Companies can boost their stock market valuations and lower their cost of capital through improved reporting of intellectual assets and value creation strategies that overcome the limits of accounting standards, according to a report by the OECD. While there is an important role for governments and standard setters in underpinning such improvements, the OECD cautions against rigid standards in this complex and evolving area.
Companies that make substantial use of intellectual assets such as highly skilled manpower, intellectual property and unique designs to underpin innovation and their competitiveness have become the hallmark of the modern, globalising, economy. The success of such companies is of crucial importance for the renewal of a country’s industrial base. It is therefore important that such companies have access to capital and that the valuation by capital markets is efficient.
In its study, the OECD notes that the long standing debate about changing accounting standards to also reflect intellectual assets has not proved to be productive. This failure has led to proposals from various official and non-official bodies for companies to publish intellectual asset reports including the provision of standardised measures such as percentage of work force with PhDs. While perhaps useful as a way to focus the attention of management, the OECD finds that such reports might give too little emphasis to the factors that make such assets productive and value creating, a primary interest of investors and, at the end of the day, for managers and the board.
In some sectors and markets, such as the pharmaceutical industry, both firms and investors have been very active in transmitting and in acquiring relevant information about intellectual assets and the success of valuation creation strategies, and these actions have improved the efficiency of the capital markets. But in other market segments, notably small capitalised companies, much more could be done to improve the way firms report about their value drivers and main risks, supported by relevant key performance indicators.
There is a role for policy makers and standard setters in improving disclosure, but the OECD argues that any guidance should remain principles-based and voluntary since the conditions faced by companies and their choices are often unique. A more prescriptive approach could engender a box-ticking, mechanistic approach to ensure compliance rather than permitting companies to produce meaningful reports tailored to their own circumstances.
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