Communicate value to boost investor confidence: creating a systematic approach for measuring and disclosing the value of a company's intangibles will go a long way in re-establishing confidence. (Intangibles).

Without a doubt, the Sarbanes-Oxley Act has created new realities for both companies and their C-suites. There is a lot more at stake now, both personally and professionally, as the legislation's mandates and the pressures created by an increasingly skeptical investment community have created an environment where it is no longer enough to just report financials.

Now, the impact of business risks associated with the numbers must also be communicated, as investors want to know about the motivations behind a company's decisions, and they want visibility into the "softer side" of the business -- intangible items that don't show up on a balance sheet or an income statement.

Some critical intangible drivers include: leadership, strategy, communications, brand, reputation, alliances and networks, technology, human capital, workplace/culture, innovation, intellectual capital and adaptability.

To give investors what they seek - and to boost their confidence -- companies can incorporate communicating the value of their intangible assets with learning to manage those assets.

Communicate to Build Confidence

Cap Gemini Ernst & Young's (CGEY) "Decisions That Matter" research showed that at least 35 percent of portfolio managers' decisions about where to allocate investment dollars are based on intangibles. The study also found a strongly positive correlation between sell-side analysts' reliance on non-financial performance and the accuracy of their earnings forecasts.

Additional results show that over 80 percent of executives queried perceive a gap between what their companies were measuring - in terms of both financial and non-financial performance metrics -- and what they actually believed was critical to measure. Moreover, the size of those gaps is important - and is strongly correlated with stock price, market value and other hard performance indicators.

Given these statistics, it is indeed surprising that intangibles are facets of a business that most companies don't measure, manage or disclose. Intangibles have value; they drive confidence.

Call to Action

As the financial gatekeepers of companies, CFOs are now operating by new rules. They need to create and track new performance measures -- measures that look forward as well as backward -- that show how the company is likely to be doing in a year or two, as well as how it did last quarter. They need to keep their eye on aspects of the business that cannot easily be counted, but that are essential to its future health. They must also accept that -- under the watchful eye of sophisticated investors -- communicating the company's activities is key to its success.

CFOs will need to rethink how intangibles impact the business, and then create a plan to obtain company-wide commitment to manage and measure the affected assets.

There are five steps for getting started:

* Determine the critical intangibles for the business. Every industry has three or four intangibles that are the most significant. In manufacturing, innovation, quality of management and employee relations are most important -- with technology and customer satisfaction ranking lower. In financial services, it's management quality, technology, brand and customer relations.

How are the key intangibles determined? Most seasoned executives have a "gut" feel for this. In addition, the leadership team can be asked to come up with rankings of the intangibles they believe are most important, by asking a series of questions and reaching consensus on the answers. For example, ask: "What are the real drivers of value in our business?" "If we could gain a competitive advantage by improving our performance in two or three key areas, what would those be?"

* Decide on metrics for the key intangibles. Start with what the company already measures. Often someone somewhere in the organization is gathering valuable data that gets filed away, and that can be utilized. Gather that data -- and if certain information is unavailable, plan to get it through a survey or publicly available information, if possible.

Some intangibles are relatively easy to measure. Customers can be polled to determine levels of satisfaction, and human resources indicators, like turnover, can easily be tracked. Others, such as "leadership," present more of a challenge and are often tough to gauge -- but tough doesn't mean impossible. As appropriate, poll customers, suppliers, investors, employees and other stakeholders, asking these types of questions: "Are your company's leaders respected in the industry?" "Are departing leaders routinely sought for high-level jobs elsewhere?" The answers often involve judgment, which can be supplied by the polling.

* Create a baseline and benchmark it against competitors. The purpose of managing intangibles isn't simply to get better scores; it's to outflank competitors with moves that are difficult or impossible to copy. It's necessary to know where competitors' strengths and weaknesses are, and to gauge them against those of your firm. This can involve substantial research by third-party consultants that can conduct surveys to assess a company's performance on a variety of scales against that of competitors.

* Undertake initiatives to improve performance on key intangibles. Assessing and measuring intangibles helps to determine where to invest time and resources, and undertaking initiatives to improve performance helps to build value. Consider innovation, a metric that ranks as one of the most important intangibles in many industries. Innovation entails R&D.

One measure of a company's success in R&D is the number of patents it holds; a second is the number of new products in the pipeline; a third is the proportion of revenues and profits accounted for by products or services that are less than, say, three years old. Tracking several such measures -- and setting annual targets for improvement -- will focus people's attention on them.

* Communicate -- far and wide. The fall of Enron Corp. made it clear that transparency is the order of the day. Enron was lauded for its adaptability and innovative culture. For a while, it was extraordinarily successful, but the success turned out to be built on something like a house of cards -- unknown by investors, as many of its dealings were cloaked in secrecy. The antithesis to such secrecy -- and a watchword for companies that want to manage intangibles effectively -- is "open systems."

This means sharing insights into intangibles with employees, customers, suppliers, industry groups, investors and Wall Street analysts. Share metrics and targets, and let the interested parties know what you expect to achieve and why it's important. Don't worry about spilling company secrets -- the information itself has limited competitive value. It's what a company does with the information that matters.

A company can gain credibility and be rewarded in the marketplace if it can show why a particular intangible is important, along with improving the company's performance. Additionally, consider adding an "intangibles audit" to the annual report.

Today's companies cannot afford to sit back and wait for others to take the lead -- or for standards to emerge for measuring intangibles. Managing a company's intangible assets provides a first-mover advantage -- and those who take the lead will set the standards. As such, these companies will be viewed as innovators and rewarded accordingly.

Pam Cohen Kalafut, Ph.D., is Director of Intangibles Methodology in Cap Gemini Ernst & Young's Corporate Accountability Practice. She can be reached at [e-mail]