Q22- $8.3 Trillion: Cost to Americans of Disinvestment in Trust?

My last two blog posts were about the importance of trust. Let me use financial data to further illustrate this.

Below is a graphical way of disaggregating the market value of a corporation.


The average market-to-book ratio has hovered around 5 since 2000 (I use Yahoo Finance data across more than 200 industry groups). This means that book value contributes only about 20% of market value. Or, intangibles (the pink area in the diagram) — which are mostly the scope of knowledge management — account for about 80% of market value. In other words, intangibles (what accountants almost always do not measure) contribute more than tangibles (what accountants measure) to value creation! This fact is one of the powerful arguments for KM. I have stressed this in my previous blogs (for example, check out “F2- Intangibles: More Essential for Value Creation”)

As of yesterday, March 30, 2009, according to Yahoo Finance, the average market-to-book ratio went down to about 2. Contribution of intangibles to market values went down from 80% to about 50%.

What was lost during the last few months of the global financial crisis? Book value or the tangible assets were basically the same. The skills of employees were basically the same. The processes and structures, the vision and strategy, and the leadership in the corporation hardly change in a few months.

What changed was the trust of the public, and specifically of the buyers and sellers of stocks. Their expections of a corporation’s future income had decreased. What was lost was how stockholders and stock buyers perceive a corporation: its reputation, brand, trust (the text in red in the diagram). They have ceased to trust the corporation. In KM language, the corporation lost stakeholder capital.

According to some estimates, Americans and others who own stocks lost $8.3 trillion as a result of the Wall Street meltdown. Its repercussions around the world resulted to total global losses of at least $50 trillion, according to the Asian Development Bank.

And all because people withdrew their trust!

(Note that there are embedded links in this blog post. They show up as colored text. While pressing “Ctrl” click on any link to create a new tab to reach the websites pointed to.)

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