21 Group on Disclosure ofTechnology-based Intangible Assets
This report aims to provide basic materials for formulating the guidelines concerning disclosure of
information on intellectual property, which has been sought in the Intellectual Property Policy Outline, bystudying the items that should be disclosed and investigating and analyzing the best practices in the UnitedStates and Japan. In addition, a pilot model of an intellectual property report was created, recommending
autonomous disclosure of information on technology-based intangible assets, securing the formulation of
intellectual property strategy by companies, and serving as one type of reference material for determining
investment in the market.
Through such disclosure of information, investors would be able to predict the future performances of acompany without depending solely on its past performances, thereby achieving a more legitimate stock price.

SummaryThis report aims to encourage companies tointroduce intellectual property into their
management strategies as a source ofcompetitiveness in line with the purport of theIntellectual Property Policy Outline, and to achieve
due appreciation of corporate intellectual
property-related activities in the market throughthe effective disclosure of information, thereby
enabling companies to increase their profitability
and corporate value. This report recommends
preparation of an “intellectual property report” as apart of efforts to accomplish those purposes.
Chapter I “Background of the Disclosure ofInformation on Intellectual Property” states the
background to the necessity in Japan to disclose
information on any intellectual property focusing ontechnology-based intangible assets. Taking a look at
the current competitive environment surrounding
Japanese companies, a new model for growth that issuited to the creation of high-value added intangible
assets has been sought as a replacement for an
economy that focuses on the conventional systemoriented toward processing, assembly and mass
production (Intellectual property Policy Outline[2002]).
Intellectual
properties,
especially
technology-based intangible assets that are specificresults of corporate research and development, areexpected to play the most important role in thismodel for growth.
Japanesecompanies
have
lost
their
international competitiveness in manufacturing
products that have become commodity or bulk
items,
andtheirinternational
industrial
competitiveness is now the subject of strong
concern. On the other hand, some of them aredemonstrating their international competitivenessin the fields of high-value added products andservices. However, generally speaking, there aremany problems to overcome in terms of Japanesecompanies’ intellectual property strategies. For
example, Japanese companies do not necessarily

IIP Bulletin 2003

have strategic views—technological development
while circumventing other companies’ patents andobtainment of patents for the results of thetechnological development. In addition, they are notconsidered to be working on the management andexploitation of patents after obtainment as
strategically as European and U.S. companies. Afterall, investment in research and development is notalways associated with profitability and corporate
value.
The Intellectual Property Policy Outline
presents a plan to design various guidelines basedon the actual corporate conditions for the purposeof maximizing profitability and corporate value by
positioning intellectual property as a source ofcompetitiveness in management strategy andintroducing it in business activities and for the
purpose of designing a strategic program forstrategic, global obtainment and management ofintellectual property. In the above outline, theguidelines concerning disclosure of information on
intellectual property are included.
“Intellectual Property Policy Outline” (abstract)
Chapter 3 Specific Action Plan
3. Promotion of Exploitation of Intellectual
Property(2) Strategic exploitation of intellectual property
by companies
2) Disclosure of information on intellectual
property
The GOJ will design guidelines concerning
disclosure of information on intellectual
property by the end of FY 2003 for the purposeof due appreciation of corporate intellectual
property-related activities and increase in profit
and corporate value. It will also consider
introducing intellectual property reports (TheMinistry of Economy, Trade and Industry).
This aims at a due appreciation of corporate
intellectual property-related activities in the market● 168 ●

through effective disclosure of information and anincrease in corporate profitability and value.
Chapter II “Global Trend of Regulation andCorporate Practices” reviews regulations on
disclosure of technology-based intangible assets,
the Regulation FD that evoked discussions on
disclosure of not only technology-based intangible
assets but also other intangible assets, andcorporate trends, with a focus on the United States,
which has been promoting the pro-patent policy.
In the United States, it has also been pointed
out that profit to be gained by companies that
actively invest in research and development tends
to be under-evaluated. On the other hand, theSecurities
Exchange
Committee(SEC)
recommends the analysis of future events (potential
future events) and provides analysis for risks in the“Management’s Discussion and Analysis: MD&A,”
which consists of the part of Form 10-K, requestedby the committee to be submitted by companies
from the standpoint of sound market operations.
However, even in the United States, companies
have not been active in such disclosure to the
public from the very beginning. Many companies
had disclosed risk analysis since it is “provided,”
but they hardly had disclosed future events in fearof a risk of being sued in the case that described
events have not happened, despite there is the safe
harbor rule.
Regulation FD (Fair Disclosure) triggeredchanges in the attitudes of U.S. companies. This is
the “regulation that discourages selective
disclosure of material nonpublic information,” andis explained in the “Selective Disclosure andInsider Trading: Release Nos. 33-7881, 34-43154,
IC-24599.” The regulation requests that when one
intentionally or negligently discloses material
nonpublic information to certain enumerated
persons, it must promptly make public disclosure of
the information. Due to this request, many
companies abolished the informal provision of
information and made clear their policy of
disclosure/nondisclosure, and thus have come todisclose more future information to the public. The
Regulation FD is not applied to Japanese companies,
but it should be recognized that the regulation has
already exerted its influence on the Japanese capital
market.
This chapter also states that the Financial
Accounting Standards Board (FASB) and the
National Investor Relations Institute (NIRI) havebeen studying measures for promoting disclosure of
non-financial information (non-financial factors that
may bring value to companies) in close contact witheach other. They have been conducting the study
from the viewpoint of promoting communications
with investors through disclosure of non-financial,descriptive information.
Chapter III “Investors’ Views” states views ontechnology-based intangible assets of institutional

investors and analysts who use information tovaluate companies.
Investors valuate the value of investment instocks to weigh the decision to invest. In order tovaluate investment value, they need to arrange
qualitative information in one numeric value.
Investors convert disclosed information, etc. into
numeric information and valuate whether or not thecurrent corporate value is fair, on the basis of acorporate valuation model. Although various
corporate valuation models are used, the discountvaluation model serves as a basis. In the model, afuture cash flow forecast is made and corporate
value is quantitatively found based on the forecast.
Ordinarily, the valuation of company starts
with finding a trend value based on a specificcompany’s performance. The trend value isanalyzed, and the results are used for future
estimate. “Using for future estimate” means, forexample, setting parameters for such indicators as
sales growth rate and ratio of profit to sales. If a
company gets excess profits, it is necessary toconsider by what the profits are produced and how
long they will continue to exist. Thereby, the way ofsetting parameters will change.
The existence of strong technology-based
intangible assets is recognized as a cause of
production of excess profits. In other words, for thethesis “how information on technology-based
intangible assets should be associated with aninvestmentvaluationmodel,”
investors’
information needs exist in the following points:
what technology produces excess profits; how longthe profits will continue to exist; how the
profitability of the technology will change when a
new technology is created in the future; and how
much influence the new technology will have. In
this sense, investors should highly appreciate
opportunities to obtain excess profits based ontechnical capability.
From the standpoint of the duration of excess
profits, it is necessary to consider when the term ofa patent expires and when a company, which hastechnical capability that serves as management
know-how but is not patent-protected, is caught up
with by others and returns to being an averagecompany. In short, the continuity of the parameterof profit rate is important, and when and at whatstage the profit rate should be returned to an
ordinary rate is also important in terms of valuation.
However, since the disclosure of information on
profit rate and continuity of profit rate is insufficientat present, it is hard to utilize the investmentvaluation model effectively. If it is difficult forcompanies to disclose information directly on thesepoints, the disclosure of even peripheral
information is desired.
What is important in disclosure is to disclosecompanies’ value driver of which the managers areaware. For investors, there is no point in focusing● 169 ●IIP Bulletin 2003

on matters of which the managers are not awareand following up on such matters. Investors hopefor the appropriate disclosure of information ontechnology-based intangible assets of which
managers can be aware for the purpose ofincreasing their own profitability and corporate
value and which can be introduced in their own
corporate valuation model.
Chapter IV “Companies’ Views” describes
corporate research and development as well as
strategies for the obtainment and exploitation of
intellectual property in the form of case study. In
addition, the chapter describes the outline ofinvestor relations (IR) necessary for carrying
information on such activities to the market to gain
due valuation in the market, and cites an IT
company as an example of companies’ view on IR.
Major problems that companies face in relation
to research and development and intellectual
property are the diversification of research anddevelopment and the selection and concentration of
intellectual property. Among these problems, thediversification of research and development is a big
problem in intellectual property management. In
other words, along with the multilateralization fromthe 1970s, companies have been shifting fromself-contained research and development to joint
development and research in cooperation with third
parties (domestic and foreign companies,
universities, research institutes, etc.), which isunavoidable for dealing with increased investment
in research and development and the necessity of
speeding up. In addition, if the technology thatcompanies require has already been completed by athird party, they introduce the completed
technology as it is. Such technology is sometimes
used at the intermediate stage of the production
process. While such situation brings a big
advantage in corporate growth, it causes legal
problems arising from mutual exchanges oftechnology with third parties, a fusion of in-house
technology, an outflow of technology to local
employees due to globalization, and other problems.
For the concentration and selection of
intellectual property, the form of exploitation must
be considered by type of rights. For example, it isappropriate for a company to establish patents interms of rights for the technology that it isexploiting, to carry out licensing, form a business
partnership or create a joint venture in cooperation
with exclusive partners in terms of rights in a
totally new product field in which it cannot cultivatea market by itself, and to assign or dispose of rightsof which no potential for in-house exploitation canbe found.
While overcoming these problems, companies
are promoting research and development strategies
and strategies for the obtainment and exploitationof intellectual property and are also running
management. However, IR is necessary to give

IIP Bulletin 2003

these corporate activities recognition in the market
and due appreciation. IR includes both a disclosure
required by the system and a disclosure thatcompanies autonomously conduct, and it is anactivity consisting of three elements—corporate
finance, marketing (in the capital market) andcommunication (with investors). Through such IR,
companies can be valuated in consideration of not
only immediate financial performance but also theirpotential in the market, including descriptions of
their strategies and systematic activities. However,
the transmission of information by IR carries
various risks. In order to reduce these risks, thereis the safe harbor rule, i.e., writing cautionary
statements.
Especially,
informationontechnology-based intangible assets involves large
uncertainty, so the safe harbor rule is necessary.
For example, an advanced composite technology
company indicates the safe harbor rule on the top
page of its Web site. Information on future
prospects involves risks and uncertain factors. The
factors mean “such figures are found on certain
conditions”; for example, performance changes if
economic information or consumption trendchanges or if the exchange rate changes.
As a counterpart of the safe harbor rule, thereis the disclosure policy. This is the corporate policyon the disclosure of information: “who will
responsibly disclose certain contents based on
certain policy.” Even now, some companies clearlystate their policy that material information thatinvolves confidential matters will not be disclosed
in detail. In other words, they do not disclose all
information but disclose information with a notethat they “withhold the disclosure of details that areimportant in terms of their business and strategy.”
In particular, pharmaceutical companies clearlystate their policy of disclosure both in English andJapanese.
In IR activities, there is a relatively clear
distinction between what corporate intellectual
property divisions can disclose and what theycannot. For qualitative information, the outline canbe disclosed in principle. However, its individual,
specific details cannot be disclosed. Even so saying,
the disclosure of such details is possible for new
products, new technology and results on thecondition that intellectual property rights are
secured. For example, if a condition such as having
filed an application for patent is met, it isconsidered possible to disclose information on
individual, specific technology.
As for quantitative information, it is possible todisclose public information and information that is
generally not assessable but is objectively verifiable(number of applications filed within a certain
period). Other than these, the approximate number
and total number can be disclosed but individual,
specific figures cannot.
Moreover, companies, as issuers, are● 170 ●

concerned that their information will come tomislead investors despite their lack of intention to
do so and that the information will become invalid
after a few months. Even when there is a safe
harbor rule, companies are in danger of afterwards
being considered to have betrayed institutional
investors or shareholders. Companies need to deal
with these problems through timely correction byIR.
Chapter V states what matters institutional
investors consider important in terms of
information on technology-based intangible assets
at present and whether they introduce such mattersin their corporate valuation models. For thispurpose, the study group conducted a questionnaire
survey to all institutional investors in Japan(excluding those that do not deal with shares).
Consequently, it has been found that institutional
investors attach importance to various types of
information on technology-based intangible assetsof companies and are utilizing such information in
the present circumstances.
The questionnaire includes 64 questions
concerning corporate research and development
and intellectual property strategy. These questions
was allocated to groups, such as “market advantageof technology” and “strategy and organization that
support technology,” for convenience, and aquestionnaire was created in which check marks
were to be placed according to the degree ofimportance attached by investors in deciding
investment. In addition to questions about
technology-based intangible assets, points to which
attention should be paid in viewing the overall
industry and such points for the overall company
were addressed as open questions.
Incidentally, individual questions were selectedfrom matters that are disclosed in the annual
reports or materials for IR explanatory meeting ofJapanese/U.S. companies (especially Japanesecompanies) and matters of which importance wasconfirmed through questionnaire surveys toanalysts which were conducted in Japan or foreigncountries. In addition to the questionnaire, thestudy group investigated the annual reports ofJapanese/U.S. companies that were in Fortune’s top
50 list for sales. In the questionnaire, the technicalarea was classified into an advanced simplicial
technology field (biotechnology, pharmaceutical,
specialty chemical, etc.), advanced composite
technology field (information technology, electronic,
fuel cell, etc.) and matured technology field.
Respondents were then asked to answer questions
with the specific image of a company in charge foreach technology classification.
As a result of the survey, it was found thatspecial importance was attached to qualitative
information that indicates relationships withstrategy and organization among information ontechnology-based intangible assets. This result hasrevealed a fact that is different from the generaltrend, which is that institutional investors arerequesting the disclosure of the appraisal value oftechnology-based intangible assets that wascalculated by an objective method. Needless to say,institutional investors give relative close focus to
the fact that companies internally carry out
research and development as well as patent
management by a counting-based method. For
information on strategy, institutional investors do
not request information on trade secrets, and even
if companies disclosed detailed information, they
had difficulty in introducing such information in
their corporate valuation models. For informationon the organization system, institutional investors
highly value having established guidelines (as theirinternal rules) for preventing the outflow of trade
secrets and technology or those for obtaining andmanaging intellectual property; and they also value
the operation of these rules. Incidentally, counted
matters are slightly different depending on theinstitutional investor’s investment period and thetype of technology, but matters to which
institutional investors generally attach importancebecame clear as indicated below.
・ Manager’s proper analysis of own company’s
advantage and duration in terms of technologicaldevelopment
・ Understanding potential customers and properly
analyzing market size in terms of development of
new technology and products
・ Ratio of the sales of a new product in the totalsales
・ Being able to understand the use of newtechnology and products and analyzing the scaleand growth potential of the customer market
・ Establishing guidelines for preventing theoutflow of technology and trade secrets and thosefor obtaining and managing intellectual property,
as internal rules
・ Link between corporate strategy and researchand development/technological development
・ Organization that manages and strengthens
intellectual property in the core business・ Consistently analyzing research and development,
strategy and domain
・ Outline of intellectual property portfolio
・ Distinctiveness of the core technology
・ Period of accumulation of unique technology inthe field in which the company has competitive
advantage・ Strategic obtainment of patents, including
peripheral patents
・ Reflecting advanced know-how and technology
on product price・ Appropriately managing technology transfer for
globalization
・ Clearly demonstrating vision and strategy
concerning research and development as well as
technology● 171 ●IIP Bulletin 2003

・ Income from patent rights and its change
・ Degree of dependence of income on thedevelopment of new products
Chapter VI studied the general idea of costbenefits from disclosure (risk of loss fromdisclosure and benefits the company is expected toenjoy) and cost benefits specifically from disclosureof information on technology-based intangible
assets, in order to discuss whether it is appropriate
to
make
all
companies
disclosetheabove-mentioned items without exception.
Generally, benefits that companies enjoy fromdisclosure are as follows.
c Effect of risk management
Through continuous communication with thecapital market, companies can achieve the effect ofrisk management, and can prevent erratic
fluctuation in the share price due to a rumor, etc. toa significant degree.
d In relation to suspicion of moral hazard
Disclosure ensures that managers do notcreate any moral hazard. If there is insufficient
information, companies may be valuated as being at
higher risk than they really are.
e In relation to a reduction of the information
gap and uncertainties
Divergence between market’s view andmanagers’ view will lessen, and corporate value is
expected to become appropriate in the long andmedium terms.
f Governance structure that increases corporate
performance
Companies can introduce a mechanism forcorporate governance that will increase corporate
performance. A checks and balances system in themarket is effective in establishing a governancestructure that contains discipline and ideas in themarket.
On the other hand, the following points are
expected in terms of the whole economy.
c In relation to appropriate allocation of
resources
In the market, resources are allocated througha decision to invest based on corporate information.
If information is not sufficiently disclosed, there is
the risk that resources will not be allocated topromising fields but will be allocated to fields thatare not necessarily promising.
d In relation to the revitalization of economy
Funds will be collected into the market and theeconomy will thus be revitalized. If resources areappropriately allocated to promising fields,companies in such fields will exert their potential,
thereby the economy will be revitalized. In addition,
this will induce sound competition and is expected
to bring about continuous corporate innovation.
On the other hand, compulsory disclosure canbring the following losses in addition to costs for
preparing information.
c Loss in terms of competition

IIP Bulletin 2003

In a questionnaire survey that was conductedto companies out of Japan, it was confirmed that if
disclosure were made compulsory, there would be ahigh risk of loss in terms of competition. These
cost benefits may be considerably obvious in
relation to information on matters that bringcompetitive advantage to companies, i.e.,
information on technology-based intangible assets.
Chapter VII describes matters to which
institutional investors attach importance when
valuating companies, in the order of businessarchitecture, while taking into consideration thesecost benefits from disclosure. This study group is
proposing it as a form of “intellectual property
report” and recommending its preparation.

● 172 ●

(Senior Researcher: Seiichi Ban)

● 173 ●IIP Bulletin 2003