The emergence of IP rich companies is the new corporate governance challenge. This is because IP is largely invisible, not only in the financial accounts, but also more generally in corporate law theory and the legal framework. The research in my new book Intellectual Property, Finance and Corporate Governance demonstrates why companies need to communicate more about how they manage corporate intellectual property (IP) rights portfolios and their strategy for delivering shareholder value. Depending on their business model and corporate objectives, companies add value via their corporate IP assets in different ways to achieve their goals. In the modern era, all companies, large and small, have intellectual property (IP) rights, sometimes across multiple jurisdictions. They are corporate IP owners. At the same time, the shift to intangibles and IP assets as the major driver of value in business is clear and unstoppable. Since the Global Financial Crisis ten years ago there has been a renewed interest in our current understanding of capitalism. As a result, shareholders, business people, stakeholders and the public, seek more relevant, accurate information about IP-dependent business models and their impact on commercial value.
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| Dr. Janice Denoncourt |
In the aftermath of the Theranos 'misleading investors' scandal, this
is an increasingly important modern corporate governance issue. Theranos, Inc. is an American consumer
healthcare technology company based in Palo Alto, California founded in 2003 by
inventor and Managing Director Elizabeth Holmes. In 2018 Holmes was
subject to civil charges by the United States Securities and Exchange
Commission (SEC) for massive fraud in excess of $700 million USD for having repeatedly
yet inaccurately assured shareholders and regulators that the company’s
patented blood testing technology was revolutionary (see
https://www.sec.gov/litigation/complaints/2018/comp-pr2018-41-theranos-holmes.pdf).
Theranos’ 200 plus US patent portfolio is public information via the United
States Patent and Trademark Office (USPTO) portal and a significant corporate
investment in IP. Holmes co-invented
more than 270 of the company’s patented innovations. While patents do not
equate to innovation or commercial success, they do act as business indicators
of inventive activity as well as a commitment to protect the results of
innovation. Holmes, of all people, was well placed (if not best placed)
to understand the capability of the blood testing technology. The alleged
misconduct, namely misleading investors and government officials, has generated
a new global regulatory discourse about what companies need to tell us about
their IP. Arguing that it needed 'to protect its IP' to excuse material
omissions and misleading disclosures is not acceptable according to the
SEC. In the SEC’s press release on 14
March this year, Steven Peikin, Co-Director of the
SEC’s Enforcement Division stated:
Investors are entitled
to nothing less than complete truth and candor from companies and their
executives... The charges against Theranos, Holmes, and Balwani make clear
that there is no exemption from the anti-fraud provisions of the federal
securities laws simply because a company is non-public, development-stage, or
the subject of exuberant media attention.
Stephanie Avakian, Co-Director of the SEC’s
Enforcement Division further confirmed:
As
a result of Holmes’ alleged fraudulent conduct, she is being stripped of control
of the company she founded, is returning millions of shares to Theranos, and is
barred from serving as an officer or director of a public company for 10
years...This package of remedies exemplifies our efforts to impose tailored and
meaningful sanctions that directly address the unlawful behaviour charged and
best remedies the harm done to shareholders.
Key corporate governance principles of transparency and disclosure are
being more rigorously applied to corporate ownership of monopolistic IP rights
that protect innovation and creativity. In the US, SEC disclosure law
Regulation S-K requires disclosure of the importance, duration and effect of
all patents, trademarks, licences, franchises and concessions that a company
holds. The standard for 'material'
corporate IP asset disclosures will continue to evolve in the US and other
IP-rich jurisdictions. The civil legal action brought by the SEC against
Holmes is the catalyst highlighting a void in corporate practice. IP-rich companies like Theranos will continue
seeking corporate finance which falls under the corporate governance regulatory
umbrella. IP rich companies need
to ensure they reflect on disclosure and transparency rules and take into
account the growing magnitude of their corporate intangibles, IP assets and
IP business models that potentially generate future wealth for their
shareholders and potential investors.
Closer to home, in 2017 the UK implemented the EU Non-Financial Disclosure Directive which requires large and listed companies
to include additional disclosures of non-financial information in their annual
reports, similar to the disclosure requirements in the Strategic Report. The Non-Financial
Reporting Regulations insert sections 414CA and 414CB into the Companies Act 2006, supplementing the
existing strategic report requirements as set out in section 414C. These new
company law equirements potentially increase the reporting of non-financial
information, better business and IP strategy reporting through the mandatory
requirement to report the company’s business model. This EU-wide reform highlights the growing
importance of disclosure of non-financial information.
IP rights have evolved from being “a little pool to a big ocean” of
corporate value and that corporate governance needs to respond to society’s
rising expectations of directors and boards. The astonishing
lack of quantitative and qualitative public information about the growing
magnitude of corporate IP assets makes it difficult to assess strategic value (“the
IP value story”) and directors’ stewardship of those assets. More
relevant, accurate and 'joined up' corporate IP information (mostly known to
internal management) is needed to triangulate intangibles financial data
through cross verification with narrative disclosures and actual
events. The SEC stated that Theranos engaged in “elaborate,
years-long fraud in which they exaggerated or made false statements about the
company’s technology, business and financial performance.” This is a
new frontier in corporate governance thinking and practice.
My research evaluates how corporate boards can ensure an appropriate
level of transparency and make voluntary and mandatory ‘true and fair’
disclosures about a company’s corporate IP assets such as patents and trade
secrets in traditional formats such as the accounts and the annual
report. The philosophies and principles that underpin debates
on disclosure and transparency suggest that more 'open' disclosures about
innovation, whilst preserving competitive advantage, are necessary so we have
something to read, evaluate, react to and question. Countries including the US
and the United Kingdom have mandatory obligations to report on gender balance,
climate change and more, but not expressly corporate IP. Patents,
mini-case studies and an original business triage-style model for assessing
corporate IP information, strategy and disclosures illustrate the gaps
corporate governance theory needs to address. Companies need to tell us
how their corporate investment in R&D and IP rights contributes to the
bottom line and regulators need to ensure boards of directors are accountable
for IP management and strategy decisions, an important underside of the
intangible economy.
Intellectual Property, Finance and Corporate Governance contributes to the legal and economic literature for readers interested in what lies behind the headlines. The foreword is written by Professor Nicolas Binctin, Universite of Poitiers. As for the future of the Silicon Valley biotech company Theranos, Inc., the company has since made hundreds of staff redundant to avert becoming insolvent.
Dr J Denoncourt,
Nottingham Law School
