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Did you know that 94.6% or 19 out of 20 of listed firms in the world do not have a board representation for marketing? I have forever wondered why the 21st century CMO is not a permanent invitee on the board. In 2019, global businesses spent USD 614 bn to establish or strengthen brand assets. These are nothing but assets, because they have a direct and material impact on performance.
This is not some clever compliance arithmetic at work. It's not nice to not have reporting, and I will explain why. Imagine that (God forbid) there was an injunction in a court which prevented your firm ( or NGO ) from using your trademarks for at least a few months. Would it be business as usual? How many different ways might the firm have been impacted, only by the loss of trademark usage? We have isolated 34.
Last month, I did a CII masterclass for 50 odd CMOs on brands as core business assets. And given what we saw in the previous paragraph, the fundamental question we debated is why the brand was missing a permanent representative on the board.
It will come as no surprise to anyone reading this piece that balance sheets represent less than 30% of the average firm’s value today. This is irrespective of category. It is not an fmcg or luxury goods bias. Carborundum Universal, an abrasives firm, trades at a price to book value of 6.73. In fact, the Sensex 30 is on average valued at 5 times its book value.
So where is the rest of the value sitting and why is it not captured or reported with the same granularity as the items on the balance sheet? Over the last three decades the world has come to accept that the two primary intangible asset groups hidden outside the balance sheet are intellectual property ( Literally the ‘recipes’ of the firm) and brands ( ‘reputation’ of its offerings )
Why is this relevant now ?
If the largest and most influential assets ( i.e. property of shareholders ) are sitting hidden in plain sight outside the books, then it is obvious that we are not cognisant of how they can contribute to performance or value creation. And hence by implication, we are governing an underperforming firm, nine times out of ten, Or 19 times out of 20, to be more precise. It’s a bit like saying that a pilot is running a plane on one out of four engines and then wondering why it is underpowered.
Therefore, wouldn’t you agree that giving these assets their rightful place at the top table is just good governance? But what does governance of intangible assets actually entail? Over the last thirty odd years, some enlightened countries ( France, Germany, Sweden, Japan and Denmark ) had decided that the least they could do was to provide clear guidelines to capture the value of these assets outside of the financial statements. Some individual firms have gone further.
Overall, our own interventions have led up to four clear board priorities for brands:
Board oversight : An independent director/committee accountable for brand assets. Consisting of brand professionals who have led businesses. This implies both a strong understanding of the asset, as well as its impact on business performance. 6% representation is a joke.
Information symmetry : A well laid out mechanism for impairment testing and asset value reporting, separately for brands. Shareholders should have clarity on the position of these large assets just like they do with tangible assets.
Return on brand capital: Set up clear and convergent metrics for a return on these assets in particular. The gross return on capital tells us nothing about how individual assets are contributing to performance and value creation.
Brand due diligence: That the board and its appointed investment committees demand, and have access to due diligence on brand assets of acquisition targets. Most of the time we are buying companies at many times the value of the books, with little or no idea of what that premium is supposed to contribute to future performance. How does that make for a sound investment logic?
For my money these are the four basic essentials for getting brands to where they belong, namely, into the boardroom. For any business category, anywhere in the world.
Does it really make sense that most of a firm’s value lies undisclosed, unaccounted for and underleveraged? Especially in a world where value seems to be moving further and further away from land, infra and stash?
Would love to know what you think! rjt@equitor.com
(This column was first published in Mint in the issue dated 06-05-2021)
