I read that eastern countries have had a better understanding of marketing to the U.S. because they can observe the U.S. analytically, figuring out what it is that Americans like and how to sell to them, which they can master because they are viewing from afar.
KOSSOVSKY: Althought there is ample room for improvement, the U.S. dominates. Another aspect of the intangible asset play internationally has been patent ownership. The Europeans dominated that initially, but post-war, the U.S. was definitely the stronger patent player. The Japanese learned about it the hard way when they basically found themselves writing a lot of royalty checks to U.S. companies for its intellectual properties.

U.S. companies definitely took the lead in figuring out how to get money out of patents, other than holding the patents and manufacturing internally.

European chemical companies have always very sensitive to patent law; so have been global industrial companies. But the U.S. has been definitely leading the patent space for quite some time, and U.S. companies definitely took the lead in figuring out how to get money out of patents, other than holding the patents and manufacturing internally. The idea of licensing, asserting patents, and creating third party patent pools are all U.S.-driven inventions.

A third area of intangible asset management deals with the growing issue of sustainability, and the emerging metrics of Environment, Social and Governance. The Europeans have definitely been leaders in that area. There have been a number of movements to metrics around companies’ ESG quotients. In the U.S., ISS, Institutional Shareholders Services, has been running a governance index since 2002. KLD Indexes, a Boston Fund Manager, published in November in Fortune magazine a global ranking of companies by ESG criteria.

But the movement really got its financial boost in Europe when Swiss Re, today’s largest global reinsurer, commissioned a study because they saw the companies that were better in governance, sustainability and so on, had fewer insurance claims. They seemed to have a more ‘enlightened’ management and proactively managed risks and anticipated perils. So Swiss Re commissioned a program to measure this thing, and this program spun out into a self-sustaining company that is known today as Asset4. And Asset4 has a huge engine that generates this ESG metric that they then feed to various hedge funds and use it as an investment strategy. So the take home message is that this third major area of intangible asset management is driving fund and investment management strategies.

When we think of corporate tangible assets, we think of them as being depreciated, appreciated, et cetera. How do these apply to intangible assets? Do they show up on balance sheets?
KOSSOVSKY: No, most intangible assets, by definition, are not on balance sheets. There are some complex rules on amortizing intangible assets that have been transformed into a balance sheet asset known and become known as Goodwill as a result of a purchase. But most of the intangible assets are expressed only in the form of market capitalization so their value fluctuates according to the market’s assessment — not accounting rules.

How does the IRS view this? Do they regulate the treatment of intangible assets with regard to the capitalization of a company?
KOSSOVSKY: No, the market capitalization of a company is established every minute by the market. The IRS cues off of the International Accounting Standards Board and the FASB, Financial Accounting Standards Board of the United States, which is trying to move more towards international standards. Neither of them has developed particularly good rules for handling the intangibles. The Department of Commerce has published the most recent thinking on this in a paper released within the last two weeks on intangibles at a macroeconomic level only. But perhaps the most interested party is the SEC, since one of the purposes of accounting is to help investors know what they are getting for their purchase of equity.

The basic challenge is that the entire accounting system, everything built around the accounting system was optimized for a much simpler economy. The Italians invented accounting for a hard-good shipping economy. The Dutch, who were big global shippers, found the Italian system limiting because it didn’t address uncertainty — the value of goods in transit that might not arrive because the ship might sink or be captured by pirates. So they invented insurance. And the Dutch also invented derivatives. And derivatives and insurance, which are variations of the same notion, allow you to accept a given value, and then transfer the risk of that not being the right number to somebody else. You purchase certainty. And your own accounts have meaning, which is what the SEC cares about.

So the Dutch are who we got derivatives from. There’s probably people that are tremendously happy that we have derivatives, and obviously those who are not.
KOSSOVSKY: Derivatives are essential commercial tools. Christiaan Huygens, born 1629, was the first mathematician that we’re aware of to use math for things other than gambling. He applied probability theory to and eventually came up with the notion of derivatives.

Do you consider your company Steel City Re a pioneer in the industry?
KOSSOVSKY: We think we’re pioneers. We have developed management tools and financial instruments to allow managers to optimize their deployment of their companies’ intangible assets, communicate the value to shareholders, and mitigate the risks to the value of those assets.

I want to talk about how you work with a client. Walk me through a typical experience. I understand there’s analysis, measurement, identification…
KOSSOVSKY: The most important part of our work is educating senior executives and ensuring that they have an understanding of the full scope of intangible asset finance and its impact of their company’s value.

Once there is senior management buy-in, our general approach is to understand what are the most valuable intangible assets in a company and the business processes that create and sustain those assets. We then compare a company’s management processes against best practices and rectify gaps. We will help a company signal to its stakeholders compliance with best practices using insurance instruments, and we provide going forward risk management and over-the-horizon risk forecasting to help protect the value of those assets against perils. To give you a better sense, let’s focus on an intangible you wouldn’t naturally think of: safety. We’ll take it because there was a very public event with Mattel this year.