Assessment Methodology, Basel Committee on 

Banking Supervision, Bank for International 

Settlements, January 2010. 

104 Fabio Pennetta and Paolo Angelini (Eds.), 

Financial Sector pro - cyclicality - Lessons from the 

crisis, Banca d’ Italia, Questioni di Economia e 

Finanza, N°44 April 2009, from p. 61 on. 

dismissal due to inadequate 

performance. Also no payment should 

be recognized in case of voluntary 

resignation. The only exception is 

resignation due to a merger / acquisition 

or to a change in company strategy. 

The widespread practice of “forgetting” 

at termination of employment loans 

made to top executives must be 

eliminated. 

3. Share programs 

Vesting should not be recognized 

before at least 3 years and should be 

subject to specific performance criteria. 

Once shares become vested, they 

should be in part retained until the 

executive reaches the end of his/her 

mandate. 

No share options should be awarded to 

non executive directors. 

A longer term focus in the 

executive compensation practices 

Most of these proposals have been 

influenced by the short-term focus of 

many current incentive plans. More 

specifically in the financial sector the 

following solutions have been proposed 104 : 

elimination of guaranteed bonuses and 

golden parachutes (against the risk of “ 

pay - for - failure”); 

cap on cash bonuses, cancelling of stock 

options, substituting them with 

restricted shares redeemable over a 10 

– year period (against the so-called 

“short – terminism” approach); 

claw back of payments made to risk 

takers whose decisions/actions 

destroyed client assets and shareholder 

value (against the systematic search of a 

“fake alpha”); 

serious analysis of sources of profit by 

focusing on know-how & innovation 

versus cheap money & excessive risk. In 

72 

fact, interest rates are established by 

central banks, the cost of the risk should 

be taken into consideration and internal 

risk management must be reinforced. 

Basically the 2008/2009 crisis had a 

significant impact on the executive 

compensation practices (and in the 

financial sector in the compensation 

practices in general). More specifically: 

a significant portion of the annual bonus 

(from 40 to 60% in the financial sector) 

will be deferred during a period of 3 to 

5 years; 

in the medium term there will be a 

trade off between cash and shares (in 

the financial sector at least 50% of the 

variable pay should be made under 

form of shares or investments whose 

value is linked to the value of the 

company shares); 

termination indemnities and/or 

severance payments could be reduced 

in case of poor performance. 

All these changes will have the effect of 

transferring a significant portion of the 

total direct compensation of one 

executive from the short-term (1-3 years) 

to the medium-long term (3-10 years). 

This transfer may have a significant impact 

on the choice of the performance 

measures adopted to evaluate the top 

management performance and to 

determine its reward. In fact: 

shareholders have realized that, despite 

very favourable financial results certified 

by leading international auditors, the 

business and economic disaster of the 

company was just around the corner; 

top managers cannot take advantage 

any more of huge short-term rewards 

linked to financial results, but they have 

to rely on the long-term success of the 

company and on the sustainability of its 

growth.

Under these circumstances the 

performance measures linked to Non- 

Financial Metrics become more and 

more relevant. Only the new products 

development, the product and process 

quality, the customer retention and 

satisfaction, the development of the 

employee requisite competencies, the 

employee safety, retention and 

satisfaction… will be able to guarantee 

the long-term development and success 

of the company. 105 

All these factors are based on the socalled 

Intangible Assets. The concept of 

Intangible Assets is certainly not new 

and several companies have developed 

during the past 15 years, together with 

the Financial Balance Sheet, also a 

Balance Sheet of Intangible Assets 106 . 

Nevertheless, so far, shareholders have 

hardly grasp the real value of Intangible 

Assets: they consider them as “nice to 

have”, probably much more focused on 

the various stakeholders (employees, 

clients, local communities…) 

expectations, rather than on creation of 

shareholders value. 

The recent financial and economic crisis 

may have changed their minds (at least 

the ones of stable institutional 

shareholders). There is no long-term 

safety for their investments without a 

careful management of the Intangible 

Assets of the companies where they 

invest. It is now up to them to review 

the performance measures chosen to 

monitor and reward the top 

management of these companies. 

In fact some large French companies 

have already chosen for their top 

management performance objectives 

linked to Intangible Assets. This is the 

case of the leading insurance AXA 

(where products innovation and market 

diversification are included among the 

objectives of the C.E.O. variable pay and 

performance shares) and of the leading 

car manufacturer PSA (where the 

quality of the product represents 55% 

of the C.E.O. annual bonus). 

Furthermore a recent French law 

(Decret 31 mars 2009) excludes any 

payment of bonuses/incentives to top 

executives of companies who have 

made significant layoffs, regardless of 

their financial performance. 

Recently some leading Dutch 

companies have decided to link part of 

the bonus of their top managers to 

sustainability. This is the case of DSM (a 

life sciences group) and of TNT (a 

postal operator). Another Dutch 

company (AKZO Nobel, leading 

worldwide chemical company) was a 

pioneer in this area, by linking half of its 

long-term incentive scheme on its 

position in the Dow Jones sustainability 

index for chemical companies 107 . 

Furthermore two Swiss leading experts 

(Anne Heritier Lachat, Board Member 

of Finma, the supervisory authority on 

financial market, and Rajna Gibson, 

Director of the Geneva Finance 

Research Institute) have indicated that 

the remuneration policies must give the 

priority to ethic values, because honest 

managers are unlikely to manipulate 

financial figures. Moreover, executives in 

charge of compliance and internal 

control should be better rewarded. 108 

The shift from Financial to Non- 

Financial Metrics (mainly Intangible 

Assets) is also coherent with the 

increased focus on stakeholders 

interests, instead of shareholders value. 

A company which pursues a long-term 

sustainable growth will be able to 

protect its stakeholders interests much 

73 

better than a company focused on 

short-term shareholders value. 

Furthermore the protection of 

stakeholders interests should be able to 

guarantee in the long-term the 

shareholders value as well. 

5.15 An Expanded Intellectual 

Capital Framework 

Co-authors 

Serafin D. Talisayon - Center for Conscious 

Living Foundation, Inc. Philippines109 Vincent Leung - Co-Founder of Predictiv 

Asia110 1. Intellectual Capital Framework 

On the average, market values of 

corporations exceed their book 

NOTES 

105 The relationship between the good practices in the 

human resources area and the company 

performance has been analysed by Andrea 

Gasperini and Nadia Raso, Capitale umano e 

performance di business, Milano 2008, p.51. 

106 Franco D’Egidio, Il Bilancio dell’Intangibile, Milano 

2001. 

107 Richard Milne, Drive to link pay to sustainability 

begins, Financial Times, 24 February 2010. 

108 Yves Genier, Tentative de reglementation des bonus: 

le risque d’une impasse, Le Temps Lundi Finance, 22 

March 2010. 

109 CCLFI is a non-profit organization based in the 

Philippines is specializes in organizational learning 

and change, knowledge management (KM) and 

knowledge-based development. Provide courses, 

trainings and workshops to groups of individuals 

including students and KM enthusiasts, and select 

organizations such as corporations, government 

agencies, non-profit organizations, funding and 

development organizations that are looking for 

ways to generate greater value for its customers 

and stakeholders. CCLFI is composed of a network 

of individuals, experts in their own fields, who 

practice and advocate knowledge management. 

110 Predictiv Asia - Specialized in the strategy 

formulation and assessment of intangibles such as 

brand, reputation, customare satisfaction, 

innovation, management credibility and strategy 

execution, for corporations from MNC to SME 

and from NGO to Governmental Bodies. Based in 

the United States, the firm has a pool of intellectual 

capital professionals with years of practical 

experience and successful cases.

values. 111 This fact provides the rationale 

for managers to pay more systematic 

attention to managing intellectual capital, 

which largely accounts for the gap 

NOTES 

111 On January 22, 2010, for example, the average 

market-to-book ratio across 5,896 companies in 

Yahoo Finance’s 215 industrial sectors was 7.14, 

or book values on the average constitute only 

14% of market values. The companies are USbased 

as well as foreign companies. Only 29.4% of 

companies have book values that exceed their 

market values; most of these are financial 

institutions and real estate companies that were 

adversely affected by the 2008 financial crisis. 

112 Stewart, T. A. (1997). Intellectual Capital: the New 

Wealth of Organizations. New York: Currency 

Doubleday. 

113 The term “customer capital” was first proposed in 

1993 by Hubert St. Onge. See: Sullivan, P. H. 

(2000). Value-Driven Intellectual Capital: How to 

Convert Intangible Corporate Assets into Market 

Value. Singapore: John Wiley & Sons. 

114 Sullivan, P. H. op. cit. 

115 Sveiby, K. A. (1997). The New Organizational 

Wealth: Managing and Measuring Knowledge-Based 

Assets. San Francisco: Berrett-Koehler Publishers. 

116 Lev, B. (2001). Intangibles: Management, 

Measurement, and Reporting. Washington, D. C.: 

Brookings Institution Press. 

117 Personal communication with Dr. Rory Chase. 

See also: Chase, R. (2009). Global Knowledge 

Management Trends. In: From Productivity to 

Innovation: Proceedings of the Second International 

Conference on Technology and Innovation for 

Knowledge Management. Tokyo: Asian Productivity 

Organization. 

118 Talisayon, S. (2009). Organisational energy and 

other meta-learning from case studies of 

knowledge management implementation in nine 

Asian countries. Knowledge Management for 

Development Journal, 5(1), 21-38. U.K.: Routlege. 

119 Talisayon, S. (2008). Relationship Capital versus 

Stakeholder Capital versus Customer Capital. Blog 

post in: Apin Talisayon’s Weblog, 16 December 

2008. Web site: 

http://apintalisayon.wordpress.com/2008/12/16/re 

lationship-capital-stakeholder-capital-customercapital/ 

120 Talisayon, S. and V. Leung. An Expanded Intellectual 

Capital Framework for Evaluating Social Enterprise 

Innovations. 6th International Conference in 

Knowledge Management. Hong Kong, 3-4 

December 2009. 

between market values and book values. 

Concepts and terminologies used to refer 

to this gap vary across authors and 

practitioners. 

i) Stewart 112 refers to this gap as 

“intellectual capital” which he 

decomposes into three: human 

capital, structural capital and 

customer capital 113 . Sullivan 114 and a 

group of prac titioners he belonged 

to, which consisted in 1999 of thirty 

companies that called themselves 

the ICM Gathering, also used the 

same term, but decomposed it into 

human capital and intellectual assets. 

The latter term refers mostly to 

corporate properties that Stewart 

calls structural capital. 

ii) Among the earliest knowledge 

management practitioners to 

recognize the signific ance of this gap 

is Sveiby. He refers to this gap as 

“intangible assets” or “know ledgebased 

assets,” a term consistent with 

accountants’ general usage of the 

term. He decomposes intangible 

assets into the same three 

components as Stewart but gives 

them different labels: employee 

competence, internal structure and 

external structure. Internal structure 

refers to the same elements as 

Stewart’s structural capital, while 

external structure includes brand 

and customer relationships. 115 

iii) Lev 116 calls the gap “intangible assets” 

and equates the term with 

“knowledge assets.” 

iv) MAKE or Most Admired Knowledge 

Enterprise is a widely-known global 

award given by Teleos to bestperforming 

knowledge enterprises. 

Teleos measures organi zational 

performance along eight criteria in 

74 

managing corporate “intellectual 

capital.” 117 118 This finding implies that 

intangible assets include noncognitive 

or non-knowledge factors 

and therefore intangible assets 

cannot be equated to knowledge 

assets. The term “relationship capital” 

refers to relationship factors 

whether internal or external and 

hence it is preferable over other 

terms in use such as “customer 

capital” and “stakeholder capital” 

which refer only to external 

relationships. Academic discourse on 

social capital and corporate 

discourse on stakeholder capital can 

be brought together by the 

introduction of a more generic term 

“relationship capital” 119 . 

The limitations of intellectual capital (IC) 

arise when this construct is applied to 

non-profit organizations, as well as to 

“social enterprises” or enterprise forms 

that straddle between for-profit and 

non-profit organizations. For these 

organizations organizations, an 

expanded IC framework is necessary. 120 

The following sections describe the 

elements of this expanded IC 

framework. 

2. Creation of both Market and Social 

Values 

Because private or for-profit enterprise 

accounts do not include costs and 

benefits to external parties, private 

creation of market value can result to 

sub-optimization if it entails 

destruction of social value such as 

through pollution, health risks to the 

community, depletion of nonrenewable 

natural resources, etc. To 

avoid this, the creation of market value 

must be complemented by another

enterprise objective: creation of social 

value. Already, private corporations are 

moving in this direction through the 

adoption of the corporate policy of 

corporate social responsibility (CSR), 

albeit from the perspective of enhancing 

their market competitiveness. 121 

When best practices in communitybased 

anti-poverty projects are 

analyzed, it was found that: (a) 

communities own or have access to 

many other forms of intangible assets 

than those of private enterprises, and 

(b) success of anti-poverty projects is 

attributable more to communities’ 

intangible assets than to their tangible 

assets. 122 

Towards creation of social value and 

chances of success, private enterprises 

can acknowledge the same forms of 

community intangible assets in their 

CSR projects such as: 

Indigenous knowledge 

Social capital: established 

relationships and roles within the 

community and between the 

community and external entities. 123 

Traditional access to natural 

resources from the public domain. 

Access to natural resources donated 

by a private party. 

Franchise from the national 

government. 

3. From Corporate Level 

Stakeholder Capital to 

Community or Social Level 

Relationship Capital 

To be consistent with social value 

creation, the concept of stake holder 

(or relational) capital from a private 

enterprise perspective must be 

broadened to relationship capital 124 from 

a larger community or social 

perspective (see next Section 3). 

“There is actually not much difference 

between the East and the West when we 

talk about relationship capital,” said 

Greg Layton, director of Interviva, a 

personal coach who dedicates 10% of 

all his company’s income to charity. 

The Japanese build up business 

relations with golf sessions. The British 

gather for glasses of beer after work. 

The Chinese treat dinner part of 

business negotiation process. Today 

with Web 2.0, people can build up 

relationships by joining social sites such 

as LinkedIn, Twitters and Face Book 

disregarding national and other 

boundaries. Cultivation of relationship 

capital in Asia may be facilitated by the 

value that many Asian societies place 

on social and group harmony (versus 

individualism). 

4. Consumption Capital and Socially 

Responsible Consumption 

In his book “Consumers Also Can Be 

Capitalists”, Professor Chen Yu 

proposed the view that development 

can be propelled not only by financial 

capital and by intellectual capital, but 

also by “consumption capital”. 125 

According to his consumption capital 

theory, a common consumer can earn 

continuous profits from the 

enterprise he patronizes thus his 

consumption becomes also a kind of 

private investment. A McKinsey study 

shows that, in the aftermath of the 

global financial crisis, China can 

achieve dramatically faster growth in 

the medium-term by shifting to 

consumer-centric policies instead of 

continuing with export-led and 

stimulus package growth policies. 126 

Consumption is also becoming a kind 

75 

of social investment. Since the 

emergence of awareness of fair trade, 

the concepts of ethical consumption 

and “socially responsible 

consumption” as a consumer 

responsibility and as a social 

movement have started to take 

shape. The humanitarian message 

behind the term is the care for the 

needy people as a criterion in 

consumption decisions. Based on an 

Oxfam Hong Kong survey, middle 

class consumers in Hong Kong are 

NOTES 

121 Talisayon, S. Corporate Social Responsibility and 

Emerging Models of Management of Stakeholder 

Capital in Philippine Conglomerates. Paper read at 

the Fifth International Research Workshop on 

Asian Business. Singapore Management University, 

Singapore, 13 April 2009. 

122 Talisayon, S. and Suministrado-Rimando, S. (2008). 

Community Wealth Rediscovered: Knowledge for 

Poverty Alleviation. Quezon City, Philippines: Center 

for Conscious Living Foundation and Peace and 

Equity Foundation. 

123 After reviewing many definitions of social capital 

from the literature, Claridge observed that the 

meaning common to most definitions is “social 

relations that have productive benefits.” See: 

Claridge, T. Social Capital, Web site: 

http://www.gnudung.com/ 

124 Talisayon, S. (2008). Relationship Capital versus 

Stakeholder Capital versus Customer Capital. Blog 

post in: Apin Talisayon’s Weblog, 16 December 

2008. He proposed that (a) relationships within 

the corporation be included in the otherwise 

solely externally-oriented concept of “stakeholder 

capital” or sometimes referred to as “relational 

capital” and (b) the three forms of social capital 

be further included to form a larger construct 

called “relationship capital.” Web site: 

http://apintalisayon.wordpress.com/2008/12/16/re 

lationship-capital-stakeholder-capital-customercapital/ 

125 Chen, Y. (2006). Consumers Also Can Be 

“Capitalists” - Consumption Capitalization, Theory 

and Its Applications. Guangxi:Science & Technology 

Publishing House. 

126 Devan, J., Rowland, M. and Woetzel, J. (2009). A 

Consumer Paradigm for China. McKinsey Quarterly, 

August 2009.

NOTES 

127 Chee, C.H. op. cit. 

128 Several new forms of social enterprises are under 

experimentation in China where consumers are 

more actively engaged in co-managing and coowning 

enterprises. These were reported in the 

First Global Consumption Capital Summit held 

last December 19-20, 2009 in Beijing, China. 

129 Talisayon, S. Exploration of Variants of Consumer and 

Employee Ownership Schemes. First Global 

Consumption Summit, Beijing, China, 19-20 

December 2009. 

130 Usage of the terms had become widespread. 

“Natural capital” is now appearing in World Bank 

documents 

(http://info.worldbank.org/etools/snc/tools_econo 

mics.htm). Both “natural capital” and “biological 

capital” were used by UNCTAD 

(http://www.unctad.org/sections/wcmu/docs/cime 

m1p01_en.PDF). A fruit tree is a common 

example of biological capital or natural capital; it is 

a form of capital because it yields annual income, 

namely, fruits. “Biodiversity capital” is used in an 

FAO document 

(http://www.fao.org/docrep/W4347E/w4347e11. 

htm). 

131 For example, see: Luthans, F. et al. Positive 

Psychological Capital: Measurement and 

Relationship with Performance and Satisfaction. 

Personnel Psychology 60(3): 541-572. September 

2007. See also: Page, L. F. and R. Donohue. Positive 

Psychological Capital: a Preliminary Exploration of 

the Construct. Working Paper 51/04. Monash 

University. October 2004. 

132 The Business Dictionary defines “emotional 

capital” as the “brand value or goodwill of a 

product or firm that motivates people to keep on 

buying the brand or the firm's products” 

(http://www.businessdictionary.com/definition/em 

otional-capital.html) while the BNET Business 

Dictionary defines it as “the intangible 

organizational asset created by employees' 

cumulative emotional experiences, which give 

them the ability to successfully communicate and 

form interpersonal relationships” 

(http://dictionary.bnet.com/definition/emotional+ 

capital.html). 

133 Talisayon, S. and Suministrado-Rimando, J. (2008). 

Knowledge for Poverty Alleviation: A framework for 

design and evaluation of development projects for 

low-income communities. Paper read at the 

Conference on Knowledge Architectures for 

Development. Singapore: Singapore Management 

University. 

134 John Elkington originally introduced the term in 

1994. He also uses the acronym 3P or “People, 

Planet and Profit.” The framework has since been 

adopted widely among NGOs and non-profit 

corporations. See: Elkington, J. (1997). Cannibals 

with Forks: Triple Bottom Line of 21st Century 

Business. Oxford: Capstone Publishing Ltd. Also 

see website: 

http://www.johnelkington.com/activities/ideas.asp. 

Conclusion 

willing to pay a premium for products 

which have a social value and 

comparable quality. 127 Enterprises 

should target at winning the “votes” 

from consumers who are willing to 

endorse the enterprises’ social vision 

through their purchasing power and 

preference choice. 

When consumers become co-owners 

of enterprises – through various forms 

of new social arrangements now under 

experimentation in China 128 – the 

perspective shifts: from consumers as 

actors external to enterprises to 

consumers as socially-responsible coowners 

of enterprises. 

5. Employee Capital and Consumption 

Capital 

The 2008 global financial crisis exposes 

the vulnerability of a system where 

stockholders can at any time quickly 

withdraw ownership by selling their 

stocks. When business confidence and 

trust (read “stakeholder capital”) 

drops, stockholders stampede to sell 

their stock holdings as fast as possible 

before prices go down further – 

actions that further cause a spiraling 

down of stock prices. As we saw 

above, financial capital constitutes only 

14% of market value of corporations. 

The remaining 86% of market value are 

created mainly by employees and by 

consumers. However, under the 

present Western system, governance of 

corporations is wielded largely by 

owners of financial capital – who are 

the first to flee ownership during 

financial crises. To address this 

governance gap, co-ownership by 

employees and consumers was 

proposed. 129 When enterprises are 

also co-owned by employees and 

76 

consumers who have an inherent stake 

in the enterprise, the results are more 

organic forms of enterprises which 

should be more stable or less 

vulnerable to factors that led to the 

2008 global financial crisis. 

6. From Intellectual Capital to 

Metacapital 

Besides the various community 

intangible assets found above, other 

concepts of capital are gaining 

currencies in other disciplines. In 

sustainable development, ecology and 

environmental management, the 

concepts of “natural capital,” “biological 

capital,” and “biodiversity capital” are 

appearing in academic literature and in 

practitioners’ discourses. 130 Less 

common but notable are new 

concepts in the behavioral sciences 

such as “positive psychological 

capital” 131 and “emotional capital.” 132 

The generic term “metacapital” has 

been proposed to embrace all factors 

recognized – whether in corporate or 

in developmental applications – as 

contributors to value creation, 

including IC, natural capital and social 

capital. 133 

Conclusion 

In summary, the proposed Expanded 

IC Framework consists of adoption of: 

(a) social value creation to 

complement corporate value creation 

from a market perspective, (b) the 

more generic term “relationship 

capital” that is applicable both to 

corporate and to community or social 

perspectives, (c) expanded governance 

to include employee and consumer coownership, 

and (d) adoption of the 

concept of “metacapital” to consolidate

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