LES Proposes New Way For Boards To Oversee Material Intangible Assets Currently Ignored
Thursday, October 11, 2018
FOR IMMEDIATE RELEASE
Kelli Baxter, Deputy Executive Director, COO
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Licensing Executives Society (U.S.A. and Canada) Proposes New Way For Boards To Oversee Material Intangible Assets Currently Ignored
LES' IA in the Boardroom Standard Could Impact Board Liability in Overseeing Increasingly Important IA
RESTON, VA –Oct. 11, 2018‑-— The Licensing Executives Society (U.S.A. and Canada) (LES) Standards Development Organization (SDO) board will vote on the first draft of LES' Intangible Assets (IA, which includes among other things, intellectual property, supply chain contracts, customer relationships, assembled workforce and franchise rights) in the Boardroom standard at its upcoming annual meeting in Boston at the Marriott Copley Place, Oct. 14 -18, 2018.
The draft standard is the first of its kind to address company directors' duty to adequately oversee IA value and risk. Specifically, it provides a set of principles as well as a reliable framework and process for that IA oversight. Notably, the draft standard addresses in-depth what Generally Accepted Accounting Principles (GAAP) may not address adequately or consistently, which could have a permanent effect on accounting standards and board-related IA litigation.
"We've had sound principles for valuing tangible and financial assets for the past 60 years, but there hasn't been a reliable equivalent for board-oversight of the management of intangible assets until now," said Bill Elkington, LES president and chair and senior director of IP management at Rockwell Collins. "Company directors have a duty to maximize shareholder value and manage risks. Some of them have been sued by shareholders because they didn't address intangible assets adequately, and this has negatively affected company reputations and bottom lines."
While the IA in the Boardroom standard faces a long approval process like any other industry standard, its effect on accounting and litigation could be profound. For example, current accounting standards including GAAP and International Financial Reporting Standards may not address IA in a manner that is consistent with the growing importance of IA in the modern global economy. For example, traditional accounting provides for different treatment for the same assets created within a first company as compared to a second company that acquires those exact same assets from the creator.
This sort of inconsistent treatment has become increasingly concerning at a time when IA are increasingly important to company value and risk. Many of today's disruptive business models depend predominantly on intangible assets, for example, Uber doesn't own automobiles and Airbnb doesn't own hotel rooms. In fact, the World Intellectual Property Organization, a United Nations agency, reported in 2017 that intangible assets add twice as much value to products as tangible capital, across nineteen global value chains, according to their ground-breaking original research.
Similarly, IA-related litigation could be impacted permanently. Specifically, directors who comply with the standard could demonstrate they acted responsibly. Conversely, directors who fail to comply with the standard could find that fact used against them in court to show negligence or misconduct.
The IA in the Boardroom standard is comprehensive. It includes a set of core principles, a common AI language for boards, an agnostic approach to materiality and risk tolerance, and a five-step process for implementing the standard.
"Directors need a rigorous way of separating intangible asset value from tangible asset and human capital value. They also need a way of identifying material intangible assets so they can understand the respective impact of each on the value of, and risk to, the company," said Paul Roberts, in his capacity as LES board counsel and co-founding chair of the Intangible Asset in Boardroom (proposed) standard. "The IA in the Boardroom standard provides an agnostic way of doing that, which is important since every company is unique. It would be disingenuous to prescribe a single model that applies in the same way to companies of all sizes, in all industries and at all stages of development."
First Public Discussion of Draft Standard
LES will present a pre-meeting workshop on Sunday, October 14, 2018, to discuss the key aspects of the draft standard. This will be the first public discussion of its content, which will include:
- Identifying changes in the financial and legal environments that impact a board's ability to effectively discharge their IA oversight responsibilities;
- Articulating the core principles for appropriate board IA oversight;
- Creating a taxonomy for translating between business and legal terminology to lower existing communication barriers between directors and IA professionals; and
- Developing a "materiality filter" that enables the standard to be applied in a way that reflects the differences in company size, maturity, technology, culture, etc.
The workshop panel will be chaired by Roberts. Panel participants include Edgar Baum, chief executive officer and chief brand economist at brand economics firm Strata Insights; John Carney, managing director of product design and manufacturing process, asset sales and market supply consultancy China IP exchange; and Ron Laurie, chairman of breakthrough invention fund InventionShare.
About Licensing Executives Society (U.S.A. and Canada), Inc.:
Established in 1965, Licensing Executives Society (U.S.A. and Canada), Inc. (LES) is a professional society of 3,000 members engaged in the creation, commercial development, and orderly transfer of intellectual property rights; protection and management of intellectual capital; and intellectual capital management standards development. LES members are accountants, business leaders, business model innovators, consultants, deal-makers, economists, engineers, IP valuation experts, lawyers, licensing executives, lobbyists, merger and acquisition experts, public policy leaders, scientists, strategic planners, supply chain managers, tax specialists, and technology transfer specialists. These members represent innovation-centered enterprises of all sizes and kinds—such as government laboratories, professional services firms, universities, operating companies, regulatory authorities, licensing specialty firms, and trade associations. LES is a member society of the Licensing Executives Society International, Inc. (LESI), which has 32 sister societies representing 10,000 members in 90 countries. www.lesusacanada.org