IP, The Most Critical Asset Class? Ft Dr. James Gregory

In this episode of Innovation Capital

We look at the intangible asset classes that are driving company values up, and the rise of IP-based transactions and strategies for companies seeking to maximize the value of their intellectual capital.

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Episode transcript

Ray Chohan: Morning, Jim, welcome to Innovation Capital. So, just to kick off with, we’re really excited to have you on board today, and what I’d love to kick off with is a little bit about your story, Jim. We’ve really enjoyed researching your background, It’s been loads of fun, our team here. So, I’d love to hear your story and where this all started, and how you ended up in this wonderful world of tangible assets.

Dr. James Gregory: I’d be happy to. Well, I am currently a senior fellow with the Conference Board, part of the innovation and digital transformation group, and I happen to be working on a project called “Making Intangibles Tangible.” So, I think that’s a perfect lead in to our entire discussion this morning.

The way I got started on this, it started in 1990. I was actually writing my first book on the subject, called Marketing Corporate Image. And I was interviewing a gentleman by the name of Richard Costello, who was the Chief Marketing Officer of GE at the time, and during the interview, he said, “Jim… I know you believe in this work, that corporate brand brings value to the company,”” he said, “but when I go into Jack Welch and ask for an increase in budget, he comes back and says, ‘What’s the return on investment?'” Since it’s not, it’s an intangible asset, the corporate brand is an intangible asset, it’s not on the balance sheet and Richard said, you know, I can prove to him that it improves familiarity or even favourability toward the company but I can’t prove a connection to financial performance.

And that half-hour conversation with Richard changed my whole career. Prior to that, I owned an advertising agency called Gregory and Cliburn. After that I became a consultant and the company became CoreBrand. And it just happened that fast. We had a blank slate, we really didn’t have any parameters set on us to develop this model and so we began to see what kind of research was out there on this subject. We began to look at best practices of various companies, who built their brands over time, and be able to understand that we began to get feeds of information like financial performance, stock performance, and then we began a major research study, a longitudinal quantitative research study, that became known as the CoreBrand Index.

Ray: So, this is fascinating out of a happenstance conversation with GE, that kind of sparked you going down this rabbit hole. I’m fascinated to, because I hear these moments, so many times with leaders and entrepreneurs like yourselves, where things just click in that very moment. In that kind of random conversation many, many years ago, what were the weak signals you can smell, which made you think, wow, let’s really dig in? Do you recall something in particular?

Dr. Gregory: Well, when Richard and I were discussing this, he actually said, “Could that be done? Could we actually do this?” And one of the things that he said was, “You know, if you accomplish this, it’ll change the whole industry, it’ll change everything.” And I believe that is still the case. We have not yet changed everything. We have not yet changed the world of accounting, and the way financials view accounting. But we do believe that this is still an ongoing process. You’re part of that process. We’re part of that process. Everyone who does brand valuations or valuations and understands intangible assets are really contributing to this this momentous sea change of valuation and how companies account for their their intangible assets.

Ray: And your contribution is fascinating to this space. So you codified this really interesting CoreBrand Index, CBI, which is used by best-in-class organizations around the world now as we sit here in 2020. But what was the actual journey on shaping that version one of CBI and actually what year did that all start?

Dr. Gregory: Well, it started in 1990. And basically, as I said, we had a clean slate, having GE behind you and Dow Jones was part of this effort, we had a lot of companies supporting us to try to find this solution. What we found is there were research studies out there that existed but they they were inadequate for really looking across the board and being able to understand the whole ecosystem of intangible assets. So, what we did is we took it an outside perspective, out-of-the-box kind of thinking on how brands are created. And when I talk about brands, I talk about corporate brands, how the image of a company is created. And to be able to quantify that we then did research and we chose an audience. One of the problems we saw is that when studies were done, they were going to vertical audiences, they would go out to employees of companies in the automotive industry, for example, and there were more employees at GE than anywhere else at that time. So, GE would always win the beauty contest. We decided not to do that and to go out to a horizontal audience. And that was a major, major change. And, we also chose impartial observers as our target audience. Now, impartial observers are made up of business executives, but not from the industry in which we were doing the research. There also happened to be very, very good consumers. And we began to do this research, we do 8000 telephone surveys a year, we track 800 companies across 50 different industries and we’ve done it consistently since 1990. So, version one lasted from 1990 to 2016.

So, it’s been very, very solid, very continuous, consistent research, and there’s no other research database of its kind on corporate reputation. And the things that we measure are overall reputation, perception of management, investment potential, and the thing that we that changed in 2016, is we added a new a new attribute, which is culture of innovation. So, this is absolutely consistent research. One of the one of the problems when when you’re one of these major companies, is very few of them actually do continuous benchmark tracking on their own corporate brands, it’s just too expensive, or it’s an annoyance, or they don’t see the value in it. And so when something would happen, when they would have a crisis, we could go back in time and identify the point of that crisis and be able to tell what would happen to their corporate brand as a result of the the crisis and how deep it would go. And we can tie it into financial performance. Specifically, their stock price, the premium people are willing to pay on the stock price, which is identified as the cash flow multiple. So, we were able to look at that and analyze what kind of an impact that would have. And beyond crisis, you can measure launches of new campaigns, corporate campaigns, PR campaigns, IR campaigns, what would happen if you get a new CEO? How will that impact the company’s performance and be able to use that to have the ability to measure the CEO’s performance? And then the primary tool that we developed for GE was how much spending would it take to really move the needle in terms of familiarity and favourability? But also, how would that impact long-term financial performance of the company? And major corporations have used this, when CEOs embraced what we do, and we took the time to explain to them how it works, that it’s not a tool specifically to drive stock performance, but to analyze. It’s a management tool to analyze how you’re doing compared to your competitors and compared to the industry and to be able to outperform them. And when CEOs understood that, they use this like an incredible tool to help manage the major decisions in their company.

Ray: Interesting how you touch upon the CEO, and how that’s attached to brand, and it’s fascinating. You touched upon the point that it wasn’t really built to drive market cap and the share price. However, as we stand today, we’re seeing some really interesting trend analysis on kind of preeminent chief execs like Elon Musk, or Jack Dorsey of Twitter, who actually play a big role in the brand, and the public perception of the business. Do you see that as a trend moving forward?

Dr. Gregory: There’s absolutely no doubt about it. Back when this was in its heyday, we had Jack Welch, for example, who was a dynamic CEO for half the period of time that the CoreBrand Index existed. And then there was a change where Jeff Immelt came in and became the CEO from there, totally different patterns of value creation, completely different. The dynamics that were driving the company changed dramatically and it was just, it was just phenomenal. And I can’t say one was better than the other, they both had their strengths, and both had their weaknesses. And it’s definitely what a CEO says, and what he does has such an impact on a company, that it is very, very important to be able to have realtime evaluations on realtime analysis. And when you have this baseline, you can do controlled experimentation to see what types of things would happen if a company makes a change. We had one CEO, when he would go live on television, the stock price would go down. It was just fascinating. And the more you use this kind of research, quantitative longitudinal research, the more you begin to develop these what-if scenarios, and there’s nothing we like better than getting what-if questions from the CEO of a major corporation, because then we can actually dig into the research, dig into the data, and be able to analyze how and what to do about it.

Ray: In the most simplest form factor, can you tell us about the CoreBrand Index and what led you to create it?

Dr. Gregory: Well, it is a quarterly update of research, we do 8000 telephone surveys a year. So it’s not done by computer, it’s done the hard way. Of course in 1990 that was expected. The data is rolled up on a quarterly basis and we measure overall reputation, perception of management, investment potential, and the culture of innovation. So, those are the descriptive attributes, what I call intangible attributes that are descriptive of intangibles, not necessarily the intangibles themselves. And, so, that’s an outside perception. If somebody thinks your company is innovative, your company may or may not be innovative, but that’s the perception that’s out there. And so that’s a very important measurement to have.

Ray: That makes sense. And it and it’s interesting now looking at some of the other asset classes in the world of intangible assets. How do you see assets like patents, trademarks, tacit knowledge, being stitched together with brand? Is there crossover? Are there scenarios where they’re all kind of packed together and, and drive that overall value on the balance sheet?

Dr. Gregory: Patents have advantages and disadvantages. One of the things that we’ve we found is that was patents were one of the few things, and trademarks were one of the few things, that would show up periodically on the balance sheet or in the annual reports, because you can identify a specific patent and be able to do analysis around it. But doing it on a large scale, being able to determine whether a patent is early in its development or late, or whether it’s cutting edge or old, whether it’s a really a value or not, was a very subjective thing. And so we found that that was kind of a hole in our research.

We just had a demo of what your folks are doing, and PatSnap is absolutely incredible, and it fills that gap totally, in terms of putting the actual value on the patents and providing a complete landscape of the patent in the context of the industry. I mean, it is extraordinary what you’ve done. And I think it really fills a hole in our research. Anytime you can be consistent and be precise, in your measure; and precise is directionally precise. It’s not, as I said, if you know, a culture of innovation, a company that may or may not be innovative, but it’s the perception of that company being innovative, that is very important to our work.

Ray: Brilliant. It’s interesting seeing how organizations are trying to really reflect these assets on the balance sheet and move stock price. You touched upon earlier in this conversation that it doesn’t really move the needle on the share price. Do you see that trend changing moving forward where it really is driving, say, capital towards a particular equity and when, for example, you’ve got institutional investors, hedge funds, looking at a particular company, are they really now taking into account these intangible asset classes, Jim?

Dr. Gregory: Oh, boy, I can’t get into the mind of the institutional investors, we’ve tried to understand them. If you call them and ask them, what drove them to pick a certain stock, intangible assets would never come up. However, as we know, intangible assets are becoming more and more part of the total value of the company. And so, I think there is a trend that CEOs and the senior management of companies are beginning to nurture the intangible assets of their company and be able to understand and be able to talk about that value. And that in turn, creates higher cash flow multiple.

Think of Apple, for example. Apple has a culture of innovation, they have a great reputation, they have good management, they’re wonderful investment potential, all of those things in our CoreBrand Index lineup to say, Apple should have a premium on its stock price. And it does, and that premium is identifiable through the cash flow multiple. There’s also the perception of innovation on their products. So there’s a premium on their products, I’m perfectly willing to pay a higher price to buy an Apple product than I am their competitors. And, so, you get what we call both sides of the value equation.

Right now Apple is coming out with some tremendous new advances, really highly innovative things. And it’s reflected both in the price and their soaring stock price as well as their the price of their products. And, you know, they’re really on a tear right now. And I just think it’s quite remarkable. So, are they managing their intangible assets? You bet they are.

An interesting little aside. I met one of the senior folks who worked for Steve Jobs many years ago, and when I first met him over lunch, he said, “Oh, Jim Gregory,” he said, “the CoreBrand Index.” I was so pleased that he knew it. And he said, “Steve Jobs hated you.” Oh, my goodness, I’m so honored. Why did he hate me? He said, “Because you ranked the company lower than he thought it should be.” Well, I didn’t rank the company lower. The perceptions of that company, were lowered by these impartial observers was lower than there are some key competitors and in advance consistently over time. And it’s that change over time that is so important. It’s not just one quarter it’s advancing and these ideas these intangible assets quarter after quarter after quarter, looking at the long term and being able to invest in and reinvest in your corporate brand, but also in the corporate brand in the ecosystem of all intangible assets.

Ray: It’s interesting, this whole ranking system. I’ve been observing your CBI ranking, especially from Q2 of 2020, this year. And you’ve got some of the usual suspects on there, which didn’t surprise us at all. But looking at this year in particular, and also with COVID-19, obviously, with Pfizer, and Moderna, hopefully doing something stunning in terms of coming up with a vaccine and hopefully getting into manufacturing soon, that will be at unprecedented speed. So, what we’re seeing in the market now is this whole new value being placed on research and development. I think every man, woman and dog now appreciates R&D after this year, which was really good for us in terms of our mission, because we’re trying to evangelize the massive importance of R&D and how it touches people’s lives. And 2020 has been an accelerant of that. So, looking forward, do you think because of COVID-19 and what’s happened this year, an organization’s R&D perception, the way it reflects on their balance sheet in terms of spend? Do you think that that’s going to be a force multiplier in terms of their market cap, their valuation, and just generally how they’re perceived in public, Jim?

Dr. Gregory: I absolutely think it’ll have a huge impact. The seas change, and things happen, that bring a lot of attention to different trends. Right now, that’s a very important trend, there’s no doubt about it. R&D is extremely important, especially in the pharmaceutical and bio-sciences, it’s just driving everything right now. But, I think that there were many other things as you look back in history, especially when we started the CoreBrand Index, there are many things contributing to growth. I mean, the entire computer revolution happened primarily during that time. The World Wide Web, I mean, brought the whole world together. Amazon and the impact that it had on retail markets. Efficiencies in advertising and cost reduction and advertising, big data, analytics, customer experience, management, all of these things have helped in the growth of intangible assets as an asset class. And it’s R&D, it’s patents, there a lot of things happening. And it’s leadership as well. Leadership has been one of the continuous ones that’s always shown up. It’s very, very important. And you know, leaders in different units within an industry, you can identify the leaders that really are visionaries that have a view of the future that people want to invest in. People want to get behind that and the ones that are really savvy are the ones where you see their intangible assets growing as a percentage of the whole company.

Ray: And the way they reflect on the balance sheet now at an accounting level, these different asset classes. Do you think things are being done well now? And are the right things being reflected and considered? Where do you think we are, from looking at it from the CFOs office level in terms of reflecting it on the balance sheet, Jim?

Dr. Gregory: Well, after I sold my company, in 2013, and I went back to school and actually got a doctorate in statistics, considering my background, I was a graphic designer in my undergraduate world and did a doctorate in statistics, because I really wanted to better understand this analysis and what was driving various factors and also the fact that, that I wanted to study more than just the corporate brand, I wanted to see how the impact of intangibles would affect the whole company.

So that’s what I did after I sold the company in 2013. And I defended my dissertation in 2018. The Impact of Innovation On The Cash Flow Multiple is the title of it, but the CFO has always been the enemy of marketing. Marketing can have the best idea in the world. They take it to the CFO, and the CFO says, “It’s just an expense, I don’t see the return on investment.” The Jack Welch conundrum. One of the things I did before I launched my dissertation, I did a survey of CFOs, some that I knew, and some that granted me a special discussion. And I really expected a hostile audience. And not only did I expect a hostile audience, I was hostile. I walked into my first interview, I said, What the hell’s the matter with you people, you know that you don’t understand intangibles. And I learned very quickly, they do understand intangibles, they do understand the value of intangibles, they do understand that intangibles are growing as a percentage of the total value of the company. But, they also understand that their role is not to help the people who are trying to measure brands, not trying to solve the issue for the marketing folks, not trying to solve the issue for investors about why this value is so important and so fundamental to the meaning of the company. Their job is to stay on track on their tracks, and not deviate from that. And those tracks are very regimented. So, they finally said, if you really feel strongly enough, what you should do is go to the Financial Accounting Standards Board, and speak to them and petition them for, for making changes. So I did, I led a blue ribbon panel to speak to the Financial Accounting Standards Board. They were very courteous and we had a great meeting. And we ended up with the fact that they said, “Our job is to protect the accountants, the CFOs, we keep them on that track, so that they are not ending up in jail. And our job is not to satisfy you.” Well, that really brought a real clarity to the issue of why CFOs resist this. And I think where we are today, and companies like yours, and the one that I had, that I sold to Tenet Partners, they need to not try to fight the CFO or try to demand to be part of the financial accounting system. We’re never going to be part of the generally accepted accounting principles. Never is a big word. But it’s going to be a long time, what I think that we need to do is develop very simple, very clear systems for understanding that value, and being able to report that value on a consistent basis. And by doing that, you then build trust with the the investors and the SEC and management of company and so they can begin to use these things as management tools to better manage the company. When the accounting world comes around, it’ll be a much easier pill to swallow, than demanding that they, you know, fall in line and see the logic of this huge percentage of the company that is relating to intangible assets.

Ray: And it’s interesting when he talks about going into that situation, and it was quite a fire with some heated energy in the room, you bring back some memories, Jim, because I remember, I was at a conference in Munich, in Germany back in 2013. And I was just casually walking past a particular booth and this organization were building out a methodology, and also a software platform focused around valuing patents. And it was a really colorful conversation to say, based on some very strong opinions there, which was excellent to observe. But the sparks were flying, Jim, and there were people huddled around that particular product demonstration saying, “Oh, this doesn’t really make sense.” So I was just curious, Jim, in the formative years, and actually even now, with the CoreBrand Index, does it throw up that heated debate where some people are non-believers and some are believers? Where are we at now? Do you still see that and how do you overcome that?

Dr. Gregory: What I have seen is actually less understanding. Back in the 90s, people were hungry, they had no explanation for why CFOs were rejecting their good ideas. And this is not just advertising and PR and that sort of thing. But I would think this is really important, things like the HR department coming up with training programs, or R&D, we know how much should we invest in R&D and then trying to get those budgets approved and being bashed over the head. And what we found is that hasn’t really changed that much, even though there’s an understanding of the CFO, they just have it so ingrained that they find it very, very difficult to broaden their horizons around another type of system for management. So, what I felt, really, is to not have those discussions with the CFO, to say, I’m not trying to change G.A.P., we believe generally accepted accounting principles are here to stay. However, this is a management tool, this is a way to manage one of the biggest asset classes in your company. And it’s simply an outside look. And you may choose to put this on your balance sheet or put it in the directors’ notes of your annual report. Or you may choose not to, it’s entirely up to you, but allow your team to have some system in place to be able to communicate consistently across your organization. And that seems to resonate. And we find that the CFOs are less resistive of that. But you also need the CEO as a champion. The CEO who is really supported at the board level is very, very important and helpful. Having board level people bring the ideas to the attention of the CEO doesn’t hurt. We have found that that was very useful. But I’ve been talking to the Conference Board folks, I mean, they’re made up of members all around the world. It’s a quite a prestigious organization. And they have the same issues that they had forever. But they are afraid to bring these issues to the senior management of the company. And the issue is how do I ask for a budget when the results are not on the balance sheet?

Ray: Thank you for that, that sheds more colour on context. And looking at now I was studying earlier this week, you’ve got the most top 100 powerful brands of 2020 and the usual suspects were there. You’ve got your Apples, your Pepsi Co’s, The Walt Disney Company, one which surprised me, which I don’t think appeared on the list, at least not in the top 20 was Tesla and organizations like Square, which quietly surprised me but looking forward in the next three to four, five years, who do you think are some of the emerging trailblazers who will make the top 20, Jim, companies you really admire from a distance who are doing it well?

Dr. Gregory: Yes, the reason why a Tesla was not in that top group is not because they’re not a trailblazer. They certainly are there, they have incredible amount of intangible value. And, great leadership and direction and all of those things. The system that is used in the CoreBrand Index is it measures familiarity and favourability and rates, the familiarity on a scale, that if you’re not real familiar with the company, your favourability scores don’t count as much. That was one of the reasons Steve Jobs hated me. Because the the system that we have, while very consistent, has an issue with up and comers. And it tends to shine better light on older companies where the familiarity is much broader and favourability has been around for a long time. That doesn’t mean you can’t measure the momentum of a company or the volatility, the growth and the clarity by which they speak. The current report that you’re talking about was simply a snapshot. When you really dig in, you can really see the strength of the company, and what is really driving the growth and the value of the company and be able to project out into the future, the strength of the company and the future potential value of the company.

Ray: And then on a broader sense, now putting CBI to one side and just looking from a macro overview. Where do you see some of the big innovations in your space right now? So, when it comes to measuring intangible assets, be it brand, be it patents or trademarks, is there some exciting developments on the horizon which kind of makes you lean in and think, wow, this is really going to move the needle in the space?

Dr. Gregory: Well, I have to say modestly, I think I’m on the leading edge here of some things. The dissertation that I just did – concluded in 2018 – really puts a new a new view of how brands are measured and valued. Brad Pukki, who just defended his dissertation, a few weeks ago, he was my head of research for decades a Tenet Partners, and he just got his dissertation. And his dissertation title was the impact of the corporate brand on revenue side. So, the two dissertations are really leading edge ideas around this valuation and how to look at corporations and the value that they create. I love what you guys are doing. I think you’re absolutely on the leading edge and it’s such a thrill to see your work. I just love it. If I had known it was there years ago, I would have I would have jumped all over it. And I may yet.

Ray: Well, brilliant. Well, Jim, it’s been fantastic meeting you today and learning about your wonderful journey and I want to say congratulations. From where you’ve taken this from the early 90s, to even what you’re doing now, and your current kind of organization, we think is brilliant. We’ll be close observers here at PatSnap. So Jim, thank you so much for your time today and please stay safe.

Dr. Gregory: Thank you. The pleasure is all mine.

Ray: Cheers. Thank you.