Intangible Assets are More Important Than Tangibles

The HSE School of Finance recently held a roundtable discussion dedicated to public non-financial reporting. The keynote presentation was delivered by Stefano Zambon, Professor at the University of Ferrara (Italy), who is also the Chairman of the World Intellectual Capital Initiative (WICI), a global network engaged in the systematization and dissemination of information on the intellectual capital indicators and modes for presenting it in non-financial reporting.

According to Professor Zambon, there are certain characteristics of a company’s business operations that cannot be expressed in cash equivalent, and this may include groups of non-financial assets (e.g., human capital, client bases, organizational or structural capital, etc.).

The main topic discussed today at the HSE School of Finance’s roundtable has special resonance in view of the concept for the development of public non-financial reporting, which was approved by the Russian Government in May 2017. In particular, an interdepartmental task force was set up by the Russian Ministry of Economic Development in September for the purpose of effectively implementing this concept, as well as drawing up new legislation regulating this type of reporting at public companies.

At the same time, preparation and publication of non-financial reports has been in practice since the end of the 20th century. According to Professor Zambon, the Swedish company Skandia published its first report on its intellectual capital back in 1994.

In 2014, the European Commission issued Directive No. 95, which requires that annual reports of major companies include environmental policies, statements on social responsibility, anti-bribery, human rights and gender equality policies, as well as statements on equal opportunities for employment. According to the Directive, reports must be submitted to regulatory authorities and published on the corporate websites.

Non-financial reports make a sizeable contribution to corporate development, as they frequently provide management with the ‘big picture’ of a company’s business operations and can help to distribute available resources more effectively

Replying to Russian attendees’ comments regarding the potential risk that competitors may use such disclosed information for their own pursuits, Professor Zambon noted that these kinds of fears should be left behind. ‘Nowadays, transparency and availability of information about a company’s operations suggest that it feels confident about their business and market positions,’ he stressed, adding: ‘Furthermore, no matter how surprising it may sound, non-financial reports can make a sizeable contribution to a company’s development, as they frequently provide management with the ‘big picture’ of a company’s business operations and can help to distribute available resources more efficiently. Not to mention that non-financial reports are, in fact, regarded as key documents by investors.’

The generally accepted part of non-financial reports primarily reflects a company’s activities with respect to environmental protection, social responsibility, support of business infrastructure and facilitation of cooperation between major corporations and small and mid-sized enterprises. However, the range of information covered by non-financial reports is not confined to such data. According to the reports for 2017, intangible assets, in fact, account for over 80% of the market capitalization of such major companies as Apple, Amazon, Alphabet, and Microsoft. With this in mind, Professor Zambon sees the growth in this share of information as a major trend, because ‘the role of knowledge is becoming more and more decisive in a competitive environment’. This fact is confirmed by growing investments in intellectual resources and their share in overall GDP, which is already prevailing over investments in tangible resources in the USA, the UK and several European countries.

The Head of the HSE School of Finance Irina Ivashkovskaya stressed the significance of this recent trend in corporate reporting: ‘Dramatic changes are happening in the formation of corporate capital and business. Therefore, such information should be properly summarized and reflected in non-financial reporting. One format that is widely popular in the global business community is integrated reports, which cover the various forms of a given company’s capital. The efforts of the World Intellectual Capital Initiative (WICI) are particularly focused on coming up with methods of measurement and a system of intellectual capital parameters, with respect to the industry-specific aspects and types of companies. In Europe, not only large corporations but also medium-sized enterprises and small businesses, are eager to gather and publish such information. Moreover, integrated reports effectively combine already existing systems with data about responsible business practices and new chapters about the components that make up corporate intellectual capital.’

As for the experience of Russian companies in preparing non-financial reports, this has so far been mainly focused on corporate responsibility in such areas as environmental and social protection. However, Russia, as a large country, is bound to become a part of this new trend towards data analysis and systematization of information about intellectual capital, said Professor Zambon. He also stated that, as WICI Chairman, he looks forward to the launch of a representative office of this organization in Russia based out of HSE in the very near future.