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SEGUNDO CONGRESO ARGENTINO DE GOBERNANCIA EN LAS ORGANIZACIONES
Universidad del CEMA
Buenos Aires, 7 de Junio de 2013
Gobernancia Corporativa del Capital Intelectual
El Impacto de los Reportes de Capital Intelectual
Cesar Julio Recalde *
Universidad del Centro de Estudios Macroeconómicos Argentino
Buenos Aires – Argentina
* MS(w/d) in Operations Research - Naval Postgraduate School - Monterey –CA –USA
Doctorando en Dirección de Empresas - Universidad del CEMA
email: [email protected] – [email protected]
Corporate Governance vis-à-vis Intellectual Capital:
The Impact of Intellectual Capital Reporting
Abstract
Background: The role of intangible assets in today´s society is undeniable and continuously growing. More than 80% of corporate market is related to intellectual capital(IC). However, corporate governance principles and practices seem strongly based and oriented towards tangible assets. The impact of intangible assets on corporate governance requires prevention and adaptative actions. Intellectual Capital Reporting (ICR) seems to be a gateway towards adapting corporate governance to intangible assets influence and a conceptual cornerstone.
Purposes: The purpose of this work is to explore the influences IC exerts on corporate governance theory and practice and analyze the impact of ICR.
Design and summary: This work employs the theory of the firm and agency theory in order to conceptually explore the effects of each dimension of IC on key corporate governance issues, namely property rights and control by shareholders and residual claims by stakeholders, fiduciary duties of management and the board, opportunistic behavior and transparency. A comprehensive IC taxonomy and map is presented. Within the resulting context, internal and external impact of ICR on corporate governance and performance is conceptually analyzed. IRC constraint and barriers are identified. Intellectual liabilities are presented within the context of IRC. Finally, IRC regulatory framework is surveyed.
Findings: Relevant conclusions were rendered on the influence of intellectual capital on corporate governance. Sufficient evidence of a positive impact of IRC on corporate governance and performance was found. Additionally, it was found that IRC exerts a leveraging effect on IC itself. Intellectual liabilities are insufficiently researched and seem to have a relevant importance on IC measuring. IRC regulatory framework was found to be insufficiently developed to capture the essence of intangible assets and to meet corporate governance challenges facing IC.
Originality: This work develops a progressive approach to conceptually analyze the mutual influences between IC and corporate governance. An epistemic ideogram represents the intersection of analyzed theories. An IC map is presented. The relatively new topic of intellectual liabilities is conceptually analyzed in the context of IRC. Social liabilities and client liabilities are presented.
Key Words: Corporate Governance, Intellectual Capital, Intellectual Capital Reporting, Intellectual Assets – Intellectual Liabilities - Voluntary Mechanisms- Regulatory Framework.
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Corporate Governance vis-à-vis Intellectual Capital:
The impact of Intellectual Capital Reporting
I. Introduction
The role of knowledge in today’s society is undeniable: its impact as a chief source
of economic value has been recognized and emphasized over the last two decades. A
growing awareness found its peak by the turn of the century. The state of the world was
described by many as a “knowledge revolution” that could be thought of as a massive,
general and deep migration from the traditional tangible sources of economic value, i.e.,
land, capital and labor, to intangible assets, i.e., knowledge (Recalde, 2003, p. 7).
Perspectives were changed: the 1998’s World Bank Report was subtitled Knowledge for
Development. It addressed the centrality of knowledge in the creation of wealth and the
arising concerns given by the new and complex challenges facing the access to knowledge
(Stiglitz, 1998, p. 11).
Knowledge based theories were developed to explain new phenomena shaping the
profile of society. Economics of knowledge and the knowledge based theory of the firm
could be counted among them. Although historical figures like Carl Marx or Adam Smith
dealt with knowledge creation, use and appropriation, Simon, Hayek, Arrow and Machlup
must be considered the pioneers of economics of knowledge (Foray, 2004, p. 1). However,
economists “have found the whole subject of knowledge too slippery to handle” (Penrose,
2009, p. 68). The resource based view of the firm aimed at explaining the boundaries of the
firm as a result of the appropriation and allocation of knowledge (Barney, 1991). The peak
production of contents based in the newer paradigm and language took place during the
early nineties. The overall result was not a new and unified theory. Rather, it became a
series of explorations into the organization of production and several topics of the firm
with the unifying perspective of knowledge (Grant R., 2002, p.133). Among the most
relevant findings, consensus was built around the idea that knowledge has become the
chief source of a realistically sustainable competitive advantage.
Together with such findings, a stunning reality was taking shape. The gap between
the book value and the market value of enterprises was apparent. Beyond cash-flow and
discount rate news as stock value drivers, many uncertain reasons accounted for the
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creation of wealth implied in such a gap. For example, circa 2000, the gap between book
value and market value was astounding in the view of traditional economics or theories of
the firm: it ranged from 15:1 in the case of Coca Cola to more than 20:1 in the case of SAP
(Daum, 2002, p.4).
Ownership, control and management of such massive intangible assets became a
complex and controversial issue. Probably, the very intangibility of those assets might have
contributed to highly visible opportunistic behaviors. Although a series of corporate
corruption cases marked “records” in the seventies (Time, 1976), the turn of the century
produced an even worst wave of public indignation in face of the bankruptcy of large firms
like Pacifica Gas & Electric Co., Adelphia Common, Global Crossing, K-Mart, Merrill
Lynch and World Com among others. Economic damage in such cases rose above 100
billion dollars (Slavin, 2005, p. 27). The saga of events that led to the fall of Enron in 2001
(Apreda, 2007, p. 302) was followed by a tide of judicial events that caused the closure of
Arthur Andersen Consulting, thus becoming the flagship of corporate corruption models.
Public trust in the way firms were managed at the time was severely affected (Recalde,
2010, p. 4). The “dot.com” bubble crisis (Quinn Mills, D, 2002, p.25) reinforced mistrust
in top management and attention turned sharply towards corporate governance.
Two decades ago, corporate governance was known but to small circles within the
academia and the firms. Nowadays, “like climate change and private equity, corporate
governance, is a staple of everyday business language” (Mayne, 2007, p. 1). Though early
traces on the subject can be found in the early 30’s, it was not until the 70’s that a semantic
began to be built (Apreda, 2007, p. 4). A simple and introductory approach of corporate
governance could define it as “the framework of rules, relationships, systems and
processes by which authority is exercised and controlled in corporations” (ASX, 2010,
p.1). Property rights and control over invested assets by owners and shareholders and
residual claim rights by stakeholders becomes the central object of protection within the
realm of a theoretical and practical movement named corporate governance. Fiduciary
duties accountability of top management and boards are the focus of principles and
recommended practices. Among other indicators, information disclosure has been
identified as a key factor for good corporate governance. Transparency in the firm’s top
management actions contributes to shareholder’s ownership rights exercise and control by
means of better informed decision making processes. Information disclosure provides light
to moderate information asymmetries as a source of agency problems. Darkness, on the
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contrary, paves the way of opportunism. Disclosure on intangible assets remains obscure
within the framework of voluntary mechanisms despite the growing impact of intangible
assets in economic value creation. The growing share of intangible assets in market value
of firms is undeniable, and yet, information for shareholders and stakeholders is not a
common and widespread practice. The lack of a widespread and consented theoretical
framework on the interaction between corporate governance and intellectual capital does
not help practitioners in the matter. Despite a recent flow of research products on the
matter, “poor understanding, inadequate identification, inefficient management and
inconsistent disclosure of key components of intellectual capital” (Majdalany et al., 2012,
p.511) remains a common place. Furthermore, a preliminary review of corporate
governance regulations on intellectual capital shows feebleness as well.
The above described scenario spawns several difficult questions. What are the
challenges facing corporate governance of intellectual capital? What is the effect of
adherence to voluntary mechanism of intellectual capital reporting in corporate
governance, and business performance? What is the influence of intellectual capital
reporting on intellectual capital itself? What constraints or corporate governance variables
influence intellectual capital reporting? What liabilities embedded might be entrenched
with intellectual capital?
This paper conjectures that adherence to voluntary mechanisms of intellectual
capital reporting improves corporate governance and performance and contributes to
leverage intellectual capital itself.
In order to answer the aforementioned questions and validate the conjecture this
exploratory research reviews essential concepts of intellectual capital theory and focus on
corporate governance theory issues more influenced by intangible assets. The wide
spectrum of impact of intellectual capital on corporate governance is explored by means of
deductive thinking based on the framework provided by firm theory and agency theory.
Intellectual capital measurement and reporting is conceptually analyzed based on
inferences from previous research.
This exploration aims at contributing in the construction of a theoretical framework
in which intellectual capital reporting research could find an explanatory context.
II. The Growing role of Intellectual Capital
The growing role of intangible asset in the firms is overwhelming. The evolution of
its incidence in market value of Standard & Poors 500 index firms over the last 25 years, as
depicted in figure 1, evidence a marked trend. The value structure of the firm has been
almost inverted over that period of time; hence a different property awareness, ownership
and control scenario must have emerged.
Figure 1: The growing role of intangible assets1
Microsoft provides a crystal clear example of this trend: by the late 90’s its stock
market value was around $250 billion, “which is more than $10 million per employee.
Surely very little of this is attributable to its ownership of physical assets. Instead, by
leveraging its control over software standards, using an extensive network of contracts and
agreements that are informal as well as formal and that include firms from small start-ups
to Intel, Sony and General Electric, Microsoft has gained enormous influence in the
computer industry and beyond” (Holmstrom et al., 1998, p.85) . Despite the intricacies that
explain stock market value of firms, it is undeniable that intangible assets are the most
important factor of creation of wealth in developed countries and their strongest source of
sustainable competitive advantage (Boedker et al, 2005, p.4).
The growing importance of intangible assets generated a huge expansion in the
literature and yet, some researchers consider that the knowledge based theory of the firm is
still in its infancy (Wei Choo et al., 2002, p. 8). Furthermore, a great deal of concern has
been raised from the view of corporate governance around the obscurity in which
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1 Source: Ocean Tomo’ Intangible Asset Market Value Study, www.oceantomo.com, 2010.
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intangible assets are located with respect to ownership and control rights of its owners.
A great deal of both theoretical and practical contents on intangible assets,
intellectual capital theories and knowledge management has been constructed. However, a
the current early stage of dissemination and collective knowledge construction gave way to
a series of opinions, stereotypes and clichés that might generate misleading lines of
thought. Thus, revisiting central concepts seems a worthy endeavor in order to generate an
unequivocal context.
Knowledge is the primary “supply” for intangible assets and it is at the center of one
of the major revolutions in history. For Drucker (Peter, 1994, p. 24), “Every few hundred
years in western history, there occurs a sharp transformation… We are currently living
through just such a transformation…It is creating the post-capitalist society in which the
basic economic resource is no longer capital, nor natural resources (the economist
“land”), nor labor. It is and always will be knowledge. Value is now created by
“productivity” and “innovation”, both applications of knowledge to work”.
Knowledge is created in human minds as a result of an unplanned learning
experience or a conscious effort that generate “know how” or even more, “know why”2.
Transforming data into information by means of contextualization or analysis and then into
knowledge by means of detecting patterns and chains of cause and effect, is a typical path
of discovery3. Tacit knowledge resides in humans and moves along with them, thus
leaving the firm either for the weekend, holidays or retirement or to another firm. Explicit
knowledge remains in the firm “when the lights go off”. Transformations between explicit
and tacit knowledge, by means of capturing, organizing and sharing are the heart of
knowledge management strategies (Recalde, 2002, p.5).
Grant (Robert, 2002, p. 136) identifies five basic assumptions in his approach to the
knowledge-based theory of the firm. First, knowledge is the overwhelmingly most
important productive resource. Second, different types of knowledge vary in their
transferability; explicit knowledge might be communicated whereas tacit knowledge
transference is costly and slow. Third, knowledge is subject to economies of scale and
scope. Its initial creation is costly but subsequent replication and use is not, hence, returns
2 As an example, take a recipe. Ingredients and quantities are data. The sequence of steps is information. When a person prepared the recipe several times, gained knowledge based on learning:“know how”. When the reason for an ingredient or a step in the sequence is known by experience, then the person “knows why”, and could change the ingredient or the step, should the situation require. 3 Extracting information and knowledge from enterprise databases is often called “data mining”, which is a graphic image of a complex process that renders a useful intangible le product from massive amounts of “supply”.
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are increasing with use. Layers of knowledge are applicable to very different uses; hence
economies of scope can be achieved. Fourth, knowledge is created by humans; therefore
specialization is required for efficiency. Finally, the production of any good or service
necessarily requires the application of different kinds of knowledge.
When knowledge is capable of adding value to the goals of the firm or, in a broader
sense, of any organization, it could be designated as Intellectual Capital (IC). Accounting
theory defines intangible assets as non physical value drivers that represent claims to future
benefits (Baruch et al., 2005, p.42); the value created by the intellectual assets is then
called Intellectual Capital (Tsai and Hua, 2006, cited by Stam, 2009, pp. 92-104). A
general theory was built around this concept, however a disperse set of taxonomies have
been developed to explain its nature and classify its dimensions. Table 1 in Appendix 1
shows such dispersion in several examples of taxonomies associated to the IC. Figure 2
displays the map of IC derived from a compilation made around the most accepted
classifications.
In accordance to some resource based theory of the firm authors, intangible assets, as
a source of sustainable competitive advantage, must be an idiosyncratic resource controlled
by the firm; hence they are not autonomously negotiable and are in general out of the
market (Barney, 1991, p. 102). As a consequence, intellectual property such as trademarks,
copyrights, franchise rights, contract rights, licenses, trade secrets or patents, normally
included in the balance sheet at purchase price, is, more often than not, excluded from the
concept of intellectual capital. However, some authors and most practitioners of
knowledge management consider intellectual property within the domain of their
competences and for some companies like Dow Chemical, the administration of thousand
of patents is a core competence and a source of research and development in information
systems and processes (Thireauf, 1999,p. 18, Harrison et al., 2001, pp. 178-189). Figure 2
includes this controversial item for it becomes a subject of corporate governance practices.
Human capital encompasses the core of tacit knowledge of the firm. Competences
can be defined as the knowledge or abilities of people that can add value to the transactions
of the firm4. It is, basically, the “know how” that might evolve into “know why”. Attitude
implies the predisposition to add value to the firm goals. Mental agility refers to the
4 Note that not all knowledge possessed by persons in the firm becomes human capital. For example, one can imagine a janitor who holds a PhD in astrophysics. His job description encompasses building maintenance and provision supply to offices. His knowledge as an astrophysicist could not be considered human capital for it does not add value to the company’s goals. The human resources department could be asked about the matter though.
capacity to solve problems of tomorrow. Human capital is the source of innovation and
competitive advantage.
tacit knowledge explicit knowledge
Figure 2: Mapping Intellectual Capital
Ownership and control of human capital resides on each individual preferences,
hence contracting becomes an issue of agency and incentives (Holmstron et. al, 1998, p.
78). However organizational knowledge dimension of human capital may be subject to
some degree of control by the firm, hence it could be subject of transactions and naturally,
asset specificity (Besanko et al., 1996, p.151). Different business combinations generate a
structure of human capital as a source of value and competitive advantage for the firm.
Control over such a structure becomes an issue for unexpected kinds of right claims can be
identified among those who form the human capital specific to contracting relations.
Social capital does not have a clear and unquestionable definition and different
disciplines and theories generate sundry approaches. From the stand point of intellectual
capital theory, Social Capital can be considered as the sum of perceptions of stakeholders.
For Claridge (Tristan, 2010) social capital are relations with the surrounding community
that may have productive benefits. The perceptions of the environment in which the firm
develops its activity may smooth, complicate or even crumple its transactions. It could be
argued that social capital has a major component of tacit knowledge in perceptions spread
around in the communities or social structures surrounding the firm. Corporate Social
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Responsibility (CSR) practices attempts to identify a social balance resulting of the
interaction of the firm with the society. The result of such a balance is the seed of claim
rights towards the firm. Although in general it can not be transferred, social capital
becomes an asset subject to investment or disinvestment as a result of actions of the firm
and therefore, has indirect effect in transactions.
Structural capital is, in short, “knowledge that stays with the firm after the staff
leaves” (European Commision, 2006, p. 11). It encompasses explicit knowledge produced
by means of organizational learning processes. A good example of organizational learning
and the accruing of structural capital is the Eureka Project carried out by Xerox. This
company transformed individual tacit knowledge into explicit knowledge by means of
several processes embedded in IT resources. The project not only increased effectiveness
but also saved Xerox 100 million dollars a year in product troubleshooting tasks5 (Bobrow
et al., 2002, cited by Chang, 2010, p. 482). According to the Brooking Institution Task
Force in Understanding Intangible Assets (European Comission, 2006, p. 11), the
structural capital can be controlled but, in general, not separated out and sold.
Organization and processes are at the core of structural capital and normally
include the central business idea and practices of the firm. Information technology
solutions normally have most business processes embedded on them; therefore it
constitutes a cornerstone of the firm structural capital. The franchising model implies the
codification and “packaging” of organization and processes as products to be sold.
Relational capital includes all connections of the firm with its environment that can add
value to the business. It refers mostly to suppliers, government agencies and NGO’s with
which the firm has business relations. “It is not what you know, it’s who you know” what
matters: a well constructed network of relationships allows the access to resources that
might be normally unreachable (Bounfour et al., 2005, 232). Address books and
interaction-based comments on each contact are clear pieces of explicit knowledge and a
5. By the late nineties, Xerox had hundreds of different types of document managing products like photocopiers, printers and scanners sold and in service. Their maintenance was within the business envelope by means of more than ten thousand technicians, sometime within the firm, sometimes outsourced. Effectiveness and efficiency was critical to the brand reputation. Every time a machine was repaired by a technician, tacit knowledge was created. If a technician repaired a given machine in three hours, then the diagnosing time for the next one would be reduced for that particular technician but not for the rest who did not have the same experience. Xerox realized the individual learning process and transformed it into an organizational learning process. To such a purpose, each technician, after a labor day would have to upload its experience (symptoms, spare parts used, approach to troubleshooting, etc.) to a network resource typically named “knowledge base”. If other technicians, anywhere in the world, are tasked to repair a product, would consult the knowledge base and the time employed in the repair would be drastically reduced. This organizational learning process created a ubiquitous repository of explicit knowledge (Recalde, 2002, p.5).
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source of leveraging business practices. Accruing a relational capital implies method and
investments. Some authors include customers within the relational capital but some
essential differences may be identified and indicate a separated consideration: metrics of
performance, evolution and tendencies are closely tied to the core of business activity.
Intellectual property, as previously stated, is normally included within structural
capital for it implies an explicit knowledge with a perfect definition and a crystal clear
profile of ownership and control. Among the components of structural capital, patents,
trademarks and such, are the most tradable of all dimensions of IC. Moreover, intellectual
property exchange firms and banks appeared as indicators of a growing market6. Research
and development include processes oriented towards the creation of new products or
services or the improvement of the existing ones. Investment in innovation and research
and development are the source of value creation and future competitive advantages and,
sometimes, survival of the firm. Nonetheless, the complex nature of the knowledge
involved in R&D makes it difficult to manage, evaluate and control investments and its
associated returns, thus opening a window of obscurity in the realm of transparency.
Client Capital can be defined as the accumulated tacit and explicit knowledge the
firm possess on customers and customers possess on the firm, its products or services
(Recalde, 2003, p. 11). As a perceptual factor, client capital is what customers know, think
and feel about the firm and its products or services. Hence, it can not be considered neither
purely human nor purely structural capital. Knowledge bases on customers habits7,
geographic distribution and brand loyalty8 accrue intangible assets that require strategy,
management and, naturally investments. Hence they are subject to contracting and
transactions costs.
IC has a dual role in the economy: either it is part of the set of means employed by
business practices to carry out production or delivery of products and services or it is a
product by itself. Mc Donald’s is an example of a knowledge company where the bulk of
6 Ocean Tomo, LLC, is an “Intellectual Capital Merchant Banc™” firm. The company provides financial products and services related to intellectual property, including expert testimony, valuation, research, ratings, investments, risk management and transactions. Ocean Tomo assists clients – corporations, law firms, governments and institutional investors – in realizing Intellectual Capital Equity®. www.oceantomo.com 7 Discount cards provided at department stores or grocery stores incessantly capture data on customers at the price of technology information investments. Data is analyzed, contextualized and transformed into information. Information in action yields experience that accrues knowledge on chains of cause and effect that bring benefits, lessons learned and best practices. Client capital has been accrued. 8 Brand loyalty for a locally produced cereal product in Bahia Blanca was measured by means of controlled and progressive increases in its price that were compared with decreasing in demand and jumping to next best product.
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its trade is knowledge in the form of a franchise. Mc Donald’s franchisees deal with
tangible assets (“meat”, labor and financial capital among others) whereas Mc Donald’s
sells its accrued explicit knowledge for a fee. Editorial and entertainment industries,
professional services and many other types of business have knowledge either as a supply
or as the basic trading product: upstream and downstream paths could be easily imagined.
All businesses, tangible or intangible product oriented, rely on IC to carry out their
activity. Contracting on intangible assets implies different and complex contexts in which
both transaction costs and agency costs profiles will be shaped as a result of clashing
interests.
Intangible assets, as object of transactions imply a new set of dimensions to take
into account, hence theoretical support becomes crucial. However the epistemic
demarcation of the IC theory has not been precisely drawn yet. It remains in a scorching
state as a new paradigm (Mc Grath, 2003, p. 81). Intangible assets concepts are still in a
process of conjecture and refutation (Popper, 1994). As a consequence, the lack of a
commonly agreed upon rationality, language and contents makes it much more difficult to
build contracts involving intangible assets as compared to tangible assets.
III. Focusing Corporate Governance Perspective
Intellectual capital and corporate governance theories do not have a clear cut
epistemic demarcation: rationalities, language and contents tend to be somehow
heterogeneous, probably because both theories are under an ongoing scientific
consolidation process. Hence, in order to appraise the impact of IC on corporate
governance it becomes convenient to establish epistemic boundaries within which develop
the analysis.
Corporate governance could be conceived as a revolutionary paradigm in the view
of Kuhn (Jackson et al., 2000, p. 613) for it aims at explaining organizational phenomena
and behaviors not thoroughly addressed by traditional theories and at proposing lines of
actions to attain desired effects in the land of practice. Thus, despite its profound and
transcendent practical dimensions, it might be considered a theory as well. Given above
mentioned lack of epistemic demarcation, corporate governance semantics becomes
sometimes blurry and polisemies are not unusual (Apreda, 2007, p. 3). Both as a theory
and as a field of practice, corporate governance encompasses a wide and growing spectrum
of issues including, among many others, financial management, boundaries of the firm,
legal accountability, social responsibility, and ethical issues. Such a multidisciplinary
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approach contributes to the richness of contents explaining phenomena within the firm and
its environment. In order to explore the intersection of the realms of intellectual capital and
corporate governance, this work focuses on areas of the latter in which the interaction with
the former is relevant.
The role of corporate governance in society is central for it has been acknowledged
a critical factor in economic development and financial market stability (Baker et al., 2010,
p. 131, Rajan et al., 1998, 560). Although early findings related to the current concept of
corporate governance could be found out in the early 30´s, it was not until the 70´s that a
new differential and holistic approach to the issues involved was taken (Apreda, 2007, p.
7). The very concept of governance was constructed, narrowed and applied to corporations
and, later to the public sector and ONG´s. Many different perspectives yielded a wide set
of definitions for corporate governance and diverse dimensions or categories of its nature.
Apreda (Rodolfo, 2007, p. 5) defines governance as a field of practice and research aimed
at i) finding principles, rules and best practices in order to permit efficient leadership of
organizations within the rules provided by its foundational charter and the law; ii) the
design, implementation and monitoring of a framework for property control,
accountability, conflict of interests solutions and agents incentive, evaluation and reward.;
and finally, iii) validation, distribution and exercise of power9. In the end, it is just about
property and power. When focusing on governance of private sector, again, diversity of
approaches takes place again. Apreda constructed a comprehensive profile of issues at the
core of corporate governance: i) organization, internal rules an best practices codes, ii)
property structure, iii) control decision rights of the board, iv) fiduciary duties of top
management, v) investors property rights, vi) conflicts of interest among shareholders,
board and stakeholders, vii) information disclosure, viii) accountability, and ix)
opportunistic behavior avoidance measures (Apreda, 2007, p. 8).
The intersection between corporate governance and intellectual capital concepts
might encompass a wide ranging set of issues and concerns, both, theoretical and practical.
However, just for the sake of simplicity and scope this work focuses exploration on the
different corporate governance scenarios rendered by IC on aspects centered around
property rights and control, stakeholders residual claims , fiduciary duties, opportunistic
behavior and transparency. IC disclosure, as a corporate governance resource is afterward
analyzed. Concepts from the theory of the firm and agency theory are employed as a tool
9 A wide ranging of definitions for corporate governance and its analysis can be found in Apreda (2007, p. 7).
in order to understand the intimate relationship between the selected issues of corporate
governance and the most relevant dimensions of IC. Somehow, the theory of the firm
becomes the battlefield where IC and corporate governance theories are to clash. Figure 3
shows an ideogram of the fields of knowledge involved in this analysis.
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THEORY OF THE FIRM
incomplete contracts information asymmetries
asset specificity agency theory
…
INTELLECTUAL CORPORATE GOVERNANCECAPITAL
Figure 3: Corporate governance and intellectual capital interactions
IV. Corporate Governance of Intellectual Capital
Property rights and control by its owners is at the very centre of concern of
corporate governance. The incessant expansion of the public company in North America,
and the British Commonwealth, the state or bank owned company in Europe and the
keiretsu in Japan and other Far East countries, created successive layers of management
and, hence, decision making processes between shareholders and their assets. The ability to
attain shareholders preferences and look after their interests became weaker as market
growing, vertical integration processes, mergers, strategic alliances and globalization
dominated the corporate world. The “dot-com” bubble, the Enron scandal and the “real
state bubble” disaster at the beginning of the 21st century, were the just tip of an iceberg of
a major crisis in corporate governance. For Capasso (Arturo, 2004, p. 4), the “crisis of
traditional corporate structures, in the main industrialized countries, together with either
local or contingent reasons, may have its common root in the growing relevance that
intangible assets in the composition of firm’s assets”. As a consequence, in order to
explore the corporate governance of IC, it is convenient to review its location in the
human capital structural capital
client capital social capital
knowledge management …
property rights stakeholder’s claims
fiduciary roles opportunistic behavior
transparency …
focus
composition of the firm assets. Figure 4 displays the visible assets above the dotted line
and, below, the invisible realm of intangible assets not captured in the balance sheets.
mar
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Figure 4: the composition of the firm assets.
Intangible assets accounting for the gap between market value and book value do
not include intellectual property or goodwill10 for both of them are incorporated in the
balance sheet at purchase price and could be autonomously negotiated. Within such a
structure, intangible assets must be mirrored by an invisible equity that creates property
rights to be owned and controlled, thus becoming one of the main challenges facing
corporate governance.
Property rights and control
A review of corporate governance theories and practices reveals that they are
mostly referred to tangible assets, hence the difficulties in identifying the nature of
intangible assets as an object of property and control. Two main distinctive features could
be identified with the purpose of helping construct a wider and deeper background in
which to understand the elusive nature of intangible assets property rights and control.
First, considering Williamson’s (Oliver, 1985) statement on uncertainty as a key
factor to transaction, the context just developed provides ground to identify some
particularities that arise when intangible assets are involved in a transaction. Owing to the
growing importance and scale of intangible assets in today’s economy, the weakness of
commonly accepted theories, strategies and procedures to understand and manage
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10 Goodwill accounts the gap between market value and book value at the time when the company was purchased.
intangible assets and the difficulties in measuring them, a key factor should be highlighted:
complexity. Complexity could be understood as the frontier between order and chaos
(Byrne, 2001, p. 16).11. More often than not, that is the case when intangible assets are
involved. Complexity is a cause of uncertainty; hence a more bounded rationality,
enhanced asymmetries and harder to design and implement measures of performance,
increase contract incompleteness, thus ex-post bargaining positions are the common place
of operations. As a consequence the control shareholders might have to exert their
preferences through the board and top management decision making processes becomes
bulky and weaker. Furthermore, from an agency theory stand point, information
asymmetries between shareholders and the board or top management might be increased
due to the complexity of intangible assets. Reliable information seems to be the first step
and only navigation tool for understanding and controlling intangible assets. Second, the
critical mass of intangible assets required to maintain sustainable competitive advantages
on wider and wider markets rises at the pace of globalization and market integration. As a
consequence, IC investments experienced a dramatic increase over the last decades as
compared to tangible assets. The impact is relevant at the macroeconomic level as well:
figure 5 shows the increasing share of investment in intangible assets as a percentage of
business output compared to tangible assets as reported by NIPA12 (OECD, 2006, p.7)
Figure 5: Investment share in intangible assets
11 A social, economic, political or technological system can be considered as complex when a large set of variables governing processes, many of them probably unknown, generates non deterministic or random outcomes. It could be argued that randomness is just a matter of information dominance: the outcome of throwing dices a natural example of randomness. However if the initial position of each dice and the forces and accelerations applied by the movement of throwing them could be precisely measured and known, then the outcome would be deterministic. As a consequence, the stronger the ability to gather and process information, the lower the randomness of an event.
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12 “Existing NIPA” stands for the share of investment currently included in the United States National Income and Product Accounts and includes durable equipment and structures plus investment in software. The lowest curve, excludes software from the accounts.
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Stakeholder’s residual claims
Knowledge is created as a result of human interaction and organizational processes.
Client capital, relationship capital, social capital and human capital are accrued as a result
of a complex network of contracts that are more often than not either incomplete of tacit.
Intangible asset specificity becomes a common place in value creation. Hence the
fundamental transformation envisioned by Williamson (Oliver, 1985) takes place. Mutual
interdependence by means of knowledge grows at the pace of scale and scope growing of
the firm13. An example might help understand the concept. In the early 90’s IBM
contracted International Systems to develop and produce a microprocessor to be a part of a
new system. Despite coordination problems, a relationship specific intangible asset was
developed in the form of human capital accrued by means of learning processes and
structural capital resulting from organization, processes and research and development
(Besanko et al., 1996, p.149). Those resources were sunk in the relationship and mutual
interdependence gave way to ex-post bargaining positions. Such positions, in the essence
were based upon residual claims on the common intangible property that was created.
Stakeholders are economic or political agents that can pose persistent claim rights
to the firm during a given period of time and are affected by both, success or failure of the
firm (Apreda, 2007, p. 10). Mutual interdependence based upon the fundamental
transformation in the realm of intangible assets has a crucial consequence: relevant
knowledge is no longer under the direct control of the firm. The very presence of
intangible assets modifies the allocation of residual claims for the firm’s performance can
affect the wealth of stakeholders who are critical for the company’s success (Williamson,
1988). Accruing a shared intangible asset implies the construction of residual right claims
by a new type of stakeholders with features of quasi shareholders that could be termed
super stakeholders. Examples of super stakeholders can be found out in human capital as
key employees, contractors or business partners; client capital when relationship specific
investments might be central to the core business; and relational capital, when other public
or private institutions became relevant. Wages, incentives, occupational security and
working environment, contractual precedence, and social or environmental responsibility
13 In the early 90’s IBM contracted International Systems to develop and produce a microprocessor to be a part of a new system. Despite coordination problems, a relationship specific intangible asset was developed in the form of human capital accrued by means of learning processes and structural capital resulting from organization, processes and research and development. (Besanko et al., 1996, p.149)) Those resources were sunk in the relationship and mutual interdependence gave way to ex-post bargaining positions. Such positions, in the essence were based upon residual claims on the common intangible property that was created.
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are among the most classical residual claims. Trust and cooperation is at the core of
qualities needed to maintain stakeholders claims satisfied. It is worth highlighting that
investments in satisfying super stakeholders claims, will normally increase, albeit generally
immeasurably, the value of intangible assets. The success of keyretsu type of firm network
testifies this assertion. The wide spectrum of situations and complexity of the dynamics
involved in this new type of stakeholders makes it difficult to qualify or quantify the extent
of their claims, thus remaining a most interesting research challenge.
Fiduciary duties
In a broad sense, a fiduciary relationship takes place when an agent willingly
commits himself to look after the interests and attain the objectives of another agent often
termed as the beneficiary (Apreda, 2007, p. 54). Hence, fiduciary duties are naturally
accrued. The firm functionality implies the establishment of a network of fiduciary
relationships. Top management has fiduciary duties towards the board of directors which,
in turn, has fiduciary duties towards shareholders. Fiduciary duties can be identified with
respect to stakeholders as well. Cession of property rights and control is at the core of
corporate governance concerns. The board of directors and top management have fiduciary
duties within a set of other general duties like loyalty, fair dealing, care, not entrenching
and supervision among others (Colley et al., 2003, p. 16).
Fiduciary roles, among other duties spawn the need for accountability, which
includes two concepts: commitment to carry out the agreed endeavor and to be responsible
for its results. Hence top management and the board of directors are accountable before
shareholders for protecting their interests and attaining their economic objectives.
Fiduciary duties have been thoroughly identified in the realm of tangible assets in general
and in particular in the finance structure and functionality.
When intangible assets are involved, compliance with fiduciary duties becomes an
elusive issue due to the complex nature of knowledge as a resource. When intangible assets
are invisible to accounting, it becomes difficult for shareholders, and stakeholders to
appraise the extent of responsibility or commitment of top management or the board.
Agency performance gets harder to evaluate. Looking after intangible assets requires
sometimes a brand new and different set of fiduciary duties as shown in Table 1 of
Appendix 2. Intangible assets, more than tangible ones, require a more proactive attitude:
Table 2 shows the difference between working “in the business” as compared with “on the
business”. For instance, neglecting the need of continuous improvement might imply a
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failure in compliance with fiduciary duties for the stronger natural decaying of knowledge
might erode a hardly accrued asset.
Opportunistic behaviors
Rent seeking, soft budget constraint and tunneling are three faces of opportunistic
behavior (Apreda, 2007, p. 344). In the essence, such behaviors describe situations in
which either the board or the top management obtain personal or group benefits from the
assets under their control by means of the power they are invested with and at the expense
of shareholders or stakeholders common wealth. It could also be described as a truly
rational behavior that evidence a deliberated will of exerting deception, fraud, malice or
simulation to carry out the purpose in mind. A word synthesizes the concept: corruption.
Opportunistic behaviors are at the centre of corporate governance concerns for it affects
property right and claims of shareholders and stakeholders. It could be also considered as
an organizational pathology for which preventions ought to be taken. An exhaustive
phenomenological description of corruption within the realm of corporate governance was
developed by Apreda (Rodolfo, 2007, p. 341). Recalde (César, 2010) describes the
intimate nature of the phenomena of corporate corruption within the realm of applied
ethics. Facing such a risk a natural question arises: what happens when the opportunist
finds himself in the realm of intangible assets?
Several factors seem to contribute to opportunistic behavior when intangible assets
are involved; most of them related to the elusive nature of knowledge and the above
described intrinsic complexity of transacting with it. Among those factors information
asymmetries, bounded rationality, difficulties in measuring IC assets and returns, asset
specificity and uncertainty are the most remarkable. A clear example of this problem can
be found in research and development investments. Uncertainty is the prevailing factor
because foreseeing the future return of current investments becomes a grueling task due to
the complexity of knowledge as a resource. Researchers tend to overestimate forecasted
returns in order to secure investments. Top management might focus on personal short
term benefits related more to the allocation of resources as a means of power rather than to
the real long term competitive advantage. Furthermore, R&D has been identified as a
particularly apt field “for accounting make ups or to hide managerial perquisites and
unscrupulous behaviors of controlling shareholders” (Capasso, 2004, p. 8). Information
asymmetries are also enhanced when intangible assets are involved due to the natural
complexity of knowledge as a resource and the lack of information on the side of
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shareholders or potential investors. Contractual intellectual asset specificity, a common
place in R&D, also becomes a source of opportunistic behavior for seeking quasi-rents
opens windows of bargaining where unscrupulous managers might take personal profits.
From the stand point of agency problems, intangible asset increase information
asymmetry and rationality becomes even more bounded due to the complexity of
knowledge in transactions. Performance is less observable as compared to tangible assets
hence, agreement of incentives becomes a blurry matter open to opportunism.
The above mentioned necessary rising in the amount of investments in intangible
assets needed to sustain competitive advantage, increases the potential profits of
opportunistic behaviors and decreases the capability of control by shareholders. Intangible
assets qualitatively modify the firm’s financial needs, as intangible assets higher implicit
risk and their reduced cautioned value require a larger equity-base (Williamson, 1988). As
a consequence, the impact of unscrupulous behavior in the financial positions seems to be
high, thus transcending the realm of intangible assets problems onto the overall corporate
governance picture. Again, transparency is the first antidote against opportunistic
behaviors for information disclosure contributes to better informed decision making.
Transparency
Appropriate information has been already identified as antidote of several corporate
governance pathologies as opportunistic behavior, difficulties in exerting property rights
and control by shareholders, defining suitable stakeholder’s residual claims, or fiduciary
duties. Property rights and control and residual claims demand accountability from top
management and the board. Information disclosure is the vehicle of accountability.
Transparency is a healthy state of corporate governance information flow and a paramount
accountability means. In order to ensure transparency, information must be opportune,
reliable, relevant and objectively verifiable (Apreda, 2007, p. 88).
Transparency has been acknowledged as one of the core corporate governance
principles. A robust implementation of the transparency principle extends beyond financial
information to include disclosure on the firm broad strategies, its operational and
competitive dynamics, remarkable corporate initiatives, decisions and actions, ownership
structure, shareholders rights and control, stakeholders environment and status, and
management and board structure, functionality and incentives (Dallas, 2004, p.86).
However, not all information shall be disclosed, transactional secrets ranging from
financial functionality to technological advances or legal or contractual details must be
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safeguarded to protect the firm structure and positions (Apreda, 2007, p. 90). Transparency
is one of the leading indicators of a firm’s governance practices and culture. It describes
the firm from the most important stand point investors are interested in: moral standards
and reliability.
Transparency is therefore a key factor in the capital allocation process for it fosters
informed decisions of investors and creditors. One natural consequence of a frail
transparency environment is simple and direct: risk. Regardless of outstanding returns on
investment, few people might be willing to face the risk that arises from obscure
information structures. Extended research accounts for the deeds and effects of
transparency. Botosan (Christine, 1997) transparency vis-à-vis cost of equity capital and
found out that under certain conditions transparency reduces the cost of equity capital.
Kanna (Tarun et al., 2002) investigated differences in transparency among firms operating
in local markets as compared to operation in international markets and concluded that the
former tend to have higher disclosure standards, thus it becomes a distinctive “passport”
that helps global strategies. Standard & Poors conducted research on the relationship
between level of disclosure and firm’s value and on jurisdictional diversity of transparency
practices. Findings suggest that the firms with higher levels of disclosure are normally
more valuated and that highest standards are located in the Anglo Saxon countries (Dallas,
2004, p. 89). Further research found out evidence that the impact of information disclosure
on market value is higher for smaller firms (Barnet, 2003).
A widespread awareness on the importance of information disclosure led to a
significant development in the practice of information disclosure by means of either
external or internal auditing. However the gap between statutory transparency firms’
habits and actual needs of potential investors, shareholders and stakeholders became more
noticeable as the pace and tempo of more sophisticated capital market tools and practices
spread with globalization. Public scandals already mentioned had relevant roots in lack of
disclosure. New transparency corporate failures and weaknesses are being identified
nowadays and attention rises on the matter (Dallas, 2004, p. 87). Concerns get even higher
when intangible assets are involved for they account for most of the firm’s market value as
previously stated and gloom seems to be the prevailing picture in the matter of information
disclosure.
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V. Intellectual capital reporting
Transparency is built upon information disclosure. The intellectual capital is
nowadays mostly invisible to the balance sheet; hence, there is an information handicap as
compared to tangible assets. Some consequences arise. As previously stated, property
rights are naturally challenged to control the greatest component of the firms´ market
value; accountability becomes more complex; stakeholders tend to have a blurry picture as
a base of their residual claims and opportunistic behaviors have darker shades where
camouflage is easier.
Financial reports describe the past performance of the firm. Intellectual capital is
the source of rent positions in the future; hence its disclosure illustrates shareholders,
stakeholders and investors, thus contributing to better informed decisions. Thus,
Intellectual Capital Reporting (ICR) becomes a need and a major challenge because it is
intimately linked with key corporate governance issues such as monitoring of senior
management and strategy by the board, reporting and accountability to shareholders,
oversight of internal control and risk policy making. Disciplining management and boards
by means of ICR, improves governance and renders positive economic consequences
(OECD, 2006, p. 5).
Early concerns and actions related to intellectual capital reporting (ICR) can be
traced back to the mid nineties. Nevertheless the weakness of ICR became noticed,
particularly in the United States (OECD, 2006, p. 14). The first ICR was presented by
Skandia, a Swedish financial services firm (Sullivan, 2001, p. 419). A long debate on
accounting standards for including intangible assets on financial reports came to a blind
alley: consensus was constructed around the idea that financial reports appear to be
inherently inadequate for including intellectual capital (OECD, 2006, p. 31). Several
international and local organizations advanced in the development of standards for ICR. In
1999, the International Accounting Standards Committee (IASC)14 released IAS 38 norm
in order to outline the accounting requirement for intangible assets. The norm provides
definition and criteria for recognition, classification, measurement, valuation and
disclosure of intangible assets. The standard offers a cost model and revaluation model for
measuring purposes. Assigning a value to intangible assets becomes a difficult task hence
14. International Accounting Standards Committee was founded in June 1973 in London and replaced by the International Accounting Standards Board on April 1, 2001 under the umbrella of the International Financial Reporting Standards (IFRS) Foundation. It was responsible for developing the International Accounting Standards and promoting their application. www.ifrs.org.
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limiting adhesion to the norm or the scope of assets included. In general, the accounting
standards remain too stiff in all norms and very little of intangible assets qualifies for
financial reports. As a consequence, narrative reports became the appropriate and most
common vehicle for the purpose. ICR narratives are the final step of a process that
includes, identification, measurement and valuation. Identification implies finding out
what components of the IC add significant value as to be considered. Measurement implies
a quantitative appraisal of their impact in the business investments and outcomes.
Valuation, the hardest step, implies a monetary estimate of the contribution of an
intellectual capital item on the market value.
Narrative ICR complement to financial statements must not only comply with the
above described requirements for transparency, i.e. reliability, opportunity, relevance and
verifiability. Furthermore they must translate assets qualitative and quantitative features
into a shared rationality and language by means of method and analytical information.
Several initiatives, most of them underway, promoted different standards for ICR.
Appendix 3 brings details on the most relevant initiatives and developments on the subject
(European Commission, 2006, p.). The prevailing practice of the proposed frameworks is
to encourage companies to report progress on IRC (OECD, 2006, p. 13). Diverse regional
organizations maintain initiatives aimed at incorporating IRC into business practices. The
European Union through the European Commission launched a plan oriented to such end
(European Commission, 2006, p. 15).
Behind each initiative a model for measuring and valuing IC has been selected and
employed. Several researchers, practitioners and organizations developed models for
identification, measurement and reporting. The most widely known are Edvinson´s
Skandia Navigator (Leif et al, 1998), Kaplan´s Balanced Scorecard (Robert et al., 1997),
Sveiby´s Organizational Wealth (Karl, 1977), the EFQM15 model. Each one of them
determines rationality, a language and methods to codify IC. In general they provide a
scoring method where subjective appraisal becomes a constraint and eventually a problem.
Differentiation among them can be made, for example, on the type of company to which
the method is directed, its conceptual base and perspectives, whether or not measurement
of monetary valuation is made or whether they are oriented to the creation or the extraction
or value.
15 EFQM: European Foundation for Quality Management. www.efqm.org
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In order to construct an appraisal on the impact of such models on corporate governance
concerns it is worth expanding on one of them. The Skandia Navigator focus on five
dimensions to explore, identify, measure and evaluate IC: financial, customer, process,
human and renewal and development as shown in Appendix 4.
For each dimension a set of indicators is defined16. Some of them are measured in
monetary units and others in percentages (non-dimensional). Examples of the first type
include, among others, investments in new technologies, research and development,
purchase of trademarks of patents, training, branding or new market developments. Current
cash flows become measurable IC. Examples of the second type include, among others,
customer satisfaction, process effectiveness, administrative or operational efficiency and
leadership and motivational indexes. The determination and evaluation of each indicator
implies a process that dives deep into the financial and operational functionality and
culture of the firm. The indicators have to be customized for each firm because of
idiosyncratic features that makes each IC unique. Subjectively weighted monetary and
non-dimensional indicators are then combined by a model in order to render an appraisal of
IC value (Edvinson et al., 1997,p. 209)17. It is worth stressing that this value will not
account for the whole “invisible equity” of the gap between market and book value for it
depends of externalities of the market and an intricate process in which explicit and
implicit information plays a vital role.
ICR remains in the realm of voluntary mechanisms of disclosure, more often than
not as narrative enclosure to yearly financial reports. ICR practices vary drastically from
one country to another and from one region to another. Social, political, economical and
cultural reasons account for the differences. A positive relationship between ICR
adherence and skills and country development level was found in some works. Australian
enterprises thought of as “best practice” in this regard, were found out behind European
firms in their ability to measure and report intangible assets (Guthrie et al, 2000, pp.241 –
251). Adherence to ICR also varies as a function of industry. The nature of the activity
drives the differences. Sectors with higher component of intangible assets tend to produce
16 Although the number of indicators changes from company to company and with time as business evolves, in the example provided by Edvinson (et al., 1997) for an hypothetical case it is possible to have an appraisal of the extent of the task : Finance:20 , Customer Focus: 27, Process: 31, Renewal and Development: 61, Human: 14. 17 Once the indicators have been determined and measured, those in monetary units are included as the base of intellectual capital C. A selected set of percentage-type indicators that evaluate performance are gathered and averaged in an efficiency coefficient i. Thus, the intellectual capital IC can be valuated as: IC = C * i (Edvinson et al., 1997, p. 209).
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higher levels of ICR. An analog behavior was found out in larger firms as compared to
smaller ones (Magena et al, 2010, p. 44-48).
Adherence to voluntary mechanisms of disclosure of intangible assets has been
growing incessantly over the last decade. However, there are some corporate governance
concerns imposing constraints and barriers to get involved in ICR and to the level of
disclosed information.
Intellectual liabilities
A word of warning should be taken into account in the process of identifying,
measuring and appraising IC: recent research found out that a relevant factor was omitted
both by researchers and practitioners: the construct of intellectual liabilities. Most methods
and accounting standards used for ICR purposes do not include intellectual liabilities. In
general a liability represents a future obligation or a hindrance that might cause harm o
deterioration to the firm. Based in accounting theory, an asset generates future economic
benefits and a liability a future economic loss. The value created by intellectual assets is
the IC. Just as intellectual assets are the determinant factor of some firm’s wealth, strength
and competitive advantage, it sounds logical to develop correlated liabilities as the firm’s
determinant factors of weakness or competitive disadvantages. Whilst value creation is
rooted in IC, value destruction is rooted in intellectual liabilities, hence, in accordance with
this theoretical approach, the appropriate value of IC should be obtained subtracting
intellectual liabilities from intangible assets (IC=IA-IL) (Stam, 2009, pp. 92-104).
The same complex mechanism that makes IC push stock value above book value
makes intellectual liabilities push it down. Omission of intellectual liabilities by
researchers and practitioners seems to be caused by a lack of regulatory frameworks and
“poor understanding, inadequate identification, inefficient management and inconsistent
disclosure of the key components of IC” (Petty and Guthrie, 2000 and Brennan, 2001 cited
by Majdalani et al, 2012, p. 512). Stam (Christian, 2009), identifies a natural tendency to
concentrate cognitive interests on success rather than failure as a reason to neglect the
existence or the impact of intellectual liabilities.18 Current awareness on the matter of
intellectual liabilities is evidently insignificant when compared to IC. 19
18 Stam (2009) exposed the results of two Google searches as an example: “high performance organizations” vs. “low performance organizations” obtaining 45000 for the former and 319 for the latter. 19 Again a Google illustrate the difference between “intellectual capital” and “intellectual liabilities”. Nowadays it shows 1.720.000 hits for the former, and 1.750 for the latter.
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Assumed the existence and the potential impact of intellectual liabilities, the natural
following question is how to identify and eventually measure them. Stam (Christian,
2009), proposes a framework based in the dimensions of IC20. In order to help identify and
categorize intellectual liabilities they are classified as external or internal. External
intellectual liabilities have two dimensions: force majeure, including natural, political,
social or economical factors outside of the control of the firm, and market liabilities that
captures the risk of decline as a result of competitive forces or conditions in the market.
Internal intellectual liabilities might weaken the firm as a result of internal forces of decay.
Human liabilities might include deterioration in quality, competences or attitude of the
labor force. Structural liabilities comprise failures or lack of effectiveness or efficiency of
organizational processes, misalignment or weakness in R&D investments or
mismanagement of intellectual property. Relational liabilities consist of potential
deterioration in the relation with customers, investors, creditors or stakeholders. Appendix
6 shows an overview of possible intellectual liabilities for each dimension of IC. Cross
referencing Stam (Christian, 2009) intellectual liabilities proposed framework with the IC
map previously developed in this work, it is possible to find two more dimensions were
awareness must be fostered: client liabilities and social liabilities. The first case could
include eventual damage to accumulated reciprocal knowledge or perceptions between
customers and the firm as well as lack of effectiveness or efficiency in the administration
of such knowledge. The second case might encompass deterioration in social or
institutional perceptions about the firm. Corporate social responsibility plans attempt to
maintain and augment relational capital as well as reduce liabilities.
Methods for intellectual liabilities identification and evaluation have not been
sufficiently developed yet and. Nevertheless attention ought to be given to liabilities
hidden behind IC. Regardless of the method employed to evaluate IC, the firm must
identify its intellectual liabilities as non-physical items that imply future or potential
economic loss to the firm in order to prevent its occurrence or mitigate its effects.
(Majdalani et al, 2012, p.511).
ICR corporate governance constraints and barriers
20 Stam (2009) classifies intellectual capital in human (H), structural (S) and relational (R). Then, each capital is obtained subtracting liabilities (L) from assets (A): HC=HA-HL, SC=SA-SL and RC=RA-RL.
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ICR has to be prepared and delivered taking into account the “target” of the
information. Not everyone has to receive the same ICR product mostly due to sensibility of
disclosed information. Disclosure on processes that are idiosyncratic and central for
competitive advantages must be managed within close circles. Legal liabilities, not to
mention IC liabilities, might generate a threat to the firm when information is disseminated
because unexpected claims might arise within the complex human network in which
knowledge is constructed. As a consequence, disclosure constraints limit freedom of action
in a firm’s transparency purposes. Hence, two main dimensions for ICR targeting can be
identified: internal and external. Internal IRC reports aim at providing top management
and board of directors with adequate information for a better compliance of arising
fiduciary duties. External information is oriented towards shareholders and stakeholders so
they can have an enhanced picture for the exercise of their property control and residual
claims respectively. Potential investors and financial institutions are also a natural target of
ICR so they can improve decision making process thus reducing information asymmetry
“feeling” and, consequently, perceived risk. The purpose, content and strategic perspective
of each type of report varies in accordance with the target, as can be inferred from
Appendix 7.
Top management and boards might be hesitant about information disclosure
because their concern on the protection of strategic assets. However, their own individual
or collective interest could be a source of motivation to limit information disclosure:
insufficient compliance with fiduciary duties might become exposed or opportunistic
positions based on information asymmetries might be revealed. Hence the nature and
extent of ICR within a firm depends on corporate governance variables. Research has been
conducted on the matter and some relevant variables were identified, namely, size of the
board, frequency of audit committee meeting, ownership structure, CEO duality21, and
independent board directors among others22. Other variables could be identified within the
corporate governance framework and functionality. Their impact in the level of adherence
to voluntary mechanisms of intangible assets disclosure and the nature and extent of
21 CEO duality occurs when the CEO is also the chair person of the board. 22 Coincident results were found for some variables. Frequency of audit meeting was found to have a positive influence in the level of ICR in Malasya (Taliyang et al, 2011, p. 114). Ownership structure comparative analysis showed that an increase in institutional investor shareholding affects negatively voluntary disclosure on intangible assets whereas the size of the board showed that up to 15 the increase in the number of members favored adherence to voluntary disclosure mechanisms and the extent of ICR (Hidalgo et al., 2010, p. 483). The other identified variables did not find coincident results.
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resulting ICR´s might surely vary as a function of the balance of benefits implied in
disclosing strategic information.
ICR corporate governance benefits
A review of literature reports that the benefits of ICR have been researched,
identified and classified. A first simple categorization of benefits might be external, when
related to impacts in the market, the stakeholders or the society, and internal when
connected to the functionality, effectiveness or efficiency of the firm. Of course, IRC
reports by themselves do not improve intrinsic illnesses of a firm, hence IRC might
sometimes show disappointing pictures.
In the external dimension, ICR “renders visible the invisible” information thus
establishing trustworthiness with stakeholders, enhancing reputation, creating a perception
of legitimate action (Cooper and Sherer, 1984; Roos and Roos, 1997; Beattie and
Thomson, 2007, cited by Mangena et al, 2010, p.17). ICR provides the firm with several
direct and very significant benefits that contribute to enhancing shareholders property.
First, IRC might enrich the company’s stock value. When Skandia released its ICR,
quotations raised very rapidly up to 40%, an increase that was sustained over time. For
Leif Edvinson, its creator, at least 25 of those 40 points were due to IC. Second, IRC
improves strategic positioning for it can show to what extent an intended strategic direction
is supported by knowledge oriented resources. Third, IRC yields better positions in the
capital market hence lower costs of financing might be obtained. IRC provides a clear
picture of the ability of the firm to create future value together with a more transparent
base for risk assessment both on potential creditors or investors (Sullivan, 2001, p. 422).
Extensive research supports such findings. In the UK a deep analysis of ICR effects
showed that ICR reduces the cost of equity capital. Firms with greater level of ICR have
cost of equity capital around 2.5 percentage points below than firms with low IC disclosure
(Mangena et al., 2010, p.66). Furthermore, evidence shows that IRC might event contribute
to attract financial capital, especially in the realm of knowledge oriented business for it is a
relevant factor to reduce information asymmetries (European Commission, 2006, p. 52).
Rewards like the one just described seem to justify, by themselves only, the adoption of
ICR initiatives.
Also in the external dimension, more indirect positive impacts of ICR can be
identified in different groups of stakeholders. To potential employees or business partners
ICR provides a better idea of what it is like to contract with the firm and how their
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knowledge might render better returns. To customers, ICR sends deeper messages on the
value and potentiality of transactions in the long term. Hence, trust might arise enhancing
the scope or scale of business. To co-operative partners in the “value constellation” ICR
might also enhance confidence and the breadth of the relationship. To citizens, ICR helps
explain the social balance of the firm and its social responsibility and commitment. To the
political system, ICR provides insight on what strategic directions are being preferred and
selected thus enhancing policy making processes (European Commission, 2006, p. 52).
From an internal stand point, ICR processes are believed to increase operational
efficiency, improve employees morale and a produce a better allocation of resources
(Flamholtz and Main, 1999; Guthrie et al., 1999, cited by Mangena et al, 2010, p.17). ICR
provides visibility to intangible assets, hence they are more thoroughly understood and top
management and employees have a clearer picture on how to add value to the firm and
how to steer their IC. ICR helps develop the firm’s strategy focusing on the most powerful
innovation capabilities. Thus, customer relations are maneuvered and evaluated not only in
the impact in the scale and scope of business but also in the client capital dimension.
Processes can be visualized and measured in their effectiveness thus leading to continuous
improvement. ICR becomes an internal monitoring system for intangible assets. Thus it
can keep track of the composition of IC and understand its evolution. ICR provides a
reference for more effective research and development strategies and becomes a powerful
tool for evaluating returns on IC investment (European Commission, 2006, p. 48). ICR
serves also to relate employees’ contribution to IC in all its dimensions, hence allowing
more adequate compensation schemes. ICR becomes an overall “compass” to verify
alignment between strategic vision and lines of action (Sullivan, 2002, p. 423).
All the above described benefits of ICR, allow deducing a direct impact within the
explored corporate governance dimensions. Property rights and control by shareholders is
naturally enhanced by adding the light of disclosure on the prevailing source of value:
knowledge. Stakeholders’ residual claims can be more easily identified and satisfied.
Accounting on fiduciary duties related to intangible assets can have a wider range of
“check points” to monitor, hence shareholders and stakeholders exert more influence on
top management and board decisions and actions. Transparency is the primary beneficiary
of ICR.
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The aforementioned benefits of adherence to voluntary mechanisms of intangible
assets disclosure allow inferring that ICR improves corporate governance and firm´s
performance, which is one of the purposes of this exploratory work.
ICR impact on intellectual capital
So far, the impact of IC on corporate governance has been explored and identified.
The influence of ICR on corporate governance was found out as positive. It seems worth
looking into the influence of ICR on the IC itself. For such a purpose, exploring several
dimensions of IC appears to be a reasonable path. Human capital includes attitude as a
component. ICR, as previously found, produces a direct impact in employees for they
become aware of their contribution to the firm’s wealth creation, hence, their
predisposition to add value might be improved. Their competences to add value might as
well be increased for they are aware of their role and challenges as far as IC is concerned.
In the Structural capital dimension processes seem to be improved as a result of good
corporate governance practices. The better the corporate governance practices, the better
the business processes. Hence more value will be estimated from this component of
structural capital. Customer benefits of ICR include a greater awareness of what they can
expect from the firm based upon the better information they receive, hence client capital
gets enhanced. The already recognized impact of ICR on the society and the political
structures, naturally improves the social capital dimension, making business interaction
with the social environment smoother. As a consequence it could be inferred that ICR has a
positive impact on IC.
ICR regulatory frameworks
A growing and widespread awareness on the impact of intangible assets is almost
everywhere in the corporate world. Also a rising sense of crisis in corporate governance
has gained core decision making centers: “corporate governance is one of the most
important failures of the present crisis” (De Laroisère Report, 2009, cited in Chance,
2011, p. 7). Such a crisis in corporate governance could be synthesized as the growing
distance between ownership and control where transparency seems to be at the very core of
the remedy. Hence information disclosure comes into view as a critical necessity. Within
such a scenario, ICR looks like a feasible approach to an effective solution and yet, its
regulatory framework seems weak and dispersed.
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The very nature of IC indicates ICR should and will remain within the realm of
voluntary mechanisms of disclosure. However, a review of current standards such as IAS
38 and GAAP23 reveals a failure to capture the invisible wealth of IC. (Majdalani et al,
2012, p. 508). Differences in ICR methods and practices led to confuse matters worse. A
European overview of core corporate governance issues based upon a comparative analysis
of almost all countries´ regulations and conduct codes reveals a complete absence of IC
measurement and disclosure or intangible assets among its topics (Chance, 2011).
A corporate governance code of conduct is a set of rules that allow a governance
structure to have observable effects in reality, instituting an accountability framework. A
code of conduct creates a must i) be originated in the governance structure, ii) be in
accordance with the foundational charter and statutes of the firm, iii) ensure compliance
with the institutional and legal environment, and, iv) become operational as to allow
monitoring, evaluation, updating and change (Apreda, 2007, p. 24). Development or
adherence to a code of conduct remains in general a voluntary act depending on
regulations. However, when compliance is voluntary, non compliance must be justified.
Most stock exchange obligate adherence to corporate governance rules that become
the kernel of the firms’ code of conduct. A vicious or virtuous circle can be inferred in the
relationship between corporate governance and codes of conduct. Good corporate
governances must yield good codes of conducts which in turn improves corporate
governance. A similar cycle of influence could be determined for the cases of bad
corporate governance and bad codes of conduct. Several surveys have been conducted on
the quality of corporate governance by country. As previously stated, Anglo Saxon
countries, by a number of historical, sociological and political reasons24, have high rates in
most corporate governance rankings. Different indexes are used for most types of
comparative corporate governance analysis. For most indicators defined and used in the
work compiled by Chew (et al., 2009, p. 77) Australia leads the rankings25. In a perceived
23 GAAP stands for Generally Accepted Accounting Principles. 24 For Cornelius (Peter, 2005, p.587), among other reasons, the law tradition could be considered as a factor in corporate and public governance: “The common-law tradition was exported by England to the United States, Canada(except for Quebec), Australia, and New Zealand as well as to several developing Countries in Asia, East Africa, and the Caribbean. France, by contrast, developed a civil-law tradition. Based on Roman law, this tradition is characterized by state-employed judges, a preference for state regulation over private litigation and emphasis on legal and procedural codes”. 25 For instance, the private benefits indicator (which shows how large shareholders impose over smaller ones), has the following ranking with values of les than 3%: Australia, Canada, Finlandia, Canada and France. Bad corporate governance, related to the lowest scores on private benefits (above 65%), was identified in countries like Argentina, Austria, Colombia, the Czech Republic, Israel, Italy, Turkey and Venezuela.
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quality of firm level corporate governance index employed by Cornelius (Peter, 2005, p.
598), Australia, again, is at the top of the ranking. As a consequence, it could be inferred
that Australia must have good codes of conduct, which is the case. Hence, it is no wonder
that Apreda (Rodolfo, 2007, p. 26) selected the Australian Stock Exchange Corporate
Governance Principles and Recommendations” as a paradigm in one of his text books on
Corporate Governance. The core value of this code of conduct includes its principle-based
approach, simplicity and precision. It is really a means for a movement on a dynamic
process of corporate governance continuous improvement rather than an end product. The
process is underway for more than 2000 entities that ensured a high level of feedback
reporting (ASX, 2007, p.1). However, not a single mention is made on intangible assets or
IC. It comes as a surprise considering that IC and intellectual property, given the findings
of this work, should be considered as areas of due diligence for management and the board.
In summary, neither accounting standards nor corporate governance codes seem to
provide an adequate framework to support a precise and sound process for identifying,
measuring and reporting IC, not to mention intellectual liabilities. Majdalany (Christian,
2012, 511) identifies the need and the convenience to create uniform and consented ICR
standards that would provide a common taxonomy on IC and its processes. A study by
Riegler and Hollerschmid (2006, cited by Majdalani et al, 2012, 510) found out that it is
possible to utilize financial reporting in a methodical way with a distinctive outline to
include indicator-based ICR methods.
V. Conclusions
The role of intangible assets as the main source of value in today´s economy is
indubitable, prevailing and continuously growing. Several theories and disciplines of
practice try to capture this transformation; however practitioners and researchers seem to
be behind the waves of reality. The growing role of corporate governance as a determinant
factor in sustainable economic development has been utterly acknowledged and evolution
towards better practices is underway. More than 80% of corporate market value is related
to intangible assets and yet, corporate governance still provides principles and rules that
are seemingly oriented towards tangible assets. Hence analyzing the impact of IC on
corporate governance in order deepening knowledge and taking preventions and adaptative
actions seems highly convenient.
Intellectual capital and corporate governance theories do not have a clear cut
epistemic demarcation: rationalities, semantics and contents did not consolidate yet into
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single bodies of consented knowledge, probably because both theories are under an
ongoing process of scientific consolidation and consensus expansion. Poor understanding,
inadequate identification and inefficient management of key components of IC reported by
research could be partly explained by poor theoretical and operational common reference
frameworks.
The impact of IC in corporate governance theory and practice was explored under
the umbrella of the theory of the firm and agency theory by means of analyzing the effects
of each dimension of the former on the following key issues of the latter: property rights
and control by shareholders and residual claims by stakeholders, fiduciary duties of
management and the board, opportunistic behavior and transparency.
Property rights and control is at the core of the intersection between both sets of
theories and practices. Thicker layers of power and control by top management and boards
of directors tend to disengage shareholders from a complex and continuously growing
constellation of intangible assets. Capacities to exert property rights and preferences as
well as accounting for fiduciary duties become weaker. The mounting complexity
knowledge as a source of value and as an object of transaction has been identified as the
dominant factor when dealing with intangible assets. Greater complexity yields more
uncertainty. Hence information asymmetries, bounded rationality and difficulties in
measuring performance are more challenging when contracting intangibles. As a
consequence, contracts tend to be inherently incomplete, thus leading to more frequent ex-
post bargaining situations where the margin of control of top management and boards is
increased and the capacity of control of share holders is reduced.
Incomplete contracting also yields more blurry boundaries of the firm where
stakeholder’s residual claims increase the level of complexity. Control over relationship
specific human capital added value becomes weaker and asymmetries are sometimes
reinforced. Relevant knowledge is no longer under complete control of the firm. Hence, a
new breed of stakeholders, arises with empowered residual claims for the wealth of the
firm highly depends on them. Corporate governance is challenged to efficiently satisfy the
claims of such “super-stakeholders” not just for maintaining competitive advantages but,
sometimes for survival.
From the stand point of the building blocks of corporate governance concepts, it could
be concluded that intangible assets create an invisible equity over which property rights and
control by shareholders and residual claims by stakeholders might be affected by top
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management and the board as a consequence of information asymmetries.
Fiduciary duties experience a two folded effect when dealing with intangible assets.
First, a new set of more complex responsibilities are added when looking after IC. Second,
the very complexity of IC makes it more difficult for shareholders and stakeholders the
level of compliance of top management and the board, thus agency problems might arise.
Opportunistic behaviors have the benefit of an expanded arena when intangible
assets are involved. The complex nature of knowledge transactions and the uncertainty of
returns on IC investments, among other factors, increase information asymmetries and
makes performance evaluation even more difficult, hence unscrupulous behaviors become
harder to detect and control.
Transparency, identified within the core of concerns and lines of action in corporate
governance, becomes even more relevant when intangible assets are involved because
shareholders, investors and the network of stakeholders require information to make better
decisions and to add more value. Transparency has two folded benefits for the firm. First,
transparency reduces appraised risk in potential creditors and investors, hence, ceteris
paribus, the cost of capital tends to be lower. Second, research found out that transparency
helps improve the firm´s stock value.
Adherence to voluntary mechanisms of ICR became a major factor in corporate
governance quality and a mandatory requirement of transparency. When intangible assets
are involved, it becomes a crucial need. Prospects to include valuation within the financial
statements came to a dead end due to strict accounting standards like IAS 38; hence
narrative enclosures have become the vessel of disclosure for IC. Several models were
developed for the process of identifying, measuring and valuing IC: the “Skandia
Navigator” is the most widely renowned and applied. The level of ICR has become a
proxy indicator of the quality in corporate governance.
Intellectual liabilities, as a potential and powerful cause of wealth destruction, were
recently found out a relevant factor in corporate governance, more often than not omitted
or neglected in ICR processes. External and internal intellectual liabilities could be
identified on each dimension of IC, i.e. structural, human, client and social. Accounting for
intellectual liabilities was ascertained as a firm’s growing requirement in order to avoid
risk and mitigate its effects. Social and capital liabilities were somehow discovered
dimensions of intellectual liabilities not addressed by the literature, the former being one
of the drivers of CSR actions.
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IC reporting has barriers and constraints that might limit the extent and the level of
information disclosed. Among those barriers, opportunistic positions and insufficient
compliance of fiduciary duties by top management, could act against ICR quality.
Ownership structure, frequency and size of audit committee, CEO Duality and board size
were identified as corporate governance variables influencing ICR level and extent. IC
reports, probably more than any other, must be tailored in accordance with recipients
because there is information to be protected and different strategic purposes might be
pursued with each group of shareholders and stakeholders.
Overwhelming evidence was found on external and internal benefits of ICR. On the
external side the following could be counted: a positive impact in the firm´s stock value,
improvement in strategic positions, lower cost of capital and better financial positions,
better firm’s perception among potential employees and stakeholders and enhanced
interaction with partners and the social and political environment. In the internal side of
the firm, ICR processes were found out to provide a strategic monitoring system and an
internal control resource and improve operational effectiveness and employee´s morale
and attitude. Also ICR serves as an internal benchmarking system thus leading to more
effective research and development and better investment decision processes. ICR was
found out to have a positive impact on managing and strengthening the IC itself mostly
because an enhanced awareness, contributes to more effective practices.
ICR regulatory frameworks in the form of accounting practices and norms and
corporate governance codes appeared to be insufficient to capture and represent the wealth
implied in intangible assets. The mounting need to create uniform and consented ICR
standards was identified.
Sufficient evidence has been found out to support the idea that the intangible
capital has a remarkable impact on corporate governance. For some researchers, the
growing influence of intangible assets has been deemed as the main cause of an identified
crisis in corporate governance, evidenced in the large series of financial scandals and
turmoil among shareholders and stakeholders witnessed by the turn of the century. IC and
good corporate governance practices exert valuable influences on each other. Sound
strategies for IC governance might earlier than later, find positive synergies between them
that will transform what was identified as a problem, into an opportunity.
VII. Future lines of research
This exploration navigated in the somehow unchartered waters of the intersection
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among corporate governance, IC and the theory of the firm. The vastness of the resulting
field of knowledge prevented from deeper analysis of too many interesting issues and
more questions than answers were found. Probably the most relevant reward of this work
is a “bucket list” for further research. Some of the most interesting unanswered questions
are summarized below.
Most of the findings were attained by means of deductive thinking based on
theoretical principles and previous research. Empirical quantitative testing of conclusions
with measurable variables would provide inductive proof and more inferences.
Identifying, categorizing, measuring, justifying and finding legal and institutional
articulation of stakeholders’ residual claims on the invisible equity created by intangible
assets seems to be one of the next challenges for corporate governance due to a rising
awareness of knowledge workers and the growingly undefined boundaries of the firm.
Tran nationality has become a serious source of corporate governance due to
globalization. Intellectual capital makes national frontiers permeable to a powerful network
of preferences and resources. Identifying is the impact of intellectual capital in
transnational concerns of corporate governance seems to be an interesting query.
Opportunistic behavior, as corporate governance pathology, seems to have different
dynamics before each dimension of intellectual capital. Exploring how client, human,
social or structural capital could be differently manipulated seems a useful defy.
Intellectual capital makes blur the boundaries of the firm in a diffuse network of
partners and contractors, where the discipline of the market is replaced by a set-up of
conditioned behaviors. Exploring the new nature of such boundaries might enlighten new
dimensions in the theory of the firm.
Creditors, sometimes exert their stakeholders’ share of control by protection
covenants thoroughly studied and put into action with respect of tangible assets, mostly by
means of a constellation of financial vehicles. What kind of protections should be taken
when firms become more and more intangible?
Intellectual liabilities present plenty of unchartered waters to researchers and
practitioners, hence it seems worth inquiring on how to identify and measure its impact
on IC. Also exploring conceptual dimensions of social liabilities and client liabilities
presented in this work might enhance knowledge on the matter.
The impact of ICR on IC itself was presented as a conceptual finding in this work.
Quantitative evaluation of such an impact is quite feasible and worth exploring.
Finally, researching on IRC within Argentine corporate environment ought to be a
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useful tool in order to appraise corporate governance evolution and trends.
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Appendix 1
Some taxonomies for the IC26
Source Basic definitions OECD Technology Economy Project (1992)
� Intangible investments in technology, e.g. R&D, design, development engineering, scanning and search activities, technology acquisition and licensing
� Enabling intangible investments, e.g. human resources, organisation and information structures
� Intangible investments in markets, e.g. market exploration, market development including brands, market organisation including developing customer information
� Investments in software, e.g. computer-controlled manufacturing processes, quality control, testing, storage, handling and services systems such as sales and delivery
International Federation of Accountants (1998)
� Human capital, e.g. know-how, education, vocational qualification, work-related knowledge, occupational assessments, psychometric assessments, work-related competencies, entrepreneurial élan, innovativeness, proactive and reactive abilities, changeability
� Relational capital, e.g. brands, customers, customer loyalty, company names, backlog orders, distribution channels, business collaborations, licensing agreements, favorable contracts, franchising agreements
� Organisational capital which comprises: � Intellectual property, e.g. patents, copyrights, design rights,
trade secrets, trademarks, service marks � Infrastructure assets, e.g. management philosophy, corporate
culture, management processes, information systems, networking systems, financial relations
The Brookings Institution Task Force on Understanding Intangibles (2001)
� Assets that can be owned and sold, e.g. intellectual property, contracts, business agreements, licenses and franchise rights, quotas and resource allocations, employment contracts
� Assets that can be controlled but not separated out and sold, e.g. business secrets, in-process R&D, business processes
� Intangibles that may not be wholly controlled by the firm, e.g. human capital, core competencies, organisational capital, relationship capital
European Commission, MERITUM Project (2002)
� Human resources � Organizational assets � Related structural assets
26 Source: OECD, Organisation for Economic Cooperation and Development, Intellectual Assets And Value Creation: Implications For Corporate Reporting, Directorate for Financial and Enterprise Affairs, Paris, 2006. , p. 11
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Appendix 2
Table 1: Expanded sources of fiduciary duties related to intangible assets27. The Board of an enterprise undertakes a number of roles with respect to IC which include, for example: • Using the specialist knowledge, experience and expertise of the Board as a whole to identify key
management challenges and opportunities with respect to IC as they arise. • Make objective assessments of problems and opportunities and key management challenges,
which arise from them. • The evaluation of strategic options in order to decide on investments in IC. • Questioning assumptions so as to surface vested interests and personal agendas within the enterprise,
which might lead to conflict and damage future prospects. • Stimulating Board discussions on IC by challenging the status quo and by providing alternative
insights and ideas. • Ensuring that internal control procedures provide reliable, accurate and timely flows of information
on IC, which enables the Board to track performance. • Determining monitoring criteria, selecting metrics and key performance criteria for IC. • Providing leadership and direction at times of crisis and ensuring that appropriate frameworks and
policies to enable decision taking, at the correct level, within the enterprise. • Representing the enterprise externally vis-à-vis stakeholders and providers of finance.
• Ensuring that the enterprise is governed in ways which enhance the brand and promote a positive corporate image.
All of these roles touch on the importance of IC by revealing the interconnections between the overall portfolio of activities of the enterprise and it’s IC. In turn, this makes it easier to visualise the problems and opportunities arising from both existing operations and from changes occurring within the marketplace
.
Table 2: Fiduciary duties attitude 28
Working in the business
Working on the business
The behavior might be described as a tendency to: Focus on the demands of today. Focus on surviving and thriving. Use of existing knowledge. Adding new useful knowledge. Use of existing processes, methods, routines, habits, etc.
Finding better, more efficient, effective and economical ways of working.
Maintaining personal “comfort zones” and the enterprise “status quo”.
Continuously seeking improvement based on innovation and change.
Firefighting to deal with problems and mistakes as they arise.
Avoiding problems and mistakes.
Stagnation and obsolescence over time. Increasing competitiveness through adding and shedding activities.
Table 1. Focusing on intangible assets imply a change on fiduciary duties.
27 Source: European Commission, Reporting Intellectual Capital to Augment Research, Development and Innovation, Directorate General for Research EU, Luxemburg, 2006. p. 90 28 Source: European Commission, Reporting Intellectual Capital to Augment Research, Development and Innovation, Directorate General for Research EU, Luxemburg, 2006. p. 88
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Appendix 3
IC Reporting Initiatives29
Origin Name Key Focus Benefits Links
Austria ARC IC Structured Holistic view on the www.arcs.ac.at/publik/ Report presentation of goals, “intellectual status and fulltext/wissensbilanz/ potentials, processes, current ‘value’” of the ARCS_Wissensbilanz_1999.pdf and resuming Organization. Justification intangible & tangible of tax payers’ investments results. in public R&D.
Denmark Danish Portfolio of Supports IC management www.videnskabsministeriet.dk/ Guidelines investments in, and and reporting. icaccounts/ effects of, knowledge Develops IC indicators. resources. Relates Identifies properties of IC practices and Statements for analysis purposes of IC and benchmarking. resources.
Europe MERITUM Differences between Supports IC management www.uam.es/meritum intangible resources and reporting. Provides a and intangible set of characteristics that activities. indicators should have.
France IC-dVAL® Performance indexes Support management and www.icforcommunities.com and IC value. IC Reporting. Building awareness of IC. Internal and external signalling of IC value and performance.
Germany Wissensbilanz IC processes Supports management www.akwissensbilanz.org decision making
Iceland PiP project Indicators Harmonized indicators http://nhki.si.is/ that facilitate benchmarking
Spain Intellectus Dividing IC into its Adaptability to each http://www.ofenhandwerk.com/ Model ® minimum components Organization oklc/pdf_files/K-4_deCastro.pdf
Sweden IC-Rating™ IC position Visibility of IC, finds areas www.intellectualcapital.se to improve and enables benchmarking
29 Source: European Commission, Reporting Intellectual Capital to Augment Research, Development and Innovation, Directorate General for Research EU, Luxemburg, 2006. p. 12.
Appendix 4
The Scandia Navigator Model30
- 39 -
30 Edvinson, Leif, Malone, Michael, El Capital Intelectual: Como Identificar y Calcular el Valor Inexplotado de los Recursos Intangibles de su Empresa, Editorial Norma, Bogota, 1998.
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Appendix 6
Overview of possible intellectual liabilities31
Intellectual liabilities
External liabilities
Internal liabilities
Force Majeure
Market liabilities
Human liabilities
Structural liabilities
Relational liabilities
- global warming - ageing population - depletion of natural resources - product tampering and other acts of terrorism - political instabilities - financial and economic crises - social unrest - boycotts
- industry life cycle - crowded markets - successful competitors - new players in the market - technological innovation, leading to creative destruction - substitute products or services
- high employee turnover - risk of losing key employees - internal competition - not-invented-here syndrome - inadequate training and development
- liability of newness - liability of smallness - group think - top management homogeneity - long management tenure - past performance - weak strategic planning process - poor information or knowledge infrastructure - orphan knowledge - cost of ignorance - struggle for power - organizational inertia - organizational sclerosis - knowing-doing gap - knowledge unfriendly culture - complex organizational structure
- poor corporate reputation - bad word of mouth - poor product or service quality - high relational turnover - potential product liability suits - lack of strategic alliances - relational complexity
31 Stam, Christian. D., "Intellectual liabilities: lessons from The Decline and Fall of the Roman Empire", VINE, Vol.39, No.1, pp.92-104., 2009.
Appendix 7
Purpose, content and strategic perspective of IC reports 32
Notes:
IC Statements show the company’s initiatives to build up, develop and increase the efficiency of its knowledge resources.
Stakeholder Accounts are directed towards the dialogue between the company and its groups of stakeholders, for example the company’s employees, customers, investors, the local community, etc;
Green and Social Accounts explain how the company handles and remedies problems such as leakages of harmful substances or worker attrition.
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32 Source: European Commission, Reporting Intellectual Capital to Augment Research, Development and Innovation, Directorate General for Research EU, Luxemburg, 2006. p. 94
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