. The shift is moving from tangible assets to intangible assets. In the 1960s and 1970s, 25% of differences in stock prices could be attributed to differences in reported earnings. In the 1980s and 1990s, only 10% of stock price differences are connected with earnings, indicating the rise in influence of intangibles. A popular way of determining the IC of a company is to look at the market price of a company versus its book value. This ratio will show what assets the company must have above and beyond its balance sheet. At a time when Microsoft’s book value was $7 a share, it was trading for $70 a share. Investors perceived Microsoft’s intangibles: strong customer/distributor relationships, employee competency, and innovation.In 1995, the S&P 500 companies had assets worth $1.2 trillion while the market value of these firms was $4.6 trillion, yielding a market-to-book ratio of 3.83. By 1999, the S&P 500 companies showed an average market-to-book ratio of 6.25. This indicates that IC accounts for six out of every seven dollars of corporate market value. What could cause such an increase in just four years? Intangible assets account for such great value because of unlimited leveraging. It is difficult to get increased value from a tangible asset because it must remain at one place at one time. On the other hand, there is no limit on where an intangible asset can be, and how many people can use it.Since these facts prove that IC is an important part of today’s businesses, it must be determined how to measure IC in its various forms.Analysis of the Edvinsson/Malone FrameworkThe following proposal comes from Edvinsson and Malone, authors of Intellectual Capital. The tables show a framework for measuring IC, divided into the categories of finance, customers, humans, renewal & developmental, and process efficiency. Edvinsson and Malone offer one of the most comprehensive guides for IC reporting, but their ...
