Intellectual Property, Finance and Corporate Governance

Janice Denoncourt

• Publisher: Routledge
• Year: 2018
• eBook ISBN: 9781317287612
• Edition: 1
• Topic: Law
• Subtopic: Corporate Law
• Index: Law

IP law has evolved from being a little pool to a big ocean. Corporate governance needs to respond to society's rising expectations of directors and boards as the impact of the global intellectual property ecosystem is felt. How can a responsible corporate culture of IP transparency be stimulated to create a rosy future to connect corporate communication with the desires of shareholders, investors and other stakeholders? The astonishing lack of material quantitative and qualitative information companies report about their IP assets makes it difficult for shareholders and other stakeholders to assess directors' stewardship of those assets – a pressing corporate governance issue in the 21st century. This book advances IP reporting in alignment with the key corporate governance principles of transparency and disclosure. It analyses the juncture between the IP ecosystem; corporate finance and accounting for intangibles; and corporate governance. Patents, mini-case studies and an original business triage style model for assessing IP disclosures are used to illustrate the gaps corporate governance theory needs to address. Focussing on the common law tradition of corporate governance in England and Wales, intangibles and IP reporting developments in other jurisdictions are also explored.

Part I
The corporate IP landscape

1 Corporate governance and IP assets

Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.

Sir Adrian Cadbury, UK Commission Report: Corporate Governance 1992

An enterprise’s assets may be broadly divided into two categories: physical assets and intangible assets. Intangible assets range from human capital and know-how to inventions, brands, designs and other intangible fruits of a company’s creative and innovative capacity. Some intangible assets may be legally protected as forms of intellectual property (IP), as legally constructed monopoly rights, some of which must be formally registered to exist. Our assumptions about the importance of key IP rights such as patents, trade marks and copyright have changed since the 1980s and 1990s. IP law continues to develop, but there are still large gaps in our understanding of the impact of IP rights on other disciplines and vice versa. IP is hardly a liquid asset; it is gained through a long, methodical process that eventually creates value for the company. This is the space in which less obvious problems arise. We lack some understanding of the consequences of the rise of IP rights: how accountants value IP assets and record that value in traditional financial accounts; how, when, where and how much companies should report about their IP assets and their strategies to optimise those assets in the best interests of the company; and finally, how the disclosure of IP asset information should be regulated to protect the interests of shareholders and other stakeholders. This is the great challenge facing corporate governance. For centuries, people have struggled to predict, control, manage and understand the future. IP rights, as a form of intangible property, create multiple possibilities for creating future corporate value during their periods of existence and company directors do not have a crystal ball. Evaluating and reporting timely, reliable and accurate corporate IP asset information is undoubtedly complex. However, some people have much greater power and influence than others to access the company’s internal IP information. Shareholders and other stakeholders seek more relevant, accurate and timely information about corporate IP assets – the type of information often only known to internal management. At the same time, public disclosure of IP asset information and strategy invites both accountability and competitive exposure. Corporate disclosure of IP information and strategy is not as straightforward as reporting traditional financial information. Accounting dominates IP valuation. Accounting standards affect valuation and recording and unintentionally result in a lack of information about corporate IP assets (the IP information gap). Nevertheless, company directors have a legal obligation to provide “true and fair” information about corporate assets they manage on behalf of shareholders in the mandatory corporate reports. Consequently, even contemplating making dynamic corporate IP information more transparent causes company directors to bury their heads in their hands. Existing corporate governance principles aimed at increasing shareholder value demand greater transparency and better public disclosure. Transparency, disclosure and accountability are core corporate governance issues and over the centuries, a body of law has evolved to control and shape the conduct of responsible corporations. Directors have access to and are a primary source of internal corporate IP asset and strategy information. Accordingly, they need to distinguish between the available financial data which may present incomplete snapshots of events and the reality behind the facts. A “true and fair” view of corporate performance requires accountants, auditors and company directors to be in a position to triangulate traditional financial performance reports with narrative legal and strategic IP asset information. Triangulation is a powerful technique that facilitates validation of data through cross verification from two more sources.¹

How do corporate disclosure principles fit the dynamic world of intangible IP rights? The author has heard anecdotal accounts of large corporate patent portfolios where each patent was valued at £1as those involved found patents too complex to value. Even now, corporate disclosure principles for this class of asset are embryonic. By analogy, disclosures related to corporate IP assets and strategy are akin to an early incomplete map of the world. For example, the discipline of cartography builds on the premise that reality can be modelled in ways that communicate spatial information effectively. In comparison to spatial information, the communication of the integral role of abstract legally constructed IP rights in corporate value creation is possibly even more difficult. Imagine that the map also needs to predict the weather. Weather forecasting involves using reoccurring astronomical and meteorological events and personal observation to help monitor changes in the weather. By integrating IP reports into the existing system of corporate reporting, shareholders and other stakeholders will be able to monitor the impact of corporate investment in IP rights. However, those involved in corporate narrative reporting and disclosure of IP strategy and material assets face several fundamental problems. First, the material corporate IP assets required to be publicly disclosed to comply with corporate regulations must be selected. This is the concern of editing. Second, irrelevant information must be eliminated. Third, the complexity of the IP assets to be reported must be reduced. This is the concern of generalisation. Finally, the elements of the corporate disclosure that best convey the company’s message to its audience need to be orchestrated while complying with the body of corporate regulatory law. Continuing with the analogy, the corporate IP asset and strategy disclosure map is beginning to emerge. Certain countries such as Denmark, Germany, the United States (US) and Japan have a more advanced approach and have introduced specific laws requiring companies to disclose certain corporate IP asset information, while the majority of others do not. That is the starting point. New three-dimensional and four-dimensional maps now exist in other fields that improve users’ ability to understand complex information by dynamically displaying changing data, over time. While that type of corporate disclosure model is blue-sky thinking² for now, what is needed is a more holistic approach to inform shareholders involved in governance of companies.³ In expounding on the way in which the system of corporate governance works in the context of IP assets, it is possible to gain a better understanding of the difficulties faced by IP rights owners and the company directors responsible for managing these corporate assets on behalf of their shareholders. It is clear that although some legal structures and norms exist, there are significant holes in the corporate governance system, a system which does not, at least in the United Kingdom (UK), contemplate or expressly address intangibles and corporate IP assets directly. Denmark, the US and Japan have implanted different approaches to regulate how to fill the gap in corporate IP asset and strategy information, to better meet the needs of shareholders and other stakeholders. Even so, these approaches leave much to interpretation and may be considered “vague”. While no best practice in corporate IP asset disclosure has yet emerged, the form of disclosure is less important than the content. More corporate IP asset and strategy information is needed. Moreover, there will not be a one-size-fits-all corporate narrative reporting solution, as IP rights are used differently in diverse business sectors depending on their role in the business model as a tool for value creation. Nevertheless, corporate disclosure and transparency norms will help to promote more widespread trust in the potential value of IP rights and how they can be deployed to support commercial objectives, create high quality employment and better pay.

The research presented is multidisciplinary, drawing on academic fields such as law, economics, accounting and finance. The traditional approach to valuation and corporate accountability for IP assets will be contrasted with the more holistic, ecosystem approach. In doing so, the author explores the gaps and problems that remain and the ability of corporate law to govern naturally dynamic IP rights that are of increasing economic importance. The aim of this book is to support a framework for better corporate narrative reporting of IP asset and strategy information. This type of narrative will complement the traditional quantitative information contained in company accounts with a view to enhancing the level of truth and fairness of corporate IP asset valuations. This chapter provides a synthesised understanding of IP rights, IP finance and corporate governance principles to inform the direction of future corporate IP asset reporting and the need for systemic change in the post-recession economy.

Let’s step back in time for a moment – intangible IP assets have existed for centuries and have been used by companies to raise finance to commercialise innovation since the late 19th century. An early IP-backed finance corporate success story involves a high value patent-backed loan made to American small business owner Lewis Waterman⁴, who invented a superior fountain pen that made inkwells and dip pens obsolete. Waterman, an insurance agent, is said to have vowed to invent a better writing instrument when an inferior pen leaked on an important insurance contract, causing a delay which led to him losing the client.⁵ In 1884, he borrowed the significant sum of $5,000 US backed by his fountain pen patent⁶ to start the Ideal Pen Company in New York. This is the first known reported example of corporate IP debt finance. Five years lat...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Foreword by Professor Nicolas Binctin
• Preface
• Abbreviations
• List of figures
• Table of legislation
• Table of cases
• Part I The corporate IP landscape
• Part II The IP finance dimension: corporate governance and transparency
• Part III Accounting for IP: corporate IP assets and transparency
• Part IV The corporate governance dimension: developing a normative practice in IP reporting
• Bibliography
• Biography and list of publications
• Index