'Rate the future, not the past'

Q&A: Leif Edvinsson

Leif Edvinsson, an acknowledged global knowledge leader, is one of the founding fathers of the idea of intellectual capital. He became the first knowledge officer of the world when he was appointed "director ""intellectual capital" at Skandia, the Swedish financial player, way back in 1991. Since then he has been explaining what the traditional balance sheet does not show. In 1998 he co-founded Intellectual Capital Sweden AB which developed intellectual capital (IC) rating, the methodology to measure and rate a firm's intellectual capital. IC rating services are being offered in India by Bizworth, the Indian partner of Intellectual Capital Sweden. Excerpts from his conversation with Subir Roy

Why do we try to measure such an immeasurable as intellectual capital?

The metaphor I have, which is shown in my business card, is of a tree which is upside down, as the roots are more important than the fruits for the future. In economics it is called opportunity cost. What is the opportunity cost of not nourishing the roots?

So what is the framework for such kind of a measurement?

At Toyota they have for many years applied a questioning model. You ask a question why, and then drill down to more and more insights. Compare that with the Wall Street paradigm of short term earnings. Financial results are lagging results based on what you did. What we probably need much more are early indicators, predictors.

How do you rationalise the mindset of Wall Street and is what is its future?

There is something called dominant logic. In most professions and societies it dominates the thinking. Financial accounting was invented as a kind of a social system and launched in 1994 in Italy. We still stick to that dominant logic of 500 years ago.

How do you measure and prepare a firm, society and economy so that they are able to do better in the future?

If you spell the word measure as m-e-a-s-s-u-r-e and then put a hyphen it becomes 'me-assure' which means you are creating trust for yourself, your colleagues and society that you are navigating in the right direction. There are three knowledge navigation paradigms "" position, direction and speed. When you have the balance sheet, you have just the position based on the past. The IC report for firms is becoming more or less standard now. You have a law in Austria, Denmark, guidelines by the European Commission, guidelines in Japan but none in the US. The initial work in the US came about in the mid 90s when the SEC was starting to look into this and I was happy to support it. That led to a kind of white paper. And then it was run over by the dominant logic. Now the present chief of the Federal Reserve, Fred Bernanke, is looking into these intangibles.

What is the future of Wall Street with its present mindset.

The future of Wall Street is like this U curve. Youngsters and seniors are more prepared to pick up on this and then you have the traditional managers in between "" financial asset players. Then you are not prepared to take risk and that's why you have got the Sarbanes Oxley Act "" which is about have we neglected something, let's do an audit. Is there time left for doing some value creation? What we are starting to see is some of the big players like Calpers have been more inclined to look into these issue for a long period. So everything is pointing in that direction.

You spoke of structural capital.

You represent human capital, Business Standard represents more than you. If you were working alone you would have much less springboard effect of your skill. So it is basically human capital and structural capital or non-human capital. You can have a whole structure of that.

How is the intellectual capital that you have in mind larger than the IP that a company poses in terms of its patents and trademarks?

Manchester United has good football players. That is human capital. They were playing in a club with a trademark so that will be a little bit more because that trademark signals some kind of trust and interest. But what is even more interesting is that the major proportion of people looking at Manchester United are not in England. They are here in Asia, 400 million people every week looking at the football league. That means the broadcasting rights become one of the most important assets.

Firms capture a lot of these things in their brand value. How is intellectual capital more than such brand value?

The brand is one of the components. The non-book value in most enterprises today represents somewhere around 80 per cent. (In the case of Infosys it is 93 per cent). Which means the book value is about 10 per cent.

Why should a firm pay to rate its intellectual capital when the difference between book value and market value captures it?

Why do you do a rating of the 10 per cent and not the 100 per cent? You should have an intellectual capital officer (ICO) "" which I was the first in the world to be "" at a parallel level as the CFO. The second dimension is that the rating process is a learning instrument. It is not the benchmark per se, it is the bench-learn to compare with the best in class, to find out where do you need to upgrade to have sustainable earnings for the future. The financial rating only captures what you have got and why you have got it. If you have a triple A in financial performance you might not have a triple A for future performance and you might not even have a clue as to where the risk areas lie. These are visualised through IC rating which gives you a very early pedagogic format. You may find a business is not performing in its processes. If you look at the financial system you will not get a clue. Therefore IC rating is a complimentary mapping to the S&P rating. Furthermore, the S&Ps are gradually moving in this domain.