At a recent press conference on the newly-emerging subject of corporate social responsibility, government minister Kim Howells commented on how most of the market value of companies these days is not represented by underlying fixed assets, but by intangibles. Perhaps the most remarkable aspect of this particular comment was that it seemed so remarkable to Kim Howells. Companies are not valued on the basis of their factories, shops and warehouses – and haven’t been for more than 20 years.
As a former stockbroker, I can assure you that companies have long been valued on the basis of future earnings (capitalise that lot and that’s your intangibles for you). The tools used two decades ago were fairly simple – forward p/e ratios compared with those for the market as a whole – whereas today the PC allows analysts to develop more sophisticated valuation models using discounted cash flow, Economic Value Added and so on. But for at least a generation, investors have looked to future earnings much more than historic balance sheets to assess investment value.
It isn’t even right to point to the so-called asset-strippers of the 1970s and 80s. Those corporate raiders weren’t after the assets as such, they simply recognised that the incumbent managements were performing so poorly that the value of the business was less than the investment that had been made in the premises. Blame inefficient management, not inefficient investment markets.
The point of this is that it has always been absolutely vital for companies – especially FDs – to communicate with investors what it is they’re trying to do and how they’re trying to do it. And this need is going to become even more onerous. This month’s issue takes several angles on the subject of communication: there’s the Myners report on shareholder activism (page 14), the careers article on FDs’ soft skills (page 12) and the main article in our new section, Financial Directions, on how investors and FDs seem to misunderstand each other in relation to the effect of the euro on UK companies.