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Intellectual Capital in the Family Business

By May 1, 2000July 12th, 2023Finance & Wealth Management, Management and Leadership5 min read

When pop musician David Bowie issued $55 million of ten-year bonds secured by royalties from his first 25 albums, institutional investors snapped them up immediately. Moody’s Investor Services gave the 1996 issue, which paid 7.9 percent a year, the same rating as those from General Motors, which backs its issues with billions of dollars worth of plant, equipment and inventory instead of disks of vinyl.

What’s going on? As the bond buyers and no doubt Bowie himself realized, we are living in the age of intellectual capital, when what we know is more important than what we own, or what we can borrow. Microsoft, for example, is now the most valuable corporation on earth. Recently its worth was more than one-half-trillion dollars though its total assets amounted to less than 1/10 of the stock market value. The reason: The intellectual capital represented by the company’s Windows brand, patent portfolio and, most importantly, the software development expertise embodied in its 31,000 famously brilliant employees.

You don’t have to be a singer to appreciate the dissonance that the growing importance of intellectual capital creates for many family businesses. Ask most family business owners – and even some advisors – why businesses fail, and lack of access to capital will top the list. But studies show that inexperienced management, poor product concept, and poor business planning are also cited as the cause of business failure. And these last three causes are in reality, components of intellectual capital – which is simply described as knowledge that can be converted to profit. When you consider the fact that you can control intellectual capital better than you can control the amount of financial capital you have access to, it becomes clear that growing and managing your intellectual capital is one of a CEOs or Chairman’s chief responsibilities.

Don’t confuse intellectual capital with one of these fly-by-night management trends. The importance of “knowledge workers” – employees whose primary asset is their knowledge of the job, the company and the industry they work in – was recognized in the 1960s by Peter Drucker, possibly the most respected of all business theorists.

Today, our understanding of what intellectual capital is, and how it works to build long-term family business success, has expanded enormously from Drucker’s early ideas. At its broadest, it includes inventions, ideas, general know-how, design approaches, computer programs, processes, and publications. When you break it down, intellectual capital has three major components: human resources, intellectual assets, and intellectual property.

Human resources are the firm’s employee intellect. Human resources provide the know-how and institutional memory around topics of importance to the company. This resource includes the collective experiences, skills, and general know-how of all the firm’s employees.

Intellectual assets are more tangible. They consist of the organized, codified physical descriptions of specific knowledge that the company can assert an ownership right to, protect and even trade for other items of value. You can define knowledge, qualifying it as an intellectual asset, by writing it down or putting it into a computer. Intellectual assets are important sources of innovations that family firms can turn into commercially valuable properties.

Intellectual property is the most protectible sort of intellectual asset. It covers patents, copyrights, trademarks, trade secrets and the like.

If you want to take advantage and make the most of the intellectual capital in your family business, consider the following four action steps:

First, know what your intellectual capital consists of. Conduct an audit to assess the contents and worth of your employee intellect, intellectual assets and intellectual property. Do this by asking questions of your oldest and most experienced employees – and also of your most unconventional and innovative employees. Read the most dog-eared and taped-together operating manuals you can find, as well as the notes taped on their machines by operators leaving reminders to the next shift. Ransack file drawers if necessary. When you’re done, you know what you know.

Second, organize the sharing of knowledge and intellectual capital. Many companies have done this – or attempted to – by putting in place complicated information technology systems designed to create computer databases of knowledge that is important to the company. Many others have done so by creating ordinary printed manuals, sponsoring mentors, holding regular idea-sharing meetings and encouraging the sharing of knowledge by, for instance, offering formal recognition or financial incentives to employees who most effectively share what they know. Anything can work. What’s important is that you select the right intellectual capital to share. Concentrate on finding ways to share intellectual capital that is of specific value to your business. You’ll get better payback from sharing techniques for dealing with key regulatory issues unique in your industry, for instance, than for new ways to handle regulators in general. This is information that can’t easily be copied, and can easily be used by you.

Third, create an environment of intellectual capital creation. The best way for creating the proper environment for building intellectual capital is also going to vary by company. In one family business, it may require no more than that the CEO declare a policy of pursuing patents, obtaining trademarks and otherwise drawing an intellectual capital line in the sand. In another, it may involve sending employees for additional training, hiring legal staff trained in ferreting out valuable intellectual property rights or, as innovation leader 3M does, encouraging employees to spend a set percentage of their time at work trying out new ways of doing things.

Finally, look without as well as within. Bring intellectual capital into your organization by tapping the resources of suppliers, customers, outside directors, advisors and consultants. Remember the Arabian quote: If you think you know it all, you’re probably wearing a dunce cap without realizing it.

Is intellectual capital the end-all to family business prosperity and endurance? Not quite. Systems for commercializing intellectual capital are a long way from being scientific. You can spend a fortune on hiring knowledge management experts and implementing complex information technology systems and wind up with no more than you started with. By emphasizing sharing of knowledge, you may let valuable intellectual property escape into the public domain. And intellectual capital alone, even if perfectly fielded and wielded, isn’t enough to build a business. You still need money, markets and lots of hard work.

But the beauty of intellectual capital is undeniable. Long-term, intellectual capital will create financial capital. But financial capital, unless it is used wisely and combined with intellectual capital, will not last very long.

To see if you might benefit from a family business consultant look at our list of ten signs.