Chapter 2

The “new value creation economy” and evolving modalities of competition

If Japan is to build a resilient economic structure under a new economic environment seen in
Chapter 1, it is necessary for the Japanese economy as a whole to shift to a new modality ofcompetition centering on differentiation. This chapter attempts to examine the spread of value creation
through the utilization of broadly-defined “intellectual assets” as the new modality of competition
from the perspectives of companies, regions and individuals, also in light of ongoing discussions on
institutional reforms.
Section 1 Modality of corporate competition – Value creation utilizing intellectual assets<Key points>
1. Intellectual assets as a source of competitivenessIn both Japan and the US, the ratio of intangible to tangible assets has grown in recent years,
suggesting that the earlier style of business management based on tangible assets is undergoing amajor transformation.
With competition among companies intensifying on a global basis, (i) companies now need to beconstantly supplying differentiated products and services, and for this reason (ii) knowledge has
become an important source of differentiation in products and services. These developments aretheoretically driving a shift in the basis of business management from tangible to intellectual assets.
2. The viewpoint of knowledge economy
International institutions and other organizations are analyzing and considering policy responses inrelation to the role of intellectual assets in recognition of the shift to the so-called “knowledge
economy.” Appropriate evaluation and disclosure of intellectual assets is becoming critical as thesource of value changes from tangible to intellectual assets. Specific approaches to the evaluation anddisclosure of intellectual assets can be broadly classified into two types: (i) approaches in which theintellectual assets have to be quantified and recorded in financial statements; and (ii) approaches inwhich intellectual assets are qualitatively evaluated and disclosed separately from financial statements.
3. Intellectual assets and the value creation capacity of companies
Whether a concrete correlation can be found between intellectual assets and the performance of acompany in terms of profit, sales or share price is examined, while introducing existing empiricalstudies. In order to analyze, intellectual assets are divided into (i) intellectual assets related totechnological innovation; (ii) intellectual assets related to organizational design; and (iii) intellectual
assets related to human capital.
Empirical studies in the US have shown that: (i) investment in R&D spurs innovation andimproves the future performance of companies, such as performing the function of creating enterprise- 79 -

value; (ii) intellectual assets other than R&D (organizational capital and human capital) are also
important sources of company growth; and (iii) organizational capital, human capital, and IT
investment complement each other and produce benefits for company performance in excess of theirbenefits as individual “assets.”
Empirical studies in Japan have shown that: (i) although there is sometimes a positive correlation
between R&D investment on the one hand and the number of patent applications which serve as a
medium-term R&D investment yardstick on the other and company performance, compared to the US
analysis, no linear correlation is demonstrated; (ii) non-R&D intellectual assets are an importantsource of growth just as in the US; and (iii) there is a correlation between organizational capital andcompany performance.
4. The value creation capacity of companies and “Corporate Social Responsibility” (CSR)
The promotion of CSR and corporate profitability can be compatible for the following reasons: (i)there is an overlap between CSR and investment in intellectual assets designed to increase company
value; (ii) when intellectual assets are understood in terms of building processes to increase company
value, these same processes lead to CSR; and (iii) the promotion of CSR leads to building the distinct
character of a company as a source of competitiveness.
Socially responsible investment (SRI), in which targets of investment are selected after evaluationof the CSR and financial performance of the companies under consideration, is becoming a major
form of investment particularly in the US and the United Kingdom (UK). This reflects the growing
tendency of institutional investors such as pension funds and life insurance companies to incorporate
SRI into their investment portfolios.
With institutional investors, particularly pension funds, entering the SRI market, signs of change
have emerged in the nature of SRI. The range covered by SRI has come to include human capital andknowledge creation companies, bringing SRI increasingly close to the intellectual asset concept.
5. International trends in systemic reforms toward the evaluation and utilization of intellectual
assetsAs the impact of intellectual assets on company performances increases and the overlap grows
between the factors covered by CSR and the factors included in intellectual assets, moves are under
way internationally to establish systems for the evaluation and disclosure of information on
intellectual assets. These are intended to improve understanding of company value creation capacity as
a whole. Based on such systems, efforts are also being made to redefine the concept of the company
within corporate law.
6. Efforts in Japan towards intellectual asset evaluation
Although no comprehensive studies are currently being carried out in Japan concerning evaluationof intellectual assets, efforts are being made that will support comprehensive intellectual assets- 80 -

evaluation in future, such as examination and classification of information disclosure and value
evaluation methods for intellectual property, improvements in risk management capacity, andpromotion of environmentally-friendly company management.
7. Provisional intellectual asset evaluation method
Evaluation of intellectual assets should be developed through information gathering, evaluationand disclosure at company level, and it would be impossible to make an evaluation based solely on thedata currently available. To promote the future development of evaluation methods utilizing diverse
indicators, however, an experimental quantitative evaluation of the level of intellectual assets in Japanwas carried out using available publicly disclosed data and drawing comparisons with other majorcountries and regions.
8. Summary of Section 1
While financial assets and tangible fixed assets are made liquid in the market through buying andselling and are easily evaluated in terms of quantity, it is difficult, or sometimes even impossible, to do
this for intellectual assets. For this reason, information and the evaluation capability necessary toevaluate intellectual assets become enhanced in quality, making equity finance more appropriate thandebt finance as the form of financing for companies with ample intellectual assets.
No matter how developed intellectual asset evaluation methods may become in future, someintellectual assets will remain inseparable from the company. Therefore, intellectual asset evaluation
will inevitably continue to include some degree of qualitative description.
If value is created through intellectual assets and shared through disclosure by the company, notonly shareholders, customers, and employees but also suppliers and the local community will be able
to participate in that company’s value creation through evaluation of its value creation capacity, which
in turn could itself become a corporate intellectual asset.
Utilization of relations with stakeholders as an intellectual asset differs from traditional
Japanese-style management in two respects: (i) these relations are formed in a globally competitiveenvironment; and (ii) the evaluation and disclosure of intellectual assets and the resulting new imageof the company are open to international discussion on systemic reform.
In Chapter 1, it was found that changes in corporate behaviors and other micro-level factors atleast partially influenced the changes in macroeconomic trends against the backdrop of economic
globalization. For example, the intensification of competition among companies in the wake ofprogress in globalization and the diffusion of IT has placed companies in a situation where they tend tolose pricing power, and this in turn has become one of the factors responsible for the underlying
disinflation trend. Under these circumstances, it is necessary for companies to enhance the uniquenessof products and services they provide and differentiate them from those of its peers in order to regain
pricing power and earn profits. On the other hand, in order to shift to the modality of competition- 81 -

through differentiation, a company needs to utilize a variety of assets, including intellectual properties,
human resources and organizational processes (hereinafter referred to as “intellectual assets”1). Thissection attempts to show that value creation through the utilization of broadly-defined “intellectual
assets” is beginning to spread as the new modality of corporate competition and discussions about
institutional reforms in response to it are getting under way on an international scale.
1. Intellectual assets as a source of competitiveness(1) Growing importance of intellectual assets at companies
The ratio of intangible assets, such as patents, brands or human resources, separate from tangible
assets like machinery and equipment, to the total market value of a company is used as a method tomeasure the importance of above-mentioned intellectual assets in corporate management. Unlike
tangible assets, any direct measurement of intangible assets is difficult due to data constraints. As amatter of convenience, therefore, the following two measurement methods are adopted. The first
method calculates the value of intangible assets by subtracting the total value of tangible assets fromthe total market value of a company, which is obtained as the sum of the market capitalization of its
shares and long-term loans (corporate bonds),2 while the second method divides total amounts ofinvestment made by a company in a given period into the total amount of investment related totangible assets and the total amount of investment related to intangible assets, and regards the total
investment related to intangible assets as the value of intangible assets.
First, the relative importance of intangible assets in the US is measured using the above-mentioned
first method. Blair et al. (2000) compared the breakdown of the total market value of companies listed
in the US between the end of 1978 and the end of 1998 and obtained the following analysis results(Fig. 2.1.1). At the end of 1978, the ratio of the total value of tangible assets to the total market value
stood at 83 percent. But the ratio of the total value of tangible assets declined to 31 percent at the endof 1998. Since the rest of the total market value minus the total value of tangible assets can be viewed
as roughly representing the value of intangible assets, it can be concluded that the mode of assets heldby US companies has been noticeably transformed from the one centering on tangible assets to the one
centering on intangible assets. As an example of a company with the higher weight of intangible assets
against tangible assets, we examine Microsoft Co.’s 2001 Annual Report. It shows that while
Microsoft had a total market value of about 39 billion dollars as of the end of June 2001, the total
value of tangible assets held by Microsoft accounted for only 2.3 billion dollars. This suggests thatover 90 percent of the market valuation of Microsoft comes from the value of intangible assets.3

1Hereinafter, “intellectual capital” and “intangible assets” are synonymous with “intellectual assets,”
unless otherwise stated.
2
In employing this method of measurement, it should be noted that the market capitalization of shares
fluctuates in response to prevailing economic conditions, causing the relative importance of intangible
assets to either expand or shrink to a greater degree than justified by the real status.
3
Iwai (2003).
- 82 -

Figure 2.1.1 Changes in the ratio of intangible assets to total assets (US)
1978

1998

Intangible assets
17%
Intangible assets
69%
Tangible assets
83%

Tangible assets
31%

Note: Intangible assets are calculated as the portion remaining when tangible assets such as machinery and facilities,
etc. are subtracted from the total market value (the sum of total share value and long-term loans (corporate bands)) of
all companies except financial institutions listed on the stock exchange in the US.
Source: Blair, et al. (2000).

The status of the importance of intangible assets relative to tangible assets, as described above, canbe shown for Japan as well, using a similar method. Employing a method similar to that of Blair et al.
(2000), the ratio of tangible assets in corporate management is measured by the breakdown of the total
market value of companies listed on the Tokyo Stock Exchange.4 Comparison of the data between
March 1986 and March 2003 produced the following analysis results (Fig. 2.1.2). While the ratio of
tangible assets to the total market value stood at 41.4 percent in March 1986, the ratio of tangible
assets to the total market value was 62.2 percent in March 2003. This indicates that the value of
intangible assets still accounted for nearly 40 percent of the total market value even in March 2003,
when stock prices fell steeply. While the analysis did not indicate the trend of expansion as seen in theUS, it still showed the relative importance of intangible assets in corporate management was high inJapan as well.5

Figure 2.1.2 Changes in the ratio of intangible assets to total assets (Japan)
All industries

Manufacturing Industry

March 1986

March 2003

Intangible
assetsIntangible
assets

58.6%

37.8%

Tangible
assets41.4%

March 1986

March 2003

Intangible
assetsIntangible
assets

69.7%

59.9%

Tangible
assetsTangible
assets
30.3%

62.2%

Tangible
assets40.1%

Note: Intangible assets are calculated as the portion remaining when tangible fixed assets are subtracted from total sharevalue, corporate bonds, convertible bonds, and long-term loans. The “all industries” classification includes 169 Japanesecompanies, and the “manufacturing industry” classification includes 104 companies.
Source: Nikkei NEEDS.

4

The subject companies consist of a total of 169 Japanese companies for which Nikkei NEEDS provides
the complete set of data for tangible fixed assets, market capitalization of shares, long-term loans, andstraight and convertible bonds from FY1985 through FY2002.
5
When the value of tangible assets to the total market value is compared between March 1986 and March
2003 with the scope of companies examined narrowed to 104 manufacturers, the ratio was 30.3 percent inMarch 1986 and 40.1 percent in March 2003, with the ratio of tangible assets shown to be smaller than thatfor an all-industry basis.
- 83 -Meanwhile, Nagaoka et al. (2003) made an analysis adopting the second method mentioned above,
which first divides total amounts of investment made by a company in a given period into the total
amount of investment related to tangible assets and the total amount of investment related to intangible
assets, and regards the total investment related to intangible assets as the value of intangible assets.
This analysis examined the ratios of the total amount of investment related to intangible assets (R&D
and advertising expenses) and the total investment related to tangible assets (capital investment) to thetotal amounts of investment, based on non-consolidated accounting, at eight major companies in thefour industry sectors (pharmaceuticals, telecommunications/games, electrical machinery andautomobiles) (Fig. 2.1.3). The survey results showed that at these companies, the ratio of the total
value of investment related to intangible assets to the total value of investment ranged from 65.7
percent to 88.3 percent, accounting for over two-thirds of the total value of investment. Investment
behaviors of individual companies also demonstrate that the value of intangible assets is gaining more
importance than the value of tangible assets in Japan as well.
Figure 2.1.3 Investment ratio of intangible and tangible assets (FY2000)

Industry typeCompany nameTakeda Pharmaceutical Co.
Eisai Co.
NTT Corp.
Communications and games
Square Co.
Toshiba Corp.
Electrical
Fujitsu Ltd.
Toyota Motor Corp.
Automotive
Mazda Motor Corp.
Average of each company
PharmaceuticalR&D expenses(%)

Advertisingexpenses (%)

70.1
75.9
80.7
74.3
64.0
67.3
55.8
49.9
67.3

16.1
12.4
1.3
11.8
4.2
4.8
12.4
15.8
9.9

Intangible asset- Capital investment
Total amountrelated(tangible asset-related of investments
investments (%)
investments) (%)(billion yen)
86.2
13.8
113.3
88.3
11.7
61.3
81.9
18.1
255.7
86.2
13.8
19.6
68.2
31.8
436.8
72.1
27.9
488.6
68.2
31.8
767.3
65.7
34.3
137.4
77.1
22.9
285.0

Note: Non-consolidated accounting base, Total amount of investments = R&D expenses + Advertising expenses + Capital investments.
Source: Nagaoka, Kagaya (2003).
Original source: Nikkei NEEDS.

As discussed above, in both Japan and the US, the ratio of intangible to tangible assets has grown
in recent years, suggesting that the earlier style of business management based on tangible assets isundergoing a major transformation.
(2) Changes in business models and industrial structures brought about by the growing
importance of intellectual assets
Amid the growing shift in the basis of business management from tangible to intellectual assets,changes are emerging in business models and the industrial structure that heretofore had relied onmachinery and equipment. It is becoming important with respect to how to rapidly create differentiatedproducts and services in response to diversifying needs of users, and accordingly, investment bycompanies is expanding in scope, extending beyond physical assets represented by buildings, facilities
and machinery to cover intellectual assets such as ideas, know-how, technologies, intellectual property
rights and brands. Consequently, how the expanded role of intellectual assets has changed businessmodels and the industry structures in such content businesses as animation production and CD- 84 -

production is outlined below.6(a) Structural changes in the animation production industry
The business of animated cartoons entails the participation by a broad array of interested parties
involved in various stages ranging from production and television broadcasting to film showing andthe marketing of character goods, such as diverse parties that provide large-scale tangible assets(broadcasting facilities, movie theaters, distribution/marketing functions and so on) in the processfrom production through distribution/marketing. Thus, it has been a common practice in the animation
production industry to set up a production committee for each animation work to make decisions
under a council system of not only a production company but also other interested parties providing
tangible assets including a TV station, movie company, marketing firm and advertising agency so thateach participant can reap a profit commensurate with its contribution to the whole process. However,this approach had the problem that it would essentially shut a company that cannot provide any
tangible assets out of the animation production business, in addition to another problem that the natureof the council system requiring approval by all participants would severely limit business potential
unless the original work of animation ensured equal profits for all interested parties.
However, business models and the industry structure in the animation production industry havebeen undergoing a major transformation with the emergence of companies that do not own large-scaletangible assets but have know-how necessary for animation production and make money by providing
one-stop services by consolidating the management of all rights related to animation production (forinstance, d-rights Inc.)7 (Fig. 2.1.4). For example, the business model of d-rights Inc. calls for thecompany’s consolidated management of all rights related to production, securing of television
broadcast slots, advertising and licensing. This approach not only made it considerably easier to secureagreement among interested parties than under the production committee formula but also made it
possible to go ahead with a project to produce an animation work that could be expected to make aprofit only in a specific area (the marketing of related character goods, for example). Thisdevelopment is generating a structural change in the industry, allowing an interested company into theanimation production business regardless of whether it has tangible assets.

6

The following are based on the results of hearings conducted by the Research and Analysis Division of
the Trade Policy Bureau at the Ministry of Economy, Trade and Industry.
7
In other cases, major changes were brought to business models and the industry structure in the animation
production industry as the result that existing companies expanded their operations into new business areas
beyond the range of tangible assets they had owned (for example, the case where a game company entered
the marketing of character goods).
- 85 -

Figure 2.1.4 Changes to the business environment in the animation industry
Tangible assets
Studios

Formerly
Production companies

TV broadcast
facilities

TV stations

Movie theaters

Movie companies

Distribution &marketingAdvertising & marketing companies

Production committees
Animation planning & production
Animation broadcasts
Production & broadcast of animated movies

Marketing of character goods

Recent trends
Know-howContents & production companies
Production companies

Tangible assets

Studios
TV broadcast
facilities
Movie theaters
Distribution &marketingAnimation planning & production
Animation broadcasts

TV stations
Production & broadcast of animated movies

Movie companies
Advertising &marketing companies

Marketing of character goods

Source: METI.

(b) Structural changes in the CD production industry
Such major changes in business models and industry structures can be seen also in the CD
production industry. In the era when analog records were the main products offered by the industry,
production and marketing of records were impossible unless interested parties had tangible assets suchas recording studios, press factories or distribution and marketing functions. In the transition of coreproducts from analog records to digital CDs, however, the sharp decline in economies of scale
regarding the cost of CD reproduction made it possible to produce CDs to meet customer needs for
those with in-depth ideas and know-how about very narrow areas of particular types of music (the typeof operation called “indies”) in spite of a lack of tangible assets like studios or press factories. One
good example is, HOWLING BULL Entertainment, Inc. (Fig. 2.1.5). Such a change in the businessenvironment has brought about structural changes where not only companies with plenty of machineryand equipment (called “majors”), but also companies like indies that do not own machinery andequipment but have only know-how or detailed knowledge about customer preferences, can enter the
CD production business.
Figure 2.1.5 Change in the business environment from the record era to the CD era
Tangible assets

Record era
Musical record planning & production

Studios
Press factories

Record companies
Production
Music publishing companies

Distribution &marketing

PromotersMusical record manufacturing
Musical record marketing
Artist management
Musical publishing management
Concerts

CD eraMusical record planning & production

Know-howIndiesRecord companies

Musical record manufacturing
Musical record marketing

Tangible assets

Studios
Production
Press factories
Music publishing companies

Distribution &marketing

Promoters

Source: METI.

- 86 -

Artist management
Musical publishing management
Concerts

(c) Evaluation
In the animation production industry as well as in the CD production industry, there used to be anindustry structure where only players with tangible assets could enter the business. In recent years,
however, the industry structure has undergone a major transformation to open the door for any player
who can utilize intellectual assets such as ideas and know-how.
(3) Growing importance of intellectual assets and changes in the competition environment
How can this growing relative importance of intellectual assets be interpreted in relation tochanges in the environment of competition?
Under a situation where goods and services are generally in short supply on the market, theimportant issue was whether consumers really needed these goods and services, and if they did,whether the goods and services concerned really existed in the market. With the advent of the “affluent
society” and globalization of the world economy, however, a diversified range of goods and services
are being supplied in immense quantities in many developed countries, including Japan. Consumers
can now choose goods and services they need from a large supply of varied goods and services
supplied. This, in turn, means that consumers now have to determine whether they need the goods andservices from the aspect of what “significance” the goods and services have for them. For this reason,
it is now necessary for companies to run their operations by paying full attention not simply to thequantitative aspect of how many goods and services they can provide to consumers but to thequalitative sides of how much “significance” their goods and services can bring to individual
consumers, such as to what extent they can offer goods and services with the “significance” that isdifferent from goods and services provided by other companies (the supply of differentiated goods andservices). In particular, as noted previously, the intensification of competition among companies due tothe globalization of economic activities is rendering obsolete more quickly the “significance” goods
and services as articles of commerce can offer to consumers, and companies are now constantly
finding it necessary to provide consumers with differentiated goods and services.8
Thus, in order to keep offering differentiated goods and services without interruption, companies
need to generate innovation constantly, and it in turn is very important for them to build into corporate
organizations the mechanism for the in-house creation and accumulation of knowledge. Nonaka and
Takeuchi (1996) offered the following analysis of this mechanism for the in-house creation andaccumulation of knowledge. Assuming that an organization itself cannot create knowledge on its own,
they argued that the key to the Japanese way of innovation was “organizational knowledge creation,”whereby knowledge created by individual members of an organization is turned into a new product orservice or an improved business process by the organization as a whole. They further analyzed theprocess through which knowledge held by individuals is transformed into knowledge held by theorganization as a whole. More specifically, they assume the two knowledge types of “tacit knowledge”

8

Uchida (2003).
- 87 -

and “explicit knowledge,” 9 and argue that tacit knowledge held by individuals is graduallytransformed into explicit knowledge in the form of languages or numbers that are easier for anyone tounderstand through constant dialogue or discussions with others in an organization. As the knowledge
concerned is communicated and shared within the organization, the knowledge of individuals is
ultimately transformed into the knowledge important for the organization as a whole, leading to thegeneration of innovation (new products, manufacturing processes and so on).
As described above, with competition among companies intensifying on a global scale, (i)companies now need to be constantly supplying differentiated products and services, and for thisreason, (ii) knowledge has become an important source of differentiation in products and services.
These developments are driving a shift in the basis of business management from tangible tointellectual assets.
2. The viewpoint of knowledge economy
International institutions and other organizations are analyzing and considering policy responses inrelation to the role of intellectual assets not only as an individual element in corporate management but
in recognition of the shift to the so-called “knowledge economy.” Some of these analyses are reviewed
below.
(1) OECD report
The Organisation for Economic Co-operation and Development (OECD) in 1999 implemented theGrowth Project with the purpose of clarifying factors and policies that could help strengthen theperformance of long-term economic growth by elucidating the causes of the discrepancy in the growth
performances of OECD member countries in the 1990s, particularly the accelerated growth of the US
and several other countries in last decade. After completing the two-year project, the OECD
Ministerial Council Meeting in May 2001 adopted the final report, The New Economy: Beyond theHype, which called for a deeper understanding of (i) the role of information and communications
technology (ICT) as well as (ii) the potential to realize the new economy through ICT, and thenproposed (iii) specific policies to help realize and sustain high economic growth. The report pointed
out that: (i) while ICT is an important factor for economic growth, having a domestic ICT
manufacturing industry is not necessarily an essential condition for a country’s growth; and (ii) inorder for ICT to be effectively utilized to give fully play to its utility, it needs to be supported withappropriate skills and capabilities, and thus human capital is an important factor in realizing economic
growth, leading to an increasing demand for knowledge workers (Fig. 2.1.6).

9

Based on the distinction made by Michael Polanyi, “tacit knowledge” signifies personal knowledge about
a specific situation that is difficult to be formalized or conveyed to others, while “explicit knowledge”
signifies knowledge that can be communicated to others by formal and logical languages (Nonaka and
Takeuchi (1996)).
- 88 -

Figure 2.1.6 Growing importance for intellectually intensive workers

Knowledge worker

Service worker

Management worker

Data worker

Goods-producing worker

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5
(%)

Note: The above represent the growth in the number of workers for each industry sector, and show the average proportion change for1992-1999.
Source: OECD (2001).

(2) The Brookings Institution report
The Brookings Institution established an in-house study task force on intellectual assets from 1998
through 2001 for a detailed examination of methods to evaluate and disclose intellectual assets. Basedon this examination, the institution classified intellectual assets into (i) assets that can be owned andsold (patent rights, copyrights, brands and so on); (ii) assets that can be controlled but not severable orsold (research and development investment in progress, trade secrets, reputation and so on); and (iii)
assets that cannot be fully controlled by companies (human capital, core competence and so on), andcame up with the following conclusions.
Since information regarding (i) can be relatively easily obtained, companies are able to disclosequantitative information to the capital market. However, it is hard to gain access to information on (ii)and (iii) and companies usually find it difficult to provide the capital market with quantitative
information. Since the absolute lack of disclosure of information on (ii) and (iii) to the capital market
would considerably undermine the efficiency in the market allocation of resources, it is necessary toensure quantitative disclosure of such information to the capital market as much as possible.
(3) EU experts’ report
In Europe, the European Commission launched a project in January 2000 for an experts’
examination of intellectual assets (PRISM Project), and the experts’ panel announced its report (The
PRISM Report 2003)10 in September 2003. The report indicated that the image of companies is
10

Hereinafter, it is referred to simply as the report.
- 89 -

changing in line with the growing importance of intellectual assets in the economy and that the
expanding importance of intellectual assets will influence a broad range of fields such as the capital
market and public policies in the longer run. The report, though not necessarily filled with specificmeasures, put forth comprehensive proposals covering a wide range of policy areas. The report isoutlined below.
(a) New image of companies
Firstly, the report noted the shift to the knowledge-based economy in recent years, where the key
sources of economic value and wealth lie no longer in the production of goods but in the creation,acquisition and utilization of intellectual assets. As the background for this shift, the report cited: (i) as
the progress in globalization and IT utilization made the scale and complexity of innovation out ofreach by an individual company and made it impossible to own resources as in the past exclusively,
the utilization of resources through some form of networking with other companies came to be
accepted as a major corporate strategy; (ii) in a situation where consumers’ basic needs have been
essentially satisfied, the modality of the value creation (value chain) by companies has shifted fromtangible assets that have turned into commodities to intellectual assets; and (iii) technologicaladvances made it possible to meet both economies of scale and consumers’ diversified needs, as seen
with Coca-Cola and IBM. Based on these, the report pointed out that it is becoming indispensable forcompanies to have unique capabilities and assets, or at least those that are difficult to copy by othercompanies, to win in today’s open and intense competition amid the changing economic environment(Fig. 2.1.7).
Figure 2.1.7 The resource base of the 21st century enterprise
Tangible assets where
ownership is clear andenforceable

Rights that can be bought,
sold, stocked and readily
traded in disembodied formand (generally) protected

Non-price factorsof competitive
advantage“Soft”“Hard”

Difficult to isolate and value

Commodities

Tangible assets<Physical assets>• Land, factories andfacilities• Inventory• Others<Financial assets>• Cash and equivalents• Securities• Investments

Potentially uniquecompetition factors thatare within the firm’s
capability to bring about

Intangible goods

Intangible competences

Latent capabilities<Competency map>
• Distinctive
competences• Core competences• Routinecompetences<Capabilities>• Leadership• Workforce caliber• Organizational(including networks )• Market/reputational• Innovation,/R&D
in-process• Corporate renewal<Material supply contracts>• Licenses, quotas andfranchises<Intellectual assets that canbe registered>• Copyright or patent protected
originals – film, music, artistic,scientific, etc. including market
software• Trademarks• Designs<Other intellectual assets>• Brands, know-how and trade
secrets

Source: European Commission (2003).

(b) New mechanism of evaluation
The report also pointed out that as long as the fundamental economic drivers have changed, as
described above, the mechanisms for evaluating assets of states or companies also need to be changed- 90 -

from old ones.
From the macroeconomic perspective, the report noted, for example, that the System of National
Account (SNA) does not reflect intellectual assets and thus does not adequately evaluate today’s real
economic conditions, and pointed out that the following drastic reforms are necessary for the SNA toevaluate appropriately the real economic conditions: (i) the sources of value creation in production
activities in the economy should be understood and evaluated; (ii) R&D and other creative activities
driving innovation should be recognized as investment activities creating wealth in the future,
departing from the present treatment; and (iii) activities related to the knowledge creation and theformation of intellectual assets, such as education and training and skill development, should also berecognized as investment activities leading to the creation of wealth in the future.
Furthermore, the report said the above-mentioned points are applicable to the level of companies
as well as the macro level, noting the current situation where intellectual assets and innovation-related
investment are not adequately evaluated at the level of companies as is the case at the macro level.
On top of these problems, the report said that from the perspectives of corporate accounting anddisclosure of information, the existing accounting systems have the following problems. While theexisting accounting systems are functioning sufficiently in terms of keeping track of incoming andoutgoing flows of funds in corporate transactions, it is becoming growingly difficult for present
accounting system models to appropriately follow trends in intellectual assets that are playing animportant role in innovation, production and the allocation of assets even without going throughtransactions. Based on this observation, the report argued that it is not sufficient to understandfinancial information disclosed under the existing accounting systems to measure the performance ofcompanies and that while proposals for a variety of evaluation methods and disclosure means forintellectual assets have been made in recent years in recognition of this situation, they have not led to a
recommendation for a comprehensive framework yet.
(c) Impact on players in the corporate community
The report pointed out that the reforms of corporate information disclosure and accounting
systems described above should influence respective players in the corporate community (corporate
managers, financial institutions, rating agencies, analysts, etc.).
The report said corporate managers need to have adequate information about the performance of
their companies. They also need to manage appropriately intellectual assets internally and also provide
investors with proper information. At present, financial institutions and venture funds seem to havelittle interest in the evaluation of intellectual assets held by companies they lend money to and investin, but they are trying to evaluate intellectual assets of borrowing or invested companies using theirown methods, though their practices are not called the evaluation of intellectual assets, according to
the report. It also noted that rating agencies, like financial institutions, are effectively utilizing
non-financial information, such as information on intellectual assets, in evaluating default risks
concerning debts of national governments or companies.
On the basis of the above analysis, the report made the following recommendations:- 91 -

(1) Develop a statistical information system for intellectual assets at the national and company level.
(a) Revise the SNA to grasp and evaluate technology and knowledge.
(b) Substantially expand the range of information disclosure by companies within the EU andenhance transparency for the capital market. To this end, the EU, governments of member
states, industries and companies at their respective levels should make efforts toward theupgrading and expanding of information disclosure.
(c) Companies should disclose information in accordance with above-mentioned mechanisms
for the expansion of information disclosure.
(2) Establish evaluation methods for R&D investment in the service industry.
(3) Continue to promote the intellectual property strategy.
(4) Factor intellectual assets into small and medium enterprise financing policy.
(4) Evaluation
All the reports cited above point to the common direction that amid the above-described shift ofthe sources of value from tangible assets to intellectual assets, it is necessary to adequately evaluate
and disclose information about intellectual assets.
However, there are broadly two divergent views regarding specific ways to evaluate and disclose
intellectual assets.
The first is the approach to recognize and quantify intellectual assets as individual assets andrecord them in financial statements (hereinafter, this approach is referred to simply as the“capitalization approach”). The second is the approach where intellectual assets do not exist as
individual “assets” or “input,” or even if they do, they are regarded as difficult to quantify, and thus
this approach calls for qualitative evaluation and disclosure of intellectual assets separately fromfinancial statements (hereinafter, this approach is referred to simply as the “qualitative evaluation
approach”). These two are not necessarily antinomic, but current discussions are revolving aroundthese two approaches.
3. Intellectual assets and the value creation capacity of companies(1) Classification of intellectual assets
Next, a concrete analysis is made as to whether a specific correlation can be seen between
intellectual assets and indicators of the corporate performance such as profit, sales and share prices.
The following examination of the possible correlation is conducted using samples of Japanese and US
companies, based on existing empirical studies.
In doing so, in order to look into the possible correlation between intellectual assets and thecorporate performance, intellectual assets are categorized into (i) intellectual assets that are generated
by technological innovation (hereinafter referred to simply as “innovation capital”); (ii) intellectual
assets that are generated by organizational design (hereinafter referred to simply as “organizational
capital”); and (iii) intellectual assets that are generated by human capital (hereinafter referred to- 92 -

simply as “human capital”), in line with the Lev (2001) formula (Fig. 2.1.8).
Figure 2.1.8 Classification of intangible assets

Intensified competition induced by globalization, deregulation, andtechnological change

Fundamental corporate change, emphasis on innovation,
deverticalization, intensive use of information technology

Human capital

Organizational

intangible assets

intangible assets

Innovation-related
intangible assets

Source: Lev (2001).

As concrete examples of (i) innovation capital, research and development (hereinafter referred tosimply as “R&D”) investment can be cited along with patent rights, trade secrets and copyrights,
which are legally protected forms of products resulting from R&D investment. Concrete examples of(ii) organizational capital include brands (those established in business activities through names, marks,
symbols, package designs and other ensigns companies use to identify or differentiate their own
products, etc. from products, etc. of competitors 11 ), processes (organizational structures, etc.),
networks (raising funds, customer development, etc.) and so on. Finally, among concrete examples of(iii) human capital are management (management skills, capabilities, eagerness, etc.) and employees(operational skills, capabilities, eagerness, etc.).
(2)Empirical studies on intellectual assets and corporate performance(a) Empirical studies in the US(Empirical studies on the relation between innovation capital and corporate performance)
Companies make a vast amount of R&D investment to generate innovation. How much is such
R&D investment actually contributing to the growth of companies? Below, we look at empiricalstudies on US companies included in Lev (2001).12
In this study, regarding the relationship between R&D investment and corporate performance, ananalysis is made on the profitability of R&D investment for a period between 1980 and 1999, using a
11

Previously, brands meant marks (emblems, signs) that were used to help consumers distinguish productson the market (Report of the Committee on Brand Valuation (2002) defined brands as names, logos, marks,
symbols, package designs and other ensigns companies use to identify or differentiate their own products,
etc. from products, etc. of competitors). As these marks were recognized by consumers to form specificimages, these marks themselves came to have the value in their own right. Presently, these marks mean abroader range of goods and services and even the whole corporate image.
12
References were made also to Lev (2002), the translated version of Lev (2001), as necessary.
- 93 -

sample of 83 chemical companies. The results of this analysis showed that every 1-dollar increase in
R&D investment in the chemicals sector would result in an average 2-dollar increase in present andfuture operating profit. When this equation is converted into the annual return on investment, thereturn on investment of R&D in the chemical industry would be 27 percent before tax and a little lessthan 17 percent even after tax, indicating that chemical companies have achieved a high rate of returnin excess of the average cost of capital (usually 8 to 10 percent) through R&D. This study also foundthat investment in tangible assets resulted in the rate of return of a little less than 8 percent, or the
average rate of return similar to the cost of capital, demonstrating that investment in tangible assets
had the rate of return no better than the level equivalent to the cost of capital.
As something that complements the above empirical analysis that examined the relation between
R&D investment and corporate performance, an empirical study was conducted to analyze therelationship between the number of patents and corporate performance by using the number of patents
as a scale for measuring the interim results of R&D. This study demonstrated following two points: (i)the larger the amount a company outlays for R&D investment, the greater the number of patents andinnovation; and (ii) the greater the number of patents and innovation, the greater the market value of acompany on average.
These results demonstrate that investment in R&D is performing the function of creating company
value as an important intellectual asset, such as innovation capital, that spurs innovation and improves
the future performance of companies.
(The relation between organizational capital /human capital and corporate performance)
Since data related to R&D by listed companies is now readily available, empirical analysis
concerning the correlation between R&D investment and corporate performance is being conducted
relatively widely, including the above-cited analysis. Regarding organizational capital and humancapital (here, “non-R&D intellectual assets” as the concept that includes both), there is less empiricalanalysis on the correlation with corporate performance due to data constraints. However, through someresourceful efforts as explained below, the correlation between non-R&D intellectual assets andcorporate performance is being analyzed through indirect methods.
Lev (2001) began with the long-term observation of trends of R&D expenses and tangible assets aswell as trends of share prices. The analysis concerned found (i) the ratio of R&D expenses by
non-financial companies to GDP averaged 2.3 percent in 1980-1989, and increased only moderately to
an average 2.9 percent in 1990-1997; (ii) the ratio of the value of tangible fixed assets owned bycompanies to GDP averaged 14.1 percent in 1980-1989, and declined moderately to an average 12.6
percent in 1990-1997; and (iii) but the S&P 500 index, which reflects share prices of major US
companies and which stood at 135.76 at the end of 1980, rose to 1,320.28 on January 1, 2001, and still
was at 1148.08 on January 1, 2002, about 10 times the 1980 level. This indicates that there are factors
other than trends of R&D investment and tangible assets that influence the corporate performance (inthis case, the share price).
Next, Lev (2003), following the line of the Solow residual, conducted a more rigorous analysis by- 94 -

estimating the portion that cannot be explained by respective factors as non-R&D intellectual assets,based on corporate data and using labor, capital and R&D13 as explanatory variables of corporate sales.
As the specific method of estimation,14 in the first stage, theoretical sales are estimated on the basis ofcapital, labor and R&D, and then the residual between actual sales and the estimated sales isrecognized as the contribution from non-R&D intellectual assets (they are further divided into
non-R&D intellectual assets common to all companies and non-R&D intellectual assets inherent ineach company). In the second stage, in order to verify the validity of the above estimation of
non-R&D intellectual assets, the correlation between non-R&D intellectual assets and typical proxy
indicators of non-R&D intellectual assets (IT expenditures, market share, and selling, general andadministrative expenses) is examined.
This analysis covered about 250 companies listed in the US Information Week 500 between 1991
and 1997 because data related to IT expenditures were available. First of all, the estimation results15 in
the first stage (Fig. 2.1.9) showed that of all non-R&D intellectual assets, non-R&D intellectual assets
common to all companies pushed up sales of the group of companies for which R&D expense data
was available by an average 3 percent and also increased sales of the group of companies for which
R&D expense data was not available by an average 2 percent. Non-R&D intellectual assets inherent ineach company pushed up sales by an average 2 percent for both groups of companies, indicating
quantitatively that non-R&D intellectual assets are indeed an important factor that affects corporate
performance. Next, for the monetary conversion of non-R&D intellectual assets, sales are estimatedwith non-R&D intellectual assets and without non-R&D intellectual assets, and the difference wasrecognized as the contribution to sales by non-R&D intellectual assets. The results of this estimation
showed that while the size of non-R&D intellectual assets was equivalent to 3 percent of the averagesales, non-R&D intellectual assets contributed 43 percent of the increase in sales. This estimation
outcome also indicates that non-R&D intellectual assets are an important factor as the sources ofcorporate growth.

13

In Lev (2001), as stated before, intellectual assets of companies are broadly categorized as R&D,
organizational capital and human capital. Since R&D has long been studied in relation to corporate
management, this analysis uses R&D, together with labor and capital, as an independent explanatory
variable for corporate sales in a way that separates it from those that are not non-R&D intellectual assets.
14
For details, see AN 2.1.1.
15
Lev (2003). For details, see AN 2.1.1.
- 95 -

Figure 2.1.9 Relationship between company sales and non-R&D intellectual assets in the US
(%)

(%)
60

6

R&D expenditure data available
R&D expenditure data not available
5

50

4

40

3

30

2

20

1

10

0

0
Average percentage increasein sales due to non-R&D
intellectual assets

Average percentage increase in sales
due to non-R&D intellectual assets
shared by all companies

Average percentage increase in sales
due to the non-R&D intellectual assets
unique to individual companies

Percentage contribution of nonR&D intellectual assets toincreases in sales

Notes:
1. The average percentage increase in sales due to non-R&D intellectual assets is the total of the average percentage increase in sales due to non-R&D intellectual assets sharedby all companies and non-R&D intellectual assets unique to individual companies.
2. The companies analyzed are about 250 companies that appeared in “Information Week 500” over the period 1991-1997.
3. The percentage contribution to increases in sales is calculated regardless of the availability of R&D expenditure data.
Source: Lev (2003).

Next, the results of the second-stage estimation16 examined the correlation between non-R&D
intellectual assets and IT expenditures, market shares of companies, and selling, general andadministrative expenses as known proxy indicators of non-R&D intellectual assets, which wasestimated in the first stage. It was pointed out that the correlation is statistically highly significant, andconfirms the validity of the first-stage estimation of non-R&D intellectual assets.
(The relation between human capital and corporate performance)
The above considerations show the existence of intellectual assets other than R&D that affect thecorporate performance. But as mentioned earlier, the role of human capital is crucially important in thesense that corporate organizations themselves do not generate knowledge in the beginning and new
knowledge is always generated by individuals. 17 Thus, how human capital alone is related tocorporate performance is broadly examined below.18
16

Lev (2003).
Nonaka and Takeuchi (1996).
18
Iwai (2003) explains the expanding role of human capital as follows, from the viewpoint of thetransformation of capitalism. After the comparison between “industrial capitalism” (capitalism thatgenerated profits through industrial activities) that functioned in developed countries since the Industrial
Revolution until the 1970s and “post-industrial capitalism” (capitalism that can generate profits byintentionally creating differentiation) that emerged in place of “industrial capitalism,” which became unable
to function in developed countries after the 1970s, Iwai (2003) explains the difference between them asfollows. In the era of “industrial capitalism, while it was possible to employ a large number of workers at
cheap wages by relying on industrial reserve labor in rural areas, the value of tangible assets such asmachinery and equipment remained high, allowing companies to secure profits simply by owningmachinery-based factories. In the era of “post-industrial capitalism,” however, with the value of machinery
17- 96 -

A survey of concrete corporate efforts toward the evaluation of human capital shows that many
companies acknowledge the importance of human capital in their financial reports. According to a UK
government report, Accounting for People Report, UK companies evaluate human capital using thefollowing benchmarks: (i) as benchmarks for evaluating human capital, big corporations and othercompanies most frequently use the profiles of employees, labor turnover rate, labor retention rate, job
vacancy rate, the performance and productivity of employees and employee participation in
management; and (ii) as additional benchmarks on top of those in (i), companies utilize education andtraining (quantity, cost and efficiency), leadership and career development, revenue, profit per
employee and compensation policy. While many companies are using the above-cited benchmarks forthe evaluation of human capital, it is actually difficult to make a quantitative evaluation of thecontribution by human capital to the corporate performance through the direct use of thesebenchmarks.
Abowd et al. (2003), in a recent US study, made use of wage data accumulated fromunemployment insurance data of state governments as well as a new set of data developed under a US
Census Bureau project (LEHD Program: Longitudinal Employer-Household Dynamics Program) to
make an analysis of about 340,000 companies in six states. More specifically, by linking the wage data
and the profile data of individual employees, the study first estimated the “personal effect” and the“experience component” of employees of individual companies, and then by using these and the“human capital index” that combine both as explanatory variables, analyzed changes in the laborproductivity of individual companies and the correlation between these changes and the variables (Fig.
2.1.10). As for the correlation between the changes in the ratio of workers who are in the upper half ofthe entire sample in terms of the “human capital index” and the changes in labor productivity, when
the ratio of workers moves up by one standard deviation, labor productivity rises by about 31 percent.
When the “human capital index” is divided into the “personal effect” and the “experience component,”
if the ratio of workers who are in the upper half of the entire sample rises by one standard deviation as
in the previous case, labor productivity rises by about 29 percent and 23 percent according to therespective criteria. This analysis is valuable in the sense that the correlation between labor productivity
and human capital was analyzed on the basis of a more specific evaluation of human capital, separate
from conventional, easily available statistical data such as “academic background.”and equipment declining rapidly, companies cannot generate profits unless they intentionally create thedifferentiation in products they make by developing new products or introducing new technologies. Under
these circumstances, Iwai (2003) concludes that in the era of “post-industrial capitalism,” the role of humancapital such as corporate managers’ planning capabilities and employees’ know-how is expanding
dramatically as the source of generating differentiated products.
- 97 -

(%)

Figure 2.1.10 Relationship between improvements to human capital and productivity increases

32

31

30

29

28

27

26

25

24
Improvements to personal effect only

Improvements to experience component
only

Combination of personnel effect andexperience component

Source: Abowd, et al. (2003).

The above analysis uses a method that falls under the category of the “capitalization approach”
discussed in 2 in this section, in that human capital and organizational capital are recognized as“input” like tangible fixed assets and examines the extent of their contribution to the corporate
performance.19 However, as stated in the discussion concerning an analysis of productivity at thecompany level in Chapter 1, Section 3, organizational capital, human capital and, IT investmentcomplement one another and produce benefits for company performance in excess of their benefits as
individual “assets” and thus the approach to recognize them as individual “assets” has its limitations.
Because of this, in studies regarding the relationship between intellectual assets and corporate
performance, Cummins (2003), for example, does not treat “intellectual assets” as an “input,” butrecognizes them as a “function” where companies utilize a variety of assets effectively to create value.
This can be considered to fall in the category of the “qualitative evaluation approach.”(b) Empirical studies in Japan(The relation between innovation capital and corporate performance)
There have also been several empirical studies in Japan regarding the correlation between
intellectual assets and the corporate performance, though not to the same extent as in the US due todata constraints and other reasons. As for the correlation between R&D investment and the corporate
performance, an analysis was carried out to examine the relation between the number of patentregistrations and ROE between 1998 and 2002. For example, the IT sector (businesses subject to theanalysis here are general electrical machinery manufacturers) and the pharmaceutical sector were
examined. In the analysis of the IT sector, profitability had a low level of correlation with the amount19

Needless to say, making an analysis with such an approach does not automatically lead to an argumentthat human and organizational capital should be recorded as assets in financial statements.
- 98 -

of R&D expenses or the number of patent registrations but displayed a higher level of correlation withthe efficiency in acquiring patents (the number of patent registrations/R&D expenses) (Figs. 2.1.11,
2.1.12, 2.1.13). Meanwhile, in the pharmaceutical sector, while there was very little difference
between individual companies in the efficiency in the acquisition of patents, a high level of correlation
was observed between profitability and the amount of R&D expenses (Figs. 2.1.14, 2.1.15, 2.1.16).
These results indicate that while there is sometimes a positive correlation between R&D investment on
the one hand and the number of patents which serve a medium-term R&D investment yardstick on theother and the corporate performance in Japan as well, no linear correlation was demonstrated between
R&D investment and the corporate performance when compared with the above-mentioned US
study.20
Figure 2.1.12 Relationship between the number of patent registrations and ROE (IT field)
42

2
ROE (Average value 1998-2002)

ROE (Average value 1998-2002)

Figure 2.1.11 Relationship between R&D expenditures and ROE (IT field)
4

0
0

20

40

60

80

100

120

140

160

-2

-4

-6

0
0

5,000

10,00015,00020,00025,00030,00035,00040,000

-2

-4

-6

-8

-8
R&D expenditures (billion yen) (1993-1997 cumulative total)

Number of patent registrations (1998-2002 cumulative total)

Source: Nikkei NEEDS.

Source: Nikkei NEEDS.

Figure 2.1.13 Relationship between the number of patents/R&D expenditure and ROE (IT field)

Figure 2.1.14 Relationship between R&D expenditure and ROE (pharmaceutical field)

16

14
2

R = 0.9338
12

8

4

R2 = 0.3129

0
0

5

10

15

20

25

30

35

40

-4

ROE (average value 1998-2002)

ROE (average value 1998-2002)

12

10

8

6

4

2

0

-8

0

Number of patents/R&D expenditure (one billion yen)

5

10

15

20

25

30

35

R&D expenditure (one billion yen) (1993-1997 cumulative total)

Source: Nikkei NEEDS.

Source: Nikkei NEEDS.

Figure 2.1.15 Relationship between the number of patent registrations and ROE(pharmaceutical field)

Figure 2.1.16 Relationship between the number of patents / R&D expenditures
and ROE (pharmaceutical field)

14
16

R2 = 0.6304
12

ROE (average value 1998-2002)

ROE (average value 1998-2002)

12

10

8

6

4

8

4

0
0

5

10

15

20

25

30

2
-4

0
0

50

100

150

200

250

300

350

400

450

-8

Number of patent registrations (1998-2002 cumulative total)
Source: Nikkei NEEDS.

20

Number of patents / R&D expenditures (billion yen)
Source: Nikkei NEEDS.

Refer to the empirical study in the US described on page 93.
- 99 -

35

40

(The relation between organizational capital/human capital and corporate performance)
Next, by drawing upon the method of analysis in Lev (2003) cited earlier, the relation between
organizational capital and human capital (here, “non-R&D intellectual assets” as the concept that
includes both) and the corporate performance was estimated for Japanese companies, with the results
as follows.21 This estimation covered the four groups of companies: (i) 402 manufacturers; (ii) 562
non-manufacturers; (iii) 173 machinery assembly manufacturers out of manufacturers22; and (iv) 263
retail/service companies out of non-manufacturers,23 for which the necessary data was made available
for the estimation period from FY1989 through FY2002 via the corporate database in Nikkei NEEDS.
The results of the estimation (Fig. 2.1.17) show that the average rate of increase in sales resulting
from those non-R&D intellectual assets common in all companies was 0.3 percent for manufacturers,
1.8 percent for non-manufacturers, 0.7 percent for machinery assembly manufacturers and 2.8 percent
for retail/service companies. The average rate of increase in sales resulting from non-R&D intellectual
assets inherent in each company was 0.5 percent for manufacturers, negative 0.8 percent for
non-manufacturers, 24 1.5 percent for machinery assembly manufacturers and 0.8 percent forretail/service companies. In Japan, the results of the estimation for the major corporate classification of
manufacturers and non-manufacturers showed the positive impact of non-R&D intellectual assets
inherent in each company on the corporate performance except for non-manufacturers. As seen above,
they were confirmed to be an important factor that influences the corporate performance for machinery
assembly manufacturers and retail/service companies.
(%)

Figure 2.1.17 Relationship between company sales and non-R&D intellectual assets in Japan
(%)

4

160

Manufacturing industry
Non-manufacturing industries
Machine assembly manufacturing industries
Retail & service industries, etc.

3

120

2

80

1

40

0

0

-1

-2

Average percentage increasein sales due to non-R&D
intellectual assets

Average percentage increase insales due to non-R&D intellectual
assets shared by all companies

Average percentage increase in sales
due to the non-R&D intellectual
assets unique to individualcompanies

Percentage contribution of
non-R&D intellectual assets toincreases in sales

-40

-80

Notes:
1. The average percentage increase in sales due to non-R&D intellectual assets is the total of the average percentage increase in sales due to non-R&D intellectual assets shared by all companies and nonR&D intellectual assets unique to individual companies.
2. The organizational capital figure was obtained independently in Japan with reference to the estimation method of Lev (2003).
3. The companies analyzed were 964 publicly listed companies that were able to obtain the data necessary for the estimate. They include 402 manufacturing companies and 562 non-manufacturing
companies.
4. The same estimation method was used to make the estimate of 173 of the manufacturing companies as machine assembly manufacturing companies, and 263 of the non-manufacturing companies as retailor service companies.
5. Because the sales of the non-manufacturing industry are declining, the percentage contribution to sales increases of this industry is not calculated.
Source: Lev (2003).

21

The results of the estimation for Japan based on the estimation method of Lev (2003). For details, see
AN 2.1.1.
22
They cover the four sectors of machinery, precision instruments, electrical instruments and transport
equipment under the industry classification of the Tokyo Stock Exchange.
23
They cover the eight sectors of retail trade, services, land transport, maritime transport, air transport,
warehousing/related transportation, information and telecommunications, and electricity and gas under theindustry classification of the Tokyo Stock Exchange.
24
It is likely that the figure for non-manufacturers was influenced by the decrease in sales, unlike the otherthree categories, during the period under review.
- 100 -

When the size of non-R&D intellectual assets is converted into monetary value, the estimatedvalue of non-R&D intellectual assets was equivalent to 0.4 percent of the average sales for bothmanufacturers and non-manufacturers, 0.9 percent for machinery assembly manufacturers and 2.8
percent for retail/service companies. The contribution rate of non-R&D intellectual assets to increasein sales was 67 percent for manufacturers, 69 percent for machinery assembly manufacturers and 130
percent for retail/service companies. 25 This indicates that non-R&D intellectual assets are an
important factor as the sources of growth in Japan as well.
(The relation between corporate governance and corporate performance)
The quality of corporate governance can be cited as one of the aspects of organizational capital.
The following are the results of an analysis of the correlation between corporate governance andcorporate performance carried out by Japan Corporate Governance Research Institute, Inc. (JCGR).26
The institute released the second Report on Corporate Governance Survey, FY2003 (hereinafterreferred to simply as “the report”), in December 2003.27 The report, based on a questionnaire surveyof companies listed on the First Section of the Tokyo Stock Exchange, calculated the JCGIndex for the
status of corporate governance at responding companies (201 firms).28
In the calculation of the JCGIndex, on the basis of the “JCGR Corporate Governance Principles,”29
the model of ideal corporate governance was established with factors shown in Figure 2.1.18 allincluded, and indexed the performance of individual companies according to the degree by which theysatisfy each item of the model. The index items are made up of the four categories of (i) performancegoals and responsibility of corporate managers; (ii) composition and functions of the board of
directors; (iii) management execution by the chief executive officer; and (iv) communication withshareholders and transparency, with the allocation of marks structured to amount to a total of 100 for
the four categories.30

25

The contribution was not calculated for non-manufacturers because their sales actually declined.
The Japan Corporate Governance Research Institute is a non-profit organization established on April 1,
2003, with the purpose of deepening the common understanding about the “modality of corporate
governance befitting the era of globalization” at the initiative of Prof. Takaaki Wakasugi of the Universityof Tokyo.
27
The first survey was carried out by the Japan Corporate Governance Index Study Group. The study
group existed as an independent organization in FY2002, but was reorganized in April 2003 to become aunit of activity of the Japan Corporate Governance Research Institute.
28
A total of 159 companies responded to the first survey, and of them, 72 companies responded to thesecond survey.
29
They are the institute’s own corporate governance principles announced in April 2003, consisting of: (i)performance goals of companies and responsibility of management executives; (ii) composition of theboard of directors and the function of management supervision; (iii) business management system by thechief executive officer (CEO); and (iv) securing accountability and transparency.
30
The average JCGIndex was 37.8 for FY2003.
26- 101 -

Figure 2.1.18 Factors of the ideal governance model in the JCGIndex
・Governance from the stockholders' perspectives
・Clear business goals
・System of responsibility for the chief executive officers (CEOs)
・Presence of board of directors centered on independent directors, and the function of management supervision・Business management system, including risk management, executed by CEOs
・Accountability for stockholders
・Providing information properly to shareholders through IR activities
・Ensuring transparency for other stockholders through disclosures
Source: Japan Corporate Governance Research Institute, Inc. (2003).

The report selected companies with the JCGIndex at least one standard deviation above theaverage as the high JCG index companies and those with the JCGIndex at least one standard deviation
below the average as the low JCGIndex companies, and compared the correlation between these two
indexes and the actual figures for the capital efficiency indicators of ROA and ROE as well as the rateof return on common stocks. The results showed, as in the FY2002 survey, that the performance of thehigh JCGIndex companies exceeded that of the low JCGIndex companies on all three indicators (Fig.
2.1.19). Based on these results, the report concluded that a clear correlation, if not a causal relationship,
can be seen between the JCGIndex and the corporate performance as measured by ROA, ROE and therate of return on stock. The report also noted that there is a correlation between organizational capitaland the corporate performance of Japanese companies.
Figure 2.1.19 Relationship between the JCG index and company performance
(%)
8
6
4
2
0
-2
-4

Companies with a high JCG index in FY2003
Companies with a low JCG index in FY2003-6-8

Companies with a high JCG index in FY2002
Companies with a low JCG index in FY2002

-10
ROA

ROE

Rate of return on stock

Note: All figures are average values for the last five years. ROA and ROE are consolidated figures.
Source: Japan Corporate Governance Index Research Group (2002), Japan Corporate Governance Research Institute, Inc. (2003).

4. The value creation capacity of companies and “Corporate Social Responsibility” (CSR)
Heretofore, the discussion has focused on the growing importance of intellectual assets for the- 102 -

enhancement of profits and value creation capacity of companies. Meanwhile, it has been a common
practice until now to regard companies’ activities to perform their social responsibility as a concept
separate from companies’ activities to enhance profits and value creation capacity. In recent years,
however, the activities of companies to fulfill their social responsibility, such as the promotion of
Corporate Social Responsibility (CSR), have begun to be regarded widely not only as simply social
obligations but also as something that would enhance the long-term value creation capacity ofcompanies. The expanding scale of Socially Responsible Investment (SRI) is consistent with thischange in social recognition. The close relevance of the value creation capacity of companies to CSR
is discussed below.
(1) Why can the value creation capacity of companies and CSR be compatible?
CSR has no clear shared definition because specific items of interest differ by country, region,
religion and custom. Generally speaking, however, CSR is interpreted as follows: “companies become
successful in business not only by complying with law but also by making well-balanced approaches
on their own to economic, environmental and social problems in a manner that is beneficial to
stakeholders surrounding companies, including citizens, local communities and society.”31 Morespecifically, CSR is understood to call for companies, in a way compatible with their pursuit ofeconomic profits, to ensure compliance with laws and regulations, corporate philosophy and corporate
governance, accountability and information disclosure, sincerity in attitudes toward customers,
nurturing of and support for human resources, securing of fair conditions for competition, respect forhuman rights, consideration for the environment, contributions to local communities and so on.
Recently, in the wake of “sweatshop” problems,32 the scope of CSR activities has extended beyond
companies concerned to cover supply chains for the selection of suppliers of materials from theviewpoints of human rights and labor conditions, the global environment and so on.
As described above, CSR in the past was often interpreted as costs that came with social
obligations of companies. In recent years, the awareness has been spreading that promoting CSR can
31

The important concept of CSR is called the triple bottom lines. The idea is for companies to conductbusiness activities by adequately balancing the three dimensions of the economy, society and theenvironment instead of contributing to society or preservation of the environment blindly at the expense ofprofitability. CSR is not simply doing something good for society or the environment but relates to themodality of corporate business activities itself, including economic efficiency. In line with the concept of
the triple bottom lines, the European Commission (2001) defines CSR as “a concept whereby companies
integrate social and environmental concerns in their business operations and in their interaction with theirstakeholders on a voluntary basis.” In this white paper, unlike the above-described common interpretations,
CSR is not regarded as balancing the three dimensions of the economy, society and the environment thatare seen connected in the trade-off relationship but rather those dimensions are considered to be mutuallycomplementary and compatible.
32
Sweatshops are factories and stores with low wages and very poor working conditions. In the mid 1990s,
US sporting goods manufacturer Nike was harshly criticized by NGOs for low wages and verbal violence
regarding working conditions at contract factories in developing countries. Also, the company’s decision to
discontinue a contract with PT Doson Indonesia, an Indonesian contract factory, as part of factory closuresin the wake of production cutbacks, invited fierce protests by local employees and local residents, leading
to a protest movement by NGOs and a court battle. After these incidents, Nike has been proactively
engaged in CSR reform (Ibuki (2003)).
- 103 -

be compatible with corporate profitability. For example, as Figure 2.1.20 shows, many corporate
managers believe that performing CSR is not simply a part of public relations activities but that it has
a high priority in corporate management and is vital to corporate profitability. Managers who believethat CSR is essential for corporate profitability account for as much as 79 percent of the total in Japan,
and 68 percent globally.

Figure 2.1.20 Awareness of the importance of CSR by managers (Japan/other countries)-29

Other countries
In the current economic
climate, CSR activites willassume a lower priority

-44

Japan

18

-38

17 1

CSR is vital to the
profitability of any company

38

-5 -9

Other countries

Japan

-19

-3

(Unsure 15%)

7-31

(Unsure 19%)

30

24

55

(Unsure 21%)
-26

Other countries

8

20

-25

CSR is largely a public
relations issue
-27

Japan

-100

Somewhat disagree

-80

-60

29

-38

-40

Strongly disagree

-20

0

20

6

40

60

Somewhat agree80

100 （%）

Strongly agree

Sources:
The 15th Corporate White Paper on ‘Market Evolution’ and CSR Management: Toward Building Integrity and Creating Stakeholder
Value (Japan Association of Corporate Executives).
CEO Survey, 5th Annual Global CEO Survey, Uncertain Times, Abundant Opportunities (PricewaterhouseCoopers).

The following three reasons can be cited as an indication to the compatibility between corporate
profitability and CSR promotion.
The first reason is that there is an overlap between CSR and investment in intellectual assets
designed to increase company value as discussed in 3 of this section. For example, the promotion ofhuman capital and the building of a good network with customers as investment in intellectual assets
are regarded from the viewpoint of CSR as companies’ social responsibility for employees andcustomers.
For the second reason, when intellectual assets are understood in terms of building processes toincrease company value, these same processes contribute to CSR as well. For example, good corporate
governance, as discussed earlier, not only leads to favorable corporate profitability but also isconducive to environmental management and compliance that are part of CSR. Figure 2.1.21 shows
the results of questions posed to fund managers and analysts in Europe regarding a potential impact ofsocial and environmental risk management on company value, and a high of 78 percent of respondents
said such risk management would have a positive impact on long-term company value.

- 104 -

Figure 2.1.21 Awareness of CSR by fund managers and analysts (Europe)
Based on your experience, how does social and environmental risk management
impact on?
A company’s short term market value?

Don’t know 5%
In a positive way

32%

It has no impact 55%

In a negative way

8%

A company’s long term market value?
Don’t know 5%
It has no impact
In a negative way

13%

4%

In a positive way

78%

Note: Questionnaire survey targeting 388 fund managers and analysts from nine European countries.
Source: Investing in Responsible Business (CSR Europe).

The third reason is that the promotion of CSR leads to building the distinct character of a company
as a source of competitiveness. As companies need to become distinct in the wake of the changes inthe environment of competition, companies’ efforts to address CSR issues on the strength of theiruniqueness leads to continued support from stakeholders through the sharing of values withstakeholders such as customers, shareholders and employees. For examples, Figures 2.1.22 and 2.1.23
indicate that companies with a good CSR track record enjoy a high level of support from consumers inJapan and other countries alike, and that the promotion of CSR helps enhance the attractiveness ofcompanies and the goods and services they provide. Moreover, as Figure 2.1.24 shows, many
individual investors believe that CSR should be taken into account when making investment decisions.
Figure 2.1.22 Awareness of the importance of CSR by consumers (Japan)
No response 0.3%
Unsure 4.4%

Make purchase decisions byplacing priority on quality,
price and preference
32.9%

Place priority on buying fromcompanies which fulfill social
responsibility and have athorough sense of ethics
62.4%

Source: SEIKATSU-SHA NO "KIGYO-KAN" NI KANSURU ANKETO KEKKA HOUKOKUSHO (Keizai
Koho Center).

- 105 -

Figure 2.1.23 Awareness of the importance of CSR by consumers(Europe)
Would you pay a higher price for a good which was responsibly producedon both the environmental and social fronts?

44

37

Average64

24Denmark

56

33

Spain

55

37

Switzerland

Sweden34

53

Netherlands

34

52

Finland

36

51

48

Belgium

42

UK

41

40

36

France37

Germany

38

30

Portugal

36

28

Would pay

Italy

16

56

-80

-60

Would not pay

-40

-20

0

20

40

60

%
80

Source: The 15th Corporate White Paper on 'Market Evolution' and CSR Management: Toward Building Integrity
and Creating Stakeholder Value (Japan Association of Corporate Executives).
Original Source: The First Ever European Survey of Consumer's Attitudes towards Corporate Social Responsibility(CSR Europe).

Figure 2.1.24 Individual investors' consideration towards CSR when investing insecurities (Japan/US/UK)

UK

Japan

0%

10%

20%

30%

8.1% 0%

37.9%

54.0%

40%

50%

60%

0%

10.9% 0%

55.1%

34.0%

US

15.7%

37.6%

46.7%

70%

80%

90%

100%

Should give consideration
Should give a certain level of consideration
No need to give consideration
No response
Note: Questionnaire survey for individual investors. Random sampling of the people who have registered with their interest on investing at sites of survey company. Fieldwork
period was from Dec. 12, 2002 - Jan. 31, 2003.
Source: Socially responsible investment comparison report among Japan, the United States and United Kingdom -- Towards the dissemination of SRI in Japan (Ministry of theEnvironment).

- 106 -

(2) Relation between CSR and corporate performance33(a) Empirical studies in Europe and the US
Past empirical studies on the relation between the promotion of CSR and corporate performanceare reviewed here. Numerous analyses have been made of the relation between the promotion of CSR
and corporate performance in Europe and the US, and there also exist surveys covering these analyses.
For example, Webley and More (2003), after the literature documentation of studies on the relation
between the social (ethical) performance and financial performance at US companies in 1969-1994,
reported that 33 out of 62 studies conducted in the US concluded that there is a positive relation
between the social performance of companies and their financial performance.
Paine (2003) surveyed 95 studies on the relation between corporate earnings and social
performance in recent years, and reported that 55 studies confirmed a positive correlation between
them.
(b) Empirical studies in JapanThe Japan Research Institute conducted an analysis of the economic efficiency of CSR in 2003 in
a research project commissioned by the Japan Industrial Policy Research Institute. An outline of theanalysis is explained below.
This study on the CSR-related efforts of Japanese companies analyzed the economic efficiency of
CSR by making use of objective time-series data that is readily available and comparable to a certain
extent, namely the Corporate Contribution to Society Survey by the Corporate Social Contribution
Survey Committee of the Asahi Shimbun Foundation, the Corporate Environmental Management
Level Survey by the Nihon Keizai Shimbun, and the PRISM (Private Sector Multi Evaluation System)
Survey by the Nihon Keizai Shimbun and Nikkei Research.
(Social indicators and corporate performance)
In the corporate social contribution survey, the FY2003 survey centering on industries familiar to
consumers obtained responses from 190 companies after mailing questionnaires to a total of 418
companies selected on the basis of sales in descending order. The survey used these responses to makea comparative examination of these companies against the nine indicators of “fair workplace,” “genderequality,” “employment of the handicapped,” “internationalization,” “consumer orientation,”“symbiosis with society,” “environmental protection,” “corporate ethics” and “information
disclosure,” and other indicators for the overall scoring and ranking of these companies.
The study by the Japan Research Institute narrowed the scope of companies subject to the research
to companies listed on the First Section of the Tokyo Stock Exchange and compared a variety offinancial data, including the operating profit ratio and ROE, against the above-listed nine indicators34
as social indicators.
33

This part makes reference to the Japan Research Institute (2004) on the whole.
The “family-oriented” indicator, which was included from the first Corporate Social Contribution
Survey in FY1991 through the eleventh survey in FY2001 is deleted in this analysis.
34- 107 -

Firstly, the analysis grouped the subject companies into the top 30 firms in the overall ranking by
the FY2003 social indicators (the top ranking group overall), the lowest 30 firms (the bottom ranking
group overall) and the remaining companies (the middle ranking group overall), and then tried todetermine the characteristics of each group by working out the average of each financial indicator forthe respective groups (an analysis by the level of social contribution).
Next, the surveyed companies were classified into the top 30 companies that moved up in theoverall ranking by social indicators in the seven years from 1996 through 2002 (the most improved
group overall), the lowest 30 companies that followed the downtrend (the least improved groupoverall) and the remaining companies (the overall moderately improved group), and then an analysis
was made of the relation between the degree of improvement for the respective groups and the averageof each financial indicator for them (an analysis by the degree of improvement in social contribution).
The results of both the analyses by the level of social contribution and the analysis by the degree of
improvement in social contribution displayed a clear correlation with the operating profit ratio for allof the top group, middle group and lowest group, but showed no correlation with ROE as the results
overlapped for the three groups (Figs. 2.1.25, 2.1.26, 2.1.27, 2.1.28).
Figure 2.1.26 "Social indicators" and ROE (analysis by level of social contribution)

Figure 2.1.25 "Social indicators" and operating profit ratio (analysis by level of social contribution)
Top 30 companies of FY2003

Top 30 companies of FY2003

Average of FY2003, excluding top and bottom 30 companies

9%

Average of FY2003, excluding top and bottom 30 companies
0.10

Bottom 30 companies of FY2003

Bottom 30 companies of FY2003

8%

0.05
7%

0.00
6%

-0.05

5%

4%

-0.10

3%

-0.15

2%
1996

1997

1998

1999

2000

2001

2002

-0.20
1996

Source: KIGYO NO SHAKAI-TEKI SEKININ （ CSR ） KATSUDOU NI KANSURU CHOUSA KENKYU HOUKOKUSHO (Japan Research Institute, Ltd.).

1997

Figure 2.1.27 "Social indicators" and operating profit ratio(analysis by degree of improvement in social contribution)

1999

2000

2001

2002

Figure 2.1.28 "Social indicators" and ROE(analysis by degree of improvement in social contribution)

30 most improved companies overall

30 most improved companies overall

All other improved companies

0.09

1998

Source: KIGYO NO SHAKAI-TEKI SEKININ （ CSR ） KATSUDOU NI KANSURU CHOUSA KENKYU HOUKOKUSHO (Japan Research Institute, Ltd.).

All other improved companies

0.10

30 least improved companies overall

30 least improved companies overall

0.08
0.05
0.07
0.00

0.06
0.05

-0.05
0.04
-0.10

0.03
0.02

-0.15

0.01
-0.20

0.00
1996

1997

1998

1999

2000

2001

2002

Source: KIGYO NO SHAKAI-TEKI SEKININ （ CSR ） KATSUDOU NI KANSURU CHOUSA KENKYU HOUKOKUSHO (Japan Research Institute, Ltd.).

1996

1997

1998

1999

2000

2001

2002

Source: KIGYO NO SHAKAI-TEKI SEKININ （ CSR ） KATSUDOU NI KANSURU CHOUSA KENKYU HOUKOKUSHO (Japan Research Institute, Ltd.).

- 108 -

(Environment indicators and corporate performance)
As for manufacturers (including electricity/gas and construction) 35 in the Corporate
Environmental Management Level Survey in FY2002, questionnaires were sent to 2,047 of all thelisted companies, including over-the-counter traded company and major non-listed companies, ofwhich 703 companies responded. The responding companies were examined against the sevenindicators36 of “vision,” “management structure,” “anti-global warming measures,” “recycling ofresources,” “production and distribution measures,” “contamination risk” and “environmental
education” for an overall scoring and ranking. The study by the Japan Research Institute used theoverall scores and rankings of the Corporate Environmental Management Level as the environmental
indicators.
The relation between the environmental indicators and the corporate performance was analyzed
under a method similar to that for the social indicators, but this analysis confirmed no significant
correlation with the financial indicators on either the operating profit ratio or ROE (Figs. 2.1.29,
2.1.30, 2.1.31, 2.1.32).

Figure 2.1.29 "Environmental indicators" and operating profit ratio(analysis by level of environmental management)

Figure 2.1.30 "Environmental indicators" and ROE(analysis by level of environmental management)
0.08

8%

0.06

7%

0.04
6%
0.02
5%
0.00
4%
-0.02
3%

Top 30 companies of FY2002-0.04

Top 30 companies of FY2002

Average of FY2002, excluding top and bottom 30 companies
2%

Average of FY2002, excluding top and bottom 30 companies

Bottom 30 companies of FY2002

-0.06

1%

Bottom 30 companies of FY2002

-0.08
-0.10

0%
1996

1997

1998

1999

2000

2001

1996

2002

Source: KIGYO NO SHAKAI-TEKI SEKININ （ CSR ） KATSUDOU NI KANSURU CHOUSA KENKYU HOUKOKUSHO (Japan Research Institute, Ltd.).

1997

1998

1999

2000

2001

2002

Source: KIGYO NO SHAKAI-TEKI SEKININ （ CSR ） KATSUDOU NI KANSURU CHOUSA KENKYU HOUKOKUSHO (Japan Research Institute, Ltd.).

Figure 2.1.32 "Environmental indicators" and ROE(ratio of improvement factors in environmental management levels)

Figure 2.1.31 "Environmental indicators" and operating profit margins(ratio of improvement factors in environmental management levels)
8%

8%

7%

6%

6%

4%

5%
2%
4%
0%
3%
-2%

30 most improved companies

2%

30 most improved companies
All other companies

All other companies
1%-4%

30 least improved companies

30 least improved companies

-6%

0%
1996

1997

1998

1999

2000

2001

1996

2002

Source: KIGYO NO SHAKAI-TEKI SEKININ （ CSR ） KATSUDOU NI KANSURU CHOUSA KENKYU HOUKOKUSHO (Japan Research Institute, Ltd.).

1997

1998

1999

2000

2001

2002

Source: KIGYO NO SHAKAI-TEKI SEKININ （ CSR ） KATSUDOU NI KANSURU CHOUSA KENKYU HOUKOKUSHO (Japan Research Institute, Ltd.).

As discussed above, at least as far as the results of this empirical study are concerned, there is a
35

Since surveys on non-manufacturers were conducted only in a limited number of years, the analysis
needs to be limited to manufacturers when time-series data is required for a relatively long period.
36
Indicators used for evaluation vary depending on survey years.
- 109 -

mixture of cases where a positive relation can be seen between CSR and corporate financial indicatorsand cases where no such relation can be seen.
(3) Socially responsible investment (SRI) as the market evaluation of CSR
The above analysis is an ex post facto analysis of the relation between CSR and corporate
performance. The action of investing entities in selecting targets for their investments after an
evaluation of the CSR and financial performance of companies under consideration is called Socially
Responsible Investment (SRI).37
Figure 2.1.33 indicates that Japanese corporate managers have the perception that the capital
market does not fully appreciate the overall company value, in terms of both financial andnon-financial aspects, in comparison with the situation in other countries. Trends toward the overall
evaluation of company value in the SRI markets in the UK and the US, to be described later, need to
be closely followed since they can potentially influence the financing activities of Japanesecompanies.
Figure 2.1.33 Awareness of managers on raters' levels of understanding of company value(Japan/world)
To what extent do each of the following understand the value of your company?

(0.45)

Japan

Institutional
investors

World

Retail investors

World(0.78)(-0.15)Japan(0.02)(1.09)

Japan

Employees(0.95)

World(0.97)

Japan

Suppliers
Rating agencies
Analysts(0.59)

World
Japan

(0.23)

World(0.64)

Japan(0.43)

World(0.86)-80

Not really

-60

-40

-20

0

Not at all

20

40

To some extent

60

80

100

120 %

To a great extent

Note: Numeric values in parentheses ( ) calculate "To a great extent" × 2 points + "To some extent" × 1 point + "Not really" × -1 point + "Not at all" × -2 points divided by the
number of responses. The larger the numeric value, the greater the degree to which one is "understanding."
Sources: The 15th Corporate White Paper on 'Market Evolution' and CSR Management: Toward Building Integrity and Creating Stakeholder Value (Japan
Association of Corporate Executives), CEO Survey, 5th Annual Global CEO Survey, Uncertain Times, Abundant Opportunities (PricewaterhouseCoopers).

37

Generally speaking, SRI is classified into: (i) the “social screen,” under which investment targets are
selected in a comprehensive manner by not only evaluating companies from financial indicators and othereconomic dimensions but also taking into consideration their responses to the environment and social
responsibility; (ii) “shareholder activism/shareholder engagement,” where investors seek companies’
dialogue with shareholders on their responses regarding the environment and social responsibility, exercise
voting rights and put forward shareholder proposals; (iii) “social investment/finance,” where low-rate
lending programs or investment are offered to support the development of districts where minority and/or
low-income people live, and thus is often interpreted as movements to contribute to society and theenvironment through investment. This white paper, however, regards SRI as a new development as
described in the main text.
- 110 -

Below, SRI, as the new modality of the market evaluation of CSR, and company value in general,is explained in terms of changes in scale as well as investment policies.
(a) Expansion in scale of SRI38
Figure 2.1.34 shows the estimated balance of SRI in the world in 2001. It indicates that SRI is
becoming a major form of investment around the world particularly in the US and the UK. Below, thebalance of SRI assets is compared with the market size of the stock market in the US and the UK,
based World Bank statistics, as an easy-to-understand measure of the scale of the balance of SRI assets.
In the US, the balance of SRI assets, at 2,332 billion dollars, is equivalent to about 15.4 percent of thetotal stock market capitalization of 15,104 billion dollars. In the UK, the balance of SRI assets, atsome 224.5 billion pounds, is equivalent to about 12.7 percent of the total stock market capitalizationof some 1,771.4 billion pounds (2,577 billion dollars). However, it should be noted that while
investment is classified as SRI in the UK or the US, actual investment is deployed around the globe.
Figure 2.1.34 Estimated outstanding value of world SRI assets (2001)(US$ billion)
500
450
400

2332.0

350

326.6

300
250
200
150
100
31.4

50
0

US

米国

UK

イギ

17.6

CanadaEurope

カナ

ヨー

1.9
Japan

日本

1.1
Australia

オーNote: The figure for Europe does not include the UK.
Source: Socially Responsible Investment (Russell Sparkes).

The exceptionally higher balances of SRI assets in the US and the UK than in other countries
resulted from the rapid expansion in the late 1990s. First, the SRI expansion since the late 1990s in the
US and the UK and its backgrounds are explained below.
(Trends in the US)
In the US, SRI assets grew rapidly from around 1995 (Fig. 2.1.35). In the background of thisexpansion was the broader availability of SRI-type financial products in the menu for 401k defined
contribution pension plans, in addition to the strong support for investment policies excluding tobacco
38

Here, references were made in general to Tanimoto ed. (2003), Chapter 3.
- 111 -

companies amid the growing social awareness about smoking and health issues and the favorable
performance of SRI-type investment management. One study shows the ratio of 401k plans thatincorporate SRI-type financial products rose to 35 percent in 1999 from only 16 percent in 1996.39
The increase in this ratio was triggered by the fact that in response to the concern that consideringfactors other than profitability by SRI mutual funds might run counter to the fiduciary responsibility as
institutional investors,40 the US Department of Labor in 1998 authorized the consideration of mattersother than profitability by saying, “the fiduciary standards of sections 403 and 404 (of the Employee
Retirement Income Security Act (ERISA)) do not preclude consideration of collateral benefits, such as
those offered by a ‘socially-responsible’ fund, in a fiduciary’s evaluation of a particular investment
opportunity.”41 The clarification of such a view by the government led to a further expansion of SRI
investment by pension funds.
Figure 2.1.35 US: Trends in SRI asset balance($ billion)
2,500

2,320
2,164

2,159
2,000

1,500
1,185
1,000
639
500

0
1995

1997

1999

2001

2003

(year)

Sources: 2001 Report on Socially Responsible Investing Trends in the United States, 2003 Report on Socially Responsible Investing
Trends in the United States (Social Investment Forum).

(Trends in the UK)
SRI-related data for the UK shows that the balance of SRI assets reached some 224.5 billion
39

Social Investment Forum (1999).
A fiduciary duty is an obligation one must assume when he carries out his assignment by winning thetrust of others (acts as a fiduciary). The fiduciary has, among others, an obligation of fidelity to give utmost
priority to the interests of those who trusted him and those of beneficiaries as well as an obligation ofutmost care in fulfilling his duty (prudent man rule). Opinions raising the issue of fiduciary duty mainly
argue that SRI-type pension fund management by institutional investors goes against the obligation of
fidelity, reasoning that social goals of SRI are inconsistent with the principle that pension fund investment
should be managed only to achieve the financial objective of making pension benefits to beneficiaries. The
statement of the US Department of Labor goes beyond this conventional interpretation of SRI, and opens
the way for SRI as something that seeks to establish the compatibility between company value andcorporate efforts in social and environmental areas.
41
Advisory comment 98-04A. See the US Department of Labor website;(http://www.dol.gov/ebsa/programs/ori/advisory98/98-04a.htm).
40- 112 -

pounds (about 326.6 billion dollars) at the end of 2001, placing the UK in the second slot in the world
after the US (Fig. 2.1.34 cited above). As for the rate of growth, the total balance of SRI assets indeed
ballooned as much as 10 times in the four years to 2001 from some 22.7 billion pounds (about 33
billion dollars) (Fig. 2.1.36).
Figure 2.1.36 Growth in total UK SRI investment assets(billion pounds)
250.0

FY2001 breakdown
Church investors
SRI unit trusts
Charities
Pension funds
Insurance companies

200.0

6%
2%
11%
36%
46%

150.0

100.0

50.0

FY1997 breakdown
Church investors
SRI unit trusts
Charities
Pension funds
Insurance companies

55%
10%
35%
0%
0%

0.0
1997

Insurance companies

1999

Pension funds

Charities

2001

SRI unit trusts

Church investors

Note: Unit trust assets have been netted off from insurance totals.
Source: Socially Responsible Investment (Russell Sparkes).

Behind this rapid expansion of SRI in the UK is the 2000 revision of the pension fundregulations.42 The revisions require all trustees of occupational pension funds to disclose in their
Statement of Investment Principles (SIP; the statement must cover the types of investment, the balance
between investments, risk, return and realization) the following two points: (i) the extent (if at all) towhich social, environmental or ethical considerations are taken into account by trustees in theselection, retention, and realization of investment; and (ii) the policy (if any) directing the exercise of
the rights (including voting rights) attached to investments.
While the revised pension fund regulations do not require pension funds to incorporate SRI, it isnoteworthy that the revision did encourage pension funds to embrace SRI by requiring them todisclose their policies regarding SRI. In the UK, where individual investors were the main SRI players
previously, the law revision prompted institutional investors such as pension funds and life insurancecompanies to introduce SRI at a burst, with the ratio of SRI to total investments shooting up to 36
percent and 46 percent, respectively, for pension funds and life insurance companies, in 2001, from nil
in 1997 (Fig. 2.1.36 cited above).

42

According to Sparks (2003), the expansion of SRI in the UK was triggered by a suggestion to revise thepension fund regulations made in 1998, ahead of the 2000 revision, by the then-secretary in charge ofpensions in a lecture at an annual meeting of the UKSIF, entitled, Building a Better World: The Future ofSocially Responsible Pensions.
- 113 -

(b) Transformation in the nature of SRIWith the rapid expansion in the scale of SRI in the US and the UK and the entry of pension funds
and other institutional investors into the SRI market, as described above, the nature of SRI is showing
signs of undergoing a transformation.43
First, SRI has come around to seek to strike a balance between companies’ social andenvironmental considerations and the achievement of investment returns. Figure 2.1.37 shows aspectrum of US investors when they are categorized by their genuine commitment to social andenvironmental returns or to financial returns. Compared with “double bottom line funds,”44 US
investors are shown to have a higher ratio of those who seek to maximize investment returns in SRI.
Figure 2.1.37 A spectrum of investors by investment objective in the USA (US$ billions)
Purely social & environmental
Full social and environmental
Investment
returnobjective- No expected financial return
Rough
$225
estimate ofBelow market financial returnwith high environmental andsocial return

Full market financial return andsome social and environmental
returnPurely financial
Full market financial return- No expected social andenvironmental return$10$2,310$17,600

Community
Other investment assets
Socially screened
Investors Individual giving$130 development financial$7.6$2,010 Under professional
funds
institutions
management in the United
Foundations andOther “Double
Shareholder
$30
$2.0
$300
donor advised
Bottom Line” funds
activism
Foundations Government grants$65 Program Related$0.2
Investments (PRIs)
Source: The Blended Value Map: Tracking the Intersects and Opportunities of Economic, Social and Environmental Value Creation (Jed Emerson)

Secondly, the scope of items to be evaluated in composing SRI portfolio have been broadened toinclude elements that are similar to intellectual assets discussed in 3 of this section. For example, insome SRI cases, there are funds that select investment targets by considering whether they are part ofleading-edge industries that generate useful knowledge (knowledge industries).45 Furthermore, withenvironmental considerations adopted by almost all investment funds and methods of evaluation
becoming similar among them, some are said to be beginning to focus on the evaluation of corporate
investment in human capital. The range covered by SRI has come to include human capital andknowledge creation companies, bringing SRI increasingly close to the intellectual asset concept.
With the expansion of evaluation items under SRI and the entry by institutional investors, SRI
funds have now in some cases outperformed the market average. In Japan, there are a total of 11
publicly offered SRI funds as of the end of March 2004, and two of them have continued with theperformance topping TOPIX (Tokyo Stock Exchange Stock Price Index) (Fig. 2.1.38).

43

The following description is based on information obtained in interviews with several major UK SRI
fund managers conducted by officials of the Ministry of Economy, Trade and Industry in February 2004.
44
They are funds designed to contribute to society and the environment through investment.
45
The Health Fund of Framlington, for example.
- 114 -

Figure 2.1.38 Trends in Asahi Life Socially Responsible Investment Fund
"Asu no Hane" standard price
10,500Standard price (based on reinvested pretax dividend)

10,000

TOPIX (set by indexing business day previous to target date as 10,000)

9,500
9,000
8,500
8,000
7,500
7,000
6,500
6,000
5,500
5,000
2000/9/28
Sep/28/00

2001/3/28
Mar/28/01

2001/9/28
Sep/28/01

2002/3/28
Mar/28/02

2002/9/28 Mar/28/03
2003/3/28 Sep/28/03
2003/9/28
Sep/28/02

Note: Standard price (based on reinvested pretax dividend) is the value after trust-charge deductions and calculated on the assumption that thepretax dividend is reinvested.
Source: Asahi Life Asset Management Co., Ltd. (ALAMCO).

These trends indicate that there could be calls in the future for information disclosure on broader
yardsticks for evaluating reports from the viewpoint of SRI. The number of companies that prepare
environmental reports from the standpoint of responding to the spread of SRI has already increased(Fig. 2.1.39), and it is possible in the future that companies begin to disclose information thatincorporate far broader elements than environmental considerations.
Figure 2.1.39 Situation of the publication of environmental reports
by companies in Japan(%)(companies)
700
600

21.9
Number of companies publishingenvironmental reports (left scale)20
20

Ratio of valid responses (right scale)
500

16
15

400
650

9.8

300
200

6.5

579

10

7.4
430
5

270
100

25

169

197

1997

1998

0

0
1999

2000

2001

2002 (year)

Source: Adachi, Eiichiro. "KEIEI KAKUSHIN NYUMON; TOUSHI-KA NI TAISURU IR-KATSUDOU TOHA," Weekly Toyo Keizai(Nov. 8 2003).
Original source: KANKYO NI YASASHII KIGYO KOUDOU CHOUSA (Ministry of the Environment). Issued each year.

5. International trends in systemic reforms toward the evaluation and utilization of intellectual
assetsAs described above, as the impact of intellectual assets on company performances increases andthe overlap grows between the factors covered by CSR and the factors included in intellectual assets,
moves are under way internationally to establish systems for the evaluation and disclosure of
information on intellectual assets. These are intended to improve understanding of company value
creation capacity as a whole. Based on such systems, efforts are also being made to redefine theconcept of the company within corporate law. Some examples of these moves are explained below.
- 115 -

(1) Preparation and disclosure of the Intellectual Capital Statement
Following the growing importance of intellectual assets in corporate management, European
countries have already been at the center of making attempts to evaluate intellectual assets, and in
Northern European countries,46 in particular, governments have taken active initiatives to improve theenvironment for the evaluation of intellectual assets. The following is a detailed look at the approachto the evaluation of intellectual assets being made in Denmark, the most advanced among them.
(a) Concerning the Intellectual Capital Statement – the New Guideline
The Danish government (Ministry of Science, Technology and Innovation) became the first in theworld to legislate the disclosure of the Intellectual Capital Statement separate from financial
statements, in the form of the Danish Financial Statement Act, in order for companies to qualitatively
and quantitatively evaluate intellectual assets they own. The act does not necessarily require thedisclosure of the Intellectual Capital Statement by companies. Instead, it actively encourages
companies to prepare and disclose the Intellectual Capital Statement. In line with the new act, theDanish government announced in February 2003 “Intellectual Capital Statement – the New
Guideline.”47
The legislation took place because the preparation of the “Intellectual Capital Statement” bycompanies was thought to be of significance in the following areas when intellectual assets as“invisible assets” are becoming the sources of corporate competitiveness. Specially, (i) through the
preparation of the “Intellectual Capital Statement,” corporate managers can put intellectual assets intowords, systematically recognize and evaluate intellectual assets, and ultimately build competitive
strategies that make good use of intellectual assets (the “Intellectual Capital Statement” as a“management tool”). In particular, since the Danish economy is based primarily on medium andsmall-scale enterprises, the “Intellectual Capital Statement” as a management tool is useful for
corporate managers to weigh the strengths and weaknesses of their own companies against othercompanies and is also expected to have the “effect of raising the overall level” of medium andsmall-scale enterprises in the country. Furthermore, it is also hoped that work to prepare the“Intellectual Capital Statement” will stimulate a broad array of discussions among corporate managers,which may also produce the “effect of raising the overall level” of medium and small-scale enterprises.
Furthermore, (ii) it can be assumed that corporate managers, by using the “Intellectual CapitalStatement,” can convey how much value their companies will be able to offer their stakeholders,
including employees, customers, investors and financial institutions (the “Intellectual CapitalStatement” as a “communications tool”). Particularly when medium and small-scale enterprises with46

While Finland has yet to come up with a specific quantitative method of evaluation as seen in Denmark,the Ministry of Labor released a report entitled, Final Report and Proposals of the Knowledge Society Team
– From Information Society to Knowledge-based Society. For details, see the website:
http://www.mol.fi/english/reports/index.html.
47
Hereinafter, it is referred to simply as the Guideline.
- 116 -

generally weaker financial bases try to raise funds from financial institutions or investors, they may beable to use the “Intellectual Capital Statement” to highlight their strengths, with a potential effect offacilitating financing for medium and small-scale enterprises.
Against this backdrop, the Guideline offers the following methodology to prepare the “Intellectual
Capital Statement” so that companies can make use of it as a manual for writing the “Intellectual
Capital Statement.”(Components of the “Intellectual Capital Statement”)
In the Guideline, intellectual assets48 are composed of the four factors of employees, customers,
processes and technology, and the “Intellectual Capital Statement” is defined as something that helps
visualize these four intellectual assets. The Guideline then states that the “Intellectual CapitalStatement” is effective for visualization purposes when it is made up of the following four steps,
offering a model for that process (Fig. 2.1.40).

Figure 2.1.40 Danish “Intellectual Capital Statement” Model
Knowledge narrative

Management challenges

Initiatives* What product or service
does the company provide?
* What makes a difference forthe customer?
* What intellectual assets arenecessary to be able to supply
the product or service?
*What is the relationshipbetween value and intellectual
assets?

* Which existing
intellectual assets should
be strengthened?
* What intellectual assets
are needed?

* What initiatives
can be launched?
* What initiatives
should beprioritized?

Indicators* Which indicators caneach initiative have?
Indicators canmeasure:1) effects2) activities
3) resource mix

Source: Ministry of Science Technology and Innovation (2003).

The first step (Knowledge narrative) shows how much of what value (referred to as “use value”)
companies bring to users through their products and services and what sort of intellectual assets arenecessary to increase the use value of their products and services. In doing that, the Guideline
recommends companies disclose intellectual assets by systematically explaining their management
ideas as a consistent story through the use of such terms as “because” and “therefore.”
The second step (Management challenges) describes to what extent existing in-house intellectual48

The term “knowledge resources” used in the Guideline is translated in the same way as “intellectual
assets” for the convenience of readers.
- 117 -

assets should be strengthened and new intellectual assets should be acquired externally to give a boost
to the above-explained company value creation capacity.
The third step (Initiatives) shows specific actions to strengthen and acquire intellectual assets.
The fourth step (Indicators) is to present indicators that allow an objective evaluation ofachievements in initiating “Initiatives” or attaining “Management challenges.”
The Guideline says that by describing each of the four factors by analyzing interrelations among
them, the “Intellectual Capital Statement” can be prepared with the consistency kept for the four
factors, as shown in Figure 2.1.40.
(Procedure for the preparation of the Intellectual Capital Statement)
Needless to say, the “Intellectual Capital Statement” with the consistent relationships among thefour steps, like Figure 2.1.40, cannot be prepared immediately. In particular, as the “Knowledge
narrative” part contains some essential questions about what constitutes intellectual assets ofcompanies, the Guideline advises that it may not necessarily be advisable to prepare the “Intellectual
Capital Statement” by following the order of above-described steps in actually preparing the statement.
For this reason, instead of starting with the most hard-to-understand step of “Knowledge narrative” inactually preparing the statement, the Guideline suggests the process of beginning with an analysis of“Initiatives” that represent concrete actions by companies, moving on to “Management challenges”
through the conceptual sorting out of these “Initiatives,” and subliming the work to the step of“Knowledge narrative.” Hence, an analysis in each step is outlined below in the order of preparation
work suggested by the Guideline.
First, the following can be cited as examples of “Initiatives” being made by companies.
<Examples of “Initiatives”>
・Setup of IT education
・Setup of contacts with educational institutions for hiring purposes
・Setup of a project group for the establishment of an electronic library・Introduction of the quality guarantee system, etc.
In order to organize a broad array of individual and concrete “Initiatives” and ultimately lead theseto “Knowledge narrative” as a consistent story, the Guideline points out that companies need to sortout the “Initiatives” by answering the following three questions: (i) what are the contents and purposesof the existing “Initiatives”?; (ii) what effects are the “Initiatives” expected to bring about?; and (iii)what are “Initiatives” that are thought necessary to enhance the existing level of intellectual assets inthe future? By preparing responses to these specific questions, companies will be able to sort out theconcept of their own “Initiatives” currently in place, according to the Guideline.
The next step is an analysis of “Management challenges” to find out how individual initiatives
interact by examining how “Initiatives” sorted out in the way described above would interact with one
another and what would be needed for individual “Initiatives” to fully function. For example, thoughthe “Initiative” to train employees in the operation of computers and the “Initiative” to train them in- 118 -

how to communicate with customers are separate “Initiatives,” these “Initiatives” may be put together
under a broader common concept, for example, by the concept of “employee skill development.” Thus,
instead of looking at individual “Initiatives” entirely separately, a large number of “Initiatives” can beincorporated into an easier-to-understand framework by consolidating them under several concepts bypicking out common characteristics found in two or more “Initiatives.” Through the series ofanalytical work (“Management challenges”), more light will be shed on the relationship of interactions
among individual “Initiatives” and companies will likely be compelled to think about “Initiatives” aspart of the whole (prioritization among the “Initiatives”), the Guideline argues.
The Guideline goes on to say that companies, by organizing their “Initiatives” into “Management
challenges,” would ultimately lead themselves into analyzing the “Knowledge narrative,” the work tobuild a story about how they are going to create “use value” by utilizing intellectual assets. First, thefollowing case is presented as a practical example of the “Knowledge narrative.”<An example of the “Knowledge narrative” of Odense Customs and Tax Region>
Odense Customs and Tax Region (hereinafter referred to simply as the OCTR) provides customer
companies with a credible systematic tax assessment system. The objective of the company is toensure that all companies are equally treated practically by avoiding unfair competition among
companies through the tax assessment system it offers. In order to achieve this objective, the OCTR
needs to have access to well-motivated and skillful employees, a fully developed database concerning
tax affairs, and an extremely significant corporate culture. Through these, the company believes,
employees can share their experiences and newly acquire appropriate skills.
As it is obvious from this example, the “Knowledge narrative” step involves a process to unveil astory about how a company is going to utilize its intellectual assets in order to achieve its strategic
objective. For your information, the Guideline states that the “Knowledge narrative,” generalized fromthe above-cited example, can be described as the following model.
<The model of the “Knowledge narrative”>
A company provides a customer with a product or service. With a product or service, a user will
experience a better situation because a product or a service makes it possible for a user to do a varietyof things. In order to make the above possible, a company, as the key to management based on
intellectual assets, needs to have access to a host of intellectual assets of its own choice, because it
allows a company to accumulate knowledge.
Finally, the Guideline points out that it is necessary to attach indicators to the “Intellectual Capital
Report.” The Guideline cites the following three points as the functions of attaching indicators to the“Intellectual Capital Statement.” Specifically, it points out, indicators: (i) make it possible to define“Management challenges” and “Initiatives” in concrete terms; (ii) make it possible to ascertain
whether “Management challenges” and “Initiatives” were initiated and implemented and, when they
- 119 -

were, to assess what effects they actually had; and (iii) can be a very important tool when the“Intellectual Capital Statement” is disclosed as described later. While the selection of specificindicators is left to the ingenuity of companies, the Guideline lists the following examples to help
companies come up with their own ideas of concrete indicators.
<Examples of indicators>
・The number of IT workers
・The number of business tie-up contracts with universities and business schools
・The number of visitors to corporate websites
・The number of patents
・The number of days of training and education per employee, etc.
(Disclosure of the “Intellectual Capital Statement”)
As explained earlier, the statement to be prepared in a manner described above can serve not only
as a management tool for corporate managers to deepen their understanding about the strength andfuture potentiality of their own companies by putting their in-house intellectual assets into words, butalso as a communication tool with investors, customers, employees and other stakeholders by fully or
partially publicizing it. Below, the situation about disclosure of the “Intellectual Capital Statement” isexplained briefly.
As stated above, Denmark has the “Danish Financial Statement Act” to govern corporate
information disclosure, but the act does not require companies or public entities to prepare the“Intellectual Capital Statement.” However, it stipulates that when intellectual assets are going to play avery important role in future profits, large companies in the private sector should describe this in theirannual reports. Thus, though companies are not required by the law to disclose the “Intellectual
Capital Statement” in principle, they are supposed to prepare it as necessary by referring to relevant
sections of “Intellectual Capital Statement – The New Guideline” described below. The number ofcompanies that disclosed the “Intellectual Capital Statement” in line with the Guideline reached 13 by
FY2002.
The following is presented as a model of the “Intellectual Capital Statement” with theabove-described four components for external publication.
<A model of “External Intellectual Capital Statement”>(i) Annual report (one page or so)
Management offers an overall explanation about a company’s goals and problems and results
concerning intellectual assets. Generally speaking, this part should include: (i) the current state ofcorporate affairs and future goals that form the background of the preparation of the “Intellectual
Capital Statement”; (ii) major results obtained through the preparation of the “Intellectual CapitalStatement”; and (iii) new goals toward corporate management based on intellectual assets.

- 120 -

(ii) Corporate profile (one page or so)Assuming a reader is not so familiar with the company, this part should describe the history of thecompany, its products and/or services, and operating performance.
(iii) “Knowledge narrative” (1 to 2 pages)
This part should briefly describe the four factors: products and/or services and users; “use value”;
intellectual assets; and “Management challenges.”(iv) Model of the “Intellectual Capital Statement” (1 page)
An overall outline of the model, from “Knowledge narrative” to “Indicators,” should be described.
(v) “Initiatives” and “Management challenges” including “Indicators” (6 to 10 pages)
This portion should include details of “Management challenges,” description of “Initiatives” fromthe previous year, a brief description of the current year’s “Initiatives” (reasons for each “Initiative,”
presentation of appropriate figures, comments on each “Indicator,” etc.), and a conclusion (goals
achieved in the current term and goals for the next term).
(vi) Accounting policy (1 page)
In order to reinforce the credibility of the “External Intellectual Capital Statement,” the sources ofvarious data, methods of measurement and examinations, definition of various figures should be
explained here.
(b) Coloplast’s External Intellectual Capital Statement
As a specific example of the external disclosure of the “Intellectual Capital Statement,” the“Intellectual Capital Statement” of Coloplast, a Danish medical equipment manufacturer, is shown
below.
Coloplast, in an annual report, identifies customers, employees, society and shareholders as its
major stakeholders, and announces a “Stakeholder Report” explaining its management strategy forvalue creation for each stakeholder group. The “Stakeholder Report” is not called the “Intellectual
Capital Statement,” and does not fully conform to the model of the Guideline. It does describe,
however, the sources of value for Coloplast that do not appear in its financial statements in relation toeach stakeholder group, and is drawing keen attention of various quarters as a typical example ofexternal disclosure amid the ongoing efforts for the “Intellectual Capital Statement” in Denmark.
The “Stakeholder Report,” in the first part entitled “From the Present to the Future,” explains theimportance of stakeholders and describes the following as equivalent to “Knowledge narrative” under
the Guideline.

- 121 -

<Key points in “From the Present to the Future”>(i) It is important to satisfy both customers and employees to generate good financial results.
(ii) Improvements to business processes and development of new technologies reduce the burden on
the environment and lead to an efficient use of resources, and thus contribute to both the interestsof society and the performance of Coloplast.
(iii) Companies are presently called upon by society as a whole to have dialogue with the environment
surrounding them and to harmonize it. Thus, they are required to achieve well-balanced value
creation in the short term as well as over the medium and long-term for major stakeholders(customers, employees, society and shareholders).
The “Stakeholder Report” then explains the key points (enablers) in value creation for eachstakeholder group and the results of efforts made under them as follows.
<Efforts for each stakeholder group>(i) Customers(Points for value creation)
Understanding customer needs and markets, perfection of major processes and technologies,
innovation(Results)
Performance for products, performance for services(ii) Employees(Points for value creation)
Best working conditions, dialogue with employees, respect for personality, skill development for
employees, sharing of knowledge(Results)
Attracting and retaining human resources, core competence(iii) Society(Points for value creation)
Social responsibility, economic contribution, environmental management, partnership(Results)
Sustainable growth, sharing of knowledge(iv) Shareholders(Points for value creation)
Business goals, promptness, new products and services, dialogue with investors(Results)
Acquisition of market share, improved earnings, securing investor confidence- 122 -

Coloplast has been disclosing the results of evaluation for these efforts based on consistentnon-financial indicators since 1998. Figure 2.1.41 shows a series of these indicators with year-to-yearchanges.
Figure 2.1.41 Results of Coloplast's Stakeholder Report
Stakeholder/Indicators

Unit

Goal
98/99 99/00 00/01 01/02 02/03 03/04

Customers
Cooperation with health care professionals and users
Index
46
47
74
Customer satisfaction measurements
Number1
4
19
Development projects through AIM
Number40
52
46
Research and Development cost
%
3.7
3.6
3.4
Complaints
Index
114
116
94
Customer satisfaction%
92.0
99.2 97.8
Delivery performance%
97.8 98.1 97.9
Employees
Employee satisfaction
Denmark0
2
1
NumberOutside Denmark
4
8
6measurements
Denmark
13
16
16%
Job rotations
Outside Denmark−−−
Employee satisfaction, Denmark
Points− 3.60
3.71
Salaried, Denmark
7.8
9.9
9.0
%
Staff turnover
Hourly-paid, Denmark
16.1 16.7 15.7
Outside Denmark−−−
Salaried, Denmark
2.1
−
−
%
AbsenceHourly-paid, Denmark
5.8
5.8
6.3
Outside Denmark−−−
Salaried, Denmark
820
616
677
Number 2,800 2,426 2,335
Unsolicited job applications Hourly-paid, Denmark
Outside Denmark−−−
Management positions filled Denmark
72
72
64
%
internallyOutside Denmark
61
53
54
Society
Volatile organic compounds
Index
116
118
110
Electricity
Index
91
98
109
Water
Index
109
118
114
Process waste, polymers
Index
99
106
112
Number47
51
46
Industrial accidents, frequency
Per million hours of work
16
18
15
New jobs created
Number476
26
432
Economic contributions, Denmark
mDKK
392
552
708
Shareholders
Patent applications
Number26
15
23
Patent rights
Number167
170
180
New products share of revenue%
12.7 15.6 23.9
Revenue per employeetDKK
874
959 1,021
Operating profit per employee
tDKK
140
143
165
Economic Profit (EP per employee)
tDKK
44
26
50
TSR 1 year
22.5
1.0
57.9
%
Total Shareholder Return (TSR
TSR 5 years
24.9 20.1 22.3
Source: Coloplast (2004).

100
16
72
3.1
100
97.6
95.8
1
8
16
5
3.83
6.8
16.3
20.9
2.0
6.0
2.7
1,441
2,909
2,585
67
51

116 >115 ↑
20
20 ↑
55
>50 ↑
3.0
3.0 ↑
104 <100 ↓97.1 >98.0 ↓96.6 >98.5 ↓
↑
2
2↑
9
9↑
13
>15 ↓
11
>5 ↑
3.87 >3.83 ↑
6.6
<10 ↑
14.0
<15 ↑
24.5
<20 ↓
1.6 <2.0 ↑5.6 <5.0 ↓2.5 <2.7 ↑1,679 >1,441 ↑2,395 >2,909 ↓
4,688 >2,585 ↑
65
>50 ↑
52
>40 ↑

100
96
100
93
100
94
100
83
59
54
17
14
1,312
518
928 1,052
28
217
29.5
1,157
189
56
-2.7
17.3

<100 ↑<100 ↑<100 ↑<100 ↑
0↓
0↓
−
−

35
>25 ↑
244
−
30.5
>20 ↑
982 >1,157 ↓161 >189 ↓
45
>56 ↓
1.1
−
14.0
−

These indicators were not developed originally for the purpose of external disclosure but wereprepared on the basis of regular data collection for the company’s top management to grasp the state ofcorporate affairs on a quarterly basis in simplified charts and graphs and plot them to determine andprioritize management tasks in the immediate future (Fig. 2.1.42). The company uses these indicators
as an important early warning mechanism to forestall a visible deterioration in corporate earnings by- 123 -

checking them for each stakeholder group.
Figure 2.1.42 Reconciliation of interests between stakeholders (Coloplast case)
Retain/secure Retain/secure
Cooperation with Shares of newusers andproducts
professional careprovidersValue intensity

Strategic

ReduceAbsenceComplaints

Avoid increase inrate
Preparation forimprovements
Vitality（Favorable)

Improve

Improve

Staff turnover

Deliverycapability

Wastes
Preparation forimprovements

ReduceAccidents（Unfavorable)

Business necessity
Source: Coloplast.

The approach of Coloplast reflects the “Copenhagen Charter,” a guideline for the “Stakeholder
Report” prepared by Danish companies and accounting houses and others in 1999. The “Copenhagen
Charter” sees the significance of the “Stakeholder Report” in that activities for dialogue withstakeholders through the preparation of the report not only contribute to the building of corporate
strategies and enhancement of the quality of information disclosure but also are effective as the early
warning process, through dialogue with stakeholders, against future risks. As shown in Figure 2.1.43,
the use of indicators in the “Stakeholder Report” makes it possible for companies to take measures andprevent the elicitation of risks before indicators used in conventional financial accounting deteriorate.
Figure 2.1.43 The early warning process for “stakeholder reporting”
Effect of new
behavior
accumulates
Stakeholders change
behavior
New signals from stakeholders(dialogue)

Manifestation of risk
Effect on
profitability

Risk
Strategic analysis
Event X occurs

Internal analysis offinancial accounts(effect)

Response
Strategic adaptation
Strategic analysis (cause)

Strategic adaptation

Source: Copenhagen Charter (Ernst & Young, KPMG, PricewaterhouseCoopers, House of Mandag Morgen).

The method of information disclosure adopted by Coloplast, which used consistent indicators since1998, has drawn keen attention from various quarters concerned, leading major accounting house
PricewaterhouseCoopers (PwC) to make an analysis into how investors have rated Coloplast’s
stakeholder reports. The analysis took an approach of preparing two different versions of reports on
Coloplast’s 2001 and 2002 reports, one without non-financial indicators and the other with- 124 -

non-financial indicators to show them to different analysts at major investment banks to see if thedifferent versions would result in different assessments. The results showed that the risk in investing in
Coloplast shares was rated as “above average sector risk” based on the report without non-financial
indicators, with 80 percent of analysts recommending “sell” for Coloplast stock. On the other hand,when Coloplast’s company value was assessed on the basis of information that included non-financial
indicators incorporated in the “Intellectual Capital Statement,” though the average was lower, analysts’
assessment of the company’s future profitability was concentrated and stock investment risk was rated
as “no more risky than its peers” with the “buy” recommendation (Fig. 2.1.44). Therefore, it seems
apparent that in some cases, the proactive disclosure of intellectual assets, adding to financial data,
could help facilitate financing by providing the capital market with an opportunity for acomprehensive assessment of company value.
Figure 2.1.44 The difference in distribution of the profitability evaluation of investors

Full report
Financial report

Forecast
Source: The Value of Reporting: A Story (PricewaterhouseCoopers Report).

Moreover, a senior executive at Coloplast says its disclosure of the “Intellectual Capital Statement”
has produced a major effect in the area of recruitment, noting a sharp rise in job applications bothwithin Denmark and from overseas without solicitation.
(2) Looking for a new image of the company – Reform in UK corporate law(a) History and outline of corporate law reform
The UK government has been addressing drastic reform in corporate law since 1998, and one ofthe pillars of reform under consideration is the introduction of the new concept of shareholder value(called the concept of “Enlightened Shareholder Value”).49 Specifically, the concept calls for membersof the board of directors to have not only short-term but also long-term views as well as theperspectives to cover a broader range of factors from relations with stakeholders such as employees,
49

UK Department of Trade and Industry (2002).
- 125 -

business partners and customers to environmental considerations, with a clear awareness of the shift
from the image of the company as an entity surely pursuing short-term and narrowly-defined profits tothe new corporate image committed to longer-term value creation.
In the reform in corporate law under consideration, obligations of board directors are set to beclarified to reflect the above-described line of thinking. Also, as a mechanism to assess theachievement of such long-term value creation by companies, the preparation and disclosure of the“Operating and Financial Review (OFR)” are under study, on top of conventional financial reports.
Individual companies have disclosed the “Operating and Financial Review” so far voluntarily, but thecurrent plan is to formalize its preparation and disclosure as part of the latest reform of corporate law.
the “Operating and Financial Review” is similar to the above-cited “Intellectual Capital Statement” inDenmark in the sense that it describes long-term value creation by companies, but it is morecomprehensive by clearly incorporating matters related to Corporate Social Responsibility. Though thefinal contents and timing of the legislation have yet to be decided,50 the contents currently underconsideration are discussed below on the basis of documents made public so far (Fig. 2.1.45).51
Figure 2.1.45 Items to be included in "Operating and Financial Review" (contents
under review)
Items that must be included in the report(1) Primary factors that determine the company's business contents, goals, strategies and performance○Standards that decide the business's feasibility, resources for success(2) Review of business in the past year
○Market changes, new products/services and changes in company position in the market(3) Business dynamics - Events, trend uncertainties, etc. that greatly influence future performance○Risks and opportunities for market changes, dependency on customers/suppliers,
technological changes, financial risks, security, environmental costs, etc.
○Projects to sustain and expand tangible assets, intellectual assets, brand, R&D, etc.

Items that ought to be included if they are "important" to the company(1) Corporate governance○Structure for internal control and valid cooperation among shareholders, directors and othermanagement personnel(2) Primary relationship that affects the feasibility of businesses (employees, customers, suppliers)○Policies regarding employment and employee participation, compliance with international
labor agreements, etc.
(3) Policies and performance regarding items related to environment, community, society,ethics and reputation(4) Relationship with shareholders (receive investments and pay dividends)
Source: "Modernising Company Law" White Paper 2002 (UK Department of Trade and Industry).

(b) Significance and outline of the “Operating and Financial Review”(Significance of the “Operating and Financial Review”)
The importance is being emphasized of companies not only releasing quantifiable information (e.g.

50

As of May 19, 2004, consultation is under way for the “Operating and Financial Review” to run throughAugust 2004. The OFR is expected to be implemented by January 2005. For details see the following
website: http://www.dti.gov.uk/cld/financialreview.htm.
51
UK Department of Trade and Industry (2001), UK Department of Trade and Industry (2002), UK
Department of Trade and Industry (2003).
- 126 -

financial statements) and past performances (e.g. financial results for the past year) but also presenting
more qualitative and future-looking information, future plans, business opportunities, risks andstrategies. Behind this emphasis, it is pointed out that the role of intangible assets for companies, suchas employee skills and knowledge, the building of relationships with other companies and reputation,is growing. While the primary beneficiaries of the report are shareholders, it is said to be ofsignificance for a broad range of stakeholders because the report reveals a variety of aspects
concerning companies.
(Matters to be included in the “Operating and Financial Review”)
A broad range of matters relevant to the achievement of long-term goals described in “History andoutline of corporate law reform” is to be included in the “Operating and Financial Review” regardlessof whether companies are in-house events. More specifically, items of entry are divided into: (i)matters that must be entered without fail; and (ii) matters that should be entered if they are material tocompanies concerned. The board of directors will have the decision on which of the matters in thesecond group of items should be entered actually. However, confidential information that could
significantly damage corporate profits is excluded from disclosure.
The government will provide guidance for the preparation of the “Operating and Financial
Review,” including matters concerning the judgment of materiality of information, while the“Standards Board” (a tentative name; an entity being considered as an organization to study standards
for reports not limited to narrowly-defined accounting reports by reorganizing the existing AccountingStandards Board) is set to work out detailed rules. However, it has been recommended that the
government refrain from presenting a “model report” or that the “Standards Board” set forth overly
detailed standards from the standpoint of allowing individual companies to play out theirself-initiatives and ingenuity when preparing the “Operating and Financial Review.”(Companies required to prepare the “Operating and Financial Review”)
Companies that are required to prepare and disclose the “Operating and Financial Review” aredesignated under the four criteria of whether they are public companies, sales, scale of total assets andthe number of employees. When the criteria currently under discussion are applied, around 1,000
companies will likely be obliged to prepare and make disclosures. the “Operating and Financial
Review” is to be prepared on a consolidated basis.
(Auditing of the “Operating and Financial Review”)
The auditing of the “Operating and Financial Review,” unlike the auditing of financial statements,
is to be conducted with the focus on the appropriateness of the process, rather than the adequacy of its
contents.
The above-described efforts in the UK represent an attempt to evaluate the long-term value
creation capability of companies comprehensively, including the aspect of Corporate Social
Responsibility, and also to expose them to an evaluation by diversified stakeholders, including markets,- 127 -

through enhanced disclosure of information. The future direction of these efforts is paid close attention
as they clearly set their sights on the building the “modality of new company image” and this could
influence corporate law throughout the European Union in the future.
(3) Strict evaluation of goodwill – Financial reporting reform by FASBIn the US, the Statement of Financial Accounting Standards (SFAS) 141 and 142 adopted by the
Financial Accounting Standards Board (FASB) in June 2001 changed the handling of goodwill,
effectively tightening disclosure rules for goodwill in financial reporting. Specifically, in corporate
acquisitions, as SFAS 141 made it mandatory to apply the purchase method that evaluates thecompany to be acquired at market prices, the goodwill has to be always recognized at the time of theacquisition, making it a common practice to enter the purchased goodwill on the balance sheet.
Furthermore, SFAS 142 made mandatory the application of impairment accounting to record losses
when the value of goodwill is impaired,52 a departure from the conventional accounting practice ofdepreciating the purchased goodwill on the balance sheet regularly over a certain period of time. Thismeans a shift to the standards that the goodwill is not something to be amortized and its value is to be
maintained above a certain level, with its value to be depleted only when it falls considerably for any
reason.
Meanwhile, intangible assets other than goodwill need to be recognized as intangible assets
separate from goodwill under SFAS 141 when they meet the following criteria: (i) when intangible
assets arise from contracts or legal rights; (ii) even when intangible assets do not arise from contracts
or legal rights, if they can be separated, such as if they can be separated from an acquired company,
can be divided, sold, transferred, licensed, leased or exchanged; or (iii) when intangible assets, thatcannot be individually sold, transferred, licensed, leased or exchanged under the purpose of the SFAS
concerned, can be sold, transferred, licensed, leased or changed in a combination with a related
contract, assets or debts.
As concrete examples of intangible assets that need to be recognized as intangible assets separate
from goodwill, when they meet the criteria of contracts and legal rights in (i) or separability as
described in (ii) and (iii), Appendix A of SFAS 141 cites the following five cases: (i) intangible assets
related to sales (trademarks, product names, registered Internet domains, etc.); (ii) intangible assets
related to customers (customer lists, customer contracts, etc.); (iii) intangible assets related to art(publications, paintings and movies protected under copyrights, etc.); (iv) intangible assets based oncontracts (licenses, employment contracts, etc.); and (v) intangible assets based on technology(patented technologies, software, databases, etc.).
The above-mentioned accounting policy is applicable only to goodwill acquired in the combinationof businesses such as corporate mergers. But since goodwill itself reflects a range of intellectual assets
including human capital and organizational capital, the progress of the above-described method of
52

Specifically, the goodwill is to be devalued when the book value is in excess of the implied “fair value.”
The “fair value” is the price at which an asset (or debt) can be bought and sold in voluntary transactions
between parties concerned, such as transactions other than forced sale or forced liquidation.
- 128 -

evaluating goodwill should be noted as one of the evaluation methods under the “capitalization
approach” of intellectual assets.53
6. Efforts in Japan towards intellectual asset evaluation
In Japan as well, there is the widespread recognition of the importance of innovation capital suchas R&D, organizational capital such as brands and processes, and human capital such as employees
and managers’ capabilities. A variety of initiatives including the unbanning of pure holding companies,
simplification of procedures for corporate mergers, and establishment of stock exchanges and stocktransfers may be interpreted as part of efforts to improve the environment for enhancing organizational
capital by allowing companies to choose from a variety of organizational forms.
Although no comprehensive studies are currently being carried out in Japan concerning evaluationof intellectual assets as in previously mentioned Denmark and the UK, efforts are being made that will
support comprehensive intellectual assets evaluation in the future. Such efforts are described below.
(1) Disclosure of information on intellectual property and evaluation of intellectual property
value
Faced with the urgent task of realizing the so-called “nation built on intellectual property” bystrongly promoting the creation, protection and exploitation of intellectual property from thestandpoint of strengthening industrial competitiveness, thereby shifting to an economy with high value
added and seeking sustained development of the national economy and culture, the Japanese
government since 2002 worked out the “Intellectual Property Policy Outline”54 and the “Strategic
Program for the Creation, Protection and Exploitation of Intellectual Property55 (hereinafter referred
to simply as the “Strategic Program for Intellectual Property”) with the aim of realizing a “nation built
on intellectual property,” and, based on these, it is pushing for a variety of systemic reforms in parallel
as well as rapidly.
Amid these developments, the Ministry of Economy, Trade and Industry, (i) from the standpointof promoting Japanese companies’ intellectual property strategies and based on the earlier-mentioned“qualitative evaluation approach,” has been promoting “intellectual property-backed management”
that combines the three strategies for business, R&D and intellectual property, and has been making
efforts toward the disclosure of their performances by the “Intellectual Property Report” or toward theevaluation of their performances on the basis of public data, and (ii) from the standpoint of facilitating
the distribution and securitization of intellectual property, also has been considering and sorting out
valuation methods for each type of intellectual property rights
53

on the basis of the earlier-cited

Around the time of this accounting change, FASB and other organizations began to discuss the issue ofthe evaluation of intellectual assets out of a sense of crisis that conventional financial reporting did notadequately respond to the needs of information users and with the recognition that financial reporting needs
a drastic review. As an example of these moves, see Financial Accounting Series Special Report, FASB
(2001), a report published in April 2001 to address the accounting problem handling of intellectual assets.
54
Strategic Council on Intellectual Property (July 3, 2002).
55
Intellectual Property Policy Headquarters (July 8, 2003).
- 129 -

“capitalization approach.”(a) Establishment of “intellectual property-backed management” and “Reference Guideline forIntellectual Property Information Disclosure”(Trinity of business, R&D and intellectual property strategies)
In order to dramatically promote the exploitation of intellectual property as well as the creationand protection of intellectual property, it is important for companies to practice management strategies
making full use of their intellectual property (the so-called “intellectual property-backed
management”). For example, the situation of patent acquisitions in the US shows that many companies
that are deemed internationally competitive have acquired an overwhelmingly greater number ofpatents related to their core businesses than rival companies (Figs. 2.1.46, 2.1.47). Similarly, in theabove-mentioned analysis, there are major differences between IT businesses and pharmaceuticalbusinesses in terms of the relationship between R&D investment or numbers of patents acquired andcorporate performances. Based on an analysis of the Ministry of Economy, Trade and Industry,materials-related businesses largely have a tendency similar to pharmaceutical businesses, andmachinery-related businesses largely have a tendency similar to IT businesses in terms of thisrelationship.

Figure 2.1.46 Number of US patent registrations by classification(total for 1998-2002)[Business equipment]
1,600

347

Incremental printing of symbolic information

Number of US patent registrations

1,400

399

1,200
1,000

358

Canon

Seiko Epson

HP (US)

Xerox (US)Electrophotography

Facsimile and static presentation processing

800
600

382

Image analysis
430

Radiation imagery chemistry

400
200
0
341 345 348 352 356 360 363 366 369 372 377 380 384 388 396 401 427 430 434 438 445 600 606

US patent classification
Source: Patent Intelligence and Technology Report (ASPEN LAW & BUSINESS).

- 130 -

Figure 2.1.47 Number of US patent registrations by classification(total for1998-2002)[IT (Computer related)]
1,200

Number of US patent registrations

1,000

800

Sharp
365 StaticSony
information storage
345 Computer graphics processing,and retrieval
NEC
operator interface processing andselective visual display systems
Hitachi360
Dynamic
Mitsubishi Electric
magnetic information
storage or retrieval
IBM (US)
Samsung (Korea)
348

600

Televisions

369 Dynamic
information
storage or retrieval

349 Liquid crystal
cells, elements andsystems
386 Television signal
processing for dynamic
recording or reproducing

327 Miscellaneous active electricaldevices, circuits and systems

400

200

375 Pulse or digitalcommunications
313 Electric lamp
and discharge devices

340
Communications:electrical

399
Electrophotography0
307 315 323 329 333 337 342 347 352 358 362 366 370 374 378 382 386 396 402 406

US patent classification
Source: Patent Intelligence and Technology Report (ASPEN LAW & BUSINESS).

A hearing survey of top Japanese corporate executives has found that top executives at many
excellent companies (in the manufacturing sector) have placed intellectual property strategies at thecore of management strategies as one of the trinity, along with business strategies and R&D strategies.
In order to promote the establishment of “intellectual property-backed management” describedabove, the Ministry of Economy, Trade and Industry in March 2003 released the “Guideline for
Acquisition and Control of Intellectual Property,” putting together the common patterns found withexcellent companies. The “intellectual property-backed management” goes beyond simple
management of intellectual property and encourages top corporate executives to give greater
importance to the aspect of intellectual property in planning and executing business strategies as wellas R&D strategies. It has, in effect, the same direction as the so-called “management of technology”;
yet, it is different in that it emphasizes the strategic viewpoint for intellectual property.
(Preparation of the “intellectual property report” based on the “Reference Guideline forIntellectual Property Information Disclosure”)
Amid the ongoing “selection and concentration” of business operations, the number of companies
that practice “intellectual property-backed management” is expected to increase as the “selection andconcentration” will likely become essential regarding R&D and intellectual property as well. However,companies are not sure how they should demonstrate their “intellectual property-backed management”
to the capital market, while participants in the capital market are not so sure either about how theyshould seek the disclosure of information about “intellectual property-backed management” or how
they should analyze such information. Therefore, in order to help facilitate the start of dialogue- 131 -

between companies and the market on patents and R&D, the Ministry of Economy, Trade and Industry
on January 27, 2004, issued the “Reference Guideline for Intellectual Property Information Disclosure– In the Pursuit of Mutual Understanding between Companies and Capital Markets through Voluntary
Disclosures of Information on Patent and Technology” (Figs. 2.1.48, 2.1.49, 2.1.50).
Figure 2.1.48 Background for establishment of “Reference Guideline for Intellectual
Property Information Disclosure”
Realizing
Realizing aa “nation“nation built
built onon intellectual
intellectual property”
property”–– Shifting
Shifting towards
towards aa highly
highly value
value added
added economy
economy ––National goal

Policy issues

1.
Businessstrategy

R&D strategy

Recommend trinity “intellectual
property-backed management” incorporations

Strategiccollaboration

Intellectual
property
strategy

2. Develop environment to ensure market’s proper
evaluation of companies practicing “intellectual
property-backed management”

Source: Excerpts from METI materials.

Figure 2.1.49 Information disclosure of intellectual assets
In order that dialogue can start between corporations and the market on the subject of “intellectual property-backed management,”
the information disclosure of intellectual assets is indicated as “Reference Guideline for Intellectual Property Information
Disclosure”
Corporate and market issues
Corporate
Seeking
Seekingto
to differentiate
differentiate themselves
themselves fromfromotherothercompanies
companiesand
andto
toincrease
increasetheir
their value,
value,
companies
companieshope
hope to
toappeal
appeal totothe
the market
market withwiththeir
their potential
potentialinin thethe technology
technology field.
field. However,
However,thetheinformation
informationinvestors
investorsseek
seek andand thethe effective
effective method
method ofofinformation
informationdisclosure
disclosure are
areunclear.
unclear.
Market
ItIt acknowledges
acknowledges thetheimportanceimportanceof
ofinformation
informationofof “intellectual“intellectual property-backed
property-backed management”
management”
asfor
aa corporation’ssustainablegrowthpotential.
Although
as judging
judging criteria
criteria
forcorporation’ssustainablegrowthpotential.
Althoughititdesires
desires totoweigh
weigh
開示の考え方（５原則）
companies
companies against
against other
other ones,
ones,hardly
hardlyany
anyinformation
informationisis disclosed,
disclosed, oror itit isis uncertain
uncertain toto whatwhat
extentextent companies
companies cancandisclose
disclosetheir
theirinformation.
information.
Ideas behind disclosure
Five principles
知的財産情報開示指針
1.
1. Strictly
Strictlyvoluntary
voluntary disclosure
disclosure
2.
Manifestationof“intellectual
2. Manifestation of “intellectual property-backed
property-backed management”
management”
3.
3. Substantiation
Substantiation withwithunderlying
underlying assumptions
assumptionsand
andquantitative
quantitativeproof
proof
4.
4. Disclosure
Disclosureon
on consolidated
consolidated andand segment-specificsegment-specific basis
basis
5.
5. Effective
Effective with
with small-,small-, medium-sized
medium-sized andandstartup
startup companies
companies asaswellwell asas withwith major
major
corporations.
corporations.
Medium for disclosureToasan
an organizationalorganizational effort
effort isis desirable.
desirable.
To createcreate anan “Intellectual“Intellectual Property
PropertyReport”
Report”asSource: METI.

- 132 -

Necessity ofbridge-building toaccelerate mutual
understanding

PremisesThe
The market
market seeks
seekstoto knowknowinin
what
what way
waypatents
patentsand
andtechnology
technologyare
are linked
linked withwithstrategy
strategyand
and organization.
organization.
On
On thetheotherother hand,
hand, ifif
requested
requestedto
todisclose
disclosetrade
trade
secrets,
secrets, refusing
refusing such
such
disclosure
disclosure as
as aa strategic
strategic
decision
decisionisis also
alsovital
vital forforcompanies.
companies.

Figure 2.1.50 Ten disclosure items in the “Reference Guideline for Intellectual Property
Information Disclosure”(1) Core Technologies and Business Models(2) R&D Segment and Business Strategy Orientation(3) R&D Segment and Intellectual Property Overview(4) Analysis of Marketability and Market Advantages of Technologies(5) R&D and Intellectual Property Organization Chart, R&D Alliances(6) Intellectual Property Acquisition and Management, Trade Secret Management, Policies
on Technology Leakage Prevention (Including Guideline Implementation)(7) Significance of the Licensing Activities to the Company’s Business(8) Significance of the Patent Portfolio to the Company’s Business(9) Policies on Intellectual Property Portfolio(10) Information on Risk Countermeasures
Source: Extract from METI materials.

According to the results of a questionnaire survey the Ministry of Economy, Trade and Industry
conducted with institutional investors in October 2003, prior to the preparation of this Guideline, theinformation that investors would seek about intellectual property was not necessarily information ontechnological details or trade secrets but information on the total picture of the “intellectual
property-backed management” of companies, such as information showing how patents andtechnologies are linked to the strategies and organization of companies. Therefore, in the preparationof this Guideline, while making it clear that it is important for companies to decline requests for thedisclosure of trade secrets as constraints on the part of companies, effective ways to convey
information to the market were put together as a broad standard for voluntary disclosure that should bemade in terms of investor relations.56 The Guideline was developed by the Ministry of Economy,
Trade and Industry as a reference standard from the perspectives of industrial policy and intellectual
property policy in the hope of promoting “intellectual property-backed management” and encouraging
proper evaluation of companies that practice it, and as such it does not force disclosure or regulate thecontents of disclosure in any way.
In light of its purpose described above, the “Reference Guideline for Intellectual Property
Information Disclosure” includes items that help demonstrate the relationship between intellectual
property and business as a whole, such as “core technologies and business models (item (1))” and“R&D segment and business strategy orientation (item (2)).” It also describes legal structures andorganizational setups relevant to intellectual property, such as “R&D and intellectual property
56

Of intellectual property (as defined under Article 2 of the Basic Law on Intellectual Property), theGuideline is intended for the disclosure in particular of information related to patents and R&D in the
manufacturing sector.
- 133 -

organizational chart, R&D alliances (item (5)).” Further, the Guideline focuses on the qualitative
disclosure of patents and technologies without the assumption of placing them on the balance sheetwith valuation as capital assets since patents and technologies, unlike assets such as movable andimmovable property, do not have an objective external market and thus it is hard to evaluate inabsolute terms. On the other hand, in order to make the disclosure convincing, the Guideline
underscores the need to explain disclosed information with preconditions and back it up with somequantitative information. It is expected that 13 companies57 that participated in a study group will
prepare and disclose the intellectual property report in line with the Guideline in May this year
onward.
Though the Guideline is limited to patent and technology information in its coverage, given that (i)it provides an overview of corporate management as a whole through R&D strategies and patent
strategies, (ii) individual companies are expected to exercise their ingenuity in preparing actual reports,and (iii) institutional investors and others are recently showing a growing interest in R&D and patentsof companies, it is hoped that the Guideline will mark the first step in pushing ahead with theconsideration of the evaluation and disclosure of intellectual capital in Japan through the preparationof intellectual property reports in line with this Guideline.
(Consideration of “intellectual property strategy indicators”)
The Industrial Structure Council, which discussed the “Reference Guideline for Intellectual
Property Information Disclosure,” is now considering “intellectual property strategy indicators” on a
micro basis, using publicized data to make it possible to compare companies in activities related to
R&D and patents even without the disclosure of intellectual property reports. In this consideration, thecouncil is trying to extract indicators related to R&D and patents that are correlated to ROE and ROA
in light of technological characteristics of respective industries. Candidate indicators underconsideration include cumulative R&D expenses, R&D efficiency, 58 productivity in patentacquisitions,59 patent profitability,60 share of patent applications61 and patent concentration.62
In parallel with the above, the council is also working on “intellectual property strategy indicators”
on a macro basis using publicized data to make comparison of the intellectual property capacity
among countries possible (Fig. 2.1.51).

57

The 13 companies are Tokyo Electron Ltd., Asahi Kasei Corp., NEC Corp., Fujitsu Ltd., Hitachi
Chemical Co., Toto Ltd., Olympus Corp., Bridgestone Corp., Takeda Pharmaceutical Co., Mitsubishi
Electric Corp., Alps Electric Co., Ajinomoto Co. and Canon Inc.
58
Cumulative operating profits/cumulative R&D expenses.
59(Cumulative patent applications/cumulative R&A expenses) x estimated cumulative number ofregistrations.
60
Operating profit before deduction of excess R&D expenses/gross number of effective patents.
61
Cumulative number of patent applications of company by international patent classification/total
cumulative number of patent applications by international patent classification.
62
Σ (Cumulative number of patent applications of company by international patent classification/total
cumulative number of patent applications by international patent classification)2 x 100.
- 134 -

Figure 2.1.51 “Intellectual property strategy indicators” on a macro basis
Overall view of major country comparisons (radar chart)
Indexation (relative comparison), set the average of the five countries in 1991 and 1998 as 1, so that comparison can be made bycountry and by year for each country
1991

FranceR&D expenses per researcher
Patentprofitability

1.5

Intensity of R&D expenses

R&D expenses per researcher
Patentprofitability

1.5

1.0

Patentproductivity

1991

Germany

1998

Intensity of R&D expenses

R&D expenses per researcher
Patentprofitability

Researcher ratio (perthousand workers)

TFP

Patentproductivity

R&D expense efficiency

Researcher ratio (perthousand workers)

0.5

TFP

GDP per worker

1.5

1998

Intensity of R&D expenses

1.0

1.0

0.5

1991

Japan

1998

Patentproductivity

R&D expense efficiency

0.5

TFP

GDP per worker

Researcher ratio (perthousand workers)

R&D expense efficiency
GDP per worker

Definitions:UK
R&D expenses per researcher
Patentprofitability

1.5

US

1991
1998

Intensity of R&D expenses

R&D expenses per researcher
Patentprofitability

1.5

1998

Intensity of R&D expenses

1.0

1.0

Patentproductivity

1991

Researcher ratio (perthousand workers)

0.5

Patentproductivity

0.5

Researcher ratio (perthousand workers){R&D performance}
・R&D expenses per researcher = R&D expenses / Number of researchers(FTE: conversion of Full Time Employed researchers)
・Intensity of R&D expenses = R&D expenses / GDP・Researcher ratio (per thousand workers) = Number of researchers (FTE) /Number of workers (thousand people)
・R&D expense efficiency = GDP / R&D expenses average of 5 terms (-1 ~-5 terms){Intellectual property performance}
・Patent productivity = Number of international patent registrations (current
quarter) / R&D expenses average of five terms (-1 ~ -5 terms)
・Patent profitability = GDP (current term) / Cumulative number ofinternational patent registrations over 5 terms (0 ~ -4 terms)* Number of international patent registrations relies on the OECD’s “triadic” patent family data
(number of patents applied to the JPO and EPO, and USPTO patented)

TFP

R&D expense efficiency
GDP per worker

TFP

R&D expense efficiency
GDP per worker{Economic performance}
・GDP per worker = GDP / Number of workers
・TFP (Total Factor Productivity) = Rough amount of added value /(Number of workers labor’s relative share× rough capital stock (civilian
sector) (1 – labor’s relative share) )Source: Excerpts from METI materials.

With further work on these projects, the respective indicators are likely to be completed by the endof FY2004.
(b) Efforts toward the establishment of methods for evaluating intellectual property value
In the exploitation of intellectual property, it is essential to appraise the value of intellectual
property in phases such as trading in intellectual property rights, financing, and mergers andacquisitions (M&A). As it has been noted that companies with excellent intellectual property cannot
raise funds on the strength of intellectual property because there is no established method of
evaluating intellectual property, the Industrial Structure Council is now examining the issues related toevaluation of intellectual property values. Some of the points that has been remarked include the fact
that: (i) it is not so hard to evaluate copyright values because there is a sort of an external market forthem, but patent rights and trademark rights have no such external markets, making it difficult toevaluate values of these rights in the first place; and (ii) in evaluating patent right values, in particular,
it is necessary to distinguish between patent rights that are generating cash flows and those that are
not.63 Therefore, the Industrial Structure Council is considering and sorting out the points of interest
63

The Industrial Structure Council points out that the degree of accuracy (stages) and modes required are
different depending on types of intellectual property rights (patent rights, trademark rights, copyrights, etc.),
assumed purposes of evaluation (sale or acquisition of businesses, granting of licenses, lending, etc.) andentities to make evaluation (providers and recipients of intellectual property) and as such, applicable
methods of evaluation should also be distinct. It is also pointed out that in view of the limitations of thequantitative evaluation that it shows only figures calculated under certain specific conditions, when
methods of evaluating intellectual property are ultimately used for investment decisions regarding specific- 135 -

regarding methods of evaluating intellectual property value according to types of intellectual property
rights (patent rights, trademark rights, copyrights, etc.), assumed purposes of evaluation and entities
that evaluate intellectual property value in line with the above-mentioned points. There remain somany problems to solve, but the Industrial Structure Council is set to finish its consideration about
evaluation methods for intellectual property value by the end of FY2004.
Incidentally, prior to the above study, the Ministry of Economy, Trade and Industry established the“Committee on Brand Valuation” to consider the quantitative and objective evaluation of brand values,
compiling the “Report of the Committee on Brand Valuation” on June 24, 2002 (Fig. 2.1.52).

Figure 2.1.52 The ideas behind the brand valuation model

Brand value

Price advantage(PD)

Expandingcapability(ED)

Sales quantity stability(LD)

PD
Brand value

＝

×

LD

×

ED

r (discount rate)

Source: METI (2002).

(2) Enhancement of risk management capability -- “Internal Controls in the New Era of Risks~ Guidelines for Internal Control That Function Together with Risk Management ~”“Enterprise Risk Management – Textbook”
Amid the growing social interest in CSR, on top of internationalization and speeding-up ofbusiness due to globalization and the diffusion of Information Technology (IT), companies are now
surrounded with diverse risks, with risk response gaining in importance in corporate management.
About 10 percent of the Fortune 1000 companies have experienced a fall of 25 percent or more in theirstock prices in a single month for a wide variety of factors (Fig. 2.1.53). When risks surrounding
companies materialize to cause them damage, the impact on enterprise value is huge in scale.
Comparison between the stock prices of the 100 companies that suffered damage of some kind or
another with movements of the S&P 500 stock price index show that it is not easy to recover from thedamage once companies were hit by the emerging risks and as a result, their stock prices tumbled (Fig.
2.1.54).
companies, it is essential to make clear the purpose of quantitative evaluation and make a comprehensive
decision by also using qualitative information (rights-holding entities and the contents and status of theserights).
- 136 -

Figure 2.1.53 Various business risks
Legal compliance
Systems failure

Competitive pressures
Customer demand shortfall

Losing key staff
Staff absenteeism

Wrong strategy

65%

IT security failure
Physical security breech
Supply chain failure
Commodity prices
Fire &
Wrong investment strategy
naturalhazards

Response to technology% of Significant Risk

56%

56%

Incorrect market
analysis

52%

Loss ofcustomers

47%

45%

50% 50% 49% 49%
47%

42%

Customer default
Currency
fluctuations

48%

47%

Liabilit

41%

40%
37%
34%
30%

Type

Strategic

Operational

Financial

HazardNote: Results from interviews with 600 companies whose 2001 sales figures in Europe were between $500 million and $5 billion, or whose
number of employees were between 50 and 500 people. Figure represents the percentage of companies who answered "Presents a critical risk."
Source: Mercer Management Consulting.

Figure 2.1.54 Comparison of stock price trends between S&P 500 and 100 companies
suffering drops
Stock price index
160
150
140

S&P500 1

130
120
110

100 cos. suffering drops2

100
90
80
70

th
s

s

(time
period)

24

m
on

th

s
th

22

m
on

th
s

m
on
20

m
on
18

16

m
on

th
s

th
s

th
s

m
on
14

th
s

m
on
12

m
on
8

m
on

m
on
6

10

m
on
4

th

th
s

s

th
s

m
on
t
2

hs

m
on
0

th

s

60

Notes:
1. S&P 500 index is the sum of the S&P indexes corresponding to time period for each of the 100 companies suffering stock drops.
2. Data was not available for all companies for all 24 months after the stock drop (e.g. for stock drops in the last two years). Where data was
not available, companies were excluded from that month for both the 100 cos. and the S&P 500 index.
Source: Mercer Management Consulting.

In such surroundings, a new approach, Enterprise Risk Management (ERM),64 is gaining wider
acceptance. Previously, like managing insurance or exchange risks, for example, many companies
addressed risk management as specialized operations in each compartmentalized area.65 In recent
years, however, with the damage increasing when risks materialize, there is a growing perception that
top management needs to address risks confronting companies in a cross-disciplinary andcomprehensive manner.
Enterprise Risk Management is closely linked to activities designed to boost intellectual assets andcompanies’ value creation capacity, as discussed earlier. ERM is a sort of early warning system. This isdesigned to detect early signs in relations with stakeholders before risks materialize to batter stock
prices. As explained in the examples of the Copenhagen Charter and Coloplast (Figs. 2.1.42, 2.1.43
64

The new approach of enterprise risk management recognizes risk management as comprehensive andintegrated activities for company value creation, and seeks to enhance company value by managing
enterprise risk in a reasonable and most appropriate manner to maximize return.
65
Burton et al. (2003), p.6.
- 137 -

shown before), a component of the process of understanding company value via intellectual assets.
In order to build this process, company requires effort from two different directions. One is thedevelopment of internal control for risk management and the other is training of human resources
capable of adequately evaluating risks facing each division in its individual business area.
The Ministry of Economy, Trade and Industry has thus far published “Internal Control in the New
Era of Risks ~ Guideline for Internal Control That Function Together with Risk Management ~” fromthe standpoint of helping to develop internal control for risk management, and Enterprise Risk
Management – Textbook from the viewpoint of training risk evaluation human resources. They arebriefly explained below.
(a) “Internal Control in the New Era of Risks ~ Guideline for Internal Control That Function
Together with Risk Management ~”In June 2003, the Ministry of Economy, Trade and Industry worked out the guideline concerninginternal control, “Internal Control in the New Era of Risks ~ Guideline for Internal Control That
Function Together with Risk Management ~,” after discussions at the Study Group on Risk
Management and Internal Control, composed of members who represented industry, academia, theaccounting profession and the legal profession, and others. It referred to the ideas presented in the
COSO Report of the US.66
The Guideline defines risk management as “a series of a company’s activities that appropriately
manage various internal and external risks associated with its business, in the course of corporate
management, to maintain and augment its value” and internal control as “a system or processestablished and operated in a company to carry out its business properly and efficiently.” On that basis
it states that these two concepts that have grown out of the different backgrounds largely share theirrespective objectives from the standpoint of preserving and enhancing enterprise value by responding
to a variety of risks surrounding companies. It then presents a framework for building these twoconcepts in a mutually complementary manner.
The Guideline first presents a process for risk management as a means of enhancing enterprisevalue. Specifically, it defines risks by classifying them into strategic risk (“risk associated withbusiness opportunities”) and operational risk (“risk associated with the execution of businessactivities”) and presents risk management through the following process: (i) Risk Detection and
Identification; (ii) Risk Measurement; (iii) Risk Evaluation; (iv) Choosing Risk Treatment; (v)Evaluation of Remaining Risks; (vi) Policies Addressing Risks and Monitoring and Correction of Risk
Treatment; and (vii) Evaluation and Correction of Effectiveness of Risk Management.
66

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is an organization
for checking fraudulent financial reporting made of five accounting organizations (the American Institute of
CPAs, the American Accounting Association, the Institute of Internal Auditors, the Institute of Management
Accountants, and the Financial Executives Institute). “The Internal Control – Integrated Framework”(COSO Report), published by COSO in 1992 is referred to in the BIS Guidelines as well as in Audit
Standards in the United States and Japan and is currently regarded as the global de facto standards
regarding the framework of internal control.
- 138 -

The Guideline then presents a framework concerning the establishment and operation of internal
control for a response to operational risk. Components of internal control can roughly be divided into
the “foundations of internal control” which are shared by the whole company and are a base of theexecutions of business activities by company personnel, and “functions in internal control” which areoperated individually thereupon. “Foundation of internal control” includes a “sound control
environment” and “smooth communication of information,” while “functions in internal control”
involve adequate risk control and risk monitoring on spot. The Guideline also provides guidance forincorporating these functions into the management control process and business activities.
Putting the establishment and operation of internal control into concrete terms, the Guideline also
describes the respective roles of the management, managers and staff as members at different levels in
the company as well as the respective roles of corporate organizations including board of directors,
corporate auditors and Audit Committee, and an Independent auditor.
The Guideline itself deals with the process of risk management by companies and the developmentof a system for that purpose. However, as the process to maximize an opportunity to enhance company
value and the process to minimize risk of degradation in corporate value largely overlap, the Guideline
can be referred to as the guidance for an evaluation of intellectual assets and enhancement of company
value.
(b) “Enterprise Risk Management – Textbook”
The Guideline cited above presented the framework for risk management and internal control. On
top of such a framework, it is necessary to diffuse specific methods that staff on the spot can use forenterprise risk management. To this end, the Ministry of Economy, Trade and Industry, as part of the“human resources training program for enterprise risk assessment and management,”67 prepared the
instructional material that helps staff on the spot facing specific risks understand and use enterpriserisk management. This material was published as the “Enterprise Risk Management – Textbook”68 in
March 2004.
In the textbook, risks are defined as uncertainty or changes about the results of future events,
including the probable occurrence of both positive and negative. The purpose of enterprise risk
management is described as an evaluation and understanding of risks by quantifying them as much as
possible, appropriate control of these risks, including the holding of them, enhancement ofmanagement stability and efficiency, and then enhancement of enterprise value (Fig.2.1.55).

67

Under the program, a set of skill standards for enterprise risk management was worked out (reference
was made to the Management of Risk: Guidance of Practitioners of the UK Office of Government
Commerce) and a symposium on risk management was held.
68
The textbook can be downloaded from the Ministry of Economy, Trade and Industry website:
http://www.meti.go.jp/report/whitepaper/index.html.
- 139 -

Figure 2.1.55 Effects of enterprise risk management
Percentage

Risk control
Risk financeRisk transfer

Risk retention

Loss

ProfitExpected profit

Expected profit when enterpriserisk management is implemented

Source: Enterprise Risk Management - Textbook (METI).

The textbook cites the three major processes of enterprise risk management and describes thetheory and practice of each of them with the aid of case studies: (i) “risk evaluation assessment andunderstanding,” the specific method of appropriately detecting, identifying, analyzing and assessing
risks defined as an uncertainty about the future; (ii) “risk response,” the specific method of
maximizing return by adequately responding to identified risks and making most appropriate
decisions; and (iii) “communication of risk information,” the specific method of obtaining theunderstanding and trust of people inside and outside companies by appropriately recording, storing,
describing and communicating information related to risks. For example, the textbook introduces acase of DuPont’s development of its risk management method as cited in a column at the end of thissection.
The key points of the textbook are structured as a standardized composition enabling a reader’scomprehensive learning from the basics about management know-how common across various
industries and business categories. Thus, it is assumed that the textbook is to be customized for use at
the stage of training human resources for company-specific risks at company levels.
(3) Development Bank of Japan’s new program: Project to Promote Environmentally Friendly
Management
As discussed earlier, factors included in CSR are closely linked to companies’ value creation
through the use of intellectual assets, and as such, the evaluation of CSR factors is deeply relevant to
the establishment of methods to evaluate intellectual assets. The following is a brief sketch of anenvironmental evaluation the Development Bank of Japan (DBJ) uses for its new program, Project toPromote Environmentally Friendly Management, launched in April 2004.
- 140 -

The new project is different from the conventional investment and loan facility. The conventionalloans system has financed specific environmentally-friendly programs such as installation ofanti-pollution equipment. However, the new project supports companies’ overall financing programfor environmental measures to help promote environmentally-friendly corporate management. Hence,for the new lending scheme, the DBJ makes a comprehensive evaluation of a borrowing entity’s
internal system to improve its environmental performance over the long term as well as current
environmental performance. The new facility also features the multistage evaluation of borrowers
according to the degree of environmental management.
Figure 2.1.56 shows a flow of screening procedures. When a company applies for a loan, thepotential borrower is evaluated first with a set of environmental screening items the DBJ has
developed on its own for each industry sector. Broadly, there are three groups of screening items:
management-related items, business-related items and performance-related items (Fig. 2.1.57). Figure
2.1.58 lists a set of screening items for manufacturing companies, and management-related items are
not limited to environmental management but cover a whole range of CSR, such as corporate
governance, employees and the disclosure of information. Based on the numerical evaluation by theenvironmental screening, the DBJ decides which level of interest rates should be applicable to rated
potential borrowers. A final loan decision is made after considering evaluation on financial criteria.
Even after the disbursement, the bank keeps encouraging environmental management throughmonitoring and disclosure requirements.
Figure 2.1.56 An overview of Project to Promote Environmentally Friendly Management

Private placement bond warranty

Businesses for which environmentallyconscious efforts are especially forward-thinking
Policy rate III

Loans

Businesses for which environmentallyconscious efforts are forward-thinking
Policy rateⅡBusinesses well-recognized for environmentallyconscious efforts
Policy rate I(Not eligible)
Note: The interest rate is highest for policy rate I and lowest for policy rate III.
Source: Development Bank of Japan.

- 141 -

Monitoring duty of disclosure

Implementation of environmental screening

Application

Company

Corporate credit risk valuation, collateral rating, etc.

Figure 2.1.57 The ideas behind the screening sheet[(1) General items of management ]“Items that test whether or not environmentally-friendly management is being shared by the organization as a whole.
Questions to eliminate companies in which environment departments are internally isolated, causing the system to beineffective (mainly qualitative)”[(2) Business-related items]“Operate an environmental policy across business processes as a whole (mainly qualitative), except forenvironmental burdens that can be directly controlled by the company itself (type (3) below), such as
manufacturing processes, etc.”
Environmental
Feedback

Procurement ofmaterials andcomponents

Manufacturing

Emissionsburden of thestages of use

Environmental
burden after use

Distribution
andmarketing

Users

Disposal,collection,
recycling[(3) Performance-related items]
Emissions“Items that test the performance of policies to deal with emissions
from the core business activities that can be directly controlled by thecompany itself, such as manufacturing processes, etc. The related
items cover a wide range, but they are composed centered on the core
indicators of the MOE guidelines (mostly quantitative).”

Source: Development Bank of Japan.

Figure 2.1.58 Outline of evaluation items- examples for the manufacturing industry (as of Apr. 2004) Evaluation items

Management-related items

Business-related items

Performance-related items

A
B
C
D
E
F

Corporate governanceCompliance
Risk management
Partnership
Employees
Information disclosure

G Capital investment
H Product and service development
I Environmental consideration for supply chains
J Recycling of used products
K
L
M
N
O

Global warming countermeasures
Measures for the effective utilization of resources
Water resource measures
Chemical substance management
Other countermeasures against environmental burdens

Source: Development Bank of Japan.

As discussed in 4 (3) in this section, the capital market’s evaluation of Corporate Social
Responsibility is gradually spreading through the expansion of SRI. It is hoped that the employment ofevaluation systems, such as that used by the DBJ, will contribute to the spread of the CRS evaluationin the capital market as well as of the evaluation of companies’ value creation capacity in general in
Japan.
- 142 -

7. Provisional intellectual asset evaluation method
As individual companies are stepping up efforts to make good use of intellectual assets,consideration of a method to evaluate intellectual assets for their utilization by companies has been put
on the agenda, with some initial steps toward that goal already being taken. Evaluation of intellectual
assets, fundamentally, should be developed through information gathering, evaluation and disclosure
at company level, and it would be impossible to make an evaluation based solely on the data currently
available. From the standpoint of promoting the future development of evaluation methods utilizing
diverse indicators, however, an experimental quantitative evaluation of the level of intellectual assets
in Japan was carried out using available publicly disclosed data and compared with those of othermajor countries and regions as follows.69(1) Provisional evaluation of intellectual assets as a nation
There is a survey (Corrado et al. (2003)) that made a macroeconomic quantitative evaluation of
the intellectual assets for a nation, using data including that publicly available (Fig. 2.1.59). The
survey assumes that intellectual assets are comprised of (i) computerized information (computer
software, computerized databases), (ii) scientific and creative property (science and technology-related
R&D, mining resources development, copyright and licensing costs, other costs related to
manufacturing, development, design, and research); and (iii) economic competencies (brands, humancapital unique to the company, organizational structures), and adds them all up using proxy indicators.
Based on this, the survey came up with a time series (1988-1990, 1993-1995 and 1998-2000) of theamount of intellectual assets in the US. The results indicate that the ratio of intellectual assets to GDP
has been rising in the US, reaching about 14 percent in the latest time series of 1998-2000. Drawing
upon this method, the amount of intellectual assets in Japan was calculated on a provisional basis.
Despite the lack of data for a few items due to greater data constraints than in the US, the results show
the ratio of intellectual assets to GDP reached about 8 percent in 1998-2000 and an indication that theratio of intellectual assets to the economy is increasing in Japan as well.

69

As an example of a provisional method to evaluate intellectual assets, the “knowledge potential survey”
was conducted in October 2003. Specifically, (a) using only data made publicly available in financial
statements and other reports, the Nihon Keizai Shimbun and Prof. Ellie Okada of Yokohama National
University calculated the “knowledge potential index (knowledge value index)” for major domestic
manufacturing companies on the basis of the six indicators of “technological innovation ability,”“transaction efficiency (suppliers, customers),” “employee productivity,” “equipment utilization ability,”“profitability potential” and “market perspectives;” and (b) using the calculation method for the“knowledge potential index,” they experimentally calculated enterprise value with the addition of “invisible
value” such as abilities and know-how and compared it with total stock market capitalization (Nihon Keizai
Shimbun, October 15, 2003).
- 143 -

Figure 2.1.59 Provisional evaluation of intangible assets by asset (Japan-US comparison)
million yen
Computerized Information
Computer software
Scientific¥ 20,371,229 ¥

20,192,427¥

8,455,995 ¥

8,036,036¥

89,867

Mining industry (R&D)¥

2,120 ¥

Movie & video production industry
Publishing, printing and relatedindustries (R&D)

¥

196

¥

45,239and Creative Property

Science and technology related R&D

Mining resources development
Trademark and licensing cost
(Information center industry R&D)

Japan
1998-2000
1993-1995¥ 10,042,877 ¥
5,982,913¥ 10,042,877 ¥
5,982,913

Manufacturing industry(R&D)
Information service industry
(R&D)

−

Finance & insurance industries (salary) ¥ 11,645,893 ¥Other manufacturing and design costs

First-class architects (salary)¥

131,918 ¥Advertising expenditure¥¥

9,469,845 ¥
4,595,477 ¥Education and training expenditure¥775,733 ¥Economic Competencies
Brand capital

Human capital unique to the company

United Statesbillion dollars 1998-2000 1993-1995 1988-1990
$145
$65
$40
Computer software
$151
$68
$41
$3
Computerized databases
$385
$250
$200
Costs of new products and new production
processes, usually leading to a patent or license

Petroleum and natural exploration cost
Other geophysical and geological exploration R&D
in mining industries−
Development costs in the motion picture industry
Development costs in the radio and television, the−sound recording, and book publishing industries
New product development costs in the financial
12,078,410
services industries
75,394
New architectural and engineering designs
R&D in social sciences and humanities
7,688,906
4,095,331
Purchases of advertising services
Outlays on market research
Direct firm expenses (in-hours trainers, outside
678,590
trainers, tuition reimbursement, and outsidetraining funds)
Wage and salary costs of employee time in formal
and informal training
Purchased “organizational” or “structural” capital
2,587

Related to organization structural reform Total salary of department heads in all¥ 4,098,635 ¥
2,914,986 Employment and wages in executive occupationsindustries
Total¥ 39,883,950 ¥ 33,864,247
GDP¥ 513,023,967 ¥ 492,384,867
Ratio to GDP
7.8%
6.9%

$185

$121

$101

$1

$1

$1

$2

$2

$2

$25

$13

$9

$50

$26

$18

$45

$39

$29

$68
$8
$685
$235
$19

$42
$4
$445
$151
$12

$36
$4
$335
$124
$10

$23

$17

$13

$100

$72

$55

$81

$42

$28

$225

$150

$105

$1,220

$760

$570

13.2%

10.8%

10.6%

Source: METI

(2) Provisional evaluation of intellectual assets at the company level70
Here, intellectual assets are intangible assets other than “liabilities/capital” on the conventionalbalance sheet, and defined as the “ability to produce results by making appropriate use of what has
been provided (liabilities/capital, customer confidence, human resources) by stakeholders(creditors/shareholders, customers, employees). The provisional evaluation is shown below.
(a) Components of intellectual assets
In view of the availability of data from publicized financial statements, intellectual assets are
estimated on the assumption that they are composed of “business structure reform capacity,” “businessefficiency,” “technological capacity,” “marketing capacity” and “organizational capacity” (Fig.
2.1.60).
Figure 2.1.60 Components of intellectual assets
1. Business structure reform capacity
Changes in the turnover ratio of total capital (the latest term ~ -2 terms)
Changes in the ratio of operating profit to sales (the latest term ~ -2 terms)
2. Business efficiency
Inventory turnover ratio (sales / inventory assets)
Turnover ratio of tangible fixed assets (sales / tangible fixed assets)
3. Technological capacity
Cumulative R&D expenses from 3 latest terms
Sales from 3 latest terms / cumulative R&D expenses (-3 ~ -5 terms)
4. Marketing capacity
Credibility (trade payables / trade receivables)
Sales share (sales / total sales of companies with two-digit US-SIC codes)
5. Organizational capacity
Employee productivity (sales / number of employees)
Changes in the number of employees (Number of employees <the latest term + -1 term> / number of employees <-1 term + -2
term>)
Source: Intellectual Assets Study Group.

70

The evaluation method was developed by “Intellectual Assets Study Group,” chaired by Asia University
President Masahiro Ikejima, for application to the manufacturing sector. For details of the method ofanalysis, see AN 2.1.2.
- 144 -

(“Business structure reform capacity”)
A company is required to have the capacity to change existing business models (“businessstructure reform capacity”) to continue with value creation over the long term. More specifically, thisanalysis, assuming that capacity can be seen in the capacity to link capital to sales and sales to profit,
breaks down the profit ratio71 to total capital into the turnover ratio of total capital and the ratio of
operating profit to sales (operating profit/total capital = sales/total capital x operating profit/sales), andchanges (the latest term – the term before the latest term) in each indicator are regarded as componentsof the “business structure reform capacity.”(“Business efficiency”)
A company is required to have the capacity to execute adequately existing business models(“business efficiency”). Specifically, this analysis regards the inventory turnover ratio (sales/inventory
assets) and the turnover ratio of tangible fixed assets (sales/tangible fixed assets) in the latest term ascomponents of this capacity.
(“Technological capacity”)
Various studies point out that technological capacity will become an important factor for amanufacturing company that tries to establish and reinforce its competitive advantage. This analysis
attempts to grasp the degree of technological differentiation with competing companies by looking
into cumulative R&D expenses in the three latest terms. The ratio of sales in the three latest terms tocumulative R&D expenses in the three to five terms prior is examined to see the degree of efficiency
in R&D activities. These two factors are regarded as components of the “technological capacity.”(“Marketing capacity”)
A company can conduct its business favorably by winning the trust of customers and business
partners. It needs to have this brand-like credibility (“marketing capacity”). Specifically, this analysis
regards credibility and the share of sales as components of this capacity, with the former indicated by(trade payables/trade receivables) and the latter shown by (sales/total sales of companies with
two-digit US-SIC codes).
(“Organizational capacity”)
A company is required to have the capacity as an organization beyond the summation of abilities
of individual employees (“organizational capacity”). Specifically, this analysis regards sales per
employee (employee productivity) and the increase in the number of employees (the number of
employees (the latest term + the term prior to the latest)/the number of employees (the term prior to
the latest + two terms prior to the latest) as components of this capacity.
71

The analysis uses an operating profit as profit in the calculation of the profit ratio to total capital.
- 145 -

(b) Provisional evaluation of intellectual assets at the company level and characteristics byregion72
Based on the above-described five components of intellectual assets, characteristics of intellectual
assets of a company subject to the analysis can be understood. In other words, the scale of eachcomponent provides a quantitative evaluation to find an area of weakness or strength in the fivecomponents of intellectual assets, which are “business structure reform capacity,” “businessefficiency,” “technological capacity,” “marketing capacity” and “organizational capacity.” In thisanalysis, a total of 7,89773 manufacturers from around the world (21 countries) were selected as
subject companies from the “OSIRIS database” and which are then classified by country or region into(i) Japan, (ii) North America, 74 (iii) Europe, 75 or (iv) Asia 76 to gain an overview of regional
characteristics.
Looking at the components of intellectual assets by region (Fig. 2.1.61), Japan is placed at the top
for “business structure reform capacity,” “technological capacity” and “organizational capacity,” while
the US leads the pack for “business efficiency” and Europe for “marketing capacity.” For Asia,
meanwhile, it can be pointed out that evaluation levels are low on the whole. When the subject
industry is limited to machinery assembly manufacturers, 77 the overall trends do not change
significantly, with Japan ranking the highest for “marketing capacity” in addition to “businessstructure reform capacity,” “technological capacity” and “organizational capacity,” while the US keeps
the top slot for “business efficiency” (Fig. 2.1.62).

72

This analysis relies on financial data of listed companies worldwide made available through the OSIRIS
database of Bureau van Dijk, and the calculations are made within the confines of the data availability. For
detailed data such as subject companies and subject industries, see AN 2.1.2.
73
The number of companies actually used for calculations by country/region and by industry is indicatedin respective charts.
74
US and Canada.
75
UK, Germany, France, Italy, Sweden, Norway, Finland, Denmark and the Netherlands.
76
China, Korea, Taiwan, Hong Kong, Singapore, Thailand, Indonesia, Malaysia and Philippines.
77
The machinery assembly manufacturers are the companies of following 4 industries in OSIRIS databaseclassification: general machinery, electric machinery, transport machinery and precision machinery.
- 146 -

Figure 2.1.61 Characteristics of intellectual assets by region

Organizational
capacity
組織力
852 companies
852社

Japan
日本

North北米
AmericaBusiness
structure reform capacity
ビジネス構造改革力
1,2861286社
companies
56
54
52
50
48
46
44
42

Business
structure reform capacity
ビジネス構造改革力
2,017
companies
2017社
56
54
52
50
48
46
44
42

Marketing capacity
マーケティング力
887887社
companies

Technological capacity
技術力
97社
97 companies

Organizational
capacity
組織力1158社
1,158 companies

Business
efficiency
ビジネス効率性
1365社
1,365
companies

Organizational
capacity
組織力
2279社
2,279 companies

Marketing capacity
マーケティング力
1740社
1,740
companies

Technological capacity
技術力
1214社
1,214 companies

Europe
ヨーロッパ

Asia
アジア

ビジネス構造改革力
Business
structure reform capacity
1,269 1269社
companies
56
54
52
50
48
46
44
42

ビジネス構造改革力
Business
structure reform capacity
1754社
1,754
companies
56
54
52
50
48
46
44
42

Technological capacity
技術力
193社
193 companies

Business efficiency
ビジネス効率性
1,339
companies
1339社

Organizational
capacity
組織力
286 companies
286社

Technological capacity
技術力
15社
15 companies

マーケティング力
Marketing capacity
1400社
1,400
companies

Business
efficiency
ビジネス効率性
2,457
companies
2457社

Business
efficiency
Business
efficienc
ビジネス効率性
2,1642164社
companies

Marketing capacity
マーケティング力
2,1192119社
companies

Notes:
1. All figures are standard deviation adjusted values assuming the average number of companies in the manufacturing industry worldwide that could obtain data is 5
2. Discrepencies between industry types among countries and regions has not been taken into account in these figures.
3. The company number recorded next to each entry in this figure represents the number of companies used for the calculation in the applicable country or region.
Source: Intellectual Assets Study Group.

Figure 2.1.62 Characteristics of intellectual assets by region (machinery assembly manufacture)
Japan

North America

Business structural reform capacity
551 companies
56
54
52
50
Organizational capacity 48
Business efficiency
46
357 companies
594 companies
44
42

Technological capacity
51companies

Technological capacity
888 companies

Marketing capacity
400 companies

Marketing capacity
972 companies

Asia

EuropeBusiness structural reform capacity
509 companies
56
54
52
50
Organizational capacity 48
Business efficiency
46
460 companies
542 companies
44
42

Technological capacity
114 companies

Business structural reform capacity
1093 companies
56
54
52
50
Business efficiency
Organizational capacity 48
461294 companies
1374 companies
44
42

Business structural reform capacity
626 companies
56
54
52
50
Business efficiency
Organizational capacity 48
46
772 companies
69 companies
44
42

Technological capacity
9 companies

Marketing capacity
566 companies

Marketing capacity
765 companies

Notes:
1. Machinery assembly manufacturers mean the four industry categories of general machinery, electric machinery, transport machinery and precision machinery,
as classified by the OSIRIS database, are used for this analysis.
2. All figures are standard deviation adjusted values, assuming that in the four industries stated above, the average number of companies able to obtain data is 50.
3. Discrepancies between countries and regions concerning the four industry types have not been taken in to account in these figures.
4. The company number recorded next to each entry in this figure represents the number of companies used for the calculation in the applicable country or region.
Source: Intellectual Assets Study Group.

- 147 -

8. Summary of Section 1
Discussions on value creation through the utilization of intellectual assets are summed up here,
employing several figures.
Firstly, the positioning of intellectual assets in companies is becoming higher. The characteristics
of intellectual assets differ from financial assets and tangible fixed assets in a number of respects, as
shown in Figure 2.1.63 prepared on the basis of Figure 2.1.7 shown earlier. While financial assets andtangible fixed assets are made liquid in the market through buying and selling and are easily evaluatedin terms of quantity, it is difficult, or sometimes even impossible, to do this for intellectual assets. On
the other hand, in terms of the modality of competition, intellectual assets have a critical role to play inthe shift to competition not by prices but by non-price unique factors. Furthermore, to the extent it
becomes relatively difficult to quantitatively evaluate intellectual assets, the evaluation of intellectual
assets would require the higher quality for necessary information as well as for the ability ofevaluation to evaluate such information, making equity finance more suitable than debt finance as theform of financing for companies rich in intellectual assets. Even today, in such areas as venture funds,
M&As and the revitalization of failed businesses, decisions on an amount of investment as a matter ofcourse involve the evaluation of factors related to intellectual assets. The growth of these markets canbe expected to lay the groundwork for an adequate evaluation of intellectual assets in Japan. The
current situation regarding venture funds, M&As and business revitalization is shown in Figures
2.1.64, 2.1.65 and 2.1.66, which indicate the steady but gradual preparation of a foundation for theevaluation of intellectual assets in Japan.
Figure 2.1.63 Characteristics of intellectual assets

Intellectual assets
Financial assets

Tangible fixed assets
Easy

Conferring
権利化
rightsDifficult

High

Low

Easy

DifficultLiquidity

Quantifying

Modality ofcompetition
Quality of
information forevaluation

Price competition

Individualistic (non-price) competition

Low

High

Debt

CapitalFinance
Source: METI.

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Figure 2.1.64 Trends in the balance of loans and investments ofventure capital(100 million yen)
12,000Total balance of loans and investments
10,407
10,127

10,000

8,714

8,761

Mar. 1999 （N=93）

Jun. 2000 （N=96）

8,000

6,000
Sep. 2001 （N=88）

Sep. 2002 （N=93）

Note: The questionnaire survey was carried out, targeting 177 Japanese venture capital companies, who were sorted according to being based in Japanand investing in domestic venture companies. Calculations are based on data from the 110 companies that responded.
Source: Venture Enterprise Center (2003).

Figure 2.1.65 Trends in the number of M&A cases related to Japanese corporations(cases)2,500
Foreign corporations → Japanese corporations (Out-In)
Japanese corporations → Foreign corporations (In-Out)

2,000

Between Japanese corporations (In-In)
1,500

1,000

500

Note: Excluding the M&A of financial institutions.
Source: Nomura Securities Financial & Economic Research Center (2004).

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20
03

20
02

20
01

20
00

19
99

19
98

19
97

19
96

19
95

19
94

19
93

19
92

19
91

19
90

19
89

19
88

19
87

19
86

0
(year)

Figure 2.1.66 Trends in the number of applications under the
Civil Rehabilitation Law(cases)

(%)
5.5

1,100
Number of (new)applications (left scale)
1,000

5.0

Proportion to total number ofbankruptcies (right scale)

4.5

800

4.0

700

3.5

600

3.0

500

2.5

400

2.0
20
00

20
01

20
02

900

(fiscal year)

Source: Teikoku Databank (2003).

While the evaluation and disclosure of intellectual assets, including the use of quantitative
indicators, should be pushed forward as much as possible, no matter how evaluation methods may
develop in the future, some intellectual assets will remain inseparable from companies just liketangible fixed assets. This is the difference between the “capitalization approach” and the “qualitativeevaluation approach” in the evaluation of intellectual assets. Therefore, as Figure 2.1.67 shows, it isnecessary to keep in mind that intellectual assets originally are of equal rank with tangible assets andthat they are generically termed as a process inherent in each individual company that integrates both
intellectual and tangible assets to produce enterprise value. Thus, in the evaluation of intellectual
assets, it is considered unavoidable to rest qualitative descriptions to a certain extent, as seen in
ongoing discussions in Denmark and the UK.
Figure 2.1.67 Relationship between intellectual assets, business model and corporate value

Corporate value

Business model

FinancialassetsTangible fixed
assetsInnovation
capitalHuman capitalIntellectual assets

Source: METI.

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Organizational
capitalFurthermore, companies’ efforts toward differentiation and the shift to competition not limited toprice competition by using intellectual assets alter their relations with shareholders and customers, aswell as local communities. These possibilities are depicted in Figures 2.1.68 and 2.1.69. Assuming thesimple circumstances where the “separation of ownership and control” and “popularization of stock
ownership” are in the fairly advanced stages, if a company originates only price value, its relations
with shareholders, customers and employees are no more than relations through dividend payments,
prices and wages, respectively, and are likely to be fluid. However, if a company creates value throughintellectual assets in the sense described earlier and that value is shared through the company’s
adequate disclosure, not only shareholders, customers and employees but also suppliers and local
communities will be able to participate in that company’s value creation through evaluation of its
value creation capacity, which in turn could itself become a corporate intellectual asset. This is welldemonstrated in the case of Coloplast of Denmark, cited earlier in this section, which is maintaining
communications with stakeholders by monitoring indicators developed for each stakeholder.
Figure 2.1.68 Scenario when stakeholders do not participate in value creation

Customers
Employees

Stakeholders

PricesROE

Wages

Price value

Financial assets

Tangible fixed assets

Intellectual assets

Source: METI.

Figure 2.1.69 The case of stakeholder participation in value creation
Customers
Creation and sharing
of individual valueLong term
patronage

Long term
stableinvestment

FinancialassetsTangible
fixed assets

Intellectual
assetsShareholders

Accumulation of
know-how

Suppliers

UniquehumancapitalCompanies
Employees
Closeness tocommunity
Community

Source: METI.

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In this manner, efforts to make good use of relations with stakeholders as intellectual assets have
many things in common with long-term shareholdings, long-term employment and other points
discussed in the past as characteristics of “Japanese-style management.” However, it has to be pointed
out that what is being discussed in this section is different from the erstwhile “Japanese-style
management” in the following two aspects. First, relations with stakeholders are formed in a globallycompetitive environment. In the globalization of the economy, shareholders, employees, customers
and all others subject to these relations are no longer limited to the Japanese market. So, the questionis how relations with stakeholders can be formed in this environment of globalization and competition.
Second, in the same way, the evaluation and disclosure of intellectual assets and the resulting newimage of the company are likely to start international discussion on systemic reform, as explained in
the examples of Denmark and the UK. Furthermore, as pointed out in the EU PRISM Report 2003,
this issue is not limited to the enterprise system theory but could have a much broader range to coversuch matters as the modalities of the capital market as well as national economic statistics. While theevaluation and disclosure of intellectual assets, as to be discussed later, should be following the“evolution of private-sector practices” rather than the “homogenous systematization,” it is doubtless
Japan should actively participate in international systematization discussions. In other words, notbeing content with “value creation by utilizing intellectual assets” at the level of individual company
management, it is necessary for Japan, as the state, to participate actively in discussions on corporate
law, the image of the company, information disclosure and other systems that are likely to be heldinternationally in the future, and also to launch domestic discussions on these issues in preparation for
global debate.
At the same time, it is necessary to recognize that these discussions, through the evolution of the
micro-level environment of competition, could lead to the stabilization of asset prices throughmacro-level problems discussed in Chapter 1, namely, a steady rise in productivity, creation of
employment, and adequate disclosure of corporate information.

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[Column]
Genealogy of discussions on the shift to the knowledge society
The shift to the knowledge economy/knowledge society forms part of the background of the “newvalue creation economy” discussed in this chapter. Discussions about the advent of the knowledge
economy/knowledge society goes back a long way, perhaps dating back to around the 1960s and the1970s. With this White Paper owing much to these discussions, they are outlined briefly below.
Daniel Bell (1972), in The Coming of Post-Industrial Society, argued that the “industrial society,”based on industrial and other manufacturing industries, was shifting to the “post-industrial society”
revolving around the service economy, which would be based on industries that would make the bestof information-oriented “intellectual technology” such as transportation, financial services andeducation. Putting particular emphasis on the advantage of technological knowledge, Bell also argued
that the hierarchical structure (meritocracy) of enterprises and states governed by technologicalknowledge would be maintained and strengthened. He further stressed that social values including
corporate social responsibilities should be realized through social programs and some other means.
Alvin Toffler (1980), in The Third Wave, focused his attention on the importance of informatizationand predicted that the progress in informatization would alter the structure of the existing industrial
society and help breaking down the hierarchical structures of enterprises and states. Also predicting atransformation of the mode of volume consumption of standardized products and individualization ofdemand, Toffler forecast the revival of the identity of producers and consumers (the Prosumer), where
producers would ultimately produce to respond to demand of their own.
Peter F. Drucker (1983), in Post-Capitalist Society, offered an analysis focusing on knowledge as
an input (a factor of production). Specifically, Drucker argued that presently, knowledge has become
the central resource of individuals as well as economic activities, and traditional factors of production,such as land and other natural resources, labor and capital, while they have not vanished, have become
secondary factors of production that are readily available as long as “knowledge” is on hand.
Taichi Sakaiya (1985), in Knowledge Value Revolution, focused on the changes in the modes ofvalues appreciated in society from the 1980s and argued a significant shift from the “industrial
society” to “knowledge-value society.” Specifically, Sakaiya (a) defined the value of creativeknowledge that is socially recognized by conforming to the structure of society and social subjectivity
as “knowledge value,” and argued that in the 1980s, the creation of “knowledge value” became theprincipal source of economic growth and corporate profits and the economy and society as a whole are
beginning to shift in a major way to a society where the “knowledge value” will be a predominant
worthiness (knowledge-value society); (b) this “knowledge-value society” should not be interpreted asa society with the growing tendency to turn away from material possessions or a highly
service-oriented society but as a society where designs, brand images, sophisticated technology or thecreation of specified functions, regardless of for goods or services, would be accorded much greater- 153 -

importance in the prices of goods and services.
As described in the body text, Nonaka and Takeuchi (1996) in Knowledge-Creating Company
recognize enterprises as the “arena” for the creation of knowledge and attempts to shed light on thespecific process of knowledge creation through which knowledge owned by individuals is transformed
into knowledge possessed by organizations as a whole within corporate organizations.
For your information, the Ministry of International Trade and Industry (MITI) (1971), in Trade andIndustry Policy Vision 2 (the 1970s) – Trade and Industry Policy in the 1970s [the Industrial Structure
Council Interim Recommendations (May 1971)],” argued that in the 1970s, Japan should pursue anindustrial

structurewhereindustries

with

the

high

intensityofintellectual

activities(knowledge-intensive industries) would form the core and that basic industries and other industries
supporting the core industries would enhance their knowledge intensity as promptly as possible. It also
noted the rising tendency toward pluralism in values and needs as well as among forces in economic
activities, specifically participation of consumers, community residents and other new groups (theconcept similar to “stakeholders” discussed in this white paper) in economic activities.
[Column]
An example of the utilization of intellectual capital evaluation ~ Management reform at Hitachi,
Ltd.
Hitachi, Ltd. (hereinafter referred to as Hitachi) aimed for consolidated sales of 9,400 billion yen
and net profit of 240 billion yen for the final fiscal year of its medium-term management program for
FY2000-2002, but the actual results fell short of its target, with sales at 8,191.7 billion yen and net
profit at 27.8 billion yen.78 In the wake of this result, Hitachi embarked on management reform byunderstanding and evaluating its intellectual capital. Specifically, Hitachi enlisted the service ofActcell Corporation,79 which provides support to corporate reform using the “Intellectual Capital (IC)Rating”80 method, and made a quantitative analysis81 of how much intellectual capital it possesses
utilizing the above-mentioned “IC Rating” as a specific indicator for intellectual capital.
More specifically, in the above-mentioned “IC Rating,” intellectual capital is classified into eightcomponents: “business model,” “intellectual property,” “process,” “management,” “employment,”“network,” “brand” and “customer” (Fig. 2.1.70), and a total of about 200 questions on eachcomponent are asked in interviews with stakeholders inside and outside the company (management,
employees, customers, business partners, etc.). Qualitative and quantitative data gathered in theinterviews is stratified and structured for an analysis, and then rated from the aspect of “efficiency,”“innovative capacity” and “risk.”
Hitachi carried out the “IC Rating” for over 10 business divisions in about one and a half years
from December 2002. During this period, Actcell interviewed over 500 people, with more than half ofthem being external parties such as customers and suppliers. For each division, the results of theseinterviews highlighted “what customers really want,” “what attracts customers and suppliers to- 154 -

Hitachi” and “what are the strengths to be boosted and what are the weaknesses to be overcome.” On
the basis of the evaluation results, Hitachi has been making efforts toward management reform,
including a drastic review of its strategy, establishment of new businesses and consolidation of
unprofitable businesses.
As a concrete example, efforts toward management reform at a Hitachi division are explained
below. In the “IC Rating,” the division achieved a fairly favorable performance with 68 points ininternal assessment of “speedy organizational response,” but customers gave it only 36 points. Since
there was the internal perception that the division’s response was sufficiently speedy, the medium-term
management program did not include any particular measure for improvement. But the numericalresult clearly showed it is a critical factor in boosting the customer evaluation. So, the division added“speedy organizational response” as an item in the medium-term management program, mapped out
new action plans for the integration of contact points with customers to meet their requests for speedy
responses and setting regular meetings with customers to put out feelers for customer needs, setting
and managing indicators to measure the progress in these efforts.
Hitachi has subjected itself to the corporate analysis with the use of the above-mentioned method
because it has expectations that (i) since the Hitachi group is the aggregate of companies in diversified
industry sectors, the individual and objective understanding of intellectual capital possessed by eachbusiness division would help reveal the strengths/weaknesses of each division and make it easier tocooperate cross-divisionally and to divide the roles between the administrative division (the head
office function) and business divisions; (ii) the visualization of invisible intellectual capital, such as
the morale of employees and brands, would induce each employee to become “aware” of problems thecompany and employees are faced with.
Although there are now various other concrete methods of intellectual capital evaluation82 inaddition to the “IC Rating,” future developments in Hitachi’s efforts need to be paid close attention as
an attempt to carry out management reform by utilizing the method of intellectual capital evaluation.
Figure 2.1.70 Components of “intellectual capital” (Actcell case)Intellectual capitalBusiness model・Business strategy
・Business planning・Marketability
・Feasibility
・Profitability
・Market size
・Competitiveenvironment
・Risk

Organizational
structural capitalIntellectual
properties
・Patents
・Licenses
・Copyrights
・FC
packages
・Application
developed
internallyRelational
structural capital

Human capital

Processes

Management

Employment

Network

Brand

Customers

・Organizational
structure
・Processes
・Documentation
・Regulation
・Standardization
・Division of
authority
・Knowledge
database

・Management
skills・Qualification
・Experience
・Competency
・Morale・Operational
skills・Qualification
・Experience
・Competency
・Morale・Customer
exploitation
・Merchandising・Logistics,
manufacturing
・Recruitment
・Material
procurement
・Financing
・Partner
exploitation

・Recognition
・Customer
appeal・Degree ofcontribution
to customer
exploitation
・Degree ofcontribution
to partner
exploitation

・Business
infrastructure
・Partnership・Information
provision
capability
・Valuecreation
capability

Source: Actcell corporate brochure.

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[Column]
A Case study of CSR commitment ~ Environmental management by Canon
Canon Inc., which has office equipment, cameras and optical equipment as its major businessareas, is known not only for its economic performance but also for its excellent track record of CSR.
Canon is included in the main SRI-oriented global stock indices of the FTSE 4 Good Index, Ethibel
Sustainability Index and Dow Jones Sustainability Index. There are only five Japanese companies,
other than Canon, that are included in all the three indexes (as of the end of 2003). In particular,
Canon has been highly rated for environmentally-friendly management. Canon ranked first in the
manufacturing sector in the seventh Environmental Management Survey ranking of the Nihon Keizai
Shimbun, while it shared the first slot in the field of environment protection as well as receiving theEnvironmental Protection Award in the thirteenth Corporate Social Contribution Survey of the Asahi
Shimbun. For financial indicators, meanwhile, the company had the third straight year of increased
sales and increased profits in 2002, actually record sales and profits, despite the overall economic
stagnation in Japan (Fig. 2.1.71). Thus, Canon has been able to excel in both financial andenvironmental performances.

(100 million yen)

Figure 2.1.71 Trends in Canon's ordinary income and sales(100 million yen)

20,0003,000

18,000

Sales (left scale)

16,000Ordinary income (right scale)

2,500

14,0002,000

12,00010,000

1,500

8,000
1,000

6,000
4,000

500

2,000
0

0
1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

(year)

Source: CANON Sustainability Report 2003 (Canon), Canon web site (http://canon.jp).

Since 1988, The corporate philosophy of Canon has been “kyosei: ‘All people, regardless of race,
religion or culture, harmoniously living and working together into the future.’” Underlying its
excellent environmental management is the company’s idea of “maximization of resources
productivity” aimed to achieve corporate competitiveness and considerations for the environment
simultaneously. This is designed to minimize consumption of all kinds of resources and raise the- 156 -

quality of products and services through reuse and recycling. The idea is that being conscious of theenvironment is not an extra cost but rather closer to the reduction of cost.
Specifically, in the “2010 Vision,” Canon sets the goal of at least doubling the ratio of sales tolifecycle emissions of carbon dioxide (CO2) by 2010 from the 2000 level (this indicator is called the“Factor 2”). Lifecycle emissions of CO2 is the CO2 equivalent of environmental burdens a productimposes throughout the chain of materials procurement, research and development, production, use
and consumption, disposal and recycling and distribution. It is the approach to look at environmental
burdens in an integrated manner covering not only those arising from inside the company but also
those that could be generated in business activities at large. Figure 2.1.72 shows the effects ofenvironmental technology development applying lifecycle analysis, using digital multifunctional
equipment as an example.

kg-CO2
1,200

1,000

Figure 2.1.72 Examples of Canon product improvement seen from its lifecycle(digital multifunctional equipment)
1156

Conventional models

New models

800

600

400

536
343

346

200
69

55
1.4

1.4

0
-93

-200
Production of raw
materials

Product
manufacturing

Physical distribution Use / consumption-75

Disposal / recycling

Source: CANON Sustainability Report 2003 (Canon).

Furthermore, Canon in 2001 started testing a new method of consolidated performance evaluation
by integrating its financial performance with its environmental performance. Of Canon’s consolidated
performance evaluation, 50 percent is assigned to the financial evaluation and the other 50 percent to
the functional evaluation (development of new products, market shares, development of intellectual
property, environmental considerations, etc.), with the environmental evaluation accounting for about
10 percent of the total. Canon says it plans to continue to fine-tune its method to evaluate
environmental management and to raise the ratio of the environmental evaluation in its earnings
performance evaluation.

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[Column]
Enterprise risk management and enterprise value ~The Case of DuPont
E.I. du Pont de Nemours & Co. (DuPont) of the US reported sales of 24,006 million dollars in
FY2002, about half of them from overseas. The scope of business is broad and diverse, ranging fromelectronics, transportation, housing/construction, telecommunications and agriculture to nutritious
food, safety/security, apparel and textiles. Its start up as an explosives maker is said to have fostered
the idea of risk management in its corporate culture.
In 1995, DuPont introduced ERM, positioning it as a strategic means of increasing profit potential
and smoothing profit fluctuations.
Reflecting on the fact that existing risk management methods were not applicable companywide
for a variety of purposes at the company with diversified operations and, as such, it was unable toprioritize individual risk indicators for corporate management, DuPont recognized the need tointegrate risk management, business strategy and operations. Under this acknowledgement, DuPont
adopted the Earning at Risk (EaR) method as its corporate “common language.” EaR represents thelargest potential loss of earnings to be caused by changes in market factors (within a certain
confidence interval). EaR makes it possible to quantify causes of risks confronting a company (riskexposure), for respective risk factors, such as interest rates, currencies and commercial value. EaR is
also said to have another advantage of being able to enhance in-house communications about risk
management because it can be broken down into EaR for each risk factor such as currencies and eachbusiness unit line.

- 158 -