RSP: Intangible Capital: Culture of Innovation and its Impact on the Cash Flow Multiple

Copyright © 2018, James R. Gregory. This article is published under a Creative Commons BY-NC license. Permission is granted to copy and distribute this article for non-commercial purposes, in both printed and electronic formats A culture of innovation is a desirable attribute to be associated with any company. Such an attribute helps to position the company in the mind of the consumer, whether that person is purchasing a product or acquiring shares of stock ownership in the company. Apple Inc. comes to mind as an example of a company that has nurtured their image to create a culture of innovation that applies to both its corporate and product brands. The financial result is that both Apple’s products and stock sell for a premium price over what would be expected of a generically branded company with the same product line. That premium effect is described as intangible capital. In this research, culture of innovation (COI) is defined as the perception of a company that prioritizes the advancement of new ideas that create value across all operations. The word perception in this context is important because it is the views held by an audience of engaged but impartial observers of companies. The quantitative perceptions held by these impartial observers may not be the actual innovation that exists in these companies. However, the perceptions, when aggregated across many interviews, offer a consistent snapshot of companies from the public perspective. When examined longitudinally, they become a reliable tool for evaluating the effectiveness of business strategy and the resulting financial impact on an outcome measure known as the cash flow multiple (CFM). The cash flow multiple is a company-wide calculation of financial performance, which is the measure that examines the premium that can potentially be achieved by improving operations or perceptions of the company. The CFM is determined by dividing the stock price per share by the cash flow per share, which provides a calculation that reflects the value of both the cash flow and market capitalization. The CFM also has the advantage of being able to project expected returns into the future, which will help a company to evaluate the return on investment (ROI) over the continuum of time. This study utilizes the CoreBrand Index® (CBI), which is a quantitative research survey that examines intangible attributes of 800 companies and fielded consistently every year since 1990. In 2016, the survey tested a new intangible attribute culture of innovation added to the study amongst a subset of 160 companies. The primary purpose of this new research was to examine the role that a culture of innovation plays in predicting whether a firm might have a higher or lower cash flow multiple. This research is a potentially new gateway by which all intangible assets can be measured, valued, and managed, which is ultimately leading to a theory of intangible capital. This research paper reaffirms and expands a proven quantitative research method to measure, value, and manage intangible assets, ultimately influencing the financial impact on the corporation’s cash flow multiple.