Ever since Stone v. Ritter sensitized corporate boards to the risks of not protecting a firm's intangible assets, there has been a progressive growth of intangible asset monetization programs. These have been recently supplemented by nascent reputation risk management programs.

From time to time, a booster has enhanced that sensitivity. Today we have a good example of that.The disposition of Kodak's (NYSE:EK) patent portfolio is exemplary.

As reported by Bloomberg (10/27, Keehner, McCracken, and Saitto), "Eastman Kodak Co.’s lenders sent a letter to the board of directors reminding the company of its fiduciary duty to sell its patent portfolio for fair market value. " In case you are missing the punch line, the article explains that "'Kodak’s board has been put on notice by lenders, who are saying ‘If you destroy value, we will sue you,’' said Amer Tiwana, an analyst at CRT Capital Group LLC in Stamford, Connecticut."

The reputation metrics, as we noted earlier, reflect low expectations and suggest progressive value destruction of the likes that moved Johnson & Johnson's equity holders to sue last December.


Over the trailing twelve months, the Steel City Re Corporate Reputation Index ranking for Kodak decreased from the 12th percentile to the lowest rank of zero (0) among the 29 firms comprising the Electronic Appliances sector. The exponentially weighted moving average of the volatility of the reputation index was most recently under 7%, and the twelve week trailing vector and velocity were most recently -55% and -7%. The corresponding return on equity over the trailing twelve months has been a dismal -44% relative to the median of its peers.

The company's intangible asset fraction is now in excess of 500% of enterprise value which would indicate to some that the patent portfolio is worth more than $1.25 billion. The creditors would like to get their hands on that value. The company's equity value is around $250 million. The equity holders are loathe to surrender that excess intangible value. The board is between the two, and that is not a pretty picture.

SAP is the dominant solution provider in the $8 billion enterprise management and business intelligence software sector. The company's products provide businesses with an integrated view of their operations for cost and asset value optimization, and predictive analytics to help identify opportunities and risks. But their software doesn't manage intangible assets, and the risk their software didn't help them see was a breach of ethics and intellectual property management best practices by a partner company that they subsequently acquired.

Cutting to the chase, Oracle (NASDAQ:ORCL) last week won a $1.3 billion jury verdict against rival SAP (NYSE:SAP), netting the biggest copyright-infringement award ever. According to Bloomberg News, the jury delivered the verdict Tuesday, after an 11-day trial in federal court in Oakland. The lawsuit started in 2007, with Oracle claiming the German company's TomorrowNow business made hundreds of thousands of illegal downloads and several thousand copies of Oracle's software as part of a plan to steal customers.

SAP acquired the TomorrowNow in 2005 and closed it in 2008. SAP had hoped to use the unit to lure thousands of customers of PeopleSoft and JD Edwards, which Oracle had acquired, to purchase SAP software, according to evidence presented at trial. The unit garnered 358 customers.

The award was more than analysts had estimated - and far beyond the $160 million that SAP had set aside for the litigation.The immediate equity costs -- SAP is underperforming the mean of its 217 peers in the Systems and Subsystems sector by 7.71% -- are therefore understandable. What about the long-term reputation effects?

One week out from the verdict,  the signals are mixed. Over the trailing twelve months, The Steel City Re Corporate Reputation Index has risen from the 92nd to the 96th percentile. The Exponentially Weighted Moving Average of the volatility of the Index, which had been falling for most of the past six months, has been rising over the past few weeks to .4%. This is a negligible amount. On the other hand,  the trailing twelve week Index velocity is negative and the vector is negative, and these are worrying signs. The intangible asset fraction is unchanged at around 93% beating the sector mean of around 80%.

If the stakeholder community looks at SAP and concludes that they are really a good company that had a rogue unit, then they will come through this period with a loss equal to the cash costs of litigation. If the stakeholders view SAP as a behemoth that may harbor other TomorrowNow-like risks, then there will be significant long-term costs.

Justice Potter Stewart’s concurring opinion in Jacobellis v. Ohio 378 U.S. 184 (1964) enshrined the qualitative standard “I know it when I see it” into business culture. Now there is a quantitative standard too. For features other than the content of films, that is, as well as other intangibles.

The International Organization for Standards (ISO) has adopted a standard for the valuation of brands - a common term for many of the assets comprising some fraction of the typical ~70% gap between market value and book value. As abstracted from the report in the IAM blog,

ISO 10668 applies to brand valuations commissioned for all purposes, including: accounting and financial reporting; insolvency and liquidation; tax planning and compliance; litigation support and dispute resolution; corporate finance and fund raising; licensing and joint venture negotiation; internal management information and reporting; strategic planning; and brand management. The last of these applications includes brand and marketing budget determination, brand portfolio review, brand architecture analysis and brand extension planning.

ISO 10668 is a meta standard which succinctly specifies the principles to be followed and the types of work to be conducted in any brand valuation. It specifies that when conducting a brand valuation the brand valuer must conduct three types of analysis before passing an opinion on the brand’s value. These are legal, behavioural and financial analysis.

1. Definitions: The first requirement is to define what is meant by brand and which intangible assets should be included in the brand valuation opinion. The brand valuer is required to assess the legal protection afforded to the brand by identifying each of the legal rights that protect it, the legal owner of each relevant legal right and the legal parameters influencing negatively or positively the value of the brand.

2. Behavior: The brand valuer must understand and form an opinion on value drivers; ie,  likely stakeholder behaviour in each of the geographical, product and customer segments in which the subject brand operates.

3. Financial:  [The standard] specifies three alternative brand valuation approaches - the market, cost and income approaches.

The above, which seem to enshrine common practice, may move valuation experts to apply these principles to patents and other intangible assets, and the fact that these practices now have the imprimatur of the ISO may enable the capital markets to accept more readily these indications of value.

To find out if this is the case and to get the latest news from the valuation front, the Society will be hosting three consecutive Mission Intangible Monthly Briefings programs on the subject of intangible asset valuation: markets, value management, and valuation, on Nov 5, Dec 3 and Jan 7. Registration is free. You won't want to miss these!

The most recent “gotcha last, no tagbacks” comes from the Hewlett-Packard (NYSE:HPQ) team who named former SAP boss Leo Apotheker as its new chief executive 30 Sep.

Team HPQ sued its rival, team Oracle (NASDAQ:ORCL) recently when the latter hired briefly-disgraced HPQ CEO Mark Hurd. The grounds: misappropriation of trade secrets. ORCL is now enraged. This is why. Not only did HPQ just name Ray Lane, former Oracle president and COO, as nonexecutive chairman of HP's board, it turns out that Mr. Apotheker had been in charge of SAP (NYSE:SAP) at a time when it was stealing Oracle’s software. The case of ORCL v SAP is scheduled for trial soon.

On the basis of reputation and financial metrics, Oracle is winning this spat. A side by side comparison of metrics from the Steel City Re Corporate Reputation Index, with a customized peer group comprising relevant hardware and software companies totalling 132 in all, shows that HPQ’s reputation ranking (on the left) has slid over the trailing twelve months 27 points from the 97th percentile to the 70th percentile, while ORCL’s (on the right) has slid only 18 points from the 84th to the 66th.

While the former’s slide has been chronic and steady -- the most recent six months shown in the second set of graphs -- the bulk of ORCL’s reputation change has occurred only amidst the sturm und drang of the past few weeks. Hence HPQ is underperforming this peer group by a respectable 18% (yellow line, top graph, left)while the now volatile ORCL is currently outperforming this peer group by 21% (yellow line, top graph, right).

This past Monday, the Society began publishing data from the Steel City Re RepuStars™ Composite Index. This equity markets composite index tracks companies with rising reputational metrics and draws from the S&P500™ Composite Index eligibility pool.

The purpose of publishing these metrics is to provide additional financial evidence for the value of superior reputation management. Reputation management is what the Society calls ‘intangible asset management’ when speaking to the general public. This nomenclature is captured in the Society’s book, Mission: Intangible, subtitled Managing risk and reputation to create enterprise value.

The Society’s mission is education, advocacy, and the promulgation of standards. When we provide content for general consumption, we talk about reputation rather than ‘intangible assets’. This is why. ‘Intangible asset’ is an esoteric term of accounting that once represented the corporate balance sheet equivalent of “petty cash” but now represents 70% of the value of the average company. More than a decade ago at the dawn of the knowledge economy, the term ‘intellectual property’ took on the meaning of ‘intangible asset.’ Alas, that term too is in relative decline as shown in the Google Trends chart below. (So is the term 'national security,' just to give you a reference point).



In contrast, ‘reputation’ is on the rise. It is a term that is being searched with increasing frequency. It is a term that is appearing in news stories with increasing frequency. It is a risk about which companies are fretting in greater numbers. In short, as we reported in Intellectual Asset Management magazine not long ago, reputation is the new IP.  Dowload a copy of the article here.

The Intangible Asset Finance Society is absorbed with issues at the interface of finance, risk, and the six major business processes that drive reputation: ethics, innovation, quality, safety, sustainability, and security. Today's note, courtesy of Society member Bruce Berman, CEO of Brody Berman Associates, Inc., a specialized management consulting and communications firm, is exemplary of core Society interests. Bruce writes,

In a story that received surprisingly scant media coverage, an appeals court has decided that two insurance companies must provide defense coverage to Hyundai against patent infringement claims by a non-practicing entity (NPE), also known as a patent troll, because the company’s policy covers advertising injury. As reported by the Courthouse News Service and IP Law 360 on April 7, the federal appeals court reversed a lower court decision when it ruled that Hyundai Motor America (SEO:011760) is entitled to defense coverage by National Union Fire Insurance Co. of Pittsburgh, Pa.,  a unit of AIG.

The case involved a patent infringement suit over an advertising method that ended with a $34 million verdict against the automaker. The U.S. Court of Appeals for the Ninth Circuit ruled Monday that Judge James Selna of the U.S. District Court for the Central District of California erred when he granted summary judgment to National Union and American Home Assurance Co. on the grounds that patent infringement does not constitute “advertising injury” for the purposes of an insurance policy.

As reported in IPL360 “ Gene Schaerr, a partner at Winston & Strawn LLP who represented Hyundai, called the ruling a ‘tremendous victory.’ Schaerr stated that the ruling is significant not only for Hyundai, but for a large number of other companies with similar policies that cover advertising injury. "The insurance industry has been taking the position that such policies don’t apply to patent infringement and other alleged wrongs involving Web sites,” he noted. The case began in 2005, when Hyundai was one of 20 automakers sued by patent-holding company Orion IP LLC, now known as Clear with Computers LLC, in the Eastern District of Texas over a patent for a method of generating customized product proposals.

Bruce adds, "I wonder how many companies are aware that some of their existing insurance coverages may fund IP defense if not liability?"

Ken Jarboe, President of Society partner Athena Alliance and Chair of the Society's Public Policy Committee has given us permission to share the following post from the blog, Intangible Economy.

As the U.S. economy evolves, intangible asset investments are becoming vital to economic growth and sustainability. But, as our new paper "Intangible Assets: Innovative Financing for Innovation" outlines, intangible assets can also be the source of financial capital. As industry has invested capital in research and development (R&D) to create new technology and advance other creative activities, a niche market of firms specializing in intangibles-based financing is springing up. Some intangible assets--traditional IP consisting of patents, trademarks, and copyrights--have been used in sale, leasing, equity, equity-debt, debt, and sale-leaseback transactions to finance the next round of innovation.

The paper outlines a number of public policy actions that can be taken to foster the use of intangible asset financing. These include streamlining the technology transfer process, developing underwriting standards to cover the use of intangible assets as collateral and making financial statements more transparent with respect to intangible assets.

The deals that have been done demonstrate that IP and other intangibles are viable assets to secure capital. Unlike other "exotic" financing vehicles, however, intangible-asset financial products are built on some of the most basic financing mechanisms. Far from exotic, they use traditional techniques in new ways to help companies innovate and grow. As the paper shows, there is plenty of opportunity to harness the power of intangibles.

The paper is a summary of our two reports: Intangible Asset Monetization: The Promise and the Reality and Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance. Published in the Winter issue of Issues in Science and Technology, the paper is also available on the Issues website.

Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events, moderated by Mary Adams who chairs our Member News Committee, comprise about 45 minutes of prepared remarks backed up by presentation materials, and 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here is the third and final potion of leftovers.

QUESTION TO JUDY GIORDAN: You talked about capturing the value from open innovation. When companies do this, do they see it in terms of the relationship with IA management? Does the question matter?

ANSWER: The concept behind Open Innovation (a term promoted by Henry Chesbrough, a professor and executive director at the Center for Open Innovation at UC Berkeley) is that companies can and should use external ideas as well as internal ideas and paths to market. As described by Chesborough and others, central to open innovation is that in a world of widely distributed and ever increasing information and knowledge, companies cannot afford to rely entirely on their own internal research, but should instead buy or license processes or inventions (e.g. patents) from other companies as well as find opportunities for internal inventions not being used in a firm's business to be commercialized outside the company (e.g., through licensing, joint ventures, spin-offs).

Explicit to all of this is the IP question – who owns the rights to the IP of the technology – and this is the aspect being focused on by companies. What is implicit and is an opportunity that is not being capitalized upon is for reputation enhancement from the standpoint of IA around open innovation. That is – demonstrating that the ability to creatively and facily interact in the open market for innovations creates a competitive edge for a company –by capturing value through the process of bringing in technology, aligning it well to corporate goals and monetizing as well as process of spinning out unused technology.

Judith Giordan.
Steel City Re

QUESTION TO DAVID HETZEL: You talked about the market for patents maturing. Is this something that will happen organically or can it be speeded up? If so, how?

ANSWER: The re-institutionalization of the public, real-time live auction ala Ocean Tomo would assist. Now that OT auction are under the umbrella of ICAP, we'll have to see what they do. ICAP, as you may know, has tremendous resources. I'm sure standardizations around patent quality and valuation would go a long way to accelerating the market's development.

David Hetzel
Motorola

Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events, moderated by Mary Adams who chairs our Member News Committee, comprise about 45 minutes of prepared remarks backed up by presentation materials, and about 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here are some more of the leftovers.

QUESTION TO JON LOW: You talked about how we shouldn't look to the accounting profession for support on intangibles yet you also call for comparability. If we don't get this from financial data, where will we find it? What will it look like?

ANSWER: Useful, comparable data supporting the growing economic importance of intangibles will most likely come from practitioners who perceive a financial benefit to themselves. Historically, this is where such innovations have come from as opposed to regulators or stolid, conservative and internally conflicted practitioner groups like the accountants. In the case of comparable data for intangibles we are already seeing growing interest in certain segments like reputation, brand and R&D as a proxy for innovation. Sustainability in its various manifestations is also gaining as a topic of interest.

From these basic roots, successive branches will grow as more factors become important to more industry segments. For instance, once M&A activity revives, data on post-merger integration success or failure – already a subject of considerable research – will probably also blossom.

It would be nice to think that some supra-national organization like the UN or OECD will take the lead, but they see no financial incentive or moral imperative to do so. Self-organized groups like WICI might have been able to lead had they adopted a more open-source approach, but they appear to be pursuing the secretive ‘let’s corner the market and see how much we can charge for our insights’ approach that has failed repeatedly in the past. Any group wedded to a particular technology or set of what they hope will be patented-able processes are similarly doomed because the market is simply too dynamic and unmanageable at this stage. Again, this is not a philosophical, political or doctrinal point of view, it is simply a reflection of natural phenomenon based on historical experience.

When comparable data emerge I believe they will look like the sort of ratios and benchmarks that managers use as a practical means of evaluating their performance. This is in contrast to the increasingly ambiguous or obfuscated metrics served up by GAAP or international accounting standards. The basis of intangibles importance to managers is their usefulness in evaluating and predicting performance, not in enabling arcane acts of financial sleight of hand. It is this usefulness that has prevented their oft-predicted demise and will support their ultimate adaptation.

Jon Low.
Predictiv

QUESTION TO NIGEL PAGE: You predicted a convergence of IP and IA/IC. I agree with you although in my experience, many folks in the IP space have a very strong prejudice that leads them to think (and often say) that intangibles outside of traditional IP (patents, trademarks, copyrights and trade secrets) have limited value. How do we cross this chasm?

ANSWER: I suspect that the events of the coming few years will see this prejudice start to disappear. Most organisations are likely to refocus their priorities as they emerge from recession and, as they do so, they will begin to pay far greater attention to the whole range of intangible assets they own, as well as the potential for monetising these assets. At the same time, CIPOs (or equivalent) will increasingly realise that the best way to secure C-suite attention for their efforts will be to make sure that they incorporate IP into a broader reputation-based 'package'. CEOs will sit up and pay attention to IP if and when they can be made to understand that it is a cornerstone of their corporate reputation, and not a techy side-avenue that's best left to in-house counsel.

Nigel Page
Intellectual Asset Management Magazine

Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events comprise about 45 minutes of prepared remarks backed up by presentation materials, and about 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here are some of the leftovers.

QUESTION TO CATHY REESE: Your comments about the concept of director's duty of oversight driving greater attention to intangibles management are intriguing. Must a new area like this be built case by case or can there be a catalyst that speeds up the process (such a new set of laws and/or regulations). Is this reasonable to expect in the space of the next ten years?

ANSWER: Directors and officers currently have an affirmative duty under Delaware fiduciary law to oversee and monitor corporate assets and liabilities. Delaware's highest court has said that directors and officers can be held personally liable for losses suffered by the corporation as a result of their inattention. That court has also said that directors violate this duty by failing to (i) implement "reporting and information systems and controls" designed to ferret out such risks and report them on a timely basis to the board, or (ii) failing to monitor and update such systems and controls and thus ignore red flags that can lead to corporate liability. The losses engendered by one patent infringement suit can be enormous, particularly in a wilful infringement suit where damages may be trebled because the company "wilfully" continued to infringe when it knew or should have known of the infringement. I believe that the catalyst that will speed up the process and lead to nationwide awareness that this body of law applies to IP or IA risks and losses, would be one shareholder suit against corporate directors seeking to recover from them personally these infringement damages. Another route might be a shareholder suit to recover market losses for director and officer failure to monitor or address reputational risks before they damaged the value of the company. Shareholder actions for breaches of fiduciary duties by director and officers that are filed in the Delaware Chancery Court receive nationwide attention from corporate lawyers and the boards that they advise and can lead to instant changes in board focus.

Cathy L. Reese, Esq.
Fish & Richardson P.C.

QUESTION TO MARK LUCIER: In your presentation, you made reference to “IA-based financial products and investment vehicles.” How do we position these products so as to avoid being tainted by the recent financial derivatives debacle?

ANSWER: When I was talking about financial products and investment vehicles, what I was referring to was inventing new ways to "ring fence" intangible assets and the risks associated with them, thereby enabling investors to own or finance those assets or bear those risks. The creativity and complexity, then, is more about how we isolate the assets and risk than in how we slice, dice and allocate cash flows among various classes of investors.....think of it more as creating an intangible asset tracking stock or risk-linked security than as engineering a multi-tranche royalty-based CDO or securitization. Alternatively, to the extent we're able to quantify value & risk associated with intangibles, and further, if we can somehow link that to more traditional measures of financial or equity value and risk, then that could serve as the basis for a financial product that enables a company or its outside investors to share in the value being created by the company's intangibles or to hedge against the risk associated with those intangibles.

Of course, your point is well taken that regulators and the general public are skeptical of (read: hostile toward) anything that requires more than one or two boxes and arrows to describe its structure. A financial product's purpose should be plainly evident to those on Main Street and not just to those of us on Wall Street. If we are to be successful in creating these instruments and having them be broadly accepted, our driving motivation needs to be a focus on creating something that funnels capital to intangible assets to support and encourage innovation, rather than on cleverly shuffling the capital structure deck and obfuscating the instrument's true purpose. If we approach the creation of new financial products from that perspective, then "positioning" what we've created will simply be about highlighting the substantive economic benefits, rather than hiding something from the regulators or the Wall Street Journal.

Marc Lucier
Deutsche Bank