HPS Leadership Best Practices Journal™

How Intangibles Influence Performance and the Bottom Line

In simple terms, a tangible is something that exists in reality, discernible by touch, concrete (e.g. appraisable assets). In contrast, an intangible is incapable of being touched or perceived, not readily defined or measured (e.g. morale).

With ever-increasing pressures on bottom-line results, it is easy to lose sight of the importance of attending to and nurturing intangibles as part of our leadership role.

Recent and compelling research-based evidence suggests that intangibles not only boost employee productivity and improve bottom-line results, but also impact shareholder value, customer loyalty (in contrast to mere satisfaction), investor confidence, and the overall market value of the enterprise.

There is great potential and unique competitive advantage in leveraging intangibles as a new bottom line which senior leaders must begin to recognize. This new bottom line suggests that the soft stuff is at least as important as the hard stuff.

This new bottom line requires that leaders learn to inspire more confidence among those they lead and focus on building more value through their people and organization. Yes, by the way, all of this must continue to be done with limited time and other resource constraints. In essence, leaders must learn how to inspire the best and highest potential from their people for long-term business success.

To put this into perspective, the following are excerpts from Dave Ulrich's and Norm Smallwood's latest book, Why the Bottom Line Isn't, Wiley, 2003 which underscores why intangibles are so significant.

"Baruch Lev, an accounting professor at New York University and thought leader on intangibles, has shown the importance of intangibles as indicated through the market-to-book value (i.e., the ratio of capital market value of companies compared to their net asset value) of the S & P 500 from 1977 to 2001, which has risen from 1 to 6 in the past 25 years — suggesting that for every $6 of market value, only $1 occurs on the balance sheet."

"Lev identifies three primary sources of intangibles as discovery, organization, and human resources."

• "Discovery intangibles include patents, trademarks, R & D programs, royalties, and innovations. Organizations able to innovate through discovery have a higher market value than those who do not."
• "Organization intangibles include technology, brands, and customer costs. Exemplary leaders know how to manage these organization factors and build more future value from present earnings."
• "Human Resource intangibles focus on training, culture, and leadership. Lev suggests that the HR domain of intangibles requires more work."

Over the years, my observation of exemplary leaders suggests that the best leaders are very deliberate with their behaviors. The majority of their behaviors involve intangibles which serve to unleash the highest potential among employees, teams, and the organization.

I was visiting recently with a friend and former colleague with Johnson & Johnson. During our conversation, I mentioned how his leadership style had always inspired the best from those he led. My observation was that he invited, seldom demanded, extraordinary performance from not only direct reports but cross-functionally throughout all levels of the organization.

In my opinion, his extraordinary leadership abilities can not be attributed to style alone, but rather to a combination of style, intuition, and clear focus on intangibles, which we will explore in more detail in the February 2004 issue.

Next month, HPS will introduce a new leadership paradigm in an article entitled "An Extraordinary Invitation™." This article will expand on the significance of intangibles and how they influence performance at the individual, team, and organizational levels.