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Leif Edvinsson

A man who measures intangiblesLeif Edvinsson is a financial visionary. The 55-year-old Swede invented the concept of intellectual capital – a company’s unseen or intangible assets – and was first to develop tools to measure it. He is the world’s leading expert on the subject today.
   Intellectual capital, says Edvinsson, covers many things and includes items as diverse as the knowledge and skills of employees, a company’s customer relationships, its information networks and organisational manuals. A more refined definition describes intellectual capital as the combination of human capital and structural combined capital, or the intangible values left when employees go home.
   Having a good stock of intellectual capital is essential to any business, says Edvinsson. Without it, a company cannot sustain itself and create maximum wealth for its shareholders; it cannot fund research and development for the future or pay dividends and its tax bill.
   Strangely, though, intellectual capital is usually nowhere to be found in the official accounts that big companies publish several times a year. Stranger still is the fact that until recently most companies weren’t even aware of what intellectual capital was. Even today, many haven’t properly grasped the concept.
   Over the past 15 years or so, Edvinsson has spearheaded efforts to make companies get serious about intellectual capital and to learn how to nurture, measure and report it to shareholders. This work led to him being named “Brain of the Year” in 1998 by the UK-based Brain Trust, an award previously held by such luminaries as chess genius Gary Kasparov and the brilliant physicist Stephen Hawking.
   Measuring something intangible sounds tricky by definition, but Edvinsson has devised models for doing so and travels the world preaching his message to the world’s largest corporations. “What we are struggling with today is that we don’t have a global standard for [reporting] intangibles,” he says. “Without it you can’t get a balanced view of a big corporation.”
   He illustrates his point: A star fund manager at an international bank, whose stock-picking expertise earns his employer hundreds of millions of dollars a year, is about to quit his job. Does the bank divulge this fact in its financial reports? Probably not, despite the difficulty of replacing such an important individual and despite the knowledge that losing him will in all certainty dent the bank’s profits.
   Only if investors know of the fund manager’s impending resignation and the bank’s consequent loss of intellectual capital can they form an accurate impression of the bank’s future prospects, Edvinsson says. His mission is to persuade business and the financial community to communicate their intellectual capital to the market, a change that will require a revolutionary overhaul in accounting principles.
   Edvinsson makes no secret of his dissatisfaction with the way things are today. For instance, he says fundamental changes are needed in the way financial analysts and stock market pundits forecast a company’s future profits by projecting historical performance into the future.
   Edvinsson says their models are flawed because they fail to take account of intellectual capital. “Intellectual capital is the best guide to future earnings capability, not past performance,” he says.
   To Edvinsson, a company that fails to nourish its intellectual capital is a company without a future. And whether a company’s intellectual capital is weak or strong is the difference between excellence and mediocrity, or in some cases between success and failure.
   Failure to appreciate the importance of intellectual capital can lead companies to make strategic blunders. Edvinsson believes that companies that try to raise productivity or profitability by shedding staff are often committing a grave error. Sacking workers means waving goodbye to valuable collective knowledge, and the ones to be sacrificed are usually the most innovative – those aged in their 20s, 50s and 60s.
   Employees of these ages are arguably the most valuable in the company, Edvinsson says. As he puts it on his business card, “Many [companies] try to starve themselves in the future instead of gorging themselves on brainpower.” This, he adds, leads to “corporate anorexia.”
   He believes there are often better ways of cutting costs than through redundancy and early retirement. Outsourcing, whereby production is farmed out to specialist contractors, is one “potentially interesting” solution. Another is to use consultants or freelancers rather than full-time staff. “Your risk goes down and your efficiency goes up if you have more part-time knowledge workers in a network, but many companies haven’t understood this.”
   Edvinsson traces the roots of intellectual capital to the early 1980s, when he was asked to participate in a group set up by the Swedish cabinet to find ways of promoting exports of intangibles.
   The government at the time was mystified that the rapid growth and success of the service sector in Sweden was not being reflected in increasing export volumes, an area where traditional heavy industries still held sway.
   Edvinsson and his colleagues discovered a remarkably simple answer to this riddle: Service companies were struggling to raise export finance because banks would only take traditional assets, such as real estate or machinery, as collateral for loans. Compared with companies in capital-intensive industries like steel, engineering and paper, service companies had far fewer traditional assets.
   “It means that a building was worth more to the bank than the people who would benefit from the money,” Edvinsson observes. “This is the way credit analysis was done 10 years ago and is still done by most banks today.”
   Edvinsson has worked hard to change this in Sweden, first at SEB, one of Sweden’s largest banks, and then at Skandia, the Nordic region’s largest insurer, where he was the world’s first corporate director of intellectual capital as well as founder and manager of the company’s “future centre” until 1999.

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A man who measures intangiblesLeif Edvinsson is a financial visionary. The 55-year-old Swede invented the concept of intellectual capital – a company’s unseen or intangible assets – and was first to develop tools to measure it. He is the world’s leading expert on the subject today.
   Intellectual capital, says Edvinsson, covers many things and includes items as diverse as the knowledge and skills of employees, a company’s customer relationships, its information networks and organisational manuals. A more refined definition describes intellectual capital as the combination of human capital and structural combined capital, or the intangible values left when employees go home.
   Having a good stock of intellectual capital is essential to any business, says Edvinsson. Without it, a company cannot sustain itself and create maximum wealth for its shareholders; it cannot fund research and development for the future or pay dividends and its tax bill.
   Strangely, though, intellectual capital is usually nowhere to be found in the official accounts that big companies publish several times a year. Stranger still is the fact that until recently most companies weren’t even aware of what intellectual capital was. Even today, many haven’t properly grasped the concept.
   Over the past 15 years or so, Edvinsson has spearheaded efforts to make companies get serious about intellectual capital and to learn how to nurture, measure and report it to shareholders. This work led to him being named “Brain of the Year” in 1998 by the UK-based Brain Trust, an award previously held by such luminaries as chess genius Gary Kasparov and the brilliant physicist Stephen Hawking.
   Measuring something intangible sounds tricky by definition, but Edvinsson has devised models for doing so and travels the world preaching his message to the world’s largest corporations. “What we are struggling with today is that we don’t have a global standard for [reporting] intangibles,” he says. “Without it you can’t get a balanced view of a big corporation.”
   He illustrates his point: A star fund manager at an international bank, whose stock-picking expertise earns his employer hundreds of millions of dollars a year, is about to quit his job. Does the bank divulge this fact in its financial reports? Probably not, despite the difficulty of replacing such an important individual and despite the knowledge that losing him will in all certainty dent the bank’s profits.
   Only if investors know of the fund manager’s impending resignation and the bank’s consequent loss of intellectual capital can they form an accurate impression of the bank’s future prospects, Edvinsson says. His mission is to persuade business and the financial community to communicate their intellectual capital to the market, a change that will require a revolutionary overhaul in accounting principles.
   Edvinsson makes no secret of his dissatisfaction with the way things are today. For instance, he says fundamental changes are needed in the way financial analysts and stock market pundits forecast a company’s future profits by projecting historical performance into the future.
   Edvinsson says their models are flawed because they fail to take account of intellectual capital. “Intellectual capital is the best guide to future earnings capability, not past performance,” he says.
   To Edvinsson, a company that fails to nourish its intellectual capital is a company without a future. And whether a company’s intellectual capital is weak or strong is the difference between excellence and mediocrity, or in some cases between success and failure.
   Failure to appreciate the importance of intellectual capital can lead companies to make strategic blunders. Edvinsson believes that companies that try to raise productivity or profitability by shedding staff are often committing a grave error. Sacking workers means waving goodbye to valuable collective knowledge, and the ones to be sacrificed are usually the most innovative – those aged in their 20s, 50s and 60s.
   Employees of these ages are arguably the most valuable in the company, Edvinsson says. As he puts it on his business card, “Many [companies] try to starve themselves in the future instead of gorging themselves on brainpower.” This, he adds, leads to “corporate anorexia.”
   He believes there are often better ways of cutting costs than through redundancy and early retirement. Outsourcing, whereby production is farmed out to specialist contractors, is one “potentially interesting” solution. Another is to use consultants or freelancers rather than full-time staff. “Your risk goes down and your efficiency goes up if you have more part-time knowledge workers in a network, but many companies haven’t understood this.”
   Edvinsson traces the roots of intellectual capital to the early 1980s, when he was asked to participate in a group set up by the Swedish cabinet to find ways of promoting exports of intangibles.
   The government at the time was mystified that the rapid growth and success of the service sector in Sweden was not being reflected in increasing export volumes, an area where traditional heavy industries still held sway.
   Edvinsson and his colleagues discovered a remarkably simple answer to this riddle: Service companies were struggling to raise export finance because banks would only take traditional assets, such as real estate or machinery, as collateral for loans. Compared with companies in capital-intensive industries like steel, engineering and paper, service companies had far fewer traditional assets.
   “It means that a building was worth more to the bank than the people who would benefit from the money,” Edvinsson observes. “This is the way credit analysis was done 10 years ago and is still done by most banks today.”
   Edvinsson has worked hard to change this in Sweden, first at SEB, one of Sweden’s largest banks, and then at Skandia, the Nordic region’s largest insurer, where he was the world’s first corporate director of intellectual capital as well as founder and manager of the company’s “future centre” until 1999.

He is now a professional board member of a number of companies focusing on intellectual capital and knowledge management issues. In 1977 he co-founded Intellectual Capital Sweden and in April this year he was appointed associate professor in intellectual capital at Lund University in southern Sweden, the first such academic post in the world.
   A compelling and confident speaker, Edvinsson makes his arguments so succinctly that you wonder why intellectual capital has taken so long to gain recognition. Astoundingly, Edvinsson reveals that corporate investment in intangibles has been outstripping investment in traditional assets since the 1980s yet, he says, “no one knows where that spending is and there are no statistics for it.”
   Thanks to Edvinsson and a number of other intellectual capital pioneers, this is about to change. After years of work, international accounting standards will come into force next year that will require companies to report their intellectual capital and in certain circumstances include it on their balance sheets.
   This will be a huge step forward, but, says Edvinsson, much more needs to be done.

Greg McIvor  
a business journalist based in Stockholm  
photos Camilla Sjödin

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