Tuesday, June 13, 2006

Where would you invest?


I nearly missed this post by Niall Cook. And it is far too interesting to let slip.

It shows where people go when visiting Hill & Knowlton. Blogs come out on top and Niall asks 'where would you invest'.

I am not sure exactly what he really means. Does he mean where would a company spend promotional money from the trading account or does he mean would you invest in H&K because it has such powerful blog presence.

The answer for sentient investors would, of course be, invest in Hill and Knowlton unless it did not reflect the relevance of this asset on its balance sheet. In which case sell.

The reason I say this is as follows. There is dubious legitimacy for a company to spend cash flow on investments (accumulation of assets) unless it is declared to investors. The reason being that it dilutes earnings. Cash spent on such investment is not available to shareholders on the one hand and and the higher valued shares yield less. PE ratios become meaningless because the full value of the company is understated which deflates price and overstates earnings and H&K understate its online asset as it is. Spending cash on blogging and other social media to exacerbate this under-reporting is close to corporate sin. H&K can get away with this because accountants use keyboards to count beans instead of value and regulators have not 'got it' either.

Creating asset value is a legitimate activity for all companies. One of the least expensive ways of creating assets is on-line. This means that, as long as H&K can recognise that its online presence is an asset, and I come to this below, it can and should raise equity to fund the development of its online presence.

How can I justify such scurrilous talk? Well let me explain.

There is the tangible asset of H&K. Tangible assets (tokens) may include: premises, cash, creditors, equipment, work in progress, stock. Some tangible assets are negative such as debtors.

There are the intangibles such as patents, copyright, trademarks, processes, know-how, know-what, brand values, stakeholders (sometimes, and narrowly called human capital when referring to internal stakeholders). This is the H&K you meet and see in the H&K offices round the world. For many people this id the 'Real self' of H&K.

Neither tangible or intangible assets have any value without relationships. These can be physical, technological, inter-organisational and personal relationships. Relationships require a medium in which to inter-react.

But there is another H&K. It is the H&K “Digital self”. The one that most of us (including clients, vendors and other institutions) know.

This digital self is influenced by on-line actors affecting the organisation. Some actors are technologies, some are organisations and yet others are people (hyper-links, search engine ranking, on-line responses and form filling, email, Instant Messaging, references on other web sites, on-line media content, comment in blogs, wiki's, podcasts and other social media). To be effective, H&K has to invest in properties (IP, processes etc) to give itself access to the benefits available from these actors. Such properties will be technical, some process, some know how.

These investments are assets (that should be declared on the balance sheet) and they facilitate relationships between H&K and its many stakeholders.

As the Internet affects organisations, there is a two way flow of information from the 'Real self' organisation and the 'Digital self' organisation. This is a logistics issue and requires logistics assets to make them work.

This adds a new range of (intangible) assets to the organisation including new processes and original responses to the new circumstance. In addition new relationships are created in new logistical responses are deployed (email, web, Database interactions, Instant Messaging, social media etc).

The organisation is changed by its 'Digital self' Its digital self provides the means by which the organisation can exchange values with stakeholders.

In another era, such assets might have been transport (ships, trains, trucks, etc.) and would be on the balance sheet.

As the 'Digital self' grows through investment and engagement (more hyperlinks and comments – providing search engine 'Google Juice' - for people and organisations interested in corporate values), its digital asset grows and now shareholders need to know how the investment delivers products, services and productivity.

So this is not just an issue of H&K blogging, it is wider than that but it is an investment and separating the investment from trading is important and relevant for investors, regulators and business managers alike.

I single out H&K because of Niall's comment and yet in a country where 10% of all retail sales are online, I suspect that there is a lot of under-reporting going on that is massive in scale.

Social media revs up the pace of change. H&K's web site is by no means a dog, it is at leat in the top quartile worldwide and yet the evidence from the H&K findings shows that its blogs have a particular potency greater than its web site. This has been archived in 18 months (I think Niall first posted on a H&K blog in December 2004).

These assets are potent and are real assets and one expects they will be reported as such. If so, how much PR activity should come off P&L?

Nice thought......