Including five classes of intangibles on a company’s balance sheet is one way to keep board members focusing on big picture issues, says Joel Barolsky.
By Joel Barolsky
“Our board gets preoccupied with operational issues. Important discussion around the company’s strategy is the exception rather than the rule.” Sound familiar?
Many boards feel they’re adding value when they focus on solving short-term operational problems. Yet often when they do this, they’re just second-guessing management.
Another problem is that board reports are filled with information about historical performance, so there’s often nothing to lead the discussion towards dealing with strategic opportunities.
"One of the most effective ways to get a board to focus on these bigger questions is to redefine the balance sheet."
Company strategy is about deciding where to play and what capabilities are needed to succeed. Intangible assets are key to addressing these questions.
One of the most effective ways to get a board to focus on these bigger questions is to redefine the balance sheet and give more clarity to intangibles. Rather than aggregating these intangibles into measures of goodwill or intellectual property (IP), they can be put into the following classes – the five-capital approach.
A board can focus on one class per meeting. Discussions usually revolve around the nature, quantity and key trends in the asset class and how a firm’s assets should be developed. It’s an approach that delineates the different roles of a firm’s board and management team.
1. Relationship capital
Relationship capital refers to the strength and stickiness of existing customers and, where relevant, channel relationships. Boards should be exploring customer commitment, advocacy and future purchase intentions. While there are no simple measures of relationship capital, good proxies include average customer lifetime value, net promoter scores, customer commitment indices, customer loyalty, social network indicators and product mix per customer.
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2. Human capital
Human capital refers to the quality, performance and commitment of managers and staff. Board reports often include data on salaries, absenteeism and safety incidents, but these don’t get to the heart of tracking human capital growth or depletion. Better measures include:
- Toe-to-toe analysis comparing the quality of key staff in the company versus direct competitors
- Leadership capacity, capability and potential culture maps, highlighting hot spots or blind spots
- Career intention indicators
- Real-time measures of staff morale and discretionary effort
3. Brand capital
This refers to the strength of the organisation’s brand
and reputation in key target markets. It can be assessed by things such as brand awareness, consideration, preference, use, recommendation and social media following. An ability to attract star recruits is also an indicator of its brand capital.
4. Digital capital
Most organisations are sitting on mounds of data, and more and more are realising there is huge value in leveraging it. Every board should be exploring the company’s potential digital capital. This includes data, algorithms, applications, platforms, sites, systems and communication networks.
An assessment of a firm’s IT systems – what’s value-adding, what’s functional, what’s dead weight – is another way to turn a digital capital lens on a business.
5. Proprietary capital
The last form of intangible assets are the traditional IP assets such as patents, trademarks and domain names. Growth in proprietary capital can be assessed by things such as the company’s investment in research and development and its innovation portfolio. Quantifying the current and potential revenue from leveraging the company’s IP assets may also be useful.
Joel Barolsky is a senior fellow at the University of Melbourne and managing director of Barolsky Advisors, a management consultancy specialising in professional service organisations, in particular law, accounting, engineering and business advisory firms.
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