Capital, in business terms, refers to any type of asset (either financial or non-financial) that will generate future cash flows for the company. Meanwhile, these assets can be classified into a number of types. The most common and prominent assets for any company are the tangible assets. These assets can be found on the balance sheet of an organization, and their value is recalculated periodically and depicted on the financial statement. Financial assets, on the other hand, also comprise a major portion of the overall asset base (Sumedrea, 2013). Virtually all organizations also possess some intangible assets. However, their valuation is very difficult to carry out. A leading researcher in the field of an intangible asset, Thomas Stewart, coined the term ‘intellectual capital’ in relation to the topic of intangible assets. This report analyzes and examines the term ‘intellectual capital’ in detail. It also aims to investigate its nature, composition and measurement.
Before moving forward to the question of composition and measurement of intellectual capital, this is vital that this term is defined and explained in full. After its inception by Thomas Steward, the notion of intellectual capital has experienced a lot of changes. Intellectual capital refers to the idea of the capital of an organization in the form of its employee’s knowledge, business training or any other propriety information that can provide company a competitive advantage (Bontis, 1967).
The definition of intellectual capital is too generic in its nature. For this reason, most of the studies divide intellectual capital into classes. According to the originator of the idea, Thomas Steward, intellectual capital can be subdivided into two components, Human capital and structural capital (Edvinsson, 1997). Human capital refers to the knowledge, skill set, talent and the know-how of employees in relation to performing their jobs. From a broader perspective, the idea of human capital is tied to the capability of the human resources of a company to achieve the overall business strategy. On the other hand, the structural capital is the availability of enterprise resource systems, databases, applications and other infrastructure required to accomplish the strategy. The idea of the accomplishment of the business strategy is a major component of the definition of both constituents of intellectual capital. An organization may have human resources that can have a lot of knowledge in a number of fields. At the same time, the processes and databases of a company may be costly and accurate. However, if these components are not able to support the firm in realizing an enhanced profit, then they are considered to be human capital; only in the situation where it can be proved that these constituents are pertinent, their inclusion in the human capital is justified.
The definition of intellectual capital is so broad that it can be classified both as a tangible and intangible asset. However, the research of Richard Petty and James Guthrie (2009) points out that human capital is an intangible asset (Petty & Guthrie, 2000). This may be because of the following reasons.
1: There is no legal ownership is the case of human capital. In spite of the fact that it belongs to a firm or company, it is also shared by the workforce and customers or suppliers etc. Therefore, this nature of human capital can only be explained in intangible form.
2: Additionally, one type of capital alone cannot provide a firm with the privilege of enhanced profits. For example, the knowledge of the workforce is not a considerable factor when its processes and ERP are outdated. Therefore, human capital is only realized when the combination of its constituents are in such a way that ensure maximum profitability. This fact points out that intellectual capital is intangible in its nature.
3: The most critical attribute of a physical or tangible asset is that it can be sold or transferred to another entity for the sake of profit or any other motive. In the case of human capital, it is virtually impossible to transfer human capital to other firms. Even if you do that, it is not 100% probable that the target firm will also accomplish its strategy by this acquisition. In this sense, human capital comes out to be not only intangible but also firm specific.
4: Unlike the financial or tangible assets, the human capital asset cannot be traded because no active market exists for it.
These four points indicate that human capital is intangible and firm specific as it is not possible to transfer it to any other firm.
International accounting standards and local GAAP of a country are trademarks in determining and measuring the value of the assets of a firm. However, there are no clear cut instructions in correspondence to the concept of measurement of human capital. Even though human capital counts as an intangible asset, its measurement is very difficult in the sense that its nature is very subjective in real life. Additionally, the non-existence of an active market is also a crucial factor for postulating that it is virtually impossible for estimating the value tied up in the human capital. However, another crucial question pertains to the fact that whether or not it is feasible to measure human capital in the first place. Yolanda Ramírez and ÁngelTejada Ponce (2013) carried out a research on the non-measurement of intellectual capital in Spanish universities (Córcoles & Ponce, 2013). The results of the research indicate that there are pros and cons on the topic of the measurement of intellectual capital. Firstly, for the measurement of intellectual capital, one needs accurate information on the processes, controls and ERP of an organization. This information comes at the expense of financial costs. On the other hand, the fees and the related expenditure of the related consultancy parties can also be significant. These are the main reasons why companies are not considering valuing the intellectual capital. However, this study also showed that there are certain benefits in measuring and disclosing intellectual capital. These benefits include customer satisfaction, improved credibility, image and reputation of an institution etc. All these factors point out that the measurement of intellectual capital should be determined by the relative cost benefit analysis of a firm. However, this is not a hard and fast rule for companies. The culture and overall management style of an organization are the deciding factor in the determination process of intellectual capital.
It is also very important to establish the fact that whether or not a firm’s performance changes in response to its intellectual capital. Silvia Sumedrea (2013) carried out a research for finding out the link between firm’s performance and its intellectual capital (Sumedrea, 2013). The results of the study indicate that intellectual capital affects both the development of companies and its profitability. Intellectual capital is supposed to have a direct and straight forward relationship with the development of an organization and its strategy formulation and implementation. However, in the case of profitability, the intellectual capital is linked in the form of a coefficient.
The firm specific coefficient determined the level of enhancement in profitability in response to a certain value of intellectual capital. In this regard, Wan Et al (2014) carried out a research in order to find out the link between intellectual capital and operating efficiency of Chinese life insurance companies (Lu, Wang, & Kweh, 2014). This research applied dynamic slack-based measure (DSBM) model in its methodology and included long term time horizon. Additionally, truncated regression, bootstrapping approach, Tobin regression and robust cluster regression were used in arriving at the overall results. This proves that the results are accurate and precise. The results indicate that there is a positive relationship between the intellectual capital and the operating efficiency of Chines life insurance firms.
Intellectual capital is becoming an important topic in the field of business in the current competitive environment. Many firms have started to realize that alongside customer support and other related parameters, the intellectual capital is providing firms a competitive advantage. Companies in the competition ridden economy are always very desirous of achieving such a competitive advantage. Therefore, the topic of intellectual capital has gained importance not only in the eyes of researchers and scholars but also the shareholders and the stakeholders of companies. This surge in the importance is not proportionate to the level of advancement in the measurement and recognition of intellectual capital. Accounting standards are too generic in their nature. Therefore, the intellectual capital, as an intangible asset, has failed to gain an insight. Considering the importance and pertinence of intellectual capital, this is vital that regulatory bodies turn their attention toward the measurement issue. If specific standards are issued and formulated, this may help in standardizing the measurement of intellectual capital.
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Lu, W.-M., Wang, W.-K., & Kweh, Q. L. (2014). Intellectual Capital And Performance In The Chinese Life Insurance Industry. Omega, 42
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