Rotman, the Magazine of the Rotman School of Management.

The Future of Capital
From the Dean: Roger Martin

BYTHE DAWN OF THE 21STCENTURY, a revolutionary change had taken hold in the realm of value creation: physical and financial assets were no longer the key factors of sustainable competitive advantage. Instead, leading companies like Dell, GE and Procter & Gamble depended on superior human and knowledge assets for their competitive edge.

The key advantage conferred by such firm-specific ‘organizational capital’ is the fact that these resources are mainly tacit: they are difficult to codify or directly transfer to other organizations. As the knowledge economy has expanded, so too has our definition of capital, to the point where the most valuable assets of leading innovation-based firms have no actual physical presence, nor a home on a traditional balance sheet.

These ‘intangible’ assets – which include reputation, brand equity, sustainability, security and customer relationships – are receiving increased attention, and for good reason: according to a study by the Brookings Institution, they now comprise between 60 and 80 per cent of S&P 500 companies’ market value. In some firms, the gap between book value and market value is modest, but in others it can be significant, leaving investors guessing as to how much this ‘unseen wealth’ is worth.

Financial reporting systems have failed to keep up with the changing nature of value creation, leaving us with the equivalent of an abacus for measuring the actual value of corporate assets (hence our cover image.) In this issue of Rotman, we aim to expand your understanding of today’s most valuable forms of capital and how they contribute to the bottom line.

I kick things off on page 4 with Capital vs. Talent: The Battle Rages On, a follow-up to my 2003 Harvard Business Review article in which I revisit the relations between talent and capital as they continue to battle for the proceeds from the knowledge economy.

The information deficiencies surrounding intangibles can cause serious share-price distortions and misallocations of corporate resources that hinder performance. In our Thought Leader Interview on page 10, Baruch Lev of NYU’s Stern School of Business talks about how the failure to measure intangibles can actually destroy value. ...

Download Rotman Magazine, Fall 2008

Pdf format, 9.9MB, 124Pages.

FEATURES
4 Capital vs. Talent: The Battle Rages On by Roger Martin
Capital is no longer the undisputed ‘scarce resource’ of the economy, and accordingly, its power over talent has dramatically waned.

14 Financial Performance Measurement for the 21st Century by Lowell Bryan and Claudia Joyce
The time is ripe for a new approach to performance measurement that addresses more than returns on financial capital.

20 The Future of Canadian Capital Markets Interview by Karen Christensen
Rotman Finance professor and Capital Markets Institute Director Paul Halpern discusses effective regulation and how agency costs and dual-class shares affect capital markets.

26 Too Hot to Handle? How to Manage Relationship Conflict by Amy Edmondson and Diana McLean Smith
Rather than eliminating relationship conflict, teams can learn how to withstand it – and flourish.

32 The Perceptual Effects of Financial Statements by Dilip Soman and Rita Yoo
The evaluation of financial statements is fraught with emotions, heuristics and physiological responses.

38 The Neglected Investment: Social Capital in the Workplace Interview by Karen Christensen
Economist John Helliwell talks about what people value most and why social and economic relations are strikingly local in nature.

44 Value Conversion of Intangible Assets by Verna Allee
Mastering modern value creation demands an appreciation for the pivotal roles of intangible capital and network dynamics.

48 Making Talent a Strategic Priority by Matthew Guthridge, Asmus Komm and Emily Lawson
Despite good intentions, most leaders are unprepared for the challenge of finding, motivating, and retaining capable workers.

54 The Challenges of Building Reputational Capital by Rebecca Reuber and Eileen Fischer
When considering how to enhance its reputation, a firm must be sensitive to perceptual differences between stakeholders.

60 The Brand Manifold: Viewing Brands in Multiple Dimensions by Pierre Berthon, Morris Holbrook, James Hulbert and Leyland Pitt
Abrand’s impact varies according to who is evaluating it, and in what context.

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The Rotman School of Management is the University of Toronto's graduate-level business school. It has recently jumped significantly in international prominence under the leadership of its dean, Roger Martin.

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