Figure 1.1 Five stages of intellectual capital research
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THE PAST, PRESENT, AND FUTURE FOR INTELLECTUAL CAPITAL RESEARCH
John Dumay, James Guthrie, Federica Ricceri, and Christian Nielsen
Introduction
When we started this project three years ago, we started with the aim “to provide an overview of Intellectual Capital (IC) in practice and beyond. It will focus on the role of IC in organizations and between organizations, institutions and beyond”. The Routledge Companions are similar to what some publishers call ‘handbooks’, being prestige reference works providing an overview of a whole subject area or sub-discipline, which survey the state of the discipline including emerging and cutting edge areas. The Routledge Companions produce a comprehensive, up to date, definitive reference that are usually cited as an authoritative source on the subject. Our goal in undertaking this project is to provide a collection of essays that address cross-cutting IC issues. We believe we have achieved our aims and our collected works should be of interest to people who want to understand IC from a variety of perspectives with a view that readers may or may not have background knowledge, as well as students who are learning to work with a particular aspect of IC and the management of knowledge. The material in this Routledge Companion relates not only to theory, but also to practice and case studies.
We are proud that this book features leading academic, policy, and practitioner articles examining the latest developments in the field of IC. The contents are organized thematically into sections that reflect the five stages of IC research developments (Dumay et al., 2017). We believe no one stage is more important than another – the themes and stages provide a useful framework with which to present the 30 chapters, written by a variety of authors and covering a wide range of subject areas.
Frontiers of research, practice, and knowledge
Intellectual capital, intangible assets, and even intangible liabilities. These terms are most likely familiar to readers of this book. It is probable that what attracts you to this collection is that the chapters herein offer state-of-the-art thinking about IC practice and research. We believe we will not let down readers familiar with these terms as we provide new understandings into how established and new authors from research and practice outline their insights, critique, and ways forward for creating value for all organizations. Additionally, the chapters in this book also offer readers who are relatively new to the IC and intangible assets field access to contemporary research that allows them to quickly position themselves and take the journey that we have taken with many others.
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To ensure we capture the progress being made in contemporary IC research, we include chapters by the seminal IC authors, or as Leif Edvinsson likes to call some of them, the ‘grandfathers’ of IC. Thus, we include chapters by James Guthrie, Robin Roslender, Leif Edvinsson, John Holland, Ulf Johanson, Henrik Dane-Nielsen, Karl-Erik Sveiby, Aino Kianto, and Göran Roos. A virtual who’s who of the early days of IC research and many of whom have their roots in practice. In adding to contemporary IC practice, we also have the pleasure of including active IC practitioners such as Mary Adams (US), and Manfred Bornemann (Austria and Germany). Similarly, we also include some of the young(er) ‘guns’, who have since the mid 2000s been blazing a new trail, such as John Dumay, Jim Rooney, Grant Samkin, Gunnar Rimmel, Maria Serena Chiucchi, Emidia Vagnoni, Suresh Cuganesan, Christian Nielsen, Marco Giuliani, and Tatiana Garanina. Then there is the new blood in the likes of Henri Hussinksi, Paavo Ritala, and Marco Montemari. Thus, the authors of chapters in this book are inclusive of many of the best that have served IC research and practice well, along with those who will serve it well into the next generations of IC research.
Arguably, IC is having a resurgence because a new reporting framework, Integrated Reporting (<IR>), makes use of IC as part of its six capitals framework (International Integrated Reporting Council (IIRC), 2013). As Dumay (2016, p. 175) outlines:
[w]hen you take away the physical capitals of financial, manufactured, and natural capital, the remaining three intangible capitals broadly align with IC’s three capitals: human capital with human capital; social and relational capital with relational capital; and IC with structural capital.
The latter fact that IC in <IR> equates to structural capital in the traditional tripartite model of IC as human, relational, and structural capital (Petty and Guthrie, 2000), is an important point of departure for future IC and intangible assets research because, as noted, the terms are often used interchangeably (Eccles and Krzus, 2010), and in different contexts. For example, in European and North American business parlance, the term ‘intangible assets’ is used more often than ‘intellectual capital’ (Cuozzo et al., 2017). So, while we see an initial resurgence in IC, we need to be clear about what it is as several authors discuss it in their chapters.
Another issue we need to be explicit about is that of ‘value’ or ‘value creation’, two terms frequently used without being adequately defined (see Bowman and Ambrosini, 1998). The meaning of value creation has evolved from Thomas Stewart’s (1997, p. x) initial definition of IC whereby value creation is associated with the ability for IC to ‘create wealth’, more in line with Bowman and Ambrosini’s (1998, p. 1) construct of “value capture” than ‘value creation’. In contemporary IC research, Dumay (2016, p. 169) critically redefines “value in four ways: monetary, utility, social, and sustainable value”, which is more in keeping with the contemporary emphasis on third stage performative IC (Guthrie et al., 2012) and the fourth stage ecosystem approach (Dumay and Garanina, 2013). Several chapters in this book use this contemporary conceptualization of value creation, and Chapter 2 goes beyond and discusses the worth, rather than the value of IC (Dumay et al., 2017).
What something is worth differs from its value, whether it be tangible or intangible. As a result, Dumay et al. (2017) outline the need for the fifth stage of IC research, to reframe the general research question of “What is IC worth to investors, customers, society and the environment?” to “Is managing IC a worthwhile endeavour?” Arguably, asking the latter question removes boundaries so that all manners of worth are included and recognizes that IC is a substantial part of what impacts everyone on a daily basis. There are still researchers who hold the view that IC and intangible assets are purely for creating wealth for investors and shareholders (Lev and Gu, 2016), while there is an opposite worldview that defines value creation as more encompassing and involving more stakeholders. Therefore, there is arguably a need to reconcile “the worth of IC to different people in different contexts and respecting that there will always be differences and that one view should not always prevail” (Dumay et al., 2017, p. xx).
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Introduction to IC as per the chapters
In this section we will describe how we frame IC for the purpose of presenting the chapters in this book. For those unfamiliar with the different stages of IC research, we recommend that you begin reading some of the seminal articles that will help you understand the evolution of IC. These would include works such as Petty and Guthrie (2000) for first and second stage research, Guthrie et al. (2012) for third stage research, and Dumay and Garanina (2013) for third and fouth stage research. Finally Dumay et al. (2017) in this book, for the first time, introduce the fifth stage of IC research (see Figure 1.1). Additionally, the latter chapter gives a comprehensive chronological outline of the path IC research has taken since the early 1990s, which is key to understanding how IC has emerged from an interesting idea, to a more comprehensive field of research and practice. As such, we lead with this chapter to introduce a comprehensive view of IC, especially for readers unfamiliar with IC research, to allow them to quickly grasp what IC is, why IC is important, and its trajectory to the time we took on this project. Consequently, we then work backwards from fifth to first stage chapters, noting a dominance of chapters addressing third stage practice-based IC research.
Figure 1.1 Five stages of intellectual capital research
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Fifth stage chapters
In the first chapter of this section Dumay, Guthrie, and Rooney (2017) examine the path that critical IC research has followed from its conception until today and reflect on the possible future path for critical IC research. From the foundation of the four previously identified stages of research, the authors thus build a fifth, critical, research path for IC. In this fifth stage of IC research, IC researchers need to move beyond the boundaries of traditional, rather narrow, IC definitions, and instead of asking what IC is worth to various stakeholders, investors, customers, society, and the environment, instead ask whether managing IC is a worthwhile endeavour at all? Focusing on this big question helps recognize that IC is a substantial part of what impacts us on a day-to-day basis. In developing the fifth stage of research, there needs to be more research that focuses specifically on understanding how IC (or the various elements) helps improve value beyond organizational boundaries and, furthermore, that going beyond organizational boundaries also requires IC researchers to broaden their idea of IC.
The authors observe that the terms intangibles and IC are used synonymously, yet the term intangible assets is much broader than those assets that create an accounting financial value because it includes everything that is not tangible and put to use to ‘create value’. The authors argue that in all forms value creation somehow relies on interaction with tangible assets. Dumay et al. (2017) then explore the key strengths of the <IR> approach, which includes financial, physical, and natural capital in its value creation model (IIRC, 2013), something that many IC researchers are only just coming to apply. They argue that it is time to take down the boundaries to IC research and work towards reconciling the worth of IC to different people in different contexts, respecting that there will always be differences and that one view should not always prevail.
Similarly, Roslender and Monk (2017), in the chapter “Accounting for people”, go beyond recognized IC boundaries and address the consequences of progressing the challenge of accounting for people, a project that long predates the recognition of the significance of IC as an element within, but one which had largely become captured in past decades. Realizing the naivety of identifying a single aspect of the IC field as being the most significant, this chapter is founded on the premise of ‘taking people into account’, and links to fifth stage IC research by asking what IC is worth to various stakeholders, recognizing the importance of devoting further resources to the continued exploration of the IC field. First, this chapter provides an overview of the history of accounting for people, from its identification as a major challenge to the accountancy profession almost a century ago, through a series of general approaches to the task, and concluding with a discussion of human capital accounting. Second, the chapter provides a number of insights on three pathways that IC researchers interested in progressing accounting for people might pursue: employee health and wellbeing; a broader range of human rights issues; and the role for human capital self-accounting.
The authors argue that taking people into account has two different meanings. First, from an accounting perspective, it brings to mind the search for some means to incorporate people within accounts, most obviously by putting people on the balance sheet. The second meaning is of a much more practical nature, at least to anyone with an interest in people and what they bring to the workplace. This meaning for taking people into account translates into a commitment to demonstrate the scale and scope of what people gift to society, including as employees. This chapter argues that human capital is, by definition, the source of IC, as a consequence of which it demands to be taken into account more than ever, to ensure that its contribution to society is the most it can be, at all times and in all spaces.
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Fourth stage chapters
Leif Edvinsson (2017) a founding father of IC in his chapter “Seven dimensions to address for intellectual capital and intangible assets navigation” provides an overview of the emerging global approaches to revealing the hidden value of both nations and enterprises, to the benefit of future generations, by identifying seven steps to address IC and intangible assets navigation. He argues that IC is about visibility, understanding, flow, networking of brain capacity, the velocity of the transformation of intangible human capital into more sustainability drivers of structural capital. The chapter contributes to the fourth stage of IC research. It is a paradigm in search of the drivers of value creation and reports to various stakeholders. In advanced economies, 75 per cent of GDP is related to IC. This chapter discusses the ELSS-Model that groups more than 60 countries over 15 years and covers the four traditional major pillars of national IC – human capital, relational capital, structural organizational capital, and renewal capital or innovation capital. It may also be refined to incorporate social capital and environmental capital dimensions.
Schiuma and Lerro (2017) in their chapter state that IC is playing a fundamental role in the development dynamics of regional economies. This chapter argues that there are two main issues. The first issue concerns the difficulty of identifying and measuring IC within regional systems. Despite the wide acknowledgement of IC as a key driver, there is still a lack of a coherent and shared framework for identifying, managing, assessing, and reporting IC at the regional level. Although there is quality and available data on different aspects of regional development, the second issue is that there is a lack of homogeneous and significant data about the use of IC. Their chapter contributes to the fourth stage of IC research, with its contribution in the way it addresses two issues. First, it analyses the role of IC and related components for regional development dynamics. Second, concerning territorial strategic resources, it presents the Knoware Tree, a framework to identify and classify territorial IC and the Knoware Dashboard, a framework driving the design of potential indicators and metrics to assess territorial IC.
Next the focus changes to IC and the public sector with Samkin and Schneider (2017) as their chapter reviews and critiques IC research undertaken in New Zealand. The identified research is positioned within the four stages of IC literature in order to answer the question: what has been the focus of IC research in a New Zealand context to date? The answer is that, despite New Zealand being heralded as a leader in public sector management following the reforms of the 1980s and 1990s, the extent and depth of research into how IC can be useful to the public sector to create public value is surprisingly limited. The majority of papers adopt a content analysis method using a disclosure index to determine the level of IC reporting in the annual reports of a sample set of organizations.
The authors state that the majority of the research identified has not moved beyond stage two IC research, which is concerned with guidelines and IC frameworks. In order to extend the frontiers of IC research beyond ‘what is’ into stage three research investigating IC in practice from a critical and performative perspective, and stage four research influenced by critical social and environmental accounting, a number of future research avenues are explored within the New Zealand public sector. Given a general acceptance of IC, understanding how the public sector views IC will become increasingly important. Additionally, how the public sector can leverage its IC in order to create value by providing better and more effective services provides several fruitful avenues of research.
The focus on the public sector continues with Vagnoni (2017) in her chapter “Intellectual capital in the context of healthcare organizations: Does it matter?” in which she states that healthcare organizations differ from others because of their fundamental mission to guarantee health protection to citizens and, therefore, their management process is driven by different criteria. Her point is that while many studies examine IC and management, regarding healthcare organizations IC is still a ‘black box’. Costs and financial results are identified, but how IC interacts to share knowledge and create innovation and value, is not known or monitored. Despite efforts to mobilize knowledge and innovation to legitimize healthcare organizations’ strategic role in society, the literature has devoted surprisingly limited attention to these IC dimensions. The chapter aims to fill this gap.
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Vagnoni (2017) explores the literature and several examples to highlight that healthcare organizations are complex and IC has a particular role to play in their strategic management. In identifying IC variables, their relationships, and how to mobilize them, the chapter identifies the potential for IC to contribute to achieving financial goals as well as clinical outcomes and administration, thus contributing to the fourth stage of IC research. She states that medical journals have widely studied the IC framework and its operationalization in different dimensions, as well as criticizing the lack of methods and approaches to using IC for management and strategy effectively. Clinicians have emphasized the role of knowledge and IC for healthcare management, while directors of healthcare organizations are under pressure to manage budget constraints.
In conclusion, she argues that IC accounting scholars can play a vital role in bridging the gap and contributing to management and accounting practice change in the healthcare organizations. Thus, studies related to the use of IC frameworks for managerial purposes at all levels of the organization can contribute to practice and to closing the gap between administrative and healthcare roles, creating greater trust among health professionals in accounting technologies.
Third stage chapters
In the chapters that we classify as third stage research articles we have also identified two distinct themes. The first theme is based on chapters that examine IC in practice from an internal perspective. These chapters mainly present case studies of how IC is used by management and highlight how IC is needed not just in commercial organizations, but how it is applicable to public and not-for-profit organizations. The second distinct theme incorporates chapters that explore various frameworks
Practice-based chapters
Holland (2017) in “Rethinking models of banks and financial institutions using empirical research and ideas about intellectual capital” discusses the concept that traditional finance theory provides ways of developing theoretical models of financial firms, but is restricted to economic processes. Many of the economic problems faced by financial firms post-2000 have been located in their knowledge and social contexts, and thus this cannot be adequately explained by existing normative theory. This chapter, therefore, extends the analytical framework for banks and financial institutions through empirical research and theoretical ideas about IC and social factors relating to financial firms and their financial intermediation processes.
Holland (2017) argues that developments in financial firm research have occurred outside of the traditional finance theory (TFT) paradigm but have not made the same progress as IC research in recent years. This chapter broadly reflects the three stages of IC research in accounting outlined by Guthrie et al. (2012). The first stage reveals research to improve awareness of the role of IC in banks and financial institutions. The second stage illustrates research to develop guidelines and theoretical views of IC in banks and financial institutions. The first and second stages reflect attempts to formulate and legitimize the field of IC research in financial firms as an area of multi-disciplinary and multi-focused research like IC accounting research.
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The chapter illustrates how ideas from field work and empirical narrative and alternative theory narrative can be ‘connected to’ TFT. The combined set of ideas acts as a “new theory frame for financial firms” (2017, p. xx). It reveals ways of critical thinking about financial firms and developing connections between the broader social science and management literature and TFT. This creates ways to critically evaluate the roles of banks and financial institutions in the economy and society, develop a critical examination of IC in financial firm practice, and critically appraise the role of TFT in explaining financial firms.
In another chapter that deals with financial institutions, Murthy and Guthrie (2017) in their chapter “Mobilizing intellectual capital in practice: A story of an Australian financial institution” examines how IC was mobilized in a large organization. Taking a narrative research approach and applying a theory of consequences to the case study organization, they find that when managers mobilized IC resources expecting certain intended consequences, there were also unintended consequences since elements of IC interacted, entangled, and acted with each other. The narrative sheds light on how the implementation of IC moved from a managerial perspective towards an ecosystem perspective as a deeper meaning relating to the effect of non-financial resources was uncovered.
Narratives have a plot, a beginning, a middle, and an end. Hence, the events gathered from the documents and interviews were not just temporal; they had a sequence where one event leads to another. The three stories of the financial institution’s back office brought out unintended consequences from the mobilization of IC. Story one was a ‘tragedy’ where different meanings of customer needs were constructed that contradicted each other as to the amount of financial investment that could be made from the various IC resources. The tragedy transformed into a ‘satire’ in story two when managers struggled to mobilize the elements of IC within budgetary constraints. In the story, three managers promoted operations that did not require significant financial resources, and they were thereby able to transform the story into a ‘romance’. These narratives illustrate how the implementation of IC moved from a managerial perspective towards an ecosystem perspective as it was discovered that there is a deeper meaning hidden within the confusion and ambiguity in the effect of non-financial IC resources.
The chapter by Michalak, Krasodomska, Rimmel, Sort, and Trzmielak (2017) examines IC in public universities. They state that universities are knowledge intensive organizations that cooperate with business and other stakeholders to commercialize research results. Their chapter contributes to the third stage of IC research because it draws attention to the influence of new public management on IC management and the ways in which IC acts as a source of universities’ competitive advantage. Their chapter presents the main sources of this benefit, as well as describing the way university IC is linked to its market value. It discusses the knowledge commercialization process, which generates IC in a university and the ways in which university–industry collaboration enhances the value of IC.
Ritvanen and Sveiby’s (2017) chapter contributes to the emergent stream of IC-as-practice, proposing that IC is seen as a ‘lens’ to guide, select activities, and assess effects and consequences of managerial action in its broadest sense. They argue that an IC-as-practice perspective is concerned with how managers deal with the fact that action is irreversible and may have unexpected outcomes. It does not shy away from issues of power and ethics. If the full implications of IC-as-practice are accepted, IC scholars must do more than analyse IC-statements or manipulate large databases. It signals a commitment to sociological theories of practice and close-up methods, such as ethnographic methods and action research. They illustrate their proposition with the case of a large manufacturing company where management is facing strategic decision making in the face of uncertainty.
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The chapter by Rooney and Dumay (2017) explores behavioural influences on innovation practice and its association with IC. In particular, it examines the performative interactions between IC and innovation and the conditions associated with innovation success and failure. The stated aim is to provide insights into the factors promoting as well as inhibiting innovation, and this is achieved by focusing on narratives, rather than numbers. Based on the literature linking IC and innovation practice, the authors examine their associations across a continuum including radical, evolutionary, and incremental innovation. From the discussions, it is demonstrated that the relationships between IC and innovation are substantively more nuanced than the IC-innovation grand theory suggests. The chapter concludes that different types of IC are more effective for various categories of innovation, and can also be mitigating factors in developing innovations, going some way to explaining the mixed empirical results of prior IC-innovation studies.
This chapter contributes to the third stage of IC research, and the findings have several implications for IC and innovation practice, research, and policy decision making. First, for practitioners, there is an imperative to resist the temptation to apply quantitative frameworks based on grand IC theories without critical review of the nuanced relationship between IC type and innovation categories. Given that innovation is, to a considerable extent, driven by strategy, there is a need for clarity on the desired strategic outcomes. Second, for researchers, there is a need to consider the influences on innovation failure as well as success. As for practitioners, this requires a more critical and nuanced understanding of the various relationships between IC type and the continuum of innovation categories not usually examined in ‘grand theories’ of IC. Finally, for policy decision makers, there is a need to critically analyse past preferences for ‘one size fits all’ innovation policies. All forms of innovation have a role in achieving national and global economic goals.
Massaro and Dumay’s (2017) chapter explores IC disclosure (ICD) in digital communication channels. The chapter fits into the third stage of IC because it explores a mode whereby investors communicate with each other, specifically focusing on Internet Stock Message Boards. This study is novel since its focus on ICD assumes an investor perspective and investigates if and how much investors discuss IC. Additionally, the research looks at involuntary disclosure because we investigate what investors say about the company, rather than what a company says about itself. The research finds that investors use new media to acquire, discuss, and share information about companies and they discuss different IC elements according to the sector of the company. Additionally, topics discussed by investors do not match previous frameworks used in ICD research. Finally, messages containing ICD more likely disclose investor’s sentiment (e.g. hold, buy, or sell), showing that IC matters to investors to justify their opinion about a company’s future. Thus this chapter represents one of the new and emerging ICD studies that breaks away from analysing traditional ICD mediums such as an annual report.
Cuganesan’s (2017) chapter studies the application of IC elements in the not-for-profit (NFP) sector and argues that despite being an important sector of the economy, it is often overlooked. Increasingly, NFPs have to acquire and maintain commercial revenue sources through the provision of earned income activities in order to ensure their financial sustainability. While customer performance measurement practices offer significant potential for NFPs, little is known about how these practices operate in this setting. Furthermore, characteristics of the NFP context mean that findings from the for-profit sector are not necessarily transferable to private sector organizations. Hence, this study sets out to examine: (a) how NFP orientation influences customer performance measurement practices comprising the measurement of value provided to customers as well as value extracted from customers; and (b) the effects of these customer performance measurement practices on non-financial performance and financial sustainability.
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Based on the study’s findings, this chapter concludes that measurement of value provided to customers contributes to the enhanced delivery of earned income activities to customers and the achievement of a social mission. Through this effect, the measurement of value provided to customers also has indirect benefits for the financial sustainability of NFPs. Also, the study provides insights into the nature of the benefits obtained from customer performance measurement practices in the NFP context. These appear to be operational in terms of enhancing individual customer relationships, rather than in terms of pricing or being portfolio related. Overall, this chapter adds to the knowledge of customer performance measurement practices and how these operate in NFP settings.
Moving from large companies to small to medium enterprises (SMEs), Yao and Koga (2017) in the chapter “Sustained competitive advantage and strategic intellectual capital management: Evidence from Japanese high performance small to medium sized enterprises” argue that IC is important as a source of competitive advantage in SMEs. They observe that there has been limited research into IC management in Japanese SMEs. This chapter explores how IC contributes to sustained competitive advantage through strategic management in Japanese SMEs by analysing five companies over ten years.
The chapter reveals that IC can deliver competitive advantage in the long run; only by combining with overall competitive strategy does it facilitate sustained long-term competitive advantage. The research has both practical and policy implications. It can help managers to review strategy formation and improve IC management and reporting for investors and other stakeholders to evaluate IC, and policy makers to provide more proper support for SMEs.
Framework chapters
This subsection presents the chapters that explore the second distinctive theme associated with frameworks. Johanson’s (2017) thoughtful chapter “Towards an integrated intellectual capital management framework” outlines and argues that a deeper understanding of how IC management is performed is needed. Work health and work environment have many similarities with other IC elements and are often connected to each other. Linear causalities could be hard to find, but mutual dependence is evident, for example between health and exploitable competence. Therefore, it is also argued that because of the ageing population there is a need to improve understanding of how work environment and work health affect sustainability on the individual, organizational, and societal level.
The Montemari and Chiucchi (2017) chapter argues that although several frameworks for measuring and reporting IC have been developed, their actual use in practice is still limited. In particular, IC measurement frameworks have been criticized for their limited ability to capture the relationships between IC and value creation, and to show the impact of IC on company performance. The business model concept has been identified as a platform within which to refocus the IC debate. This chapter explores how the business model can support IC measurement and how the transition from the business model to measurement can be executed. This chapter contributes to the third stage of IC research, outlining a single, in-depth case study, conducted using an interventionist approach. The analysis finds that using the business model clarifies which IC elements are of utmost importance and what role they play in the company’s value creation process.
Smith (2017) explores the important issue of IC disclosure: what benefits, what costs, is it voluntary? It explores the costs, benefits, restrictions, and alternative perspectives to IC disclosure through a synthesis of evidence obtained from a direct survey investigation of, and follow-up interviews with, 93 finance directors in UK listed companies. The findings show that benefits, costs, and restrictions are unequally associated with disclosure across the spectrum of IC information and that IC disclosure decisions are increasingly complex. This explains why IC components observed to be disclosed are not necessarily those that are the most critical in the value creation process.
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Under contemporary international financial reporting regulations, many IC elements are not recognized in the financial statements, and various incentives are suggested in relation to the voluntary disclosure of IC. These include increased transparency to capital markets, establishing trustworthiness with stakeholders, and providing a valuable marketing tool. However, what creates value is potentially highly sensitive, and disclosing value creation-related information could be a serious burden. Therefore, IC management and IC disclosure are mutually dependent activities in the value creation process, with the disclosure in itself having the potential to create or destroy value; in theory, voluntary disclosure will occur if benefits exceed costs. However, due to bounded rationality, not all potential benefits and costs might be considered. Benefits and costs are unlikely to remain constant over time, and it is unclear if the IC disclosure decision is the product of a static or a dynamic trade-off, or indeed subject to periodic review. Further, disclosure cannot be said to be voluntary if private disclosure agreements or other restrictions/regulations are in place to safeguard highly sensitive information from the public domain.
Bornemann’s (2017) stated purpose is to report on the situation of the discipline and experiences of IC reporting over the last 15 years in Germany. A national initiative plays a vital role in the process of reporting IC by the Federal Ministry of Economic Affairs which published the method of Wissensbilanz (IC Reporting and Management) Made in Germany: a management and reporting instrument for strategic organizational development that has been implemented and tested in Mittelstand companies since 2004. He concludes that with more than 100,000 downloads of the guideline for IC reporting, it is well received by enterprises and management education programs.
Demartini and Bernardi’s (2017) chapter “A management control system for environmental and social initiatives: An intellectual capital approach” examines a company operating in the global aerospace and defence industry, which has designed a management control system focused on IC measurement to assess, manage, and monitor environmental and social initiatives. The tool is intended to meet the stringent criteria required for inclusion in the Dow Jones Sustainability Index. The study is an action research project, in which data were gathered from in-depth interviews with managers, as well as from group discussions.
The research illustrates how to link IC and environmental and social initiatives. To the best of our knowledge, no research has addressed this topic to date. Their chapter contributes to the third stage of IC research by investigating IC in practice from a critical and performative perspective.
Chiucchi, Giuliani, and Marasca (2017) argue that despite a plethora of IC concepts and reporting frameworks, none has been widely accepted. IC reporting has been criticized as more preached than practised, suggesting an urgent need to reflect on what are the levers and the barriers that can influence the successful implementation of IC reporting. This chapter examines IC reporting implementation from a longitudinal perspective, thus contributing to the third stage of IC research. It finds that the levers and barriers identified in the literature vary in space and time and that these include ambiguity of aims or indicators and the existence of grand theories. Also, corporate social responsibility reporting may hinder the effective implementation of IC reporting. Project leaders and sponsors, as well as external partners, have an active role in determining the fate of an IC project.
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In Rimmel, Baboukardos, and Jonäll (2017) “Revival of the fittest? Intellectual capital in Swedish companies”, the authors examine the amount of IC disclosure in the annual reports of the top 30 Swedish companies and compare it to Skandia’s IC disclosure 20 years ago. The authors aim to discover the level of IC disclosure in the annual reports and if IR has led to a revival of IC reporting?
The study reveals that the level of Skandia’s IC disclosure 20 years ago is on average above the level of IC items contained in current corporate reports by Swedish companies. Additonally, the study finds that IC disclosures in IR companies do differ from companies that do not report according to IR and rely on traditional annual reports. Overall, the results indicate that there are differences in IC reporting between companies that applied IR and traditional annual report companies, which is consistent with the aim of IR declared by the IIRC.
Adams (2017) analyses the emergence of <IR> practices in the US. The IR movement can be seen in the third stage of development of IC thinking: from raising awareness to theory building and frameworks, and now to IC in practice. While the <IR> movement is still in its infancy across the world and even less common in the US, there are already some compelling examples of <IR> practice in the US. This chapter examines the key characteristics of ten publicly available US integrated reports to get a sense of this emerging practice. Findings show that, if the reference to the IIRC Framework is a requirement for being considered an integrated report, then practice in the US is limited to just two US-based companies in her sample. However, if a broader definition of <IR> is adopted as providing information about the full set of capitals and how they relate to value creation, then a complete list of ten companies qualify here. Overall, the analysis shows that the practice of <IR> is still in an emergent form. Each of the analysed companies is taking steps in its way to tell its stories to shareholders and stakeholders in a more integrated way.
Beusch and Nilsson’s (2017) stated purpose is to provide a longitudinal analysis of the ‘what and how’ of disclosure of capital in annual accounts of major Swedish companies in relation to the IIRC’s six capitals concept. In doing so, the chapter explores the level of the stage of <IR> research and practice in Sweden and discusses the achievements of a possible shift from a ‘financial capital market system’ to an ‘inclusive capital market system’. For this purpose, the annual reports for the years 2011 and 2015 of 20 of the largest companies listed on the OMXS 30 large cap list in Sweden are examined. Content analysis is performed on the reports, applying a scoring system with 25 items, derived from the IIRC’s Integrated Reporting Framework (IIRC, 2013) and previous studies.
Findings illustrate increases in human, intellectual, and social and relationship capitals, whereas natural capital shows a small decrease between the years. Overall, there are no fundamental changes during the four-year period covered in this study regarding multiple capital reporting: a majority of companies score slightly higher in 2015 compared to 2011, attributable entirely to increases of disclosure within non-financial and non-material/intangible capital (former IC classification). This study indicates that there is a long way to go until one can speak about a real shift from a ‘financial capital market system’ to an ‘inclusive capital market system’.
It is argued that a solution that would make IC reporting matter (more) attractive to the investment community is to emphasize the interconnectedness between parts of the narrative sections according to the logic of contemporary business model understandings. This chapter identifies a series of potential inconsistencies due to a mismatch between business reporting orientation and the general stakeholder orientation in the business community. It concludes that propositions of aligning management commentary with business models may lead to challenges for both companies and external interested parties, and that regulation should be concerned with creating guidance on how to structure management commentary and strengthen such narrative statements through appropriate performance measures.
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Second stage chapters
Roos (2017) sets out to recap the contributions to the field of IC he has made with colleagues over the last 20 years, and as such he summarizes the ten key works in this respect. The chapter is structured according to the author’s personal assessment of the importance of the given contribution. In the author’s personal view, his most influential contribution is found in the development of the IC-Navigator, which sought to address the lack of tools to assist companies in adopting a resource-based view of the firm. The side-effect of this tool was that it complemented business model innovation as well as the management of IC in general. Also highlighted as an important work is the contribution to identifying and using performance measures to the field of IC in the form of the Conjoint Value Hierarchy (CVH) measurement system.
He states that this has since spread into related fields also encapsulating complex objects with difficult or multi-dimensional attributes of value that must be captured. However, the author argues that none of the above two contributions nor the contributions to the field of corporate governance (reporting and disclosure) would have been possible without the contributions to the taxonomy of the field that addresses confusions as to what stocks and flows of resources exist as well as dealing with the confusion around the distinction between intangibles and IC. It is clear from the work that is presently ongoing on the meso-economic scale that the IC lens is useful and able to contribute to insights around value creation on multiple scales.
Dane-Nielsen and Nielsen (2017) in their chapter argue that IC is the platform of any business model and its value creation, and that without IC no value creation can take place at all and thereby contribute to answering Dumay et al.’s (2017) fifth stage of IC research question, namely ‘is managing IC a worthwhile endeavour?’. The answer is yes, because IC is the basis of all wealth creation. Through the notions of ‘emergentist’ sociological theory, this chapter offers a theoretically grounded lens for analysing and understanding business models. The authors argue that business model descriptions should focus on describing the connections between the different activities being performed in the company. Current perceptions of relationships and linkages in the business model literature often only reflect tangible transactions and relationships, and this is found to be problematic. Regardless of what an organization does, it is not possible to perform functions and activities without the appropriate IC to make use of machinery, apply financial capital, perform processes, create management actions, and so on. An organization’s value drivers are always their IC.
The chapter introduces five examples of distinct business model configurations to illustrate that the value drivers of business models are IC entities at different levels of the organization. Individuals have relevant knowledge and work with other staff members in functional departments. An organization is made up of a number of interacting functional groups and departments, which together form the whole organization. Organizations, suppliers, and buyers act in a market, and the price and volume of products are ultimately determined by so-called market forces. The chapter contributes to a number of relevant action points for future studies that should be undertaken in order to further our understanding of IC in action, potentially in combination with business models. For example, the relationship between business models and different levels of organization.
In Lund and Nielsen (2017) “Making intellectual capital matter to the investment community”, the authors discuss trends and dilemmas in reporting and disclosing IC in the light of two decades of attempts at creating guidelines and regulation for such corporate strategy narratives. They argue that to make IC reporting matter (more) to the investment community, the interconnectedness of parts of the narrative sections according to the logic of contemporary business model understandings should be emphasized. A series of potential inconsistencies that are the result of a mismatch between business reporting orientation and general stakeholder orientation in the business community are highlighted. The chapter concludes that propositions of aligning management commentary with business models may lead to challenges for both companies and external stakeholders, and that regulation should be concerned with creating guidance on how to structure management commentary and strengthen such narrative statements through relevant performance measures.
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Hussinksi, Ritala, Vanhala, and Kianto (2017) in the chapter “Intellectual capital profiles and financial performance of the firm” argue that existing research demonstrates that IC is positively related to organizational outcomes. However, little is known about whether and how distinct configurations or profiles of different IC dimensions influence the real bottom line – the financial performance of firms. This chapter extends the traditional tripartite IC division into human/structural/relational capital with a finer-grained categorization and suggests three additional dimensions: renewal capital, entrepreneurial capital, and trust capital. In addition, it is suggested that relational capital could be divided into internal relational capital and external relational capital dimensions. We examine the types of configurations of these seven types of IC dimensions among groups of firms and look at how companies with different IC profiles vary in terms of their financial performance.
Continuing on the issue of performance, Kianto, Garanina, and Andreeva (2017) deliver an interesting chapter “Does intellectual capital matter for organizational performance in emerging markets? Evidence from Chinese and Russian contexts”. The chapter uses a series of studies demonstrating the importance of IC for efficiency and value creation and that differences of cultural, economic, or institutional context pose a range of challenges for the management of IC. As most current studies have been conducted in developed countries, the significance of IC in emerging economies remains unclear, particularly as there are no comparative analyses of IC management in such contexts. This chapter’s comparison of how IC impacts the performance of companies in China and Russia is of particular interest here because, while these emerging economies both prioritize innovation and are increasingly integrated into the global economy, their traditional management approaches differ significantly from those in developed countries. Based on survey data collected from 139 Chinese and 86 Russian companies, the chapter outlines the performance impact of the human, structural, and relational components of IC.
The finding that IC impacts performance in different ways in Russia and China shows that although emerging economies are sometimes grouped together, they should not be. The likelihood of fundamental institutional differences among emerging economies means that they should be examined individually rather than simplistically grouped together, with a view to identifying their idiosyncratic characteristics.
Stage one chapters
The De Villiers and Hsiao (2017) chapter discusses the relationship between IC and <IR>. <IR> is a reporting format that aims at communicating the interactions between financial and non-financial information in IR in the form of six distinct capitals. <IR> places considerable emphasis on articulating the future value creation story of the reporting entity with reference to the organization’s strategy, business plan, and the six capitals: financial, manufactured, intellectual, human, social and relationship, and natural capital. Anyone with an interest in IC will immediately recognize its close relationship with <IR>. IC’s ‘structural capital’ resembles <IR>’s ‘intellectual capital’, ‘human capital’ remains ‘human capital’, and IC’s ‘relational capital’ maps to <IR>’s ‘social and relationship capital’. Initially, this chapter provides details on the origins and developments of <IR>, and the connections between IR and IC and discusses prior literature.
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The <IR> movement involves a number of important players at various levels in society and the capital markets. Early evidence suggests that <IR> is being implemented and adopted at a more rapid rate than previous reporting initiatives. As such, and given the similarities between several of the characteristics and components between IC and <IR>, it is worth researching IR and considering the implications for the IC movement. In addition, both the IR and the <IR> movement are argued to emphasize value creation and the business case for reporting. Therefore, any headway made by the <IR> movement in promoting IR can only benefit IC disclosure. Proponents of IC should consider ways to collaborate with the <IR> movement, as well as the means to leverage off the activities of the IIRC. The chapter concludes by pointing to research opportunities at the intersection between <IR> and IC.
In his chapter, Catasús (2017) asks the question: in which ways do numbers matter? This question is central to the discussion of the relevance of IC indicators. He argues that technologies such as accounting can move between practices and become important. Characteristics such as being trustworthy, fair, and moveable, make the measurements emanating from an accounting system into a technology für alles. It is thus not surprising that the practice as well as the study of accounting has become a more central activity in society in general, but in the IC discourse in particular. This, in turn, may lead to a focus on the measurements, accounts, reports, and KPIs for a plethora of aspects of the organization, begging the question: do we need all these numbers? To address this question the chapter is centred on the requirement of the relevance of indicators, and the idea that relevance is an issue related to whom the indicators are for, why we are measuring, and what is the ambition associated with IC indicators. The chapter also critically discusses the possible aims and use that can be made of IC indicators.
An important lesson from this chapter is that although we live in an age where measurements are omnipresent and where the measurement paradox drives measurement activities, we cannot expect all measurements to achieve what we want. Instead, we ought to approach a subset of measurement as IC indicators and use them as a means to mobilize interest about IC and reflect and learn about the ways IC affects practice because the conundrum of organizing will never be resolved – it is an eternal mystery.
Conclusion
To conclude this introductory chapter, we would like to leave on a note of curiosity and inspiration. We hope that from the insights gained from this Routledge Companion you will be inquisitive, and we encourage you to go out and pursue new research studies that will enrich companies and society. We also hope that eventually you will bring back new thoughts and ideas to further develop the field of IC in the future.
As was noted in this chapter, the five stages of IC research that organize the contributions of this Routledge Companion illustrate the trajectory that IC research has taken over the past 20 years. Throughout the development of a research field, it is necessary to have all stages of research in play for the construction of new knowledge and insights gained in the other stages, and therefore the stages presented here are interconnected rather than sequential.
The chapters presented in this Routledge Companion capture at a point of time our understanding of the field of IC. While the decade from 1997–2007 primarily saw the development of stages 1 and 2 research, it is evident that the ten years of research from 2007 to 2017, have moved from the ostensive stages 1 and 2 research and towards conducting performative analyses of IC practices in action (Mourtisen, 2006). This Routledge Companion has a majority of contributions representing the third stage of IC research. While the reporting agenda of the IC community has been focused on the <IR> initiative, the performative trend in IC has produced meaningful connections to fields such as innovation, entrepreneurship, and management.
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If Dumay et al. (2017), are correct, there will be more research in stages 4 and 5 in the coming years. This will fill out several significant research gaps that will strengthen the IC agenda in relation to policy debates, as well as its overall societal impact. Asking whether managing IC, as is done in the depicted fifth stage of IC research, is a worthwhile endeavour, raises significant concerns about the ‘return on investment’ of the time and effort spent by companies, public organizations, and nations. If IC has any relevance for the performance of organizations, industries, and nations, there will surely be moves to capture, build, and manage it. And the question is whether this will be for the good of IC. As a community of practice and research, we need to be at the forefront of understanding these questions.
Arguably, the IC research agenda has not yet reached maturity levels capable of significantly affecting policy and regulation debates. Stage 4 research, which is specifically aimed at developing and building strong economic, social, and environmental ecosystems, brings with it a call for contemplating the good for society to the IC agenda. In addition to affecting policy and environmental debates, this ecosystem notion poses some interesting thoughts for further research on an organizational level too. From an organizational perspective, the idea of viewing oneself as a part of a collaborative ecosystem poses potential research to look into how IC can be practised in network-based business model settings. This would entail going beyond the understanding of the focal firm and contemplating effects further upstream and downstream in the value chain.
The current focus on stage 3 research and calls for research in stages 4 and 5 by no means indicates that stages 1 and 2 research are, or are going to be, obsolete. Because the outputs related to these three stages will alter our knowledge in the field, raising IC awareness in relation to IC with no boundaries, IC in an ecosystem context, and IC in reporting frameworks will be a continuous exercise. And because IC reporting is not a standalone communication vehicle, as it was to a large extent in the early 2000s, relationships with other concepts will be ever more important to review and address. Forthcoming research should aim to strengthen these ties and provide insights into the conditions under which IC can and cannot stand alone as measurement and reporting activities. Further, the creation of guidelines, standards, and indices to measure, manage, and report IC will need to be revisited to identify the effects of new regulation and new business models.
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