Friday, April 13, 2007

We Are All Financial Institutions Today


by Nir Kossovsky, MD
CEO and President, TOPCAP


For years, financial institutions led their peers in corporate risk management. Always facing credit, market, and operational risk, any one of which could produce a catastrophic outcome that could precipitate the demise of the corporate enterprise (e.g., EF Hutton, Anderson, Enron, Drexel, Barings), financial institutions have always been under the gun to improve their control, mitigation, and management practices.

With intangible assets comprising upwards of 80 percent of the market capitalization of traded companies, the value of intellectual properties and other intangibles in the 21st century economy is indisputable. Companies and investors are rapidly coming to understand how the convergence of human capital and intellectual assets are their greatest source of both strategic risk and financial reward.

If we focus on the risk side, it appears that we are all financial institutions today. We are all exposed to precipitous losses in enterprise value of the basis of impaired intangibles. Consider Jet Blue’s recent reputational hit due to poor IT investments; BP’s decline due to poor safety practices, or Vonage’s collapse in the face of patent litigation – all body blows to enterprise value arising from a catastrophic loss of (intangible) asset value.

Because TOPCAP is an intangible asset management consultancy, and we help clients at the C and board level identify and take practical steps to mitigate risk, we are seeing this awareness evolving. One of the key aspects of the new risk agenda we are seeing is the increased emphasis on functional alignment – where the risk team, the finance team, and the capital management teams work together. We're also seeing the incorporation of lines of business and IT that need to be linked into the finance, risk, and capital teams.

But when is all said and done, a company is still exposed to fortuitous risk because
%$#!& happens. And in practical terms, this is why equity holders get higher returns because they currently hold that corporate risk. This past fall, the Intangible Asset Finance Society (
http://www.iafinance.org/) surveyed the intellectual property community with the question: In IP-rich companies, who bears (or should bear) the ultimate risk in IP litigation, IP M&A or technology transfer - shareholders, outside counsel’s E&O insurance, the company’s law department, the company’s D&O insurance or professional IP risk bearers?

At the operational level, executives and legal advisers acknowledged that certain events could put a company at mortal risk. The emerging question: is whether shareholders will wish to continue bearing catastrophic risk or will demand that companies find a more efficient vehicle for risk transfer?

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