Every real CFO knows that the drivers of wealth creation in a business are its intangible assets.
An analysis of the enterprise value of businesses less their tangible asset value, across a vast array of industries (except for investment and banking entities) reveals that 80% of the real value of a business is held with intangible assets such as acquired goodwill, brand names, trademarks, customer lists and the like, as opposed to tangible assets.
The shift in value paradigm from tangible assets to intangible assets began in the early 20th century with the growth and dominance of stock exchanges around the world, mergers and acquisitions and the focus on how brands (like Coca Cola for instance) were able to generate huge revenue streams and therefore cash inflows on the back of consumer loyalty. Business valuations progressed from an analysis of balance sheets to a focus on sustainable earnings and consideration of valuation methodologies to determine the extent to which cash flows could be generated from the value of intangible assets.
As auditors, we are acutely aware of the importance of intangible assets in assessing both the financial position of an enterprise and its financial performance. Considerable effort and expertise is required to address what are significant estimations and judgements in these accounting matters and to avoid the potential for material errors arising from these calculations.
But if you think I’m about to address the accounting minefield that is International Accounting Standard IAS 138 Intangible Assets, think again, because while I’m sure you appreciate the history lesson here, this column is looking ahead and considering issues which CFOs should have on their radars from a business and commercial point of view.
Consider where the underlying value of intangible assets exists within an enterprise and it can be grown and supported for wealth creation. Especially where the predominant value of intangible assets for an enterprise is driven by its brands, trademarks, internally developed technology, systems and secrets.
Underlying intangible asset value of enterprises
This value is found in an organisation’s culture, its people, and its purpose.
Leading American business magazine Forbes partnered with market research firm Statista to compile a list of the World’s Best Employers in 2020. They surveyed 160,000 full-time and part-time workers from 58 countries working for businesses with operations in multiple nations or regions. Participants were asked to rate their willingness to recommend their own employers to friends and family and to rate their satisfaction with their employers’ COVID-19 responses and score their employers on image, economic footprint, talent development, gender equality and social responsibility. The final list is composed of 750 multinational and large corporations headquartered in 45 countries.
Unsurprisingly, the top 10 companies listed as “World’s Best” include Big Tech giants Samsung (1), Amazon (2), Microsoft (4), Apple (6), Adobe (7) & Alphabet (8). Excepting that there is substantial acquired goodwill intangible assets on their respective balance sheets, especially as they have grown and acquired smaller competitors along the way, the fundamentals of these enterprises is that they have a culture and purpose which attracts the best talent and branding which attracts very loyal customers.
There is nothing new in these fundamentals, but the key issues for CFOs to consider is how and what to invest in and what to do differently to attract and retain the best talent, develop these people and ultimately build the brand to sit above competitors’.
Ironically, the following two areas I’ll focus on are the “intangible elements” behind the intangible assets:
- Rebuilding team and culture
- Diversity, equity and inclusion
In other words, these are the real intangible assets for CFOs to focus on ‚Äì people and culture.
Rebuilding team and culture
As we emerge from an extraordinary year of challenges, employees can be feeling disconnected from their teams, disillusioned, stressed, concerned for the future, and perhaps unsupported or alone. Even if regular Zoom meetings were held these can lack a level of communication, learning and support that comes from physically being together. ¬†In addition, many employees had to home school their children or assist with their learning to some extent, care for elderly parents and experience other challenges that nobody predicted or prepared for. The fall-out post COVID-19 will involve many employees making choices to leave their current roles seeking alternative employers or roles where work life balance and flexibility are a given, where greater support and understanding is provided, including for learning, career advancement and benefits available.
CFOs are well-positioned to rebuild their organisation’s culture, and this means investing in people and technology to allow people to work where they perform best and to enable participation in a range of activities which promote rebuilding teams, supporting positive culture and assisting employees to fulfil their potential.
Consider the view of Virgin founder Richard Branson who advises that, “clients do not come first. Employees come first. If you take care of your employees, they will take care of the clients”.
Diversity, equity and inclusion
Perhaps this should be referred to as empathy, because when you consider the feelings of your team members, their perspectives on the culture and performance of the enterprise, their ability to communicate their thoughts, be heard, respected, and engaged with, that’s what we are talking about.
Understanding different personality types (via a Myers‚ÄìBriggs Personality Type Indicator assessment or a similar framework) can be rewarding for individuals and teams to understand themselves and how they interact with each other. Introverted people may speak up less often for instance, but when they speak, they will have something very important to express and will want to be taken seriously. Understanding your people to this extent is exactly the type of inclusive behaviour that employees are looking for in their employer.
Knowing that employers will respect and promote diversity is not only decent, but good for business. Greater diversity in teams is more likely to advance innovation and avoid “group think” outcomes. Moreover, it creates a culture of merit, higher performance, and a more enjoyable workplace.
Call to action for CFOs
The intangible elements discussed above come with a price: ¬†Investment in people and culture, in learning and technology and in policies that support people in your enterprise.
In a cartoon where the CFO questions the CEO with, “What happens if we spend money training our people and they leave”? The CEO responds with, “What happens if we don’t spend money training our people and they stay? The clear answer is that CFOs should have the authority and leadership qualities to determine that the success of your enterprise lies with its people and the culture they generate. To support your people, invest in the activities which will promote rebuilding teams and culture and ensure that you prioritise diversity, equity and inclusion. The next generation of employees have already arrived at your enterprise and they have strong feelings about these intangible elements.
Enterprises should focus on these intangible qualities of rebuilding team and culture, diversity, equity and inclusion as priority because being the employer of choice will attract the best people and having the best people enables an enterprises to achieve optimal outcomes. Afterall, these intangible elements are the drivers of business success and the intangible assets you value so highly.