Investors urged to put a greater focus on intangibles when investing
Investors traditionally seek to understand a companies’ financial results, earnings, business metrics and other figures before investing.
However, over the past half-century, intangible factors, such as corporate culture, are a far more important factor measuring and driving a company’s market value.
Most of the stock market value of an organisation today is derived from assets that are not on the balance sheet, says Ocean Tomo[1], a US-based research and ratings firm. Approximately 84% of the market value of the United States S&P 500 equity index is in ‘intangibles’ – assets not captured on the balance sheet.
That leaves only 16% of the market value of a company to be ‘tangible’. This portion includes traditional earnings, ratios, estimates, cash, receivables, plant, property, equipment and inventory.
Intangible assets are not physical in nature. They are the results of human intellect and include intellectual property (items such as patents, trademarks, copyrights, business methodologies), human capital, reputation, brand recognition and customer relationships.
“Corporate culture is an intangible factor. It is often described as the ‘DNA of the organisation’ and shapes interactions with internal and external stakeholders,” Marty Switzer, CEO of Contango Asset Management said.
Contango distributes WCM’s Quality Global Growth Strategy to Australian investors via the WCM Quality Global Growth ETMF (ASX:WCMQ) and the WCM Global Growth Limited LIC (ASX:WQG). The strategy has a unique corporate-culture focused investment approach.
“Corporate culture is as important to a company’s health and future as any financial indicator. I’d also argue that culture is the single best predictor of long-term performance and viability,” he said.
The recent revelations of misconduct from the Royal Commission highlight the need for investors to garner greater insights into the corporate culture of the organisations in which they invest.
“Unhappy banking clients affected by the fees-for-no-service scandal joined disgruntled shareholders and have seen their shares fall in value by more than 20% over the past five years in some cases. In contrast, companies that are famous for their focus on culture, such as Netflix among others, have seen their share price rise more than 450% over the same period. While not a like-for-like comparison these are not isolated examples,” he said.
He notes studies demonstrate that companies with a positive workplace culture consistently deliver superior investment returns.
Mr Switzer says an increasing number of investors want to know what the CEO of an organisation has learned from other great leaders, what the firm’s core values are and how they are integrated throughout the organisation.
“Corporate culture is as important to a company’s health and future as any financial indicator. Companies with a positive workplace culture consistently deliver superior investment returns. Engaged employees keep customers happy and generally deliver consistently on business objectives. This can translate to more innovative products, higher sales, lower costs from staff turnover and lower financial volatility.
“When you have nearly identical businesses in the same industry there can still be big differences in business performance – due to differing corporate cultures. In the financial services sector, when a company culture is poor, this can lead to numerous issues which can affect the customer experience and the company’s long-term financial performance.”
[1] Ocean Tomo, a merchant bank focused on intellectual capital and intangible assets, notes the financial value of tangible and intangible assets has reversed in the past 40 years. In 1975 tangible assets comprised 83% of the S&P 500 market value; in 2015 intangible assets made up 84% of the S&P 500 market value. http://www.oceantomo.com/intangible-asset-market-value-study.
