The Enterprise Value Creation Management Process and Intangible Assets - the CERM/ROIAM Approach

Author Name KARIYA Takeaki  (Faculty Fellow, RIETI / Professor of Financial Engineering & Management and Dean, Graduate School of Global Business, Meiji University / Visiting Professor, Institute of Economic Research, Kyoto University)
Creation Date/NO. March 2006 06-J-016
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As Robert Redfield has stated, culture is a shared common knowledge and understanding to be manifested in behavior and processed goods.

Intangible assets are the fundamental source of enterprise value creation. In this paper we first aim to clarify the compound, complex and multilayered processes whereby intangible assets contribute to value creation, and then aim to formulate the framework of an effective and comprehensive management process referred to as CERM/ROIAM. This approach makes it possible to understand the compound, multilayered, and holistic contribution of intangible assets to corporate value, to point out the limitations to information disclosure policies for intangible assets from a viewpoint of individual resources, and to note how adopting a story-type approach is conversely desirable when advancing an information disclosure policy for intangible assets.

Our argument proceeds by understanding the holistic nature of intangible assets, developing the concept of organizational spiritual assets, and discussing the importance of such assets in value contribution. From our perspective, the processes and states of governance and internal controls also constitute intangible assets as structural and process assets, and need to be effectively incorporated into the comprehensive management process.

Specifically, we formulate a framework for understanding the relationship between intangible assets and value creation process from the risk-process approach perspective developed in Kariya (2005). For that purpose we extend the 2004 COSO ERM (Enterprise Risk Management) framework, adopt an approach that identifies risks, the corresponding real options, and the intangible assets required to exercise those options, and consequently propose the basic framework for a new management process referred to as CERM/ROIAM. Here the letters "CERM" stands for "Comprehensive Enterprise Risk Management" and ROIAM is an acronym for Real Option and Intangible Asset Management. This approach views the entire corporate value creation process as a single comprehensive and proper intangible asset each firm carries. Consequently, while the governance and internal control structures and the governance and internal control processes are also intangible assets as a part of the comprehensive integrated intangible asset (the management process), there is a multilayered structure and process whereby as resources and as processes their relationships (organizational relationships and process relationships) with the overall value creation process also constitute intangible assets. Here structural assets and process assets are distinguished in that the former are resource assets that involve no human element in the identification, but the latter involve a human capability with a tacit knowledge of employees in the identification.

We believe that our CERM/ROIAM process framework is a comprehensive management process framework for understanding the relationships among risk, corporate value creation and intangible assets, and that it serves as a basis for examining national competitiveness via intangible assets as well as information disclosure policies for intangible assets.

When we discussed an information disclosure policy for intangible assets, we should take into consideration the reasons why we adopt a capitalistic framework of placing corporate management in a competitive environment and allowing each firm to follow individual and diverse management methods and processes under private controls. In addition to such reasons as it enhances the ability to respond to risk and uncertainty and effective incentive-based inducement of innovation, they includes the reason that together with the competitive environment it allows each firm to create a new creature for value as a comprehensive management process by forming a proper complex and multilayered structure of intangible assets. In practice, the process whereby firms form various complex relations with employees, consumers and suppliers, and link these to value creation must be a process of strategic commitment to the indefiniteness, uncertainty and future evolution including unknown areas of humanity, the evolution of value systems, and technologies, and the social and economic environment. Accordingly, individual firms adopt individual formats and approaches to innovation in their overall management processes. This is one important reason for leaving activities to private controls, and it is also why the management process of each firm can constitute a comprehensive intangible asset in and of itself.

The competitions of firms in the various uncertainties and their individual approaches and responses to various uncertainties for value uncover the diverse and unknown human needs that exist in society and markets, prompt the flow of value within society, and lead to an even “richer” society without taking a great deal of time. Such efforts inevitably result in both successes and failures because not all of them encompass uncertainties in competition, markets, regulation, preferences and technologies. The strategic management of risk involves:

- Setting incentives, risk appetite and other appropriate risk preferences

- The use of investment risk-averting frameworks such as venture investment, project finance, corporate alliances, and technology alliances

- The construction of platforms for information, knowledge advantages and intellectual assets to understand uncertainty.

Additionally, creating effective corporate culture and vision effectively incorporates human resources into the management process, skillfully steers personnel incentives, forming a strong organizational motivation for value, generates an innovation orientation, and consequently, creates a management process that takes the lead in advancing corporate evolution. In this sense the spiritual space of the organization is also an intangible asset.

It is evident that value creation is context-dependent or process-dependent. This context dependence cannot be ignored in understanding the contribution of intangible assets to value creation, and the comprehensiveness of the management process itself is an intangible asset. Here, management's human factor related to the dual nature where human resources become both the subject and the object of the management process must be incorporated into the understanding of intangible assets. This is a difficult theme, and we attempt to develop the process without forgetting that this theme is yet to be thoroughly understood.