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Intangible Assets and the Catholic Framework for Economic Life

The “Catholic Framework For Economic Life” (CFEL) prepared by the National Conference of Catholic Bishops provides new optimism for all of us in the global economy. The CFEL consists of ten essential points that help balance societal obligations on one hand with business and economic decisions in a competitive environment on the other. Now more than ever, the balance provided in the CFEL is critical. As everyone knows, moral, ethical decisions can conflict with corporate goals of profit maximization and shareholder value. Affording business the ability to compete in a global market while simultaneously protecting workers’ rights and the disadvantaged in society presents a difficult challenge. Enhancing one is often viewed as being at the expense of the other. Increasingly, however, this dilemma is being reshaped, creating new opportunities to take advantage of the CFEL. In many areas, the corporate sector is realigning its goals to address more comprehensively individual worker needs and the disadvantaged in society.

During the past decade, the shift from a manufacturing based economy to an information based economy has accelerated. Now, a firm’s assets are much less tangible (manufacturing machines or equipment) and much more intangible (intellectual capital, research and development, or relationships with employees and suppliers). Problems surface because the accounting and financial reporting systems used in the private sector have not kept pace with these changes. Critics of old economy accounting and generally accepted accounting principles (GAAP) grow in numbers every day. One of these critics writes “intangible assets like innovation, employee education, customer loyalty ... are barely measured by the accounting system.”1 Baruch Lev, Professor of Accounting and Finance at New York University, has indicated that accounting “no longer delivers accountability” and has become “increasingly irrelevant.” Furthermore, the accounting system “cannot capture the new economy, in which value is created by intangible assets .... The disconnect, says Lev, affects more than just financial analysts and corporate financial officers: Employees don’t know how to value their contributions accurately ....”2

Historically, accounting for these types of intangible assets caused no particular difficulty—the information based economy had not been developed. Maintaining employee relationships, worker rights, and corporate responsibility simply represented costs (liabilities) for a firm. More and more, however, they are becoming assets (intangible assets) to be sought and valued. For firms to be prosperous and maintain a competitive advantage in the new economy, they must fully leverage employee relationships, employee knowledge, and other intangible assets. This, of course, means that management will need to treat workers with dignity and provide them with job security—both consistent with the CFEL. Now a greater incentive exists for firms to adhere to the CFEL’s ten points, because firms need employees to “buy into” organizational goals and “go the extra mile” to assure institutional success. These marginal differences (employees going the extra mile) can make the difference between survival and failure in an economy based on ideas, efficiency, and information exchange. “The trouble was that the scientific management approach or, to put it more crudely, the ‘top down’ approach sees the employee as someone who is there to ‘do as they are told.’ Why? Because they are paid to ‘get on with it.’ But they do have a choice; they always did. No amount of pay will ‘make’ someone do something they don’t want to—at least not with the levels of motivation, passion and obsession needed in today’s competitive environment. So they have a choice—whether or not to give you their ‘hearts and minds.’ The secret is to find out how to appeal to the ‘what’s in it for me’—the WIIFMs.”3 In our information based economy where the firm’s assets are intangible, sharing knowledge and cultivating cooperative relationships are absolutely critical. If organizations truly value their employees and enter into more reciprocal relationships with them (consistent with the CFEL), information exchange should flow more easily. Ultimately, this process will translate into increased shareholder value.

The public sector also has an opportunity to develop policies based on the CFEL to encourage a cooperative environment. These policies will help, without hindering, economic development and private sector competitiveness. There will be less resistance, because almost all will eventually benefit. The CFEL is a blueprint for pubic policy, not just because it is morally correct, but because it has become economically logical for many more organizations in our information based economy to adopt.

Having previously described their merits, the ten points in the CFEL are delineated as follows. First, the economy exists for the person, not the person for the economy. Second, all economic life should be shaped by moral principles. Economic choices and institutions must be judged by how they protect or undermine the life and dignity of the human person, support the family, and serve the common good. Third, a fundamental moral measure of any economy is how the poor and vulnerable are faring. Fourth, all people have a right to life and to secure the basic necessities of life, such as food, clothing, shelter, education, health care, safe environment, and economic security. Fifth, all people have the right to economic initiative, to productive work, to just wages and benefits, to decent working conditions, and to organize and join unions or other associations. Sixth, all people, to the extent they are able, have a corresponding duty to work, a responsibility to provide for the needs of their families, and an obligation to contribute to the broader society. Seventh, in economic life free markets have both clear advantages and limits; government has essential responsibilities and limitations; voluntary groups have irreplaceable roles, but cannot substitute for the proper working of the market and the just policies of the state. Eighth, society has a moral obligation, including governmental action when necessary, to assure opportunity, meet basic human needs, and pursue justice in economic life. Ninth, workers, owners, managers, stockholders, and consumers are moral agents in economic life. By our choices, initiative, creativity, and investment, we enhance or diminish economic opportunity, community life, and social justice. Tenth, the global economy has moral dimensions and human consequences. Decisions on investment, trade, aid, and development should protect human life and promote human rights, especially for those most in need wherever they might live on this globe.4

The recent difficulties in the economy, including, for example, corporate scandals and volatile capital markets, may be a blessing in disguise. They may have accelerated needed reforms in the accounting and financial reporting sectors necessary for the new economy to grow. This will take time though. Corporate leaders will need to see more clearly how the CFEL has a positive impact on the bottom line. New accounting systems and company valuation methods will have to be tested over time for accurate representation. In the end, everyone should benefit. Employee knowledge, employee value, and employee relationships are intangible assets (no longer problems or costs) that can help a firm prosper in a competitive global market. If these intangible assets are managed properly, productivity and competitiveness will ultimately increase. More than ever, the ten points of the CFEL are as much about how a firm can leverage intangible assets as they are about protecting workers and the disenfranchised.

Notes

  1. Farrell, Christopher, “Needed: 21st Century Accounting Rules,” Business Week (March 22, 2002), at http://www.businessweek.com/bwdaily/dnflash/mar2002/nf20020322_7451.htm.
  2. Webber, Alan, “New Math For A New Economy,” Fast Company (January/February 2000), at http://www.fastcompany.com/online/31/lev/html.
  3. Thomson, Kevin, Emotional Capital: Capturing Hearts and Minds to Create Lasting Business Success (Capstone Publishing Limited: Oxford 1998) 130.
  4. National Conference of Catholic Bishops, “Catholic Framework For Economic Life,” Woodstock Business Conference Report (Woodstock Theological Center, Georgetown University January 1997, Vol. 4 No. 1), at http://www.georgetown.edu/centers/woodstock/wbc/wbc-r41.htm.