Intellectual property (IP) is a key element in business success, yet directors and their boards often give it limited attention.
What are the risks and rewards associated with IP? Why should an organisation have an IP strategy at all?
No matter the size of your business, if you are a director you have certain responsibilities that come with that role.It is not just about understanding the finances of a business, as a director you need to fully understand and engage withthe whole business strategy that underpins the direction the business is taking.
Value in a modern business relates more to intangible assets than building, plant and product.While the industrial economy saw an emphasis on control of raw materials, products and markets the modern economy focuses on the control of ideas, brands, innovation and markets. Whether brand names, trade secrets, or patents for inventions, intangible assets now make up major assets of a modern business. Having a clear strategy around IP is critical to a business and must be integrally linked with the business strategy.
Surveys have been undertaken which highlight a disturbing gap between the way that IP is seen, and the way that it is managed in practice.
One survey of venture capitalists conducted by Howrey Europe found that over 90% of respondents believed IP:
- gave business a competitive advantage
- improved profits of a business
- was important to protecting a market
- was an important factor in assessing investment.
Venture capitalists clearly see IP as a key business asset. Despite these findings, a report by a global legal services organisation found that only half of the major European businesses surveyed had a documented IP strategy for their business. Worse still, less than 29% had a strategy document signed off by the board. Interestingly, the same survey found that businesses with a documented strategy rated themselves as more successful than those without!
Similar surveys conducted in New Zealand reveal a similar gap. While not surprising, this is of concern if a business is looking to drive growth through better use or leverage of its IP assets.
The surveys suggest that lack of board-level commitment to IP management is attributable to a lack of understanding of IP and its benefits. Often IP is regarded as a cost or goodwill item rather than as a revenue generator. It is also often seen as a specialist legal issue rather than a broader business issue. This thinking needs to change.
Directors have a fiduciary duty to oversee IP asset management. "Corporate Governance in New Zealand Principles and Guidelines" require a continuous disclosure regime. Full and meaningful information must be disclosed so shareholders are kept well-informed about an organisation's affairs.
Annual reporting is also required on risk identification and management. Disclosure should include information about key assets and their value, material expenses, and liabilities, such as for IP infringement.
In the current governance climate there is a greater possibility of directors personally being held liable for company losses incurred through negligence or bad faith.
Omitting IP from strategic consideration may expose the company to liability and lessen shareholder value. It may also expose directors to personal liability. A sound IP strategy supported by an IP policy outlining how IP matters are to be handled, can minimise risks and help compliance with the disclosure requirements.
Boards should not wait for a crisis to highlight the importance of IP to the organisation they govern.
There is no magic one size fits all IP policy. An organisation needs a flexible policy which reflects the nature of its business, and is informed by its business strategy. However, any IP policy does need to address some of the following common but critical areas.
What have we got?
Carrying out an annual IP audit will tell you what IP you own. This may cover brands, patents, trade secrets, copyright, contracts including licences, business information such as customer and marketing lists, and financial information. The audit also helps the asset valuation process.
How do we capture it?
IP rights are easily lost or their value decreased if not carefully handled. For example, rights can be lost through publication or the inadvertent transfer of ownership interests to third parties. Balanced against this are the continuing disclosure obligations and the duty to preserve asset values. An IP policy should address these issues by identifying the process for capturing IP and monitoring its release.
Who is responsible?
Your IP policy should identify the person or team that:
- captures IP for your organisation, seeks and maintains protection and makes enforcement decisions;
- monitors agreements impacting on IP which can include agreements like employment agreements, research contracts, distribution agreements, confidentiality agreements, licenses and material transfer agreements;
- monitors legal and regulatory changes impacting on IP policy and business strategy; and
- checks for infringement of third party IP rights.
What are we doing with the IP?
An IP policy should match your current business strategy. IP is only a tool to assist businesses achieve their commercial objectives. It is easy to collect a portfolio of IP rights, but these can come with significant costs. A regular audit can help to keep the portfolio strong, current and maximise the value of your IP spend.
If you are not using it can you create value for example by selling or licensing that asset? Or should the rights be allowed to lapse? If you don't have the rights you need, how can you buy them?
You should also address how your marketing and research teams are aligning IP policy with the business strategy.
A regular review of IP databases can provide some valuable information. You may be able to gain insights on who your major competitors are and what they are doing, ideas about product development and how to minimise infringement risks. You may also be able to identify potential business partners or acquisition targets.
The value of IP for a modern business is undisputed. IP strategy can no longer be left solely to management. IP needs to be given a higher profile in board discussions because the risks and rewards are too important to ignore. IP rights need to be treated strategically in line with the business strategy and vision. Most importantly, any IP strategy needs the full understanding and support of the board to succeed.
An edited version of this article was published in Issue 702 of NZRetail Magazine.