The value you cannot grasp

Intangible assets are the value-drivers we cannot touch or see. While most companies consider their property, manufacturing facilities or equipment as their prized possessions, intangible assets represent significant value.

From intellectual property to computer code and branding, intangible assets are often the hidden foundation for profit and growth. While the loss of intellectual property might not appear as obvious as conventional risks, intangible asset loss can be a danger for any company. Intangible assets are a growing risk for companies, yet many risk professionals believe the subject is overlooked.

AIG’s head of cyber and professional indemnity APAC, Liam Pomfret, says: “It’s become apparent that much of an organisation’s value is in its intangible assets. You only have to look at how the top five global companies by market cap have changed over the past 40 years to understand where value lies today. The difficulty is in identifying and categorising the types of intangible assets and the impacts they could have on a business if disrupted.”

STILL OFF BALANCE SHEET

“The most common risk is the failure to identify intangible assets at all,” says Paul Adams, CEO of EverEdge Global, a New Zealand-based intangible asset advisory firm. The company has worked with companies from Coca-Cola to Air New Zealand. “If you fail to identify these assets, you fail to identify the risk to those assets.” Adams says intangible assets are typically “off balance sheet”, and of less importance to finance managers and risk teams.

“You have these tremendously valuable assets that aren’t captured in P&L, aren’t on the risk register and generally do not make the risk register. Yet they represent so much of the value and earnings growth of that company.”

The biggest intangible risks vary from sector to sector, Adams says. “For companies like Google, it may be data. For SAP, it would be their software code. For drug companies, it would be their patent holdings and approvals. For industrial companies, it might be technical know-how.” Adams believes that cyber risk, one of the most significant threats facing global companies, is a “subset” of intangible risk. He says cyber insurance products do not protect against the loss of intangible assets.

“Most [cyber] insurance products do not deal with the issues. The average cyber policy is a business interruption policy, but it doesn’t compensate if someone steals data or information.”

WHAT PRICE BRANDING?

How can companies value their intangible assets and the associated risks? Adams says risk managers need to take a new approach using different methodologies. “The risk industry can be very creative. If they can come up with the damage a hurricane might cause, they can come up with the costs associated with not being able to use their software, or if someone rips off their brand.”

Adams says quantitative modelling – measuring the relationship between cost and value – is not an efficient way of valuing intangible assets. “Often, there is no correlation between their cost and value.” He adds that the “income approach” – valuing an asset on how much income it earns – does not capture the value of intangibles, as intangibles often represented new ideas and innovation.

AIG’s Pomfret believes insurers can help risk managers understand what they need. “We’re working with risk managers to shift the mindset of an enterprise from only managing and insuring tangible assets to figuring out what intangible assets exist, how losses might compare between the types of assets and what is insurable.”

“Historically, intangible asset value has been associated with patents, trademarks or brand equity. However, more recently cyber incidents have shown us the risks associated with loss of information or the reliance on access to data and networks.” While solutions are needed, there are options, he adds.

“The market will likely develop further as the knowledge economy evolves. It also depends on the category of intangible asset. For example, is there an integrity, confidentiality or accessibility issue? Then cyber may be a solution. Is there a dispute over ownership or the use of something, such as software? Then a legal defence policy may be required.”

TURN UP THE HEAT

Companies across the Asia-Pacific region have begun to elevate the importance of intangible asset risk. Victoria Tan, head of group risk management at Philippines conglomerate Ayala Corporation, says the company has made brand and reputation a “top five risk” on its register. “In Ayala, we regularly conduct an annual risk assessment while employing different methodology, so we always have a fresh and relevant view of risks,” Tan says. “In 2014, we did a Black Swans approach in our risk assessment, where we focused more on the value drivers of the holding company. During that workshop, the group, composed of the senior management team, concluded that Ayala’s brand and reputation were its most critical value-drivers.”

Tan says intangible assets such as brand and reputation drove economic benefit through better access to capital markets, a lower cost of financing, better access to talent and greater business opportunities.

Yet most companies underestimate their intangible assets, according to Eamonn Cunningham, an Australia-based independent risk consultant. Cunningham says companies tend to take “an “informal approach to their management”. He adds: “As a consequence, their approach to protection is undercooked.” Cunningham calls on risk managers to assess their intangible risks and address potential legal issues.

“Take a hard look at what’s driving value in your business. Assess the value; it is probably more than you think. Make sure you have legal ownership of intangible assets and the right documentation in place.” Cunningham says companies should be mindful of the internal threats to intangible assets. “You would be well-served to address this issue in-house. If you have a disgruntled employee, for example, your IP might be compromised suddenly, causing a massive loss of value. Make sure the right people in your business have a clear appreciation of intangibles and recognise their importance to the company.”