Intangible Factors

The results of a study of intangible investment criteria was conducted by Perry, Scott, and Bird [16], based upon responses from selected companies in the Fortune 500 list. The factors most often listed by the management executives will be discussed in this section.

9.4.2.1.1 Employee Morale. This factor is directly related to efficiency of operation. If an employee does not consider that working conditions are favorable, this will surely affect not only the amount of material produced but also its quality. Quality circles and other employee input groups have done much to improve workers' interests in their immediate jobs, giving them an opportunity to make constructive comments about the working environment. Management, in turn, has an obligation to listen, digest and, if possible, put into action employees' suggestions. Employees who feel that they "belong" to an organization will take more interest in it, be more content, and display high morale.

9.4.2.1.2 Employee Safety. Safety should be regarded as a joint venture between labor and management. Unsafe conditions cause accidents to personnel and equipment that result in increased costs for capital equipment, losses of production, utilities, and raw materials, as well as associated increased insurance expenses. Refineries, chemical plants, steel mills, paper mills in recent years have improved their safety record but constant vigil must be exercised. A plant must be designed and constructed with safety considerations early in the planning stages with the result in operating cost savings and increased employee morale.

9.4.2.1.3 Environmental Constraints. Increasingly tight restrictions on water, air, land, and noise pollution have forced management to reconsider existing operations, as well as future investments. There are daily examples of plants being under scrutiny for not complying with environmental standards. Like the two preceding intangibles, it is impossible to determine dollar effects, that is, cost versus benefits. While it may be a relatively simple matter to calculate the capital requirements, operating expenses, and change in cash flow to meet environmental standards, the benefits are continued operation and recognition that the company is a good citizen. A return is meaningless but the options are clear.

9.4.2.1.4 Legal Constraints. Local, state, and federal laws must be considered whenever an investment decision is made. A proposed venture that infringes upon statutes is doomed. Fines or large capital expenditures to avoid legal action can quantitatively affect the firm's finances. It is therefore essential to review existing laws and seek advice on locating a plant. Zoning ordinances, potential antitrust actions, and potential licensing or patent infringements are examples. Most firms want to avoid litigation as such proceedings are long, costly, and damage a firm's image.

9.4.2.1.5 Product Liability. In recent years this intangible has received considerable public attention. Consumer advocates and the public demand that a product, be it a pharmaceutical or a child's plastic toy, must be safe to use. Management must consider this intangible early in a project development stage. It would be a wise decision to forego the installation of a plant until there is a high probability that the product will meet safety requirements. Management must take a responsible posture with regard to this intangible.

9.4.2.1.6 Corporate Image. How a company is perceived by the public is an important factor in capital investment decisions. A poorly maintained plant is an eyesore to the community and indicates an indifference not only to the locale around the plant but also to the employees. General housekeeping within the plant and its immediate environs is indicative of the type of management.

Corporate image also is expressed in how much positive interest a company takes in community affairs. Social responsibility, such as corporate giving, sponsoring scholarships and programs that benefit society and the community contribute to a company's image. Corporate image is considered in any investment decision because capital expenditures are often required to maintain a good image. Like the other intangibles, it is difficult to calculate a return since a benefit cannot be assigned to such an expenditure.

9.4.2.1.7 Management Goals. This is a complex intangible because it involves not only the corporate goals but subjectively personal goals of individual managers. Although corporate goals were mentioned earlier in this chapter, it is advisable to point out that company growth and cash flow are two indicators of management effectiveness. They are important to the survival of a company.

Managers may make investment decisions on the basis of personal interests that may not enhance the well-being of the firm. On a personal level, managers may make decisions that influence job security or as part of "empire" building that gives them greater visibility within the company. These points promote personal gain. Although most organizations have checks and balances, it is doubtful that the personal aspect can be eliminated entirely.

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