The value creation index
| DOI | https://doi.org/10.1108/14691930010377919 |
| Date | 01 September 2000 |
| Pages | 252-262 |
| Published date | 01 September 2000 |
| Author | Jonathan Low |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
JIC
1,3
252
Journal of Intellectual Capital,
Vol. 1 No. 3, 2000, pp. 252-262.
#MCB University Press, 1469-1930
The value creation index
Jonathan Low
Cap Gemini Ernst & Young, Cambridge,
Massachussetts, USA
Keywords Value analysis, Intangible assets, Performance measurement, Open market value,
Innovation
Abstract The Cap Gemini Ernst & Young Center for Business Innovation (CBI) has conducted
a series of studies on the role of intangibles in creating value in the modern corporation and
developed a rigorous, comprehensive model ± the value creation index ± of value creation for
progressive companies, one that enables users to measure the impact of key intangible asset
categories on a company's market value. By devising a set of standardized measures, weighted
according to their relative impact, managers have the tools to better drive and monitor their
company's future performance. At the same time, if disclosure rules change in parallel, investors
will be armed with a more uniform, less subjective and more robust way of evaluating companies.
Over time, the value creation index will evolve, continuing to identify value creation drivers, while
remaining sufficiently flexible so it can adapt to the constantly changing nature of companies in
the connected economy.
Introduction
In today's economy, traditional companies with solid market share and robust
revenues have significantly lower market capitalizations than their counterpart
Internet companies ± dot.coms. The dot-com Initial Public Offers (IPOs) have
been known to rack up valuations in the hundreds of millions if not billions of
dollars.
So, what is wrong with this picture?
Clearly, it is not about the demise of old economy companies or about the
economic supremacy of new economy ones. What this growing valuations
chasm suggests is that much of the picture is missing for old and new economy
companies alike. Existing measures are now woefully insufficient at expressing
corporate value. The time is right for smart companies to recognize that the
better the job they do of managing all their assets and liabilities, not just those
which are traditional and tangible, the more comprehensible and positive their
valuations will be.
In today's knowledge-based, turbo-charged economy, financial results
account for an ever-shrinking percentage of corporate performance.
Technology, connectivity and human capital play an increasingly dominant
role, yet the accounting systems we have traditionally relied on to track
corporate and economic performance are woefully outdated.
Over the past 80 years, market-to-book value has steadily increased,
reflecting an increasing shift from past to potential performance as the source
of shareholder value. Investments in R&D, brand development and training
now exceed total investments in tangible assets, skewing return on investment
capital from historic norms. The percentage of a company's value that is
unaccounted for by tangible assets has skyrocketed anywhere from 50 per cent
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