|
A new economics and integrated business model is possible.
Go to: Project NEMO (New/Next Economic Model)
Go to: INSEDE (Institute for Sustainable Economic Development)
Go to: Business Engineering Systems
(New perspectives for the design and development of economy, politics and community)
to original bengin ¦ 
to English (beta)
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 Chris Meyer at LinkedIn
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) 
"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
|
