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This is a transcript of a speach Walter Wriston held at the

"Measuring the Future" Conference
of the CBI (Center of Business Innovation) of Cap Gemini Ernst & Young in Boston.

Unfortunately CBI has been closed by Cap Gemini - may be they could not find the intangible assets of CBI (its real value) in Caps' balance.

Now you may find the director of CBI at http://www.monitor.com - chris_meyer@monitor.com


 

Measuring the Future: Navigating the New Economy
Transcript

The Great Disconnect: 
The Balance Sheet vs. Market Value

Walter Wriston, Boston, October 2, 2000



MR. MEYER
: -- Walt Wriston is going to talk about that new economy and those issues of how we measure value in the intangible economy.

Let me tell you a little bit about Walt and little about that handshake because it's symptomatic. Walt is probably known to you as a pioneer in the evolution of banking in the last 30 years. A little history. Walter Wriston went to Wesleyan. He then got a degree in Diplomacy from the Fletcher School. And now, Walt says that no one who knows him believes he has a degree in diplomacy. That might be borne out by the next stage of history where he went to the State Department for a year. Diplomacy failed him so he went to war in the Army for four years, continuing politics by other means, I guess. Now, this was a somewhat less powerful platform, apparently, than the Harvard Business School is today because after that experience because, unlike what Clay Christensen reports to us happens to the HBS graduate, Walt joined what was then First National CitiBank in 1946 as the junior inspector in the controller's office, but he began a meteoric rise because four years later, by 1950, he had become an assistant cashier.
Now, somehow things changed and to accelerate both his career and my introduction, by 1967 he had become President and CEO of CitiCorp and added Chairman to his title in 1970. And, it really was Walt Wriston who propelled banking into the global arena. (Citibank was) the first to build a global network, to move money around the world continuously, the first to have a vision that he articulated in his book The Twilight of Sovereignty in which the financial institutions not -- that is the private financial institutions, not the governmental ones, governed the currency flows and financial flows of the world.

But there's another reason that Walt is here, and Walt is the right person to talk to about this. The CBI has an advisory board called The Visiting Fellows and when we looked for people to join it, we were looking for people of stature and imagination and open mindedness, and someone proposed Walt to us. And we thought, "God, he would be perfect," but we worried about one thing. We had all ready signed up Neil Stephenson, a cyberpunk science fiction writer, who last year had a best seller called Cryptonomican. And we had these visions, not knowing either of them, of the cyberpunk author and the banker emeritus meeting one another and actually not having a frequency in common on which to communicate.

In the event, exactly the opposite happened. Neil and Walt became great friends. And, Walt told Neil a story about Shanghai during World War II that became the opening to Neil's Cryptonomican novel. And I say that as kind of a proof statement that when we listen to Walt talk about how the future of measurement and economic value will evolve, we're listening to someone who combines experience, wisdom, and open mindedness. So, please welcome Walt Wriston.
[applause]

MR. WRISTON: Well, I want to thank you for letting me be here. I have some problems sometimes with my grandson… his idea of music. But if I can get a copy of that picture with Chuck D, I'm golden from now on out. [laughter]
I think that we had this conference today on measurement and it was prestaged I think by Galileo. He said, "We must measure what is measurable and make measurable what cannot be measured." And I think he hit it right on the nose many years ago. I would say that almost from the very beginning of recorded history, man has attempted to take the measure of things, the passage of time, the size of things, or the distance to some location. Indeed, there are some historians who have suggested that the eminence of measurement itself has to rank among the major achievements of man.

Our reliance of measurement in our daily lives is so persuasive, so pervasive, that we hardly notice or even reflect upon how much we rely on a speedometer in our car or the time of our watch or the government figures on the GDP.
Because, however, there's money to be had, many attempts have been made to link one set of data or another to the market value of a given stock. There are those who look at the corporate results as revealed by GAAP accounting and compare those stated values with a market value. And they declare the market is a huge bubble or even proclaim the market suffers from irrational exuberance.

On the other hand, there are corporate CEO's whose reports record record high earnings. They stand around and watch as their stock price declines, and complain that the market is totally irrational and unreasonable. There are others who look at return on invested capital and complain that their so-called old economy company requires large amounts of capital for plant and equipment  thus reducing their return on capital, while a new economy company has to invest substantially less and, therefore, its return on capital soars.

There are numerous other theories, but they are all spawned by the fact that it is clear that the market value does not appear to be based on a six-month old annual report or even last week's 10Q. Something else is going on. The talking heads on the evening news explain to us why the market went up or down, add almost nothing to our knowledge of economics but a great deal to the skill of creative writing.

Some years ago, a Nobel winner, James Tobin, created what came to be called the Tobin Q, in which he indicated that the best yardstick of market value was a replacement value of the books of the company. In short, replacement of corporate assets should have an equilibrium relationship with the value the market places on the stock.

In the height of the industrial age, there are a good many people who agreed with Professor Tobin. Since his position was originally put forward, however, the world has changed. And I believe that argument can be made that the Tobin Q is no longer a relevant way to measure the reasonableness of a company's market value in the new economy.

As Robert Solow once wrote, there's a lot to be said in favor of staring at a piece of reality you are studying and asking just what is going on here? What is going on here is unrecorded intellectual capital. And when that becomes the driving force in the economy, it is clear that the book value and some of the old rules may not have the same felicity as they had in the past. It is not unlike, in my view, trying to measure the speed of a computer by the old industrial measures of pounds per square inch or revolutions per minute, both of which were extremely valid measures in the machine age but have little relevance today.

When I was a young lending officer at CitiBank, my boss told me always to check the freight car loadings in Chicago, which he said represented the best proxy for how the economy was performing. It was a good index back then but is not of a great deal of use today. Even though the world has changed, there is a natural desire to hang on to yesterday and to embrace the familiar.

Although numbers look and are definitive, few people bother to look behind them to see how they are constructed. We have a mixed bag in this country when it comes to measurements of all kinds. In the fiscal world, the United States is an English island in a sea of metric measurements. Our corporate accounting is different from that that is practiced in other developed countries. Sometimes we even use two different systems in the same sentence, or to be specific, on a can of soda. We measure our soft drink in ounces but the fat in them is recorded in grams.

Sometimes the quality produces some serious consequences. The confusion between the kind of metrics used in controlling the thruster of a space vehicle caused the loss of $125 million spacecraft in September last year as it was approaching Mars. The NASA controllers believed that the thrusters, to alter the direction of the spacecraft, were calibrated in metric Newtons while the builder had specified specifically that they were calibrated in pounds. The difference was undetected for months, and when the final adjustment was made in the flight as it approached Mars, it veered off course by 60 miles. Nobody knows its fate, but it has either crashed or is orbiting the sun.

The director of the propulsion lab, which was in charge of the mission said, "The real issue is not that the data was wrong. The real issue is that our process did not realize there was this discrepancy and correct for it." I would argue that statement ranks right up there with world-class spin control.

I think the same can be said for a lot of accounting data. It may be correct as far as it goes, but it may miss the target of useful information by a very wide margin. Indeed, I do not know a CEO in this country who would attempt to guide his or her company's destiny based solely on the accounting numbers produced by GAAP, even though the dictionary definition of corporate accounting is to recognize the factors that determine its true condition.

In the scientific world, there has been a coming together of nations to produce some standards, but this has been a very long and a very divisive process. The modern metric system owes much to the committee on weights and measures of the French Academy of Science in the early 19th Century, which was headed by an astronomer, John Bordeaux (phonetic).

Their basic decision was to use a base of 10, and that unit would be used to derive volume and area. The length of the unit, later called the meter, was measured by the fraction of a meridian. This pioneering work furnished a framework on which has built much of modern physical measurement. More than 100 years later, the general conference on weights and measures met again in Paris in October 1960 and gave the name to the International System of Units "the Metric System," based on the meter as a unit of length, the kilogram a unit of mass, the second a unit of time, and the ampere a unit of electrical current.

The system has continued to evolve as more and more nations have joined the treaty, but there is no such treaty or an agreement on how to measure the economy or corporate performance, even though we are inundated with data that purport to tell us how we're doing, and unfortunately, sometimes furnishes the basis for government action in the economic arena.

The numbers we do see are not always a very good guide. Nicholas Everstock has commented, "Where unstrikeable, traditional beliefs or passing superstitions played official roles in the past, we now witness an overconfidence based on false precision. Where antique despots surrounded to the temptation of numerology," he said, "the modern statesman probably succumbs to the allure of quantifrenia and idolatry of numbers no less reasoning and no less purely suited for promoting the common wheel than his predecessors.

With the advent of the industrial revolution, it was clearly necessary for man to devise some kind of record keeping that was more sophisticated than that which was required for a one or two person farm. Merchants in those days had no knowledge of books of account, and they often recorded transactions by sticking a piece of paper on the wall. The great historian, Fernand Braudel, tells us that the first known evidence of an accounts ledger dates from 1211 in Florence, but it was not until 1517 that double-entry bookkeeping was in general use.

As economies grew and prospered, first dozens and then hundreds and then thousands of people were employed in a single enterprise and an accounting system had to be devised, not only to keep track of what had happened but also to permit managers to make informed business decisions.

Centuries later, there is still no accounting system that has total global acceptability, either for business or for government. In the United States there is, you all know, thousands of accounting rules and they are constantly changing.

On the other hand, in the physical world, when one says that something is 10 meters long, all the world knows that they have received a universally accepted measurement. During the great inflation not so long ago in the American economy, when the price level rose 12 percent, major companies were forced to publish up to five earnings per share numbers. So that in the end, the investor had a plethora of data and little or no information about the business. As inflation abated and the number of earnings per share calculations shrank until we have now arrived at the current situation.

But matters affecting accounting have never moved very fast. To give you an example, about the time that Columbus set sail, there was a monk named Pacioli, who published a book on double entry bookkeeping, that's often accredited with publicizing this practice. Even earlier, Benedetto Cotrugli had published a similar work in 1458 and a second edition was published 100 years later. The fact that the second edition was identical to the first one established a precedent for the speed in accounting changes [laughter] that I would argue is still the norm today.

There were several big firms, by that standard at least, that still used single entry bookkeeping well into the 19th Century. The Dutch East India Company was one and the Sun Fire Office in London was another.

In today's networked information economy, the importance of knowledge workers, as we all know, is rising rapidly, but the measurement for their output has not kept pace. Measuring productivity of knowledge workers is primitive at best and down right misleading at worst. Huge sections of our economy are totally left out. So far, we can make some rough judgments about, say, the productivity of a loan officer or an insurance underwriter, but we have no real metrics at all in the service sector.

"Work on the productivity of knowledge workers," Peter Drucker has recently written, "has barely begun. In terms of actual work on knowledge work or productivity, he said, "we are in the year 2000, roughly where we were in the year 1900, a century ago, in terms of the productivity of the manual work." The government figures, such as they are, cover less than 50 percent of the service workers of America. So when you read in the paper that productivity goes up or down, (it) doesn't mean very much. Since most Americans work in the service sector and their productivity is either unmeasured or, as bankers were until late 1999, by assuming their productivity was zero and output rose only as a function of the number of hours worked.

This method of computing output solely on the basis of input affects between 25 and 30 percent of the entire service sector of the United States. Now, the people who produce these numbers, about zero productivity and banks, walked by and often used ATM's for their banking needs, but they fail to make any connection between that and productivity.

I would argue that since knowledge workers constitute more than half our workforce, improving their productivity is a linchpin upon which hangs the future prosperity of our country. At the end of the day, this means that we have to find metrics that measure quality, as well as quantity.

For example, is a loan officer who makes a lot of loans and has few defaults more or less productive than a lender who makes a few loans and has no defaults? We have no agreed upon measures. Indeed, there is a clear disconnect between what is measured and what is important. The world has simply moved faster than those who measure it.

On another front, everyone from Main Street to Wall Street watches the inflation numbers. The numbers going up, we assume that the Federal Reserve will take action. With so much riding on the veracity of the numbers, it's vital that a full review of those numbers was conducted.

Accordingly, Congress created an advisory panel on consumer price, chaired by Mike Boskin. And after his study, he reported that the CPA overstated the change in the cost of living by 1.1 percent. That number seems small, almost irrelevant but compounded over time, the effects were incredible. For example, instead of falling by 13 percent, real hourly wages had really risen by 13 percent from 1973 to '95.

Now that's a mind bending change that affects millions of us across the country, with about 1/3 of the federal budget outlays index to the cost of living as our income tax brackets, the distortion between the numbers reported, and the real world is huge.

Another example of how the public data conceals reality, in my view at least, is the savings rate in this country or the lack thereof.

Many analysts look at the savings rate as a way of predicting how the economy of the country will unfold. For example, a low savings rate may foretell a scarcity of capital that could cramp the growth of the economy, while a large rate portends ample money for all. Many commentators have deplored that Americans don't have enough money and that our savings rate is said to be so low as compared to other nations. Sometimes the savings rate is in the paper. Yesterday, it said that it was negative.

Now while the official numbers seem to confirm this story, it is the way these numbers are put together that assures the result. Until last year, just for example, government employees' pensions were counted as government savings instead of being private, as they are in private pension plans. The press often reports this lack of savings in America by running in juxtaposition a story that the inflow of money to mutual funds has just hit an all-time high, that the purchase of new homes, many people's principle asset, continues the pace, that IRA's and 401K's are bulging with cash and most corporate pension plans are overfunded.

All of these events, plus the purchase of consumer durables, represents savings by Americans and they constitute a direct disconnect from the official savings number, which is derived by computing savings as a proportion of disposal income individuals set aside. I would argue that measurement in the private sector is little, if any, better.

The companies in the industrial age that spawned our current accounting rules had huge sums invested in hard assets, things you could feel and touch and count, like buildings and factories and inventory. In the new economy, intellectual capital is far more important than money capital. But so far, it goes mostly uncounted in the balance sheets of our corporations because it is largely ignored by the writers of accounting standards.

Examples abound, but to cite just one example the value of patents is nowhere to be seen on a corporate balance sheet. This is not exactly a trivial matter. The best estimates of the value of patents range from $115 billion to a little over a $ trillion. And the number of patents filed each year is exploding. Ten years ago, for example, Microsoft had one patent, while today it has somewhere around 800, while the other companies in the valley, like Intel, Bell, Novel, Sun, Oracle have increased their patent filings by more than 500 percent.

While the American accounting profession has now produced about 5,000 pages of accounting rules, Bob Elliott, a partner of KPMG has pointed out, "At best," he said, "today's financial statements are an obsolete product," relatively unchanged over the last 100 years. Financial statements were designed to describe industrial era assets, inventory, machinery, buildings, and land. Post-industrial enterprises run on intangible assets, such as information, research, development, brand equity, capacity for innovation, and human resources. Yet, none of these appear on a balance sheet.

Today there's a debate going on about how to handle good will among various accounting authorities around the world. One school holds that it should be written off against earnings, which is another way of saying that intellectual capital or the worth of a brand name, like CitiBank or Coca-Cola, has no value.

On the other side of the argument is the marketplace, and its verdict is loud and clear. Microsoft, for example, which has basically trivial fixed assets, has a market cap exceeding the big three automobile companies put together. This being so, it becomes increasingly hard to argue that intellectual capital has no value. The old guard will say that this view is just a way of measuring hot air and not real assets. Even though many of the so-called "real assets" are rusted hulks in the scrap yard of history, while the firms based on intellectual capital, like AOL, are propelling themselves into the new economy.

As bad data produces bad results, both the public and the private sector are in need of new metrics for a new economy. So far, there has been little progress in this direction, as there's a huge vested interest in the familiar and the known. But reality is beginning to sink in and there are scattered efforts to come to grips with a need for the new metrics.

There is no doubt that an essential factor and the success of the industrial revolution was a use of accounting to permit management of huge enterprises. But the old rules measure yesterday and usually only a point in time. Like the numbers of the freight car loadings in Chicago, their usefulness has come and gone.

Today’s investors and credit granters want, need, and can get an almost constant stream of useful information. Audited financial statements have their place in this stream of data, but the current accounting rules now prevent, for example, a company in publishing a cash flow per share number, data which many managers believe is vital to running a business.

To quote Bob Elliott again, "Financial statements are assembly line Model T's," he said, "when what are needed as instruments designed to client specific management criteria and performance," indicators, such as the measure of customer satisfaction, product and process quality, innovation, and new technology. But the pace of change is now so swift that no bureaucracy, either public or private, can keep up. But as this huge disconnect between markets and accounting becomes obvious, efforts both in the public and the private sector are beginning attack this problem of metrics.

The government has made a few modest changes in establishing the retail index to take partially into account and measure the explosion of e-commerce. The new index, which was initiated in March of this year, measures products sold on the net, but it omits such things as services on on-line banking, travel bookings, where a great deal of the action is. But the complexity of attempting to measure the new economy is enormous. The players change, the rules change, and the output changes. Despite all the mergers that have taken place, there are far more players in the game than ever before.

In Mike Boskin's words, "Back when we had a very few products being made by a small number of manufacturers, we needed a lot less detailed information, and it was easier to come by."

In the private sector, there are many initiatives designed to create the new metrics to measure the economy. Our hosts today are leading the parade on that with the joint effort of Forbes, Ernst & Young's Center for Business Innovation, and Wharton Research to create a kind of a value index. With intangible assets apparently playing such a huge role in the stock valuation, research is needed and is being undertaken to try to determine the factors that are driving stock values.
Although this project is probably in its infancy, many of the tenets of conventional wisdom are already falling by the wayside. One of the leaders of the project reported that perhaps the most amazing result of our research is that two intangible asset categories, the use of technology and customer satisfaction, have not statistical association with market value.

There's another group down the road consisting of the Sloan School of Management at MIT and the consultants of Arthur Anderson are also working to find a way to value intangible assets. The scope and pervasiveness of the problem is now becoming evident to all.

As the co-chair of that effort put it, "Even the Coca-Cola’s and Disney's of this world are actually creating most of their value from assets that do not appear on their balance sheet."

Another initiative is undertaken by the Brookings Institute about which you will hear more at this conference. There's still another initiative in creating measurements by Professor Baruch Lev at the New York University. In his scenario, he has devised a way to measure the earnings impact, resulting from knowledge-based activities. Using his metrics, Professor Lev has constructed a chart, showing knowledge capital of dozens of firms derived by computing the discounted value of future knowledge earnings. Now as this methodology gets refined, more and more companies, I believe will recognize that measuring knowledge capital will become even more important than measuring their fiscal capital. This applies in every occupation to the farmers growing produce, people driving trucks are making durable goods will be supported and enveloped by network information resolution so that the urgency of finding these new metrics is manifest to all.

Many accountants are far from comfortable with these new concepts. They like things they can touch and feel, things that have a clear cost and that can be verified. One can count physical inventory. One can dig back through the records to find what an asset costs. But the concept of value creates huge questions because value is an intangible concept, and yet, every sector of our society is impacted.

Banks, for example, which like to have collateral for their loans, are increasingly faced with the dilemma of what constitutes collateral. Some major banks, such as BT Commercial, which is now part of the Deutsche Bank, have lent hundreds of millions of dollars and taken as collateral the firms' trade names and patents. The law has now progressed to the point where the banks are able to obtain a perfected security interest in these intangible assets.

This new kind of lending spawns a new kind of an appraiser, the value appraiser, who gives the banks an appraisal of the value of intangible assets so that the loan officer can make an informed judgment.

BT Commercial is not alone, as some of these loans are syndicated with many other banks. All of this moves such valuation, ideas from the conference room of think tanks into the real world of corporate finance.

Efforts to come to grips with the value of intellectual capital are not confined to the United States. The Swedish consulting firm of Celemi has developed what they call an "intangible asset monitor." Their approach is somewhat different, but it aims at the same results. They have to try to put a value on intangible assets.

One big Swedish insurance company, Skandia, is now using both internally and with the public a set of metrics the call "the business navigator." The company now publishes a report on its intellectual capital as a sort of a supplement.

It took centuries for a universal system of measurement to evolve in the fiscal world. Measurement moved from using various parts of the human body, from the foot to the fingers, until the metric standard was finally adopted. From the late 18th century, until the middle of the last, France was the custodian of a specially constructed bar of metal kept at 0 centigrade bearing two finely engraved scratches, exactly 1 meter long. By 1960, however, the meter was defined by the wavelength of radiation produced by the atoms of krypton 86.

No such precision will ever be possible in the economic world as the conditions change over time. Despite that difficulty, it is becoming increasingly evident that nations need a whole new chart of accounts and that business needs new measures to measure the new economy. Since it took centuries to get a generally accepted system of measurement in the physical world, and even then one that's largely ignored by the people of the United States, it seems clear that there is little hope of conforming our official accounting system to the realities of the information network economic before the next stage of the economy occurs.

What to do? There is clearly a massive disconnect between corporate accounting the value the market puts on its stock. Even if you do not believe in the efficient market theory, it's clear that the market is creating real-time values at odds with conventional measures used by analysts. In this situation, Carver Meads' famous admonition, "Listen to the technology," could be paraphrased to say, "Listen to the market." The market is saying that our current GAAP accounting, while useful, is far from reflecting real reality in the network economy. While regulators and CPA's continue to debate new rules, it's clear from past history that if corporate managements want to get their story out about how value is being created, some kind of a supplement detailing the companies' intellectual capital is needed.

Unlike the Scandinavian example, which is basically concerned with the environment, such a supplement in my view would have a different emphasis. Since intellectual capital is the driver of the new economy, this information has to be given equal prominence with the GAAP financials so that analysts and the public will get more of the data they need to make a value judgment. Such a tabulation, obviously, would be different for every country, but I suggest that, say, a model of some company might read something like this:
- Last year, we filed 78 patents. We had 15 prior filings granted and we were able to license out 8 patents to others, which created a stream of income of $130,000.
- Since constant learning is the only road to survival in this economy, we conducted 10,000 hours of training for our staff. Some 37 percent of all employees got some form of new training last year.
- To keep new ideas flowing, we hired 350 people last year. Some 62 percent of the new hires had a masters degree or equivalent and 50 percent had prior business experience.
- Some 40 percent of our products and services have been introduced during the last five years so that the output of our R&D continues to be good.
- So far, 60 percent of our departments have gone through the six sigma process, and we will complete the rest at next year.
- Our personnel turnover fell to a new low.
Now, these are obviously just a sample of what such a page might look like, and they clearly can be expanded or changed, tailored to specific companies. Whatever the content of that list, one thing is clear. It's intellectual capital that drives the new economy.

It follows from this, that successful corporate managers must know that a company’s real competition in the marketplace are not the ones that they have been familiar with for years, but that the vital competition is now for men and women with the brains to survive and prosper in the economy. If all the brains go to one segment of the economy or to one company in your industry but not to yours, then it doesn't really matter what your competitors may be. You have all ready lost the race. This being so, I believe that corporate reports should reflect this reality.
Thank you.
[applause]


Q&A
AUDIENCE
:
(indiscernible) the complexities of the modern economy and is one of the sponsors, original sponsors of the Santa Fe Institute. I wondered if you could comment specifically about the measures of intangibles and intellectual capital as it relates to uncertainty and complexity being feature oriented metrics.
MR. WRISTON: Well, we did fund a fellowship at the Santa Fe Institute, where Dwayne Farmer and the others were studying on the complexity theory. It was designed, first of all, to try to figure out the staffing of a telephone bank for credit cards. In other words, how many people are going to call between 5 and 6 at night? How many people will call between midnight and 2 o'clock? I don't know what the result of it is. All I know is they answer the phone very promptly out there. So something happened.
But other than that, I'm not familiar with what else they got out of it. They did get that out of it, which with four big service centers and 100-million credit cards, it was very helpful. As far as measurement goes, I don't know.
I'll try to put it on the Internet with Chuck D. Then what?

AUDIENCE: (indiscernible)
MR. WRISTON: Well as somebody said here that the idea of patents and copyrights is in the Constitution of the United States and so it's not something that's transitory. The first group of Patents Commissioners consisted of the Secretary of State, the Secretary of the Treasury, and the Attorney General of the United States. There are people such as Thomas Jefferson who was on it. So patents became embedded in the fabric of America.
And up to the time of Lincoln, for example, he owned a patent. You had to put in a model, which couldn't be more than 12 inches square, and we had a warehouse full of these models in Washington, DC. And fortunately or unfortunately there was a fire and the models were destroyed and that provision in the law was changed, so you don't have a model, which is fortune because then it was merged with the copyright office, and we now are copyrighting songs and books and articles and so forth.
My own instinct is that networks distribute power along the periphery and that being so, it becomes increasingly difficult to control it from the center. And if it were just a problem of the law or whatever… the law is now clear, as far as copyrights and patents are concerned … the problem is whether it can be enforced. And the way our political system works is usually that the political system accommodates to the reality of the world.
So I would suspect that, obviously not knowing, over the next ten years, we're going to have a different set of laws on this. You're not going to take it out of the Constitution. The Constitution doesn't say how it should be operated. It just says that there shall be this group to protect. They didn't call it intellectual capital then. I can't remember the exact parse.
So, I would suspect we're going to have a change simply because you can't enforce the thing with a network that's growing so fast over the world. I have no idea how it will work out.

AUDIENCE: I'm trying to tie in today's entire presentation. And I'm wondering if you feel as if the reporting on intangibles and providing companies with a clear understanding of their true value, whether or not you see that as a disruptive technology or disruptive phase in corporate value analysis.
MR. WRISTON: I don't think that based on prior history, that the youngest person in this room will live long enough to see intellectual capital in the balance sheets. That's why I'm suggesting that if we can agree that this is a driving force, we have to find another mechanism. You're going to get it by Mr. Lizarraga or Mr. Levitt or whoever is calling the shots, it won't happen. So I would like to have this -- what I suggested some kind of a supplemental report, but I would like to have it wrapped in so that it's in equal prominence, opposite the balance sheet.
Now maybe -- I hope I'm wrong. I hope the accounting profession will figure out a way to do it, but I'm not sure that it's going to happen very soon. That being the case, what's the alternative? The alternative is to make some kind of a supplemental thing. Mine was just a list, you know, of things that interest me in a company. You can make your own. Maybe you should have 12 or 10. Maybe they should be in paragraphs. I don't know. But the idea of the thing, I think has some merit to it. Does that answer you?
Yes, sir?

AUDIENCE: Wouldn't you say though that the leadership of CEO's and others are equally at fault for not pushing this? They talk about the value of the intellectual capital, but when it comes to mergers and acquisitions it then is let's ring out the costs and let's rationalize lines of business, etc. So, I mean, it's a two-way street. You've been criticizing the accounting profession, which I think is -- should get criticized. And what about the boardroom and the leadership?
MR. WRISTON: I'm sorry. I couldn't hear the last part. What is the question?

AUDIENCE: What about the culpability of the leadership of companies not pushing changes in valuation and pushing the importance of intellectual capital within their own organization?
MR. WRISTON: I don't think there's any culpability either on the accounting profession or on the part of corporations. People always say they like change and then you ask them to move their house across the street, and you've got a real problem. A lot of corporations that are running strictly on intellectual capital are making some efforts on this. Some of the older companies aren't; I agree with you. But I think that the efforts that are undertaken here now with the Cap Gemini's Group and Brookings and even the FASB has got a task force under Ralph Saul who is looking at this thing. So, I think that we're building momentum on it, and whether or not the corporate America gets aboard, I couldn't tell you. But they have been in the past very slow to embrace a change of this nature.

AUDIENCE: On the subject of following up on the question before about what corporations should disclose and your suggestion about doing a supplement, do you think it would be more valuable for a company to do a supplement on their own for the public and the investment community, or do you think it would be more valid if they referred to independent public sources of that same kind of information?
MR. WRISTON: I think the accountants can move into that field, if that's what you're suggesting. And I don't know whether you'd have a certificate of audit on the supplement, but it might be a new business department I can see Chris would like. But yes, I think they could help. I don't know why the auditors' certificate should and couldn't cover that in the new world and it would add some verisimilitude to it as opposed to a puffery that some CEO might hand out. Is that what's your point? Got a whole new business department working for you, Chris.
AUDIENCE: (indiscernible).


MR. WRISTON: Thank you.
[applause]


Cartoon of Walter Wristons' speach (click on image for enlargement - 1'000KB) Walter Wriston on value


"A new Information Revolution is under way. [...]   
It is not a revolution in technology, machinery, techniques, software or speed.  
It is a revolution in CONCEPTS.
".  
Peter F. Drucker  
Management Challenges for the 21st Century, p.97