The governance of intangibles: Rethinking financial reporting and the board of directors

This paper develops a theoretical analysis of performance measurement systems (including related accounting standards) and the composition of the Board in the context of business models driven by complementarities, innovation and intangibles. Performance management systems frame and shape the representation of business performance and risk, while the composition of the Board is designed to control and govern the business processes and disclosure of information over time. Complementarities, intangibles and innovation exacerbate the information asymmetry that characterizes the specific economy of the business firm, making it different from external markets. Therefore, firm-specific information becomes as important as market prices to gauge the past and future performance and risk of the ongoing business firm. Specific knowledge of the firm is therefore required to disclose relevant and reliable information and to monitor corporate executives. This argues for the role of improved historical cost accounting systems coupled with non-independent, proficient Board members.