The shift from an economy based mainly on physical or “tangible” assets to one where the majority of economic value is derived from “intangible” assets has been a long time coming, a transition that was intensified by the coronavirus pandemic which saw companies spend big on remote and virtual ways of doing business.
The numbers paint a convincing picture of what amounts to a 40-year transition. According to the 2019 Intangible Assets Financial Statement Impact Comparison Report from the Ponemon Institute, a Michigan-based, independent research firm, the value of intangible assets has skyrocketed during this period as a percentage of the overall value of the S&P 500.
- In 1975, 17% of the S&P 500’s then overall value of $715 billion was attributed to intangible assets.
- By 1985, intangibles accounted for some 32% of the S&P 500 value, while the figure rose to 68% by 1995.
- In 2018, 84% of the S&P 500’s overall value of $25 trillion came from intangible assets.
“The 84% figure might actually be a little low today,” explains Eric Ludwig, whose California-based law firm, Ludwig APC, specializes in intellectual property, data privacy matters, and business litigation around the globe. “Throughout the pandemic, many businesses that relied primarily on physical assets, such as those in the hospitality and travel sectors, lost significant value, while companies active in digital and virtual market spaces did quite well . . . and continue to do so.”
Bricks and Mortar a Thing of the Past?
Clearly, the days of companies deriving most of their value from bricks and mortar assets such as buildings, land, vehicles, equipment, and concrete financial assets such as stocks, bonds, account receivables, and cash are in the rearview. Nowadays, non-physical assets that represent potential revenue are what comprise a company’s greatest value. These intangible assets include patents, copyrights, trademarks, trade secrets, know-how, goodwill, brand reputation, market influence, agreements with other businesses, human capital, non-competes, customer and vendor relationships, public rights, software, and client/vendor databases.
Think of top tier companies like Apple, Alphabet (Google’s parent), Microsoft, and Amazon. Now contrast them with the likes of Exxon, IBM, Mobil, and GE. Given the makeup of today’s marketplace, where intangible assets rule, it’s easy to see why today’s leading companies are the most valuable while those who have traditionally derived value from physical assets, manufacturing, and refinement processes are now what could best be described as belonging to a “second tier” of companies.
Protecting What’s Important
With so much riding on intangibles, more than ever companies must find ways to protect their assets. But unlike physical assets, intangibles can be difficult to value. They’re also difficult to insure. After all, just how do you go about placing a value on goodwill or brand reputation? Similarly, how do you insure something that’s intangible against intellectual property infringement?
First, it is possible to place monetary value on intangible assets—possible, but not easy. As you might suspect, opinions abound on the best approach, and none are an exact science.
- For example, one method is to subtract a firm’s book value from its market value to establish the overall value of its intangibles.
- Another is to determine the fair value of an intangible asset by estimating what it would cost to replace it with a similar intangible asset.
What almost all experts can agree on is the need for companies to work with external business asset evaluators to properly gauge value.
Protecting a company’s interest in its intangible assets is far more straightforward, at least for a subset of them that includes trademarks, patents, copyrights, and trade secrets. Registering these intangibles as intellectual property is commonplace. Doing so gives you greater standing in lawsuits should someone infringe on your rights or claim you’re infringing on theirs.
For other intangibles not covered by traditional intellectual property registration, protection often comes in the form of contract terms and insurance coverage (yes, they make insurance for that!). The types of intangibles covered by contract language and insurance include things like customer relationships, goodwill, employees and their know-how, and brand recognition.
- Companies can protect themselves and seek protection from others by including clauses in their contracts to indemnify them from infringement up to certain monetary levels (often in the millions of dollars) or entitle them to compensation from the other party should they infringe.
- Intellectual property insurance is another option. For policyholders, it covers legal costs associated with pursuing intellectual property infringement or theft, plus legal costs for defending against accusations of infringement or theft.
“For the foreseeable future, or at least until the next big ‘revolution’ in business comes our way, the most successful companies will be those whose leaders are best able to adapt their business models to thrive within this new digital, intangible asset paradigm,” says Ludwig. “It’s an exciting time, but it won’t be easy. Globalization, the advent of sophisticated technologies, and the growth of remote workforces make many great things possible for today’s companies, but they also add numerous layers of complexity. We recommend companies work with intellectual property and business litigation experts such as Ludwig APC to explore various options and approaches for protecting their interests.”