For the most innovative companies this may means that analysts do not have enough information to work out their true market value.
Reforming this area should be a key part of any proposal to reinstate a requirement for an operating and financial review (OFR) section in company reports, reform of which was unexpectedly dropped by the Government two years ago.
A team of academics at Cass Business School at London’s City University analysed three unseen factors involved in innovation – often known as 'intangibles' - and their relation to business performance in almost 700 manufacturing and services companies.
The factors were human capital (people and teams), structural capital (the processes, information systems and patents that remain when employees leave), and relational capital (links with customers, suppliers and other stakeholders).
They found that conventional measures, typified in the DTI’s Innovation Index’s focus on R&D spend and patents, fail to reflect the drivers and effects of innovation in services. The new analysis provides a better way of viewing innovation in service firms, and gets beneath the surface of such factors as R&D spend to identify the underlying processes that ensure this is used effectively.
A separate analysis of 2003 annual reports for 150 companies revealed that their coverage of intangibles was skewed towards their relational capital and away from human capital (60 per cent of commentary focusing on this) with just 14 per cent of mentions relating to human capital.
One likely explanation is that companies want to assure the market of their prospects by focusing on relations with customers and suppliers. The authors warn this risks taking attention will be drawn away from longer-term drivers of innovation involving people working in teams.
“While intangibles have grown in importance, conventional accounting technology, however, remains ill-equipped to account properly for them,” says Professor Chris Hendry, who led the research. “These findings suggest there is an economic rationale for firms’ current voluntary intellectual capital disclosures.”
However the weak focus on aspects of human capital that matter for innovation implies that much of what firms write about people in their annual reports has little bearing on future business performance. “This is not to say people don’t matter, but that firms either add much that is irrelevant to performance or that they do not emphasise what does matter,” he says
The authors say their findings show that any future attempt by regulators to produce a new OFR must ensure it selects the correct key performance indicators to accompany the text, which the revised UK OFR had required.
The research also highlights investors’ attitudes towards company strategy and risk. Interviews with 27 key figures including analysts and fund managers found that investors look for a clear innovation strategy, which has a short- and long-term view of where returns can be generated.
Risk is seen as something companies should respond to positively rather than quantify, moderate and manage downwards. Avoiding risk altogether certainly won’t generate abnormal or even acceptable returns in a competitive climate. This justifies innovation and provides a hook for reporting which any new OFR would do well to embrace.
Annika Howard | alfa
How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung
Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT
A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.
Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...
In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.
“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...
The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.
The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...
Broadband rotational spectroscopy unravels structural reshaping of isolated molecules in the gas phase to accommodate water
In two recent publications in the Journal of Chemical Physics and in the Journal of Physical Chemistry Letters, researchers around Melanie Schnell from the Max...
The efficiency of power electronic systems is not solely dependent on electrical efficiency but also on weight, for example, in mobile systems. When the weight of relevant components and devices in airplanes, for instance, is reduced, fuel savings can be achieved and correspondingly greenhouse gas emissions decreased. New materials and components based on gallium nitride (GaN) can help to reduce weight and increase the efficiency. With these new materials, power electronic switches can be operated at higher switching frequency, resulting in higher power density and lower material costs.
Researchers at the Fraunhofer Institute for Solar Energy Systems ISE together with partners have investigated how these materials can be used to make power...
16.11.2016 | Event News
01.11.2016 | Event News
14.10.2016 | Event News
02.12.2016 | Medical Engineering
02.12.2016 | Agricultural and Forestry Science
02.12.2016 | Physics and Astronomy