Tuesday, December 2, 2008

Benefits of Intellectual Capital Reporting

It is common knowledge today that the real growth drivers of business in this knowledge era are not Physical assets, but rather the Intangible assets of the Company. These assets, better known in the academia as Intellectual Capital, are well researched, understood and broadly categorized into Human, Structural and Relational Capital. Some examples of these are:

Human CapitalStructural CapitalRelational Capital
Employee Education IndexInternal ProcessesCustomer Satisfaction Index
Average TenureDatabasesRepeat Business
Number of Days of Annual TrainingPatentsInvestor feedback

It is therefore in the interest of every Company to measure and publish their own Intellectual Capital in order to be able to manage the Company’s growth and communicate the intrinsic value of the Company to investors and lenders.
By many estimates, Intellectual Capital represents more than half the market value of public Companies. In the case of some Companies such as Google and Microsoft this estimate may even be as high as 90%. Experts agree that Intellectual Capital will be important going forward as the growth driver of the knowledge economy in the future, if it is not so already today. Measuring, managing and publishing information about Intellectual Capital will therefore become as important an activity to Companies in the future as publishing financial reports is today.
Intellectual Capital Reporting can benefit a wide section of audiences:
  • Companies could use an Intellectual Capital Report to measure the effectiveness of their Corporate Strategy and fine tune it.
  • Investors and Lenders could use it to understand the Company’s value creation processes and the basis for sustainability of the same in the future.
  • Prospective Customers could use it to understand whether the Company has strengths in the areas it desires from its suppliers.
  • Potential employees could use it for selecting the right Company where they can hope to make a career for themselves. The side benefits of this could be reduced attrition and reduced knowledge leaks to competition thereby creating a circular loop for increased Intellectual Capital.
  • Investment Bankers could use an Intellectual Capital Report for matching potential suitors after mirroring the strengths and weaknesses of each company to conceive of a combined entity that would be stronger than each one individually.
  • Fund Managers and Retail Investors could use it for discovering under and overvalued stocks, provided valuation information is disclosed along with the Report.
  • Bankers could use it to better quantify the risk of lending to the company thereby managing the amount of nonperforming assets in their loan portfolio.
  • Finally society at large will itself benefit, since the combination of above benefits would result in efficient utilization of Capital thereby leading to the creation of more businesses and hence more jobs.

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