Assessing and Managing Risks Related to Intangible Assets

Importance of Understanding Value and Risks of Intangibles

Since intangible assets do not appear on the balance sheet but are now the primary drivers of value, the duty of oversight being applied to intangible assets is especially important.  According to the article, “Intangibles and the New Reality:  Risk, Reputation, and Value Creation” by Cathy L. Reese and Nir Kossovsky, the duty of oversight requires ensuring the implementation and ongoing monitoring and adjustment of reporting and information systems and controls- which are part of a solid enterprise risk management program.

Furthermore, the authors comment that the framework for oversight and control of intangible assets consists of building quality and integrity into each of those business processes that create the foundation for intangible asset value.

This paper argues three changes related to managing intangible assets that can produce corporate benefits. These changes include:

1. Establishing a C-level understanding of how intellectual property and related intangibles create value and risk.
2. Implementing enterprise-wide integrated practices for increasing, protecting and restoring intangible asset and reputation value.
3. Expanding board oversight obligations to include management of a company’s intangible assets.

Key Elements of an Oversight System

Situational Awareness

The authors noted that the board needs to be aware of what key business processes drive intangible asset and reputation value. In relation to these processes, the board should know what the key performance indicators for these are, as well as the signals associated with indications and warnings of threats. In addition, ex ante systems and controls are recommended by the authors. These systems and controls can be designed to detect and address infringement threats, and protect and leverage intangible asset value.

Benchmarking

The article suggests benchmarking as an element because it can offer a variety of solutions. The board can benefit from such resources and establish standards by which it will expect management to conform.

Bridging the Gap

The article refers to bridging the gap by first assessing the gap between current corporate practices and best practices. Afterwards, the board should approve a strategic plan to close the gap and bring the company into conformance.  This plan should be unique to the company.

Fire Drills

Fire drills are completed through stress tests that assess the effectiveness of tactical, operational, and strategic plans. According to the article, these drills should be simulated crises in each of the key areas that drive enterprise value. The result is an opportunity for substantive dialogues between the board and management.

Red Flags and Escalation

This key element represents the monitoring and reporting systems of a company. The authors state that they should be able to provide early warnings of threats that might impact the business or raise flags about bad things to come. In addition, the systems would provide sufficient business intelligence that boards can plan, respond to and manage at the enterprise level before they occur or get out of control.

Foster Conformance

The article noted that the best control systems mitigate risk by fostering conformance with the desired best practices. When behavior is linked transparently to incentives, the more they can provide the evidence of conformance that stakeholders look for and value.

Communicate with Stakeholders

The authors suggest that an ideal system would enable stakeholders to appreciate and properly value the benefits of conformance. In addition, the new SEC reporting standards regarding risk governance can be used as a differentiator for those who proactively address risks to the corporation’s most valuable assets.

The article wraps up by discussing how ERM creates value for a corporation. These benefits include a higher credit rating and overall superior financial performance.

Original Source Article:  “Intangibles and the New Reality:  Risk, Reputation, and Value Creation”, Corporate Finance Review, January/February 2011