Company valuation or market value has two parts: tangible value, like cash flow and earnings, and intangible value. Intangible value is based on the market’s perception of whether a company is likely to keep its promises about future growth. Over the last 20 years, intangible value has grown as a percent of total market valuation. Even during the worst of the recession last year, companies with similar size and earnings had different market valuations. That’s in part because investors have more confidence in the future of some companies than others.
When contemplating the power of intangibles, leaders must figure out what they can and should do to create intangible value, and to make intangibles tangible. This challenge confronts leaders in publicly traded and privately held firms, at the top and throughout the organization, and in line and staff roles. Wherever they are, leaders have the responsibility to build and protect intangible value.