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Jonathan Low: Cap Gemini Ernst & Young, Cambridge, Massachussetts, USA
Introduction
In today's economy, traditional companies with solid market share and robust revenues have significantly lower market capitalizations than their counterpart Internet companies - dot.coms. The dot-com Initial Public Offers (IPOs) have been known to rack up valuations in the hundreds of millions if not billions of dollars.
So, what is wrong with this picture?
Clearly, it is not about the demise of old economy companies or about the economic supremacy of new economy ones. What this growing valuations chasm suggests is that much of the picture is missing for old and new economy companies alike. Existing measures are now woefully insufficient at expressing corporate value. The time is right for smart companies to recognize that the better the job they do of managing all their assets and liabilities, not just those which are traditional and tangible, the more comprehensible and positive their valuations will be.
In today's knowledge-based, turbo-charged economy, financial results account for an ever-shrinking percentage of corporate performance. Technology, connectivity and human capital play an increasingly dominant role, yet the accounting systems we have traditionally relied on to track corporate and economic performance are woefully outdated.
Over the past 80 years, market-to-book value has steadily increased, reflecting an increasing shift from past to potential performance as the source of shareholder value. Investments in R&D, brand development and training now exceed total investments in tangible assets, skewing return on investment capital from historic norms. The percentage of a company's value that is unaccounted for by tangible assets has skyrocketed anywhere from 50 per cent to as much as 90 per cent of its value. Where once "hard" assets - property, plant and equipment - accounted for a big piece of a company's market value, today it is intangible assets that rule - things like innovation, brand development and training. This is as true for the Procter & Gambles, as it is for the Intels and eBays, of this world.
Management teams that rely wholly on reporting of their past and current financial performance are operating with blurred vision: they are not only getting an incomplete view of their enterprise, but also they are missing entirely any kind of forward view of their company...