October 8, 2025 | Global Equity
The Hidden Drivers of Corporate Value
Director of Sustainable Investing
For decades, investors have relied on traditional financial metrics and tangible assets to evaluate investment opportunities. But a fundamental transformation in how corporate value is created and measured is underway. Today, a company’s true value is increasingly shaped by intangible assets and externalities.
The Rise of Intangibles
Intangible assets such as human capital, intellectual property (IP), brand reputation, and customer relationships are now the primary drivers of corporate growth and shareholder value. The following chart illustrates the dramatic rise in intangible assets for S&P 500[1] Index companies, from 17% of total enterprise value in 1975 to 90% by the end of 2020.[2]
Components of S&P 500 Index Market Value
Sources: Ocean Tomo and William Blair, as of 2020. It is not possible to invest directly in an index.
Further evidence of this trend and the impact of intangibles on corporate performance is presented in a new academic paper published in European Financial Management, a respected journal for global academics and practitioners concerned with the financial management of modern corporations. In “The Role of Intangible Assets in Shaping Firm Value,” Professors Feng Dong and John Doukas find that intangible asset intensity is a strong predictor of firm performance, with high-intangible firms outperforming peers by 3% annually.[3]
The emergence of artificial intelligence (AI) is likely to accelerate these trends, boosting the value of intangible assets. AI systems rely heavily on proprietary data, algorithms, and models—core intangible assets. Companies that own high-quality datasets or develop advanced AI capabilities may see these assets become central to their competitive advantage.
Intangible Asset Example: Human Capital
Employees’ knowledge, skills, and experience are no longer viewed merely as costs but as a critical source of value creation. McKinsey Global Institute’s 2023 study, “Performance Through People,” analyzed 1,800 companies across 15 countries and identified a subset called “People and Performance Winners.”[4] These firms excelled at both human capital development (such as training, internal mobility, and organizational health) and financial performance. These companies showed
- 30% higher revenue growth per dollar invested in human and organizational capital,
- Lower attrition rates and greater earnings resilience during crises, and
- Superior ability to retain and motivate talent, which translated into more consistent long-term performance.
According to McKinsey’s ranking of company categories across six metrics, “people and performance winners” outperformed peers across key metrics including return on invested capital (ROIC), revenue growth, economic profit, and attrition rate.
As AI automates routine tasks, the value of uniquely human skills increases.
As AI automates routine tasks, the value of uniquely human skills—like creativity, emotional intelligence, and strategic thinking—increases. This elevates the importance of talent management, culture, and leadership, all of which are intangible drivers of value.
Why Externalities Matter
Externalities are the hidden costs and benefits of a company's operations that affect third parties or the broader economy. When these impacts become financially material, investors can no longer afford to ignore them.
Positive Externalities
Positive externalities help create value outside the firm and are relevant to investors because they can signal future growth, improved operational resilience, and reduced risk, and can potentially enhance shareholder value.
For example, investments in research and development or innovative software can generate spillovers that boost productivity and spur industrywide innovation, sometimes leading to higher overall market returns. Similarly, workforce training can build a more skilled labor pool that benefits the broader economy.
We believe companies that innovate to solve environmental challenges or address societal needs can unlock significant market opportunities.
Strong practices in environmental stewardship, social responsibility, and corporate governance also signal operational stability and stakeholder focus, potentially lowering a company’s cost of capital and attracting investors who prioritize these factors.
We believe companies that innovate to solve environmental challenges or address societal needs—which we refer to as “enablers”—can unlock significant market opportunities. Investments that lead to, for example, reduced waste, a better-educated workforce or enhanced product quality can create a stronger brand reputation and customer loyalty, providing a durable competitive advantage.
Negative Externalities
Conversely, negative externalities, or unintended side effects that others have to bear, can erode shareholder value through increased risk and reduced growth potential. Historically, companies were less accountable for externalities such as pollution from manufacturing processes or unsafe working conditions. This is changing as companies increasingly face pressure to account for their adverse impacts. This “internalization” of costs can happen through regulation, weakening demand or the ability to attract and retain talent.
Integrating Intangibles and Externalities Into Investments
We have long viewed sustainable investing as an extension of fundamental research, considering how environmental constraints, social dynamics, and governance structures influence a company’s ability to execute its strategy, sustain competitive advantage, and manage downside risk.
At its core, we believe that investing sustainably in a broad sense is about incorporating intangible assets and externalities into the investment process, as these factors increasingly shape long-term value creation and risk.
This is not an ideological pursuit. Rather, it’s about being aware of the full spectrum of financially material risks and opportunities that can shape investment outcomes. To navigate this new reality, we believe it is important to continually evolve our investment frameworks and tools to help us try to account for a broadening range of a company’s potential value drivers.
Blake Pontius, CFA, is the director of sustainable investing at William Blair.
[1] The S&P 500 Index is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States. [2] Source: Oceantomo. [3] Source: European Financial Management. [4] Source: McKinsey.