The rise of the intangible

Half a century ago a company’s value was overwhelmingly derived from its physical capital – the assembly lines and buildings it owned, and the products it made. Today’s firms are built on intangible capital, with assets in the form of software algorithms, brand, customer data, business plans, engineering specifications, product formulas and organisational capital accounting for as much as 90% of the S&P 500’s total assets – up from just 17% in 1975. 1
https://www.wsj.com/articles/accountings-21st-century-challenge-how-to-value-intangible-assets-1458605126
2
https://www.visualcapitalist.com/the-soaring-value-of-intangible-assets-in-the-sp-500/

Privileged access and secrecy are inherent to the value of many of these assets, making them by definition “trade secrets”. Whether or not firms identify them as such, these assets are vulnerable to employee leaks, competitor theft and cyberattacks – risks that continue to grow as more business is conducted online and across borders, and as more employees work remotely. Yearly, the cost of trade secret theft reaches up to USD 1.7trn. 3
https://www.g4s.com/en-us/academy/our-views/articles/business-espionage

The value of intangible assets in the S&P 500

The importance of proprietary information

‘Proprietary information is essential to my organisation’s value’ (% of responses)

To better understand the extent to which firms identify intangible assets as trade secrets, and seek to protect them accordingly, The Economist Intelligence Unit (EIU) conducted a survey, supported by CMS, of more than 300 corporate executives based in six countries. Our research finds that the risk to high-value intangible assets is a growing concern which warrants proactive protective measures: firms widely recognise that proprietary information is essential to their organisation’s value, and many have already taken steps to protect it, primarily through targeted cybersecurity measures and increasingly through employee regulation. A majority of respondents report that a breach to trade secrets would have significant financial consequences for their organisations.

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What is a trade secret?

A trade secret is a piece of information that is valuable to an enterprise, gives that enterprise a competitive advantage and is treated as confidential. In order to be protected as a trade secret, the piece of information must meet the following criteria:

  • Known to only a limited group of people
  • Provides the owner enterprise with an economic or competitive advantage
  • Subject to sufficient protective measures to keep it secret
  • Subject to sufficient investment to develop the information

According to our survey, the three most valuable types of proprietary information held by organisations are customer databases (42%), product technology (40%), and research and development (R&D) information (23%).

Source: World Intellectual Property Organization (2020).

Consequences of misappropriation

In your opinion, what would be the consequences of trade secret theft to your organisation? (% of responses)

Corporate executives expect the risk of trade secret theft to rise in the next five years as firms increasingly store and share sensitive information across distributed workforces. The covid-19 pandemic and associated changes to business continuity – from redundancies to remote working – are further driving organisations towards trade secret protection. Companies have seen an uptick in unauthorised disclosure of company confidential information by employees, resulting in lost business, reduced competitive advantage and reputational damage. This increased threat has put trade secret protection on the agendas of both legal departments and C-suite decision-makers. Indeed, our survey finds that trade secret protection is seen as a top priority in the upmost reaches of business decisionmaking, with more than a third of board directors and C-suite respondents deeming it an “essential priority”.