By: David M. Pridham
Corporate Wealth: what if I told you that more than 80% of your company’s wealth was invisible — literally invisible to managers and shareholders? You might think I was nuts, right? But it’s true.
According to the experts, the average company’s intangible assets — most especially its intellectual property and technological know-how — now account for 84% of its market value. That’s quite a change from just 40 years ago, when 84% of firm value resided in tangible assets like plant and equipment. The cause of this dramatic value shift, of course, is the emergence of a new Knowledge Economy in which know-how and innovation rather than factories and raw materials have become the main factors driving productivity growth and profitability.
Yet surprisingly, little if any of this enormous wealth in technology innovation and intellectual property shows up on corporate balance sheets, thanks to a 500-year-old accounting system designed for a world in which tangible assets were the chief forms of wealth. Nor is it visible to managers. And rarely if ever is it the topic of C-suite or board-level analysis and planning.
Take Microsoft as an example. You could liquidate the entire company — sell all its real estate, buildings, equipment, inventory, and other tangible assets — for about $72 billion (its book value). But the actual value of Microsoft’s shares on the open market (its market cap) is $444 billion. That $372 billion difference between Microsoft’s market cap and its book value is composed of the firm’s intangible assets — i.e., its technology know-how and its patents, trademarks, and other intellectual property (IP). Yet it doesn’t show up on the balance sheet, even though it accounts for 84% of the company’s total market value.