The past 20 years has seen increased recognition of the role that intangible assets play in contributing to a company’s value. This is demonstrated by the diminishing correlation between market value and net asset value.
The gap or ‘hidden value’ resides in the intangible assets of the organisation, which, until recently, remained largely unidentified and underutilised. The introduction of new international accounting standards, which require businesses to include a value for intangible assets in their financial reports, has focused attention on intellectual capital (IC).
WHAT IS INTELLECTUAL CAPITAL
Intellectual capital has been defined by the ICM Gathering (an international group of companies that meet regularly to create, define and benchmark best practices in the area of intellectual asset management) as ‘knowledge that can be converted into profits’.
The IC of a business comprises two key elements: human capital and intellectual assets (Fig. 1). Human capital is embodied in the knowledge, skills and creativity of a company’s employees. It is a resource that can create value through the generation of new knowledge and its conversion into innovative products or services with commercial value.
Intellectual assets comprise the knowledge and know-how of employees that has been codified in some way – captured or recorded in the form of documents, drawings, designs, databases, business methods and inventions. Companies may seek legal protection for some or all of these assets in the form of patents, trademarks, copyright, confidential information, designs, circuit layouts or plant breeders’ rights. These registered rights are known as intellectual property. Intellectual assets are owned by the company and are the key source from which value may be extracted through commercialisation.
Clearly, since human capital is not owned by the company and is lost when an employee leaves, it is in the company’s interests to capture ideas, knowledge and innovation as intellectual assets by encouraging their codification.
Structural capital provides support for the human capital in the form of tangible elements such as infrastructure and equipment, and intangible elements such as strategic plans, customer/supplier relationships, etc. Some of the firm’s intangible assets will clearly contribute to its structural capital.
Complementary business assets form an important part of structural capital and typically consist of purchasing, manufacturing, distribution and sales capabilities. They may be generic and widely available, or unique to the firm, complementing the innovations produced by its human capital and often subject to legal protection themselves.
Value is extracted from a firm’s intellectual capital by leveraging with its structural and complementary business assets. Value can be realised in a variety of ways; not only through revenue generation from sales or licensing of products and services, joint ventures or strategic alliances; but also through corporate positioning, reputation and branding. Multiple combinations of these methods may be used at any one time.
The key to obtaining competitive advantage and maximising shareholder returns is the alignment of IC with the fi rm’s vision and strategy and the effective management of the key relationships between its human, intellectual and structural capital.
Carolyn Harris (Principal) and Dr Shirley Lanning (Director Business Development and Commercialisation) of Watermark Patent and Trade Mark Attorneys work with clients to maximise value from their intellectual asset portfolio.
The information contained in this article is not exhaustive and should not be relied on in place of legal advice.