A Measure Of Intelligence

Quantifying IC will take time; attracting it will take integrity.

Few disagree that the most effective wealth creation engines of this information age are more intellectual than physical. Microsoft Corp. gives ample evidence of this. But when so-called experts try quantifying intellectual capital (IC) so it can be shown on the balance sheets of companies with tangible assets, the trouble begins. Traditionally the fundamental wealth factors of economics have been land, labor, and capital. The wealthiest companies of the industrial age possessed large portions of these -- each was a powerful wealth factor, and each had unique and specific ownership. If a person or company possessed a portion of these, no one else could simultaneously possess that portion. Not so with intellectual property. Information not only makes shared ownership possible, but even desirable. Information, and the knowledge that results from its use with human insight, is made richer by more people possessing it and adding to it. Thus, IC embodied by information in the minds of employees is not quite so easily owned by employers. It is a suspicious, if not dangerous, asset addition to the balance sheet. Companies can be bought and sold, and the tangible assets go with the sale -- if they can be tagged, inventoried, or bolted down and locked up. But people may or may not stay with the new company. The best way to protect IC as an asset is to preserve it. If Apple Computer's wealth circa 1990 was valued in intellectual property, certainly the departure of huge numbers of their best and brightest creative minds would been a devastation of wealth well ahead of the decline in sales. Over time, the same result has occurred in other companies (AT&T to name just one), but this might not have happened if that wealth had been replaced by equal or better new minds. Perhaps today's IC would be more meaningful if it stood for "integrity capital." A large and growing body of thought says that the best and the brightest people are attracted to and retained by people of integrity, especially in positions of leadership. Integrity capital may beget intellectual capital. That has been the case in my experience and in the experience of many others. Placing intangibles on the balance sheet of companies is a dicey business. There are far too many temptations to mislead investors with such entries. There also is no doubt that the ultimate wealth of the company is dependent on having superior talent -- but only if there is equally superior leadership. It's not my intention to attempt to solve such a complex issue in this brief column. I only hope to broaden the perspective and raise some new directions for further thought. While this dilemma is argued, let the proof of either of these ICs be in the competitive performance and ethical behavior of the companies in which they reside -- for that moment in time. Only in retrospect will we really know if these ICs can be appropriately quantified among the traditional assets of the company. Then the accountants can start on how the valuation process works.

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