A Matter of Trust

Michael Malone: Don't Know the Value of Anything

Not that there haven't been attempts. A few years back, I wrote a book with the Swedish economist, Leif Edvinsson, entitled "Intellectual Capital." The impetus for the book was the growing realization in the business and financial communities that we really had no idea what anything was worth anymore. That is to say, we had all of the traditional accounting measures: inventories, capital equipment, etc. But the gap between that sum and what the stock market seemed to believe the company was actually worth was growing by the day. For example, how could Intel, which at the time had about $20 billion in revenues, be worth more than the entire U.S. automobile industry?

In fact, the only accounting entry that seemed to be stretching to encompass these changes was that little item called "goodwill," traditionally a kind of mulligan to cover the difference between the book value and sale price of traditional companies. But, nowadays, such goodwill might be three times the book value of the firm, meaning if we were willing to admit it, that we really don't know the value of anything anymore. [That's even more true now than it was then, which helps explain the increasing volatility of the world economy.]

Edvinsson and I (along with a number of other folks working with the same idea at the same time) set out to find real measures and real numbers for these other "intangible" assets, a company's hidden "intellectual" capital.

In the end, we came up with a whole bunch of different measures, from executive turnover to the number of patent filings to customer satisfaction ratings. Other folks came up with other measurement schemes. Some worked pretty well, others less so. A few of the measures have been unofficially adopted by companies and industry analysts, although none yet officially so.

Someday, I suspect that intangible asset measures will be an accepted part of all balance sheets. But it won't happen anytime soon.

Looking back, if there is one part of our research I would have emphasized a whole lot more, and would have tried harder to quantify, it is the matter of Trust. Writing at about the same time, in his book of that name, political scientist Francis Fukuyama got it right: Trust is the single most valuable currency of the modern global economy, the maker and breaker of nations.

Everywhere you look, the question of trust is defining winners and losers in the Internet age. Why are newspapers dying? Not just because technology passed them by, but because they violated readers' trust that they would deliver timely, accurate and unbiased news. Why is Apple Computer so successful? Because it has upheld its customers trust that Steve Jobs will continue to give them interesting, innovative and "cool" products. Why have a handful of bloggers earned huge audiences, while millions of others have not? Because we trust those few to either consistently entertain us, or we trust their judgment in selecting interesting items for us to read, or we trust that their world view is just like our own and their ability to enunciate those views even better. Why is the xBox 360, a superior game player, falling behind Nintendo and Sony? Because gamers don't trust Microsoft to continue delivering the best games.

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