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'Intellectual Capital' The Reality of Intellectual Capital By Raymond Soong, Chief Knowledge Custodian and corporate entrepreneur, Sansayah Electronics Corporation, Singapore. In the early years of the twenty-first century many executives believed that the concept of ‘intellectual capital’ (IC) was at best a chimera or at worst a hoax; just another buzz phrase dreamed up by management consultants keen to earn further lucrative assignments. Many of my more hard-headed colleagues thought that while there might be something to the idea, any value generated within business processes themselves or the collective knowledge contained in our employees’ heads was either: 2). Already reflected in the share price of the business or in its ‘goodwill’ component that would be realised at the time of a sale or merger.
Today, such captured and managed knowledge is a discrete, quantifiable and fully fungible asset of our corporation, far more valuable than any notional worth that might have been wrapped up in our fickle and very cyclical share price or in any notion of generic ‘goodwill.’ IC is now as important a component on our balance sheet as our physical assets, patents and copyrights, brands or R & D operations. Its emergence has changed the landscape of corporate accounting and any enterprise that today does not capture, maintain and exploit the knowledge it generates collectively is at an economic disadvantage so great that it cannot be considered competitive. Let me define the term ‘intellectual capital’ as it has come to be understood by the world’s accounting standards bodies and Chief Financial Officers of major corporations, NGOs and publicly-funded enterprises. Research and discussion about the nature of such assets and how they might be captured, analysed and quantified began in France and Denmark in 1998 when European governments first asked accounting standards regulators to examine the concept. A year later the US Securities and Exchange Commission began its own project and invited views of how companies should disclose what the Commission called their ‘employee knowledge’ assets. In the end, international agreement on how to value and depreciate such assets was reached only in 2007 but that decision finally allowed businesses, whether local, regional or global, to recognise such value on their balance sheets. In the international agreement, which was finally signed by national leaders at the G12 meeting in Toronto in June 2009, the term was defined over a total of eighteen pages, but I will summarise it as follows: Intellectual capital is any collective knowledge in an enterprise other than normal research and development, patents, brands, trade-marks, copyrights, etc. that is securely and comprehensively captured, properly maintained and is available and saleable on the open market. For over a decade senior IT managers and finance officers of the world’s major corporations had sensed that systems and networks were going to offer the potential to capture that flickering, intermittent substance that is collective knowledge but the concept could not be made real until several pieces of the technological puzzle and some changes in human behaviour were in place. The first step necessary was the complete networking (fixed and mobile, wholly global) of everybody in the organization and those who formed its ‘extended family’ – i.e. the suppliers, consultants, professional advisors and relevant customers. Following the internet and mobile phone revolutions of the mid-nineteen-nineties almost all sizeable organizations moved from networking their computers with proprietary protocols to the use of ‘IP’ – Internet Protocol – an open standard suitable for use by all kinds of devices. By the millennium, almost every employee and many sub-contractors, suppliers and customers were connected and terms such as ‘intranets’ and ‘extranets’ were coined to describe these extended voice and data networks. But it wasn’t until the arrival of low-cost, permanently-connected, broadband mobile telephones, communicators and PDAs in the years between 2004-2008 that the fully connected enterprise became a reality. This was the first time such an ‘always-on, always-connected’ socio-business entity had ever existed in the world and it was the key to releasing a form of capital that had long existed but could not previously have been identified, retained and, therefore, traded. But for intellectual capital to be successfully captured, an extended enterprise must be fully connected: knowledge is the most slippery substance of all – of an even higher viscosity than money – and one hole in a network can allow a key piece of knowledge to escape, so devaluing the capital to which it relates. The second component that was necessary to create an effective ‘knowledge generation system’ (KGS) was a software layer that sat between the many ‘nodes of the network’ (people and their devices, both fixed and mobile) and the back office systems that the corporation used to run its management information systems. This layer had to be transparent to the end user (employee, supplier, customer, etc.) but efficient at managing varying levels of access, node failure, information fall-out and data exchange. It was also necessary to have a really powerful distributed database system. By the early part of this century the cost of permanent data storage had already fallen to below US$0.015 a megabyte and in the interim, holographic storage systems have arrived offering terabyte and petabyte capacities (a petabyte is one quadrillion bytes) at extremely low cost – e.g. $0.0002 per megabyte. (The physical costs of the necessary off-site back-up storage and disaster recovery storage have, however, remained unchanged). More powerful search tools for these databases were also necessary, but I will describe these in some detail later in my report on our first successful program to capture a substantial body of knowledge. Comprehensive data capture was the fifth component needed to create a KGS. Here I came across real resistance in the corporation. Employees did not like the concept of having their every action recorded by cameras, microphones and other data capture devices. And the more senior the employee, the less he or she liked the idea. Some of our most senior executives took me aside and made their objections very plain. Unions were also full of complaints about corporate ‘eavesdropping’ – as they described it – in the muddled years between 2004 and 2010, but their thinking was confused. I remember asking one union negotiator in Atlanta how she felt about the many CCTV cameras that were located in the local shopping malls. She admitted they gave her a sense of security. Before she arrived for the meeting I had taken the trouble to research the likely route she’d use to reach our facilities from her own office and I then laid out what I thought might have been her journey plan: She had walked or driven under the gaze of over 200 CCTV cameras on that eleven-mile journey alone. ‘We are moving into a world where every moment of our lives is going to be recorded,’ I remember telling her. ‘And most of the time we will be grateful for it. Our personal systems will also record everything for security and for legal reasons, our car systems will record everything, every street corner will have a camera, every hospital, every school, every store, every park...’ I won’t say that my argument fell on deaf ears, but we reached no agreement at that meeting. But whilst employees were objecting to every one of their working moments being ‘captured’ by our systems and stored in our corporate databases, most of their leisure moments were also being captured and stored by unknown agencies without their specific permission and without them having any rights to review what had been captured. While they were shopping in supermarket aisles cameras were recording how they moved between products, which shelves they favoured, whether there was any pattern discernable when certain products were placed in particular locations, and so on. Today we all understand that in future humans will be recorded throughout their entire lives and that this is mostly meaningless. Back then, however, people still hadn’t come to terms with this change. The main fear was of a ‘Big Brother,’ a concept that was a hangover from twentieth century fears of communism, totalitarianism and government control. But by the end of that century it had become clear that Big Brother was a moron, or asleep, or indifferent to the individual. The fear was baseless under the (deliberate) inefficiencies of democratic governments.
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For years I dreamed of an enterprise in which every action, every discussion, every conference, every informal chat, every phone call, letter, email, fax (remember them?), drawing, design and so on would be recorded and stored. Only if such an information paradise could be reached would it become possible to capture elusive intellectual capital. The Importance of Privacy Some people in the company thought my ideas strange but I persevered. I understood that employees needed personal privacy; I proposed a cut-out function that would allow a staff member to opt out of universal recording to make a call, or send an email, etc., to a husband or wife, or to a friend. While this idea was welcomed I was asked if the system would know how frequently an individual was ‘opting out of the data stream’ during every day or every week. I had to admit that such information could be extracted. Then a colleague took me aside; Mrs Constance Kramer, our International Head of Human Resources, invited me out for lunch and over a very good Thai salad in London asked me if I considered myself to be a political animal. This question rather took me back. Until that point my background had been entirely in strategic IT; my career progression had depended mainly on my technical and scientific knowledge and my project management skills. Understanding the difficulties, costs and time-scales of integrating two large but semi-incompatible enterprise computing systems following a proposed merger was my type of benchmark. If I got that right I got promoted. And I studied so hard I usually did get that sort of thing right. ‘I’m not sure what you mean,’ I told her. ‘Sweet,’ she said with a peculiar smile. ‘So sweet.’ Over the next hour she told me things about some of my most senior colleagues that I found shocking. I had understood that at board level some directors are more concerned with protecting and advancing their own position than they are with the operational affairs of the corporation but I had no idea that ‘office politics’ was played so enthusiastically all the way down to local management levels. ‘You’ll never get them to agree to constant surveillance,’ Constance told me. ‘Because you come from a scientific discipline where there is less politicking than normal, you don’t realise the role that gossip and back-biting plays in a working day. Not everyone is trying to do the others down, but they are putting them down all the time; it’s part of human nature. And you’ll never get agreement for permanent recording.’ I dwelt on this for some time. Even though I didn’t understand it fully, I accepted that for many employees the workplace remained a space in which they would be rude about their bosses, their customers and each other. If I were to insist on recording that, the behaviour would disappear and then, in turn, the employees themselves would disappear. So I developed a system called the ‘Data Gateway’ which was an ‘opt-in’ recording system with external reminders and prompts. To access any of the enterprise information resources on the networks, employees had to turn recording ‘on.’ But when they were not using voice or data networks they could turn it off and could verify for themselves that it really was off. But the system would remain listening, although not recording, and if a keyword was heard, e.g. the name of a colleague, a supplier, of a product or a project, the system would issue a visual and aural prompt, asking them if they wanted to turn capture back on. This was intended to assist those who would simply forget to turn the system back on for a meeting and it kept records of how it was used, so it would be easy to identify team members who were ignoring or abusing the system. The ‘Data Gateway’ operated on all devices – mobile phones, communicators, PDAs, Laptops, PCs and other networked components such as conference-room screens, white boards, company vehicles, etc. The Data Gateway (DG) was integrated with the network calendars all staff were required to use and if a meeting was scheduled and the DG was ‘off’ the system would prompt those attending to switch it back on. I understood, however, that some meetings, e.g. between our staff members and suppliers, might be so sensitive that one side or the other would request that it should not be recorded and in these instances the senior member of staff present would designate the meeting as ‘confidential’ and leave the system off: he or she would, however, be expected to provide a spoken or written summary afterwards so that there were no unrepairable gaps in our knowledge matrix of what was occurring across the nineteen territories in which we operate and the 261,400 people employed by the corporation. Mexico 2008-2011 In the spring of 2007 I was told of a large-scale upcoming project that I realised would provide me with the perfect platform to trial our Knowledge Generation System and, perhaps, give me an opportunity to take on an entrepreneurial role and market the intellectual capital that was generated. The board was planning to build a major new consumer-electronics manufacturing and assembly facility in a small town twenty-five miles outside of León in Central Mexico. It was going to be a major undertaking. The corporation already had extensive manufacturing facilities in Asia and Europe but nothing in the Americas. The trigger to the board’s decision to survey the region and send in a project team was the final long-term ratification of the expanded North American Free Trade Agreement (NAFTA) which meant that products manufactured in Mexico could be sold throughout the USA and Canada (as well as all major South American territories) without attracting import duties, quotas or other tariffs. It was clearly time to get moving. I wrote a detailed memo to my immediate boss, John Ho, the Chief Financial Officer of our corporation. I outlined what I wanted to do, provided financial models and a budget summary and I copied recent papers produced by the SEC and the other Accounting Standards Agencies in the USA, EU and Japan. It was obvious that after a decade of discussion the various accountancy regulators were close to agreement on how to identify, value and depreciate collective corporate knowledge. I asked to be given entrepreneurial responsibility for the generation and marketing of this intellectual capital. (As an aside, it is worth underscoring the fact that all money, all forms of value other than the absolute basics of food, shelter and energy, are forms of ‘value storage’ which exist only by agreement within a community; money is a wholly virtual, human-made commodity. There is no intrinsic value in a dollar bill or a Euro note and the ‘promise to pay’ by a central cashier at a national bank has long been worthless if taken literally. Even when currency was actually backed by gold deposits there was still no real value on offer: there was never enough gold and, in the final analysis, gold has no actual value for survival and has none at all to those communities that do not treasure it. Money and all other forms of stored value that can be exchanged and forwarded are products of the collective social consciousness and, in my opinion, humankind’s greatest single cultural achievement. Value resides where society agrees it does, which was why the impending international agreement on how captured knowledge should be valued was so exciting). I got the budget and approval necessary for my trial entrepreneurial project and, more importantly, I got the unreserved backing of the main board even though I warned the members that they too would have to consent to their work discussions being captured. I was also offered attractive personal bonuses related to the profits I hoped to make from the sale of IC. The board’s approval meant that a ‘Data Gateway’ scheme was imposed arbitrarily throughout the organization. In theory every phone call, every discussion, every email, every videoconference, every briefing, every on-site and off-site meeting, every seminar, every suppliers’ presentation, every brainstorming session, every working lunch or dinner, even every water-cooler discussion would be captured in vision, sound and data unless one of our employees turned the gateway off. If they turned the data capture system off, it would still listen and remind them it was turned off if it overheard any keyword or concept that related to the project. (And the setting up, testing and implementation of knowledge generation network itself became a piece of our corporate intellectual capital.) The board had requested that a cross-disciplinary team should go to Mexico to research the project. At that time we didn’t even have our own office in Mexico; we were represented by two excellent distributors and to reassure them about our long-term intentions, we invited them each to supply a representative to join our team. We also hired GES Consulting, an international manufacturing consultancy that had extensive experience of advising clients investing in Mexico, to help us with the project. It was a condition of their hiring that the consultants agreed to use our Data Gateway system on the terms we laid down and that all knowledge generated during the project was to be the property of the Sansayah Electronics Corporation, Inc. Because Knowledge Generation Systems were so new at that time, everybody agreed but I doubt whether such agreement would be forthcoming today. Joint ownership schemes for knowledge have now become common and few consultancies today would be prepared to contribute their knowledge to the pool of their client’s intellectual capital without a royalty or a share of any value created. But in the spring of 2007 there was a sense of something new in the air and for a short time everybody was prepared to contribute in order to learn. I ensured that our own project team was properly equipped and that our consultants and the distributors’ representatives also had multiple types of capture devices and then I contacted our legal department with a request that they should draw up a ‘knowledge waiver’ form that would be presented to potential suppliers and other contacts at the same time as the usual non-disclosure agreements. The prospect of a corporation as large as ours investing in a new territory is significant news, not just for the stock markets but also for the political landscape of the country concerned. All involved would expect to sign confidentiality agreements but now we were also asking them for knowledge waivers; commercial knowledge resulting from a meeting or from anything that was said would be our property. That included the views of all the professionals advising us as well as other suppliers. We got agreement fairly readily; we were the ones paying the fees.
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With the help of the HR Department our Business Development Director put together a thirty-strong Project Assessment team. It included a senior finance director from head office, two directors of manufacturing, a lawyer from our US legal office, two senior procurement directors (one from our US subsidiary, one from head office in Singapore), our head of property maintenance from Europe and the two leaders of the project team that had built our most recent manufacturing and assembly plant in Zagreb. From my team I seconded my best all-round IT operations director, a young German called Andreas Politza; although he had become an IT project leader in Europe he had never forgotten his engineering background and he was always ready to roll up his sleeves and fix systems and kit. That’s a necessary quality in the field. From Day One of the project everything – everything – was to be captured. That included the setting up of the team, all meetings about its form and structure, all emails, all videoconferences, all text messages, all presentations: I won’t continue. You get my drift. The capture devices were both discrete and discreet. Everybody wore button mikes, pin mikes (mikes that looked like brooches for the women), tie mikes, lapel mikes. Every comms unit had a camera and every team member was given a variety of stand-alone micro-cameras. Most team members preferred to use sun-glasses with built-in cameras for site surveying and field work and plain-lens glasses for office use. All units were wireless and were networked using Personal Bluetooth, Version 6.2. Each individual’s communicator was his or her primary data store and data dumps and back-ups were carried out automatically in background without the user being aware of it via whatever local broadband cellular-network was offering the best rates to reach our own global network. (Our entire global enterprise is networked virtually on a rate/quality/security axis. Our network providers buy bandwidth automatically on the spot markets and providing our criteria for integrity and security are met, create and configure our international networks in a wholly virtual fashion. Beyond the boundaries of our own facilities, we do not own or lease a single kilometre of our own copper or optic cables anywhere in the world.) It is a sad sign of the times, but the first consultancy we hired for the Mexican project were specialists in personnel security. It was a firm from Washington DC and although there had been no reports for some years of ransom-kidnappings of business executives visiting Mexico, it has become a standard policy for our corporation to take such advice. I reviewed the data capture; we appeared to have everything. I won’t bore my readers with step-by-step details of how the pilot project progressed. Suffice to say that there were meetings with many departments within the Mexican Government at both national and local levels (we didn’t inform them of our data capture techniques) as we had to explore topics such as the value of local development grants, land and highway availability, zoning regulations, national social security and pension regulations, labor laws, corporate regulations, taxation regimes, incentives and tax breaks for inwards investors as well as scores of other issues. Our team had to meet with local trades unions, with surveyors, architects, the Mexico Association of Industrial and Business Parks, builders, utility providers, environmental and conservation groups, local community leaders, leaders of trade associations, local lawyers, accountants, banks, local recruitment agencies, relocation consultancies, potential local suppliers, shipping companies, logistics companies, insurance companies, national accountancy regulators, local accountants, local attorneys, bandwidth providers – there were many, many more. The only business sector we did not meet were the media; that was absolutely off limits. The consultants we hired to advise us on making inwards investment in Mexico created many short cuts for us and saved us considerable time and money. But they weren’t cheap to hire and they were selling us a crude, personalised version of the sort of intellectual asset I was hoping to generate within our own corporation. After eight months the pilot team reported back to our board. They proposed that we should re-consider the site of the plant and suggested that Puebla, eighty miles south of Mexico City would be ideal. A new highway was being constructed to link the city to the ports of Veracruz in the East and Acapulco on the Pacific coastline. They showed video of the proposed site, its environs and the local towns and showed both outline and detailed plans as well as the architects’ scale model of the buildings. They told the board that the development would cost between $3.25 and $3.62 billion. The board gave its final approval seven months later. By this time I had had the opportunity to review all of the data captured during the pilot project and there were a few minor adjustments I wanted to make before the main project began. One change concerned the way foreign translations were carried out. In the system as it was, all conversations were captured in real-time for subsequent translation into English. This technique didn’t work so well and I decided that auto-translations must also take place in real-time and our employees must then edit those translations for accuracy sometime within the following forty-eight hours. Leaving the checking until long after the event had taken place was introducing serious errors. I also invited members of the pilot team to view some of the captured footage of meetings, site visits, etc. and, as a result, we issued new guidelines on how to wear microphones and cameras and how to structure meetings. We also fine-tuned the auto-transcribing system (which produced a written version of all conversations and spoken elements). It took almost two years to build the facility, and it came in $7.28 million over budget. Despite a thorough survey of the site the builders discovered an underground spring that had remained undetected and it was necessary to divert this and build a culvert around the plot. Certain other elements such as changes in the spot-market price for steel and delays in shipping pre-fabricated parts of the building also added exceptional items to the costs. But on the whole, everybody was pleased. EVERYTHING was captured, in high-definition colour video and all data, including sketches and drawings, no matter how basic or how elaborate, were digitised and stored in the project database. I also commissioned two local film crews to shoot the project as if they were making documentaries (including periodic interviews with key project leaders) and my team installed CCTV at the site even before the ground was broken. When the facility was finished the plant contained 1,791 cameras and every area was wired permanently for sound. Even now, three years after the facility opened, they all record 24/7/365 and the unedited material is fed straight in to our project knowledge database. It is now 461 petabytes in size and it is automatically backed-up to two off-site, fire-proof and earthquake-proof storage facilities – one in Asia, the other in Europe. (Not quite everything was captured; during the project I twice received encrypted emails from the project leader that told me that a meeting was due to take place in which a bribe was likely to be demanded. I agreed that such data should not be captured and that a segment should be inserted that bridged the continuity gap, referring knowledge researchers to the relevant project leader for further illumination of a ‘Third-Party Confidential Item.’) How did such a vast amount of raw data suddenly become saleable knowledge, of value to others planning to build a manufacturing or assembly facility in Mexico? The conversion was achieved with a formidable array of search tools and some human assistance. In addition to the usual ‘key word and phrase’ search facilities, our knowledge bases can also be searched by topic recognition, voice-print recognition, facial pattern recognition, security IDs, time, place, personnel relationships, contractual relationships or a combination of all the above. They can be searched by time, date and by GPS locator and latitude and longitude. They can also be searched by colour, by font, by sound pattern and even by a specific combination of iris scans, voice prints and other biometric identity checks that I cannot describe more fully here. This formidable array of search tools (some proprietary to Sansayah) allows a search to take place for every meeting, phone call, email, etc. that happened on the topic of, say, security fencing or bus transportation, about air conditioning, labor laws or noise levels on site during the construction phase. People searching the knowledge base don’t have to be precise if they can’t remember an individual’s name or job function, they can browse the material at high speed and, once they’ve picked the person’s face out, they can ask the system to assemble all of the meetings he or she attended, all of the emails, phone conversations, etc. It is the fuzzy search tools that turn this mass of data into something of real value. At one time, many database experts predicted that only highly structured data and storage systems that were well organised at the time the data was captured would generate any real value. The problem was that structuring data as it is captured does not reflect the way the real world works and this becomes an insurmountable limitation. Using fuzzy tools to search raw data to create relationships is a far more satisfactory solution. So how did I prove this knowledge base had a realisable value? Eight months after we opened our plant in Puebla I sold our project knowledge base to a French car manufacturer who was also planning to build a factory in Mexico for the first time. The car company paid our corporation $497.3 million for the database and they later stated that the access to our knowledge saved them almost a year and at least as much money as they had spent on its acquisition. They were able to save on outside consultancy costs, to find reliable suppliers quickly and to understand local laws, zoning regulations and development grant opportunities by actually ‘sitting in’ on all the meetings we had had on those topics. They were able to identify union leaders, government ministers and local officials by name and face long before they actually set foot on their target territory. In short, they were able to experience the virtual methodology of building a factory in a far-off land before they actually went there. When they did arrive in the territory our knowledge base assisted them in real time when they met with government officials, union leaders, bankers, politicians, etc. Their own data capture devices were linked to our knowledge base and, using face pattern and voice-print recognition engines, our system instantly delivered the person’s name, job function, and other relevant information (including our own staff’s private comments about the trustworthiness and reliability of an individual, for example) in any way our clients chose. Those who wanted to wear communications spectacles could receive this information as a semi-transparent overlay, other chose to merely have a private audio feed delivered by an almost invisible earpiece. Most of their staff opted for a minimum of an aural prompt for correct name pronunciations. As the entrepreneur responsible for turning the data capture project into profit, I found my French buyer for our IC very simply. I put together web sites on the topic of ‘Investing in Mexico’ and ‘Building a manufacturing and assembly plant in Mexico’ and I made sure all the of key search terms appeared prominently in all of the major search engines. The French company found my sites less than two months after they went up. Obviously, when they started to research the idea about investing in Mexico, they searched the web, which lead them directly to us (in this case, to me). Two members of the French project team evaluated ‘snapshots’ of the data I made available to them and then they flew to Singapore to meet me and the two humans I was prepared to loan to them on a part-time basis. The human virtual secondees were the key; they were the problem solvers and translators. They took the place of the AI system which I hope will be developed one-day to spot and fill in gaps in the knowledge base. From time to time a key piece of knowledge would be exchanged or even created in a hotel bar, a club or some other place that the individuals concerned might not wish to admit to being in. Our humans plugged these gaps. Both had been senior members of the project team that had built the facility and for a two year period we made them constantly available for videoconference, email consultation, phone conference calls, etc., to clarify or add to any piece of knowledge that remained unclear. At the point when the sale of a license for the intellectual capital was agreed it had cost our corporation almost US$92.1 million to capture and store the data in the Mexico knowledge database. We put the figure of maintaining it at around $18 million a year so the first license sale netted us a profit of almost $400 million. But the sale wasn’t exclusive and the knowledge remained ours. The French licensee was invited to contribute its own experience of Mexican construction to the knowledge base of the factory-building project and so develop a new product ‘building a car manufacturing facility in Mexico.’ When this was complete it was agreed that our corporation and the French car manufacturer would each own 50% of the new intellectual capital. Meanwhile, we would continue to maintain and update our original database which would remain available to other licensees. My personal share of my company’s initial profit from the project was $8 million. But in the future it will not be necessary to find buyers for the intellectual capital we generate as we go about our business. Something doesn’t have to be sold to have a value; it only has to be saleable. Just as my company would not normally think of selling its headquarters building, so future IC will be captured and remain ready for sale even when we are not offering it to potential customers. This will allow us to capitalise confidential knowledge that we don’t wish to sell and still show it as an asset in the corporation’s accounts. Intellectual capital only has to be fungible, to be capable of sale, to have a value. Our auditors now have a special department for evaluating intellectual capital. The team assesses the level of data capture on any given project, creates a model of the up-dating and maintenance schedule and depreciates the value of the capital over three or five years, dependent on the percentage of new information that is added each year. This is today’s reality of intellectual capital at the Sansayah Electronics Corporation. We currently have twenty-two major projects in hand around the world on which we are capturing, storing and maintaining intellectual capital. It has now become inconceivable that any corporation would allow valuable knowledge to simply slip away. And I am grateful for the freedom I have been given to become an entrepreneur within our corporation. |