LES' IA in the Boardroom Standard Could Impact
Board Liability in Overseeing Increasingly Important IA
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 StandardLES 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
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Licensing Executives SocietyKelli Baxter, 703-234-4088Deputy
Executive Director, COOkbaxter@les.orgorZumado Public
RelationsNicholas Gaffney, 415-377-1131ngaffney@zumado.com