2 Research methods and research sites employed

This section presents the justification for the approach to the empirical research employed in this thesis by publication, and identifies the two research sites utilised in the collection of empirical material. Section 2.1 outlines the research methods that were employed, and section 2.2 presents further details of the two research sites employed.

2.1

Research methods

The objective of this section is to align the critical research perspective with the different approaches that can be used in developing empirical research in accounting. Academic researchers have traditionally been confronted with the choice of two distinct paradigms by which to conduct their research: positivistic or

phenomenological (Collis and Hussey, 2003). These approaches are sometimes also referred to as quantitative or qualitative. The proponents of positivism argue that reality is independent from the researcher (Morl, 2001). On the other hand, proponents of the phenomenological approach argue that reality is subjective and the researcher interacts with what is researched (Collis and Hussey, 2003). But the choice of research method employed should not be considered an either/or decision as research based on a critical perspective is not a fixed homogenous approach (O'Donnell et al., 2006, p. 6). From an accounting standpoint, the critical perspective can be seen to be akin to taking the middle ground as far as research methods are concerned. Laughlin (1995) identifies this as middle-range thinking and advocates this as a preferred approach to accounting research. In adopting the term middle-range, Laughlin (1995, pp. 70, 7723

85) argues that critical accounting researchers establish the middle position (on a high, medium and low continuum as shown in Figure 1) in regards to the dimensions of theory, methodology and change. As Laughlin shows in Figure 1, German critical theory is at the heart of the approach, although he does not advocate that researchers must adopt the exact position per se. Rather, he justifies the centrality of German critical theory because of its approach to discourse and argument which, combined with the ability of humans to communicate, opens the possibility for researchers to make known what we are doing and why we are doing it (Laughlin, 1995, p. 78). This, in essence, allows questions to be asked and for the outcomes of the research, that is, the insights, critiques and arguments for transformative redefinition, to be communicated.
Figure 1: Characteristics of alternative schools of thought

Source: Laughlin (1995, p. 70, Figure 2)

Laughlin (1995, p. 79) advocates that the middle-range approach overlaps the boundaries of the schools of thought that occupy the top left and bottom right squares 24

of Figure 1, not so much as a combination of these schools of thought, but borrowing from the corners indicating that it draws from both of these dominant ways of thinking yet is distinct and separate. In borrowing from these schools of thought a middle-range research paradigm emerges that derives its characteristics from the dimensions of theory, methodology and change (Laughlin, 1995, p. 80). From the theory dimension the end result is a broad skeletal theory model from which it is possible to derive generalisations. From the methods used dimension the researcher is seen to be an important part of the discovery process while the nature of the method employed is mainly qualitative and based on actual situations. The data is likely to be case study-based, descriptive and analytical with the empirical results of the analysis tied to the skeletal nature of the theory. Finally, from the change dimension the findings can advocate change anywhere along the continuum of radical change to the maintenance of the status quo. The importance of grounding the middle-range research perspective is that it is possible to diverge from this central position and still remain in the critical mode of thought. For example, in Figure 1, Giddenss (1976; 1984) structuration theory is placed at a Medium/Low/Low (Theory/Methodology/Change) position within the framework. Thus, the research paradigm that emerges from using structuration theory, according to Laughlins framework, would need to diverge based on the Low positioning of the methodology and change dimensions. Using this logic, Structuration theory would, from the methodology dimension, have an unstructured qualitative approach to the research and would typically consist of heavily descriptive case studies. From the change dimension, it is argued that there would be a low emphasis on changing the status quo (see Laughlin, 1995, p. 80).

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While Laughlin (1995, p. 80) specifically advocates the qualitative position in relation to structuration theory research, Giddens (1984, p. 287) takes a more open view in identifying that it is not the debate between the qualitative and quantitative camps that is at issue, but rather structuration theory is intrinsically incomplete if not linked to a conception of social science as critical theory. Thus for Giddens (1984, p. 327), critique is the first priority, and more specifically, the purpose of research is to clarify many different issues, according to the nature of the problems the investigator sets out to illuminate. It is from this position where the decision to use qualitative or quantitative methods should be made rather than from the merits of the debate between qualitative and quantitative research methods (Giddens, 1984, p. 327). Accordingly, Giddens (1984, p. 333) advocates that there is no obvious point where the division can be made but the decision to chose a research method from the approaches depends on the number of cases being investigated: a large number of cases advocates the use of quantitative methods and a low number of cases advocates the use of qualitative methods. While this may seem a simplistic way of eliminating the debate between the quantitative and qualitative camps, Giddens (1984, p. 333) elaborates that what we classify as quantitative data is, when examined closely, in reality a derivative of qualitative data. This is because qualitative measures are defined by actors as an ordered grouping of context-specific composite measures. In the development of these measures, researchers are prone to the same hermeneutic issues that confront the qualitative researcher in the development of the diverse codes and categories on which they base their analysis. Alvesson and Deetz (2000, p. 53) remark that this:
diversity means that a coherent definition with universal aspirations may tell us relatively little in terms of the richness and complexity of the quite varied phenomenon it supposedly refers to. It hides

26

this variation and gives a false impression of similarity through the use of abstract labels

The research methods in the papers used in this thesis by publication and the positioning of the papers on the continuum between quantitative and qualitative methods is displayed in Figure 2. The rationale behind the use of the research method employed in each paper is presented next, while a full explication of the specific methods used is contained in the text of the papers presented in the appendices.
Figure 2: Positioning of Papers in Relation to Qualitative versus Qualitative Methods in Critical Research

In Paper 1 the stated purpose was to examine an alternative way by which firms can disclose their IC to external stakeholders who have an influence on their share price. In doing so the paper (see Dumay and Tull, 2007, pp. 240-4) applies the qualitative event studies method for the 2004-2005 financial year to determine relative movements in share price in conjunction with utilising qualitative content analysis to determine whether the components of IC are used in price sensitive company announcements to the ASX. From this an examination of the relationship between the disclosure of IC and the cumulative abnormal return of a firms share price is analysed. Owing to the number of cases that were analysed, the paper uses qualitative measures. In this paper two data sets containing share price movements for the top 20 and the top 200 listed companies were used. Qualitative classification using a tripartite model of IC was added to provide the analytical dimension of IC. 27

Papers 2 and 3 are purely qualitative and each draws from the same pool of data collected from a single case, that is, Lands (Dumay, 2008, pp. 110-2). In this case data was collected over two years from semi-structured interviews, focus groups, participant observation and the examination of internal and external documents. Paper 2 utilises Laughlins (1991) alternative model of organisation as the basis for the analysis. Even though Laughlins (1991) model was developed before he advocated middle-range thinking (Laughlin, 1995), the foundation of the model is grounded in a discursive argument derived from the critical thinking of Habermas (Laughlin, 1991, pp. 210-1) and thus fits within the middle-range rationale. Paper 2 discusses how an environmental change for an organisation can be a catalyst for the take-up of IC. In particular, it uses Laughlins (1991, pp. 218-20) colonizing model of organisational change to understand the catalyst for change and the resultant formation of an accounting of IC. Paper 3 builds on the change theme of Paper 2 and investigates the manner and impact of IC disclosure. To frame the discussion, and in keeping with the critical theme, elements of Giddenss (1976; 1984) structuration theory and narrative theory (see Weick and Browning, 1986; Czarniawska, 1998) are used to analyse change from within an organisation. Paper 2 explores the impact of the disclosure of IC by Lands, which was the first Australian public sector organisation to externally disclose IC. Paper 4 is influenced by complexity theory (see Kurtz and Snowden, 2003; Snowden and Boone, 2007) to develop a visual representation of IC and value creation. While Laughlins (1995) critical research framework, as presented in Figure 1, does not make mention of complexity, it can be classified in the context of the framework as taking the medium/high/medium (theory/methodology/change) position. The medium 28

theory position, advocated as complexity theory, and as applied in this paper, has a framework which gives a view of the nature of the world (Laughlin, 1995, p. 66) yet is still open to interpretation. Methodology is high as the prescribed method of research is the collection and analysis of organisational narratives (Snowden, 2006). As for the need for change this is seen to be medium as the research method employed seeks to make sense of complex environments and to decide what changes (probes), if any, are required (see Brown and Eisenhardt, 1997, pp. 16-21; Kurtz and Snowden, 2003, p. 469; Snowden and Boone, 2007). This paper examines a number of cases, that is, 208 narratives gathered from 41 individual employees, allowing for both qualitative and quantitative analysis of the data (also see Brown and Eisenhardt, 1997 for a similar application of mixed qualitative and quantitative analysis), and thus fits in the middle of the continuum as outlined in Figure 2. Specifically it is written as a case study and utilises Snowdens (2006) pre-hypothesis research method which is in turn extended by the use of statistical theory methods (see Dumay, in review, pp. 713). This thesis advocates that the critical research tasks of insight, critique and transformative redefinitions be utilised to explore IC theory and practice in a contemporary form. The task of insight is to focus on the phenomenon of IC and to report on the experiences of IC in action rather than to develop theory and broad based explanations of IC. Critique offers the opportunity to research IC from various perspectives and also the impacts of IC at an organisational level, allowing for a discourse that increases the understanding of the dynamics of IC in practice, rather than developing more theoretical perspective. Transformative redefinitions allow for the insights and understandings of the dynamics of IC practices to influence future IC

29

practice. In utilising a critical perspective this thesis uses and mixes both quantitative and qualitative research methods as indicated in Figure 2.

2.2

Research sites

In this thesis two research sites were utilised. In Papers 2 and 3 the research was conducted Lands, an Australian public sector organisation employing 1500 people. Lands is an organisation facing the effects of reforms that have instigated Public Trading Enterprise structures and more stringent financial performance requirements, which are typical of contemporary reforms in the Australian public sector (English et al., 2005). These broader reforms have focused Lands to improve performance and the manner in which it is articulated to the wider community. A specific senior management objective was to seek to identify, value and demonstrate the Knowledge (Intellectual) Capital within the Department (NSW Department of Lands, 2004, p. 4). As a result, a commitment was made by the Director General to publish Landss first IC statement in their 2004/2005 annual report and this was also carried out in the subsequent years report (see NSW Department of Lands, 2005; 2006). Notably, Lands is the first Australian public sector organisation to publish a specific IC statement. In Paper 4, the research site was the business operations (BOP) division of AusFinCo which performs the back office functions for AusFinCos products, manages the overall information technology (IT) architecture, supports and enhances software systems, and manages and implements major projects. They also provide infrastructure support for cash management, fraud, physical security, business services and records management. In addition, BOP manages AusFinCos property portfolio and outsourcing contracts. BOP employs 16% of AusFinCos staff 30

(representing about 4000 employees) and is responsible for 45% of AusFinCos expense base. AusFinCos, or more precisely BOPs, motivation for commencing this research project was to demonstrate the value that BOP created for both its partner business divisions, who are the recipients of BOP services, and end users of AusFinCos products and services. Thus, the initial focus of this study was the investigation of how IC was represented at AusFinCo in relation to value creation. The problem perceived by BOP management was that the value that BOP creates for its partner business divisions and end customers is intangible. This problem was seen to be compounded by AusFinCos internal accounting systems which allocated the costs of the services provided by BOP to the end users of these services. This has, in the view of BOP management, led to the perception that BOP is considered a cost to the other divisions and not a partner in the creation of value. Thus, BOPs challenge was to articulate how it creates value for the other divisions and to understand the interaction of the intangible resources utilised in creating this value. In this case, value was defined in two ways. First, in economic terms, in the generation of income and reduction of costs. Second, value relates to the services provided by BOP to the constituents of the groups that make up BOP, the other AusFinCo divisions and BOPs customers. Now that the research sites have been identified and the discussion of the research methods is complete, the thesis turns to the development of the motivation behind the thesis. This motivation is developed from gaps in the IC literature identified from an examination of contemporary IC theory and practice and this is the focus of the next section.

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3 Review of Contemporary IC Theory and Practice

3.1 Introduction
This section of the thesis incorporates a review of the IC literature on the two main topics of contemporary IC theory and IC practice. To complete this examination three sections are presented. Section 3.2 reviews the literature in relation to contemporary IC theory. Section 0 reviews the literature in relation to contemporary IC practice. Section 0 discusses future opportunities for research and how these are linked to the empirical studies contained in the four papers that comprise this thesis.

3.2

A review of contemporary IC theory

There can be little argument that the worlds economy has shifted, and is continuing to shift, from an economy driven by the use of tangible assets such as plant, equipment and real estate, to an economy driven by the use of intangible resources such as knowledge, technology, core competencies and innovation (Meritum Project, 2002). An example of this shift is evidenced in the USA where NASDAQ-listed companies such as Microsoft, Cisco, Amazon and Yahoo, who are representative of the knowledge-based economy, have become permanent members of Standard & Poors (S&P) 500 index. Towards the end of 2002 knowledge-based economy companies represented 11.9% of S&Ps market value (Burgman and Roos, 2004). While the definition of the knowledge-based economy is ambiguous, there are several structural changes that have been occurring. These are identified as follows (Meritum Project, 2002): Knowledge is being recognised as a commodity and is being utilised in transactions;

32

The connectivity between knowledge agents has increased remarkably; and

Information and Communications Technology (ICT) has allowed for greater creation and diffusion of knowledge and thus the network of knowledge agents has expanded globally.

Evidence of this increase in intangible assets can be seen in the valuation of companies over the last few decades where the ratio of market value to balance sheet, or book value, has been constantly growing, especially in the 1990s. Although there has been almost an equally dramatic decrease in the ratio since the burst of the internet bubble in 1999 (Fernandez, 2003), it is still more than a 2:1 ratio, as indicated in Figure 3.
Figure 3: Ratio of Market to Book Values in Germany, UK and US
6
Germany UK US

0
12/74 12/76 12/78 12/80 12/82 12/84 12/86 12/88 12/90 12/92 12/94 12/96 12/98 12/00 12/02

Source: Extract from (Fernandez, 2003: Figure 2.1)

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The difference in the market-to-book ratios indicates that the current financial accounting systems in practice are not adequate definers of economic value or resources. The Meritum Project (2002) theorised that this may result in the inefficient allocation of resources, both human and financial. Stewart (1997) espouses that this difference between the tangible accounting assets base of a firm and the market value of a firm that is considered to be the intangible assets or the IC of a firm from which hidden value emanates. The following graph in Figure 4 shows the apportionment of intangible assets and tangible balance sheet (equity) assets of some of the worlds largest corporations based on the market value of these companies. This was determined by taking the net asset position of each company as reported in their 2003 annual reports and comparing it to their market capitalisation as reported at Yahoo.com on 3/4/04. From this, the relative percentage of net assets to market capitalisation and intangible assets to market capitalisation was calculated. It is concluded from an examination of Figure 4 that the majority of value of these listed companies is based on intangible rather than tangible assets. While the market to book ratio is a simplistic way of conceptualising IC, Brennan and Connell (2000) identify that it has three weaknesses. First, IC does not comprise the entire difference between market and book values. Second, the continual fluctuation of share prices distorts the value of IC. Last, it is a singular measure of the value of IC that does not give a breakdown of the individual components of IC. Therefore, in order to gain a deeper understanding of IC and its management it would be useful to examine the concept in more detail and this is the purpose of section 3.2.1.

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Figure 4: Intangible Assets and Net Assets in Some Large Firms

100%

90%

80%

70%

60% Intangible Net Assets

50%

40%

30%

20%

10%

0% General Electric Coca-Cola Exxon Market Value Ranking 2004 Microsoft Intel

Source: 2003 Annual reports and stock quotes from Yahoo.com accessed 3/4/04

3.2.1

Defining IC

There is not one generally accepted definition of IC, but Stewarts (1997, p. x) definition is often used:
the sum of everything everybody in a company knows that gives it a competitive edge Intellectual Capital is intellectual material, knowledge, experience, intellectual property, information that can be put to use to create wealth.

The focus of the definition is not the sum of the defined components, but rather the way that these components interact and work to create value for stakeholders. The Meritum Project (2002), the European Union-sponsored program, identified that IC is comprised of a combination of human, organisational and relational resources. An illustration of their definition and examples is provided in Table 2, below.

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Table 2: The Components of IC

Examples Innovation capacity Human Creativity Capital Know-how and previous experience Teamwork capacity Loyalty Internal communication Organisational flexibility Structural The knowledge that stays within the firm at the end of the working Innovation capacity Capital day. It comprises organisational Organisational culture routines, procedures, systems, Documentation services cultures and databases. Knowledge centres Use of information technologies Image Relational All resources linked to the external relationships of the firm. Alliances Capital It comprises the part of human Customer loyalty and structural capital involved Customer satisfaction with the companys relations with Supplier links stakeholders (investors, creditors, Commercial power customers, suppliers, etc.) plus the Dealing with financial institutions perceptions that they hold about the company.
Source: (Meritum Project, 2002: Box 1)

Definition The knowledge that employees take with them when they leave the firm. It includes the knowledge, skills, experiences and abilities of people.

In order to understand the interaction of the components two firms are presented as examples, Coca-Cola and Intel, both of whom have different IC assets that complement each other, but which alone may not contribute as much value. For example, the intangible value of the Coca-Cola company would be greatly influenced by the Coca-Cola brand and the intellectual property surrounding their secret formula for the Coca-Cola syrup. For Intel, much of their intangible value is based on their ability to continually design microchips that have increased capacity and the image of Intel in the computer industry as a supplier of quality microprocessors. These are just some of the factors that contribute to these companies competitive advantage over their rivals. But a competitive advantage is not an asset; rather it is an example of having a capability to deliver a set of goods or services to customers who are willing 36

to pay economic rents for the privilege of consuming or using the products in question. Therefore, if companies are to leverage their IC and create sustainable competitive advantages they need to have management practices and processes that allow them to do so. This is what is termed knowledge management. Marr et al. (2003b, p. 773) define knowledge management as the collective phrase for a group of processes and practices utilised by organisations to increase their value by improving the effectiveness of the generation and application of their intellectual capital. These processes are seen as meta-processes. They are unlike physical

processes (i.e. a manufacturing process) because they cannot be consistently observed and their means of creation, nature, recording, transmission and style of application are fundamentally different. For Marr et al. (2003b) the main reasons for an organisation to invest in knowledge management are for organisational efficiency and / or to gain a competitive advantage over their rivals. They may disguise the reasons behind their investment in knowledge management but the underlying reasoning is always the same: survival or competitive advantage. So, if organisations are concerned with developing their IC they need a way to communicate this to both internal and external stakeholders. In response to this need a plethora of contemporary frameworks for the measurement and reporting of IC have been developed and these are examined next.

3.2.2

IC Measurement and Reporting

This section of the review presents a theoretical view of IC measurement, reporting and disclosure. An intrinsic task of management is to report on their activities so that they can keep track of their progress and report their progress to employees, other

37

managers, shareholders and other stakeholders. In addition, organisations are forever looking for ways to improve and to achieve the Holy Grail of above average or superior performance, and for more than a decade non-financial performance indicators have become an integral part of this search (Ittner and Larcker, 2003). A whole industry of accountants and management consultants who are the proponents of the latest performance management systems are out there trying to make this happen, but the Grail has yet to be found. So is the measurement, management and reporting of IC the ultimate answer? The answer is probably not, especially since all too often organisations do not identify and develop the correct measures (Ittner and Larcker, 2003). There is scant and contradictory empirical evidence to link organisational performance to performance management systems (Franco and Bourne, 2003). The literature has been more about how to negate the problems of other performance management reporting systems by replacing them with other frameworks (Neely et al., 2004). But it is suggested by Pea (2002) that organisations that have made an effort to manage and develop their IC have shown higher levels of performance. Additionally, the IC of a firm is seen as a critical element and cause of the development of a sustainable competitive advantage. Empirical evidence from a study of manufacturing firms that implemented knowledge management policies concluded that these firms were more likely to innovate and have increased productivity, thus contributing to a firms competitive advantage (Kremp and Mairesse, 2002). While superior performance is a desired outcome, it is too general. Thus, in order to understand what drives an organisation to measure and report IC, a more in-depth look at the reasons why it does so would be useful. This is provided by Marr et al. 38

(2003a) who conducted a literature review that identified five main theoretical reasons, contrasted with empirical research, as to why organisations measure IC. These are: to help organisations with strategy formulation; to help assess strategy execution; to assist in strategic development, diversification and expansion decisions; as a basis for employee compensation; and to communicate measures to external stakeholders. While considerable attention has been paid to building the theory behind the different reasons organisations choose to measure and report on IC, there has been little done in the way of testing these theories. Thus, to advance the knowledge behind the measurement and reporting of IC more research is required (Marr et al., 2003a). This research is required in order to move beyond the theoretical assumption that the measurement and reporting of IC is beneficial, to a stage that provides empirical evidence in support of this proposition (Guthrie, 2001). In support of this proposition Gerpott et al. (2008, p. 55) in their study of voluntary IC disclosure by international Telecommunication companies found it is not only the content of the IC disclosure, but also the quality of the disclosure, that impacted on capital market reactions to the disclosure. While the issue of IC and its reporting has become more prominent, especially in Europe, and more specifically in Scandinavian countries, the recognition of IC has also been considered an important concept for business in the past. A prominent economist at the turn of the 20th century, Professor Thorstein Veblen (1904, p. 144), is attributed with making the following statement:
The common stock, typically, represents intangible assets and is accounted for by valuable trademarks, patents, processes, franchises, etc. In this sense, then, the nucleus of the modern corporate capitalization is the immaterial goods covered by the common stock.

39

Thus, the notion of intangibles is not new and has been seen as an important aspect of business valuation for over 100 years. Veblen (1904, p. 154) was also cognisant of the process of value-creation in that he saw that all of the capital employed in a business had an element of intangibility and this added to its ability to generate future earnings. He is quoted as saying:
All capital is subjected to an interminable process of valuation and revaluation on the basis of its presumptive earning-capacity, whereby it all assumes more or less of a character of intangibility.

So, if business has long been aware of the value of intangible assets, how has it been measured and reported on in the past? Ordez de Pablos (2003) identifies that the management of IC is the combination of business elements that were managed separately before. The elements include human resource management, organisational development, change management, IT, brand and reputation management, performance management and valuation. Thus, organisations have been measuring and managing these elements for many years but not necessarily under the banner of IC. So, the main questions are: How did the interest in IC develop? and How are these elements linked together within a conceptual framework? The contemporary frameworks of the measurement and reporting of IC have developed predominantly over the last few decades as the notion of goodwill has been influenced by the advent of new technologies in the 1980s and expanded market to book value ratios in the 1990s. At that time two distinct schools of thought emerged. In the late 1980s and early 1990s Scandinavian businesses, with the help of practitioner consultants, attempted to understand and measure IC, which initially they termed intangible assets. As a result, Sveibys (1997) Intangible Assets Monitor 40

emerged. At the same time in the USA, the concept of the Balanced Scorecard by Kaplan and Norton (2001) gained prominence. In the mid 1990s the Scandinavian insurance company, Skandia, combined the principles of the Intangible Assets Monitor and the Balanced Scorecard to develop the Skandia Navigator and began to use the term intellectual capital in place of intangible assets. Skandia used the Navigator framework and began to report externally on IC by way of an IC report which was a supplement to their annual financial report. In the late 1990s, researchers, academics, governments and international organisations became interested in IC and this led to the start of some significant projects. The MERITUM Project and the Danish Ministry of Science, Technology and Innovation (DMSTI) initiatives, which examined the measurement and reporting of IC from an academic viewpoint, are prominent examples. The continued interest in IC culminated in an international conference sponsored by the Organisation for Economic Cooperation and Development (OECD) which was held in Amsterdam in 1999 (Guthrie, 2001). This work has continued into the 21st century and has led to a proliferation of frameworks for the measurement and management of IC and intangible assets. Sveiby (2007) identified 34 different frameworks that can be classified into at least four separate measurement and reporting approaches (Luthy, 1998; Williams, 2001; Sveiby, 2007). Another emerging type of IC framework, not yet classified within the measurement and management waves, is the visual representation of IC. These visual frameworks have begun to evolve in the IC and performance management literature to provide visual representations of the way that intangibles and / or IC interact to create value. Examples of these visual frameworks are Roos et al.s (2005) representation of value 41

chains, networks and shops; Strategy Maps as derived from the Balanced Scorecard approach (Kaplan and Norton, 2004); value creation maps as developed by Marr et al. (2004a); and causal performance maps as developed by Abernethy et al. (2005). These visual frameworks are seen to be useful because visual representations are influential in our ability to understand and interpret the world (Chaplin, 1994, p.1). From a research perspective, these visual representations of IC are seen as a fruitful area within which to develop and further refine the methods involved, especially in regard to addressing the emerging research agenda focusing on explicating the complex nature of IC interactions and value creation (Cuganesan, 2005).Table 3 outlines the different approaches and Appendix 1 outlines the different frameworks for the measurement of intangibles which combines those identified by Sveiby and others that have been discovered by the author in the contemporary literature. One of the results of the work in developing IC frameworks was the emergence of three elements that have been used to classify intangible assets and IC. There are a number of name variants given to these elements in the different frameworks but in general they are identified as being linked to the external, internal and human perspectives. As can be seen in Appendix 1 these elements and their variants are prominent in the descriptions of many of the frameworks presented. An examination of Appendix 1 shows that there are varied theoretical purposes behind each of the frameworks and a decision about which one to use in a particular circumstance can be difficult, although Sveiby (1997) does not elaborate, it recommended to use the method which is associated with a particular purpose, i.e. use valuation methods when trying to determine a dollar value for IC or scorecards if trying to measure the individual components of IC.

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Table 3: Five Approaches for Measuring Intangibles

Approach Direct Intellectual Capital methods (DIC)

Description Estimate the $-value of intangible assets by identifying their various components. Once these components are identified, they can be directly evaluated, either individually or as an aggregated coefficient. Calculate the difference between a companys market capitalisation and its stockholders equity as the value of its intellectual capital or intangible assets. Average pre-tax earnings of a company for a period of time are divided by the average tangible assets of the company. The result is a company ROA that is then compared with its industry average. The difference is multiplied by the company's average tangible assets to calculate an average annual earning from the intangibles. Dividing the above average earnings by the companys average cost of capital or an interest rate, one can derive an estimate of the value of its intangible assets or intellectual capital. The various components of intangible assets or intellectual capital are identified and indicators and indices are generated and reported in scorecards or as graphs. SC methods are similar to DIC methods, except that no estimate is made of the $-value of the intangible assets. A composite index may or may not be produced. Provide visual representations of the way that intangibles and / or IC interact to create value so that informed interventions into IC development can be made.

Market Capitalization methods (MCM) Return on Assets methods (ROA)

Scorecard methods (SC)

Visualisation methods (VIS)

Source: (Sveiby, 2007 for the DIC, MCM, ROA and SC methods only)

While this section of the review has presented a theory of IC and the resultant frameworks that are descendants of this theory it needs to be understood how this translates into practice. This is the purpose of the next section of the review.

3.3

A review of contemporary IC practice

43

The purpose of this sub-section is to depart from a theoretical understanding of the contemporary IC field and to examine the proliferation of IC in practice. To do so, this section has two further sub-sections. Section 3.3.1 examines the literature on contemporary IC measurement, management and reporting practices, and section 3.3.2 critiques a number of the more popular contemporary measurement, management and reporting frameworks.

3.3.1 IC measurement, management and reporting practice

The disclosure of IC information to both internal and external stakeholders is generally seen as an important tool in the development of an organisations decisionmaking processes, and as an enabler for organisations to judge the effectiveness of their IC management practices (van der Meer-Kooistra and Zijlstra, 2001). While the theory of IC reporting often espouses the benefits of disclosure, there can be disadvantages as well. Hence, the decision to disclose IC information must be balanced between the needs and wants of the stakeholders and the interests of the organisation (van der Meer-Kooistra and Zijlstra, 2001). Additionally, researchers in the field of IC have been interested in the substance of the disclosure that emanates from annual company reports (Guthrie et al., 2004). This is because the annual report has become a focal point in external IC disclosure, as evidenced by the proliferation of frameworks that use the annual report as an appropriate vehicle for the public disclosure of IC (Edvinsson, 1997; Meritum Project, 2002; Mouritsen et al., 2003a).

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Content analysis has been a popular method for determining the extent of IC reporting found in company reports (Guthrie et al., 2004). An early example of the use of content analysis in the IC literature is found in Guthrie and Petty (2000), who conducted an empirical examination of Australian annual reporting practices to examine the extent of IC reporting practices. This study was based upon a content analysis of the annual reports of the top 20 listed Australian companies by way of market capitalisation. The reports were examined for different attributes of IC and Table 4 below gives details of these attributes.
Table 4: IC Reporting Attributes for Australia Internal Capital Patents Copyrights Trademarks Infrastructure assets Management philosophy Corporate culture Management processes Information systems Financial relations External Capital Brands Customers Customer loyalty Company names Distribution channels Business collaborations Licensing agreements Favourable contracts Franchising agreements Human Capital Know how Education Vocational qualification Work-related knowledge Work-related competencies Entrepreneurial spirit

Source: Guthrie and Petty (2000, p. 246)

While the study is limited because it concentrates only on the external reporting of IC, it still provides insight into the proliferation of the measurement, management and reporting of IC amongst major Australian businesses (Guthrie and Petty, 2000) had three main findings. First, the concept of IC is poorly understood, inadequately identified, inadequately managed, and the essential components of IC were not reported using a consistent framework. Second, the focus of the IC being reported was based on the areas of human resources, technology and IC rights, and organisational 45

and workplace structure. Last, in the case of an enterprise that was considered an Australian leader in the field of IC, a comprehensive framework for the measurement and reporting of IC had yet to be developed. Even though there was wide-ranging agreement that IC is important and that it has a place in driving the long-term success of an enterprise, there was no evidence that there was any practical action being taken by Australian companies to measure and report IC externally. As a result Guthrie and Petty (2000) concluded that Australian companies had not yet attained the same level of IC measuring and reporting that had been attained by several European firms. The Guthrie and Petty (2000) study has been the basis for similar studies using varying methodologies in a number of different countries including: Canada (Bontis, 2003); Hong Kong (Guthrie et al., 2006); Ireland (Brennan, 2001); Italy (Bozzolan et al., 2003); South Africa (April et al., 2003); Sri Lanka (Abeysekera and Guthrie, 2005); Sweden (Olsson, 2001); England and Italy (Bozzolan et al., 2006); and The Netherlands, Germany and France (Vergauwen and van Alem, 2005). Each of these studies has limitations. First, they are all based on samples of publicly listed companies and so privately held enterprises are ignored. Second, the methodologies vary and thus it is impossible to compare quantitative results (Vergauwen and van Alem, 2005) directly. Last, each of these studies was conducted in a different cultural setting so the cultural context behind the measurement and reporting of IC was often ignored, with the notable exceptions of Vergauwen and van Alem (2005) and Bozzolan et al. (Bozzolan et al., 2006) While the limitations are significant, some of the studies mentioned above are closely

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related and some similar qualitative and quantitative findings emanate from the works. In the majority of studies a common theme was found in that the reporting of IC was important to firms but it still had not yet reached a stage where it was disclosed within a consistent framework. An example of comparative qualitative data is found in the study by April et al. (2003). Based on the top 20 mining companies in South Africa, it had similar results to the findings of Guthrie and Petty (2000). April et al. (2003) found that, like the Australian companies, there was an emphasis on the reporting of external capital and almost equal consideration was given to the reporting of internal and human capital. An example where the qualitative findings differ can be found in the comparison of results of Guthrie and Petty (2000) and Bozzolan et al. (2003). On average, Italian companies disclosed more IC information than Australian companies (Bozzolan et al., 2003: 555). The researchers speculated that these differences could be attributed to three possible reasons. First, recent Italian government initiatives have encouraged Italian companies to be more cognisant of the importance of IC. Second, the Italian company reports dated from 2001 and the Australian reports dated from 1998; thus the increasing international awareness of intellectual companies could have contributed to the increase. Last, the Italian companies examined were based on the Nuovo Mercato (New Market), Italys equivalent of the NASDAQ, where there would naturally be a greater emphasis on IC than in the more generic Australian listed companies. The limitations and similarities identified lead to further opportunities to study the content of IC found in company annual reports. One opportunity would be to include data from privately held companies in their reports to stakeholders and combine and 47

contrast this with publicly owned companies, although gaining access to sensitive company data may limit this approach. A second opportunity would be to conduct more research in the area of the cultural differences and the relationship of the prevalence of IC disclosure in company reports. Last, more longitudinal type studies that would trace the growth or decline in IC disclosure, as evidenced in Guthrie et al. (2006), could be conducted. In contrast to the private sector orientation of the previous studies mentioned above, Collier (2001) examines IC utilisation and external reporting in the public sector in an examination of the UK Police Service. Collier (2001) links IC reporting to its utilisation across a variety of media. These include formal police reports where IC was represented only implicitly through descriptions of human resource and technology initiatives; cost reports including IC information such as training expenditure; performance reporting where the benefits of IC were difficult to assess; and general media reports of IC failure amongst the police forces. Collier (2001) also identifies drivers of this reporting, such as the importance of achieving external recognition of efforts to improve human capital, the drive towards greater accountability over public resources and the need to demonstrate the invisible benefits of IC investments such as avoiding poor publicity. However, the extent to which different IC components are reported is not systematically analysed. Therefore, there also exists an opportunity to examine the development of IC reporting practices from a public sector perspective. In summary, from an Australian perspective there have been two related studies which have examined the IC reporting practices of publicly listed Australian companies by way a content analysis of their annual reports. The first study conducted by Guthrie 48

and Petty (2000) identified that the concept of IC is poorly understood, inadequately identified, inadequately managed, and the essential components of IC were not reported using a consistent framework. A further study by Guthrie et al. (2006) reexamined the original study and compared it to data from annual reports four years later. The results of this study confirmed that there was still no consistent and accepted framework for IC reporting even though there had been increases in the discursive reporting of IC but not in the measures of IC. Thus, it seems from a private sector company perspective that while there is empirical evidence to show that awareness of IC has increased amongst Australian firms, no great progress has been made towards the measurement, management and reporting of IC. From an Australian public sector perspective there has been a noticeable lack of discussion of IC in the academic literature. On the other hand, there is evidence of the importance of IC in the public sector, as seen in some government department annual reports (NSW Department of Lands, 2004) and white papers (DISR, 2001).

3.3.2 Critique of some popular contemporary IC measurement, management and reporting frameworks
This section will explore and critique the use of popular contemporary frameworks for the measurement, management and reporting of IC. From the list of frameworks presented in Appendix 1, three have been selected for review. These are the Balanced Scorecard, Skandias Navigator and the Danish Ministry of Science, Technology and Innovation model (DMSTI). There are four reasons for choosing these models. First, their selection is based on the principles of measurement theory. According to Roos et al. (2004), measurement theory is a multi-stage process which separates the representation of the object being measured from the system of measurement. In the 49

case of measuring IC this means that the attributes of the organisation must be separated from the numerical system that measures the attributes and relationships between values. Roos et al. (2004) argue that the frameworks of market capitalisation and return on assets are not suitable for measuring the components of IC. This is because these methods measure the value of the organisation and not the elements of IC that contribute to the value creation of the organisation, and therefore do not comply with measurement theory. Second, the direct IC and scorecard methods, some of which can also be eliminated as they are concerned with only one specific element of IC, for example human capital, are incomplete. Third, it can be argued that the chosen frameworks exemplify how prior frameworks influence the development of the next iteration of frameworks. For example, there is an identified link between Kaplan and Nortons (1992) Balanced Scorecard framework, Sveibys initial work in the late 1980s and Edvinssons work on the Skandia Navigator (Sveiby, 1997). Last, the frameworks are presented chronologically according to their appearance in the examined literature. Frameworks for the measurement and reporting of IC can be communicated both internally and externally. The object of internal reporting is to assist with the management of the key capabilities and competencies of the firm, while the purpose of external reporting is not only to communicate these capabilities to external stakeholders, but to re-emphasise internally that the management of knowledge is taken seriously. There may be the added effect from external disclosure of creating an environment with managers that makes them feel more accountable to the process (Mouritsen et al., 2003a). The Balanced Scorecard is mainly used for internal measurement and reporting even though it can still be used in an external

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environment. The other two frameworks are seen to be predominately focused on reporting to external stakeholders as well as being useful for the internal management of IC. The discussion of each of these frameworks will be presented in two parts. First, a prcis of the theory behind each framework is presented. Second, a critique is offered which will highlight the major benefits and limitations of each framework as a result of their use in practice.

3.3.2.1 The Balanced Scorecard

3.3.2.1.1 Theory
The development of the Balanced Scorecard by Kaplan & Norton (1992) was based upon the premise of what you manage is what you get, and that a firms measurement system is a key driver of the behaviour of managers and employees. The Balanced Scorecard as illustrated in

Figure 5 is a widely accepted framework that is designed to provide encompassing measures of performance beyond a firms financial metrics. These traditional financial metrics were appropriate for the industrial era but are not in keeping with the challenges of developing the skills and competencies that firms require in the knowledge-based economy. Kaplan and Nortons (1992) Balanced Scorecard consists of four essential elements, and these are outlined below.

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The financial perspective: asks the question How do we look to our shareholders and debt holders? The key metrics are the key performance indicators that drive financial targets, for example, return on investment, return on equity, profit growth, and turnover.

The customer perspective: asks the question How do we look to our customers? Here, the firm should be measuring how their customer relationships are developing using metrics such as customer churn, customer loyalty and customer satisfaction.

The internal process perspective: asks the question How effective and efficient are the firms internal processes? The goal here should be associated with employee and operational efficacy. Metrics could include items such as production targets, wastage, employee satisfaction, and occupational health and safety incidents.

The learning and growth perspective: asks the question How will we sustain or improve our ability to grow? The objective here is to identify the key learning and innovation elements that help the firm to grow. Metrics could include the number of new products, educational levels of staff, and time to market for new products.

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Figure 5: The Balanced Scorecard

Source: http://www.balancedscorecard.org/basics/bsc1.html, accessed 30/4/05

An important aspect of the Balanced Scorecard is that it is more than just a tactical or operational tool as it is connected to the strategic vision of the firm. It is used in this context because it helps develop a strategic management system by clarifying and translating vision and strategy, communicating and linking strategic objectives and metrics, developing a planning process to set targets and align strategic initiatives and 53

enhancing strategic feedback and learning. Another important aspect of the Balanced Scorecard is that it can be used as a complimentary tool to the higher level IC statements that will be examined in more detail later (see page 64). In this regard the Balanced Scorecard is an internal tool that measures corporate sensitive key figures and data that would not be typically included on the externally presented IC statement. More importantly, the Balanced Scorecard is used to report on and actively drive the changes required in the strategic metrics at an operational level, while the IC statement deals mainly with knowledge management activities and communicating to external stakeholders (Systematic, 2004).

3.3.2.1.2 Critique
Marr and Schiuma (2003), in their study of citations from papers accepted at the Performance Management Association conferences from 1998 to 2002, found that the Balanced Scorecard was a dominant concept as it was the most commonly cited framework. But they also found that there was a considerable lack of information about the theoretical foundations of the Balanced Scorecard. They also suggested that the field of business performance management could benefit from future research into the Balanced Scorecard to solidify its theoretical base and to provide empirical evidence to validate its claims. There seems to be a good foundation behind the suggestions of Marr and Schiuma (2003) that the Balanced Scorecard concept and other types of performance management systems are popular. An estimated 60% of Fortune 1000 companies surveyed had either implemented or experimented with a Balanced Scorecard by 1998 (Silk, 1998) and the number of firms implementing performance management systems by the end of 2004 was expected to reach 85% (Neely et al., 2004). But the 54

effectiveness of the Balanced Scorecard approach as a practical management tool is questioned as there is empirical evidence from a Dutch study showing that 70% of the implementations that were examined failed (Lewy and du Me, 1998). Additionally, empirical research by Ittner et al. (2003) concludes that while businesses are satisfied with the Balanced Scorecard as a measurement system there is not any direct evidence to associate it with economic performance. Similarly, a study by Neely et al. (2004) could not prove the link between the implementation of the Balanced Scorecard and increased profitability. Finally, Ittner et al. (2003) found that users of the Balanced Scorecard approach were unlikely to place any greater emphasis on non-financial customer, innovation and internal processes metrics than non-users. Thus, it is questionable if firms who claim to be using the Balanced Scorecard are using the information generated to change the way their decision making and performance evaluation efforts are conducted. Another criticism of the Balanced Scorecard and other similar frameworks is outlined by Neely et al. (2000). They advocate that while the frameworks are valuable, their usefulness is inhibited by the fact that they are simply frameworks. This is because the frameworks identify the different types of measures which may be of benefit, but do not give explicit guidelines on which measures would be of specific value to the management of the organisation. Sveiby (2007) also holds the view that metrics are contextual and thus each organisation needs their own custom metrics, making comparisons with other organisations difficult. Thus, for any Balanced Scorecard framework to be of practical value to an organisation the manner in which the specific metrics is developed needs to be understood (Neely et al., 2000). Sveiby (2007) offers two more criticisms of the Balanced Scorecard approach. The 55

first is centred on the premise that managers are used to viewing management reports from a financial perspective and the new reports generated by the Balanced Scorecard may not be easily accepted. The second is that the Balanced Scorecard can produce inordinate volumes of data which can be difficult to communicate and evaluate. More recent research by Voelpel et al. (2006) suggests that firm survival is being jeopardised because of the rigid application of the Balanced Scorecard. Their findings conclude that innovation within the organisation is stifled and this negatively affects customer value rejuvenation, shareholders benefits, other stakeholders and society. Voelpel et al. (2006), along with many other authors, offer a revised version of the Balanced Scorecard which addresses the problems they have outlined.

3.3.2.2 Skandias Navigator

3.3.2.2.1 Theory
In 1995, the publication of an Intellectual Capital Supplement to the 1994 annual report for the Swedish insurance firm Skandia captured international attention. The supplement was prepared by Leif Edvinsson who was the companys Director of Intellectual Capital (Sveiby, 1997). The impetus behind the development of the Skandia Navigator was an attempt to understand the difference between Skandias accounting-based assets and its market value. Edvinsson (1997) saw that this difference was the intellectual capital of Skandia. The building blocks of Skandias value scheme are represented in Figure 6 below. Traditional accounting methods only account for the financial capital of a business but Skandia realised that the IC of a business accounts for a large proportion of a businesss value. Skandias representation of IC is the sum of human capital and 56

structural capital and it provides Skandia with the ability to develop a competitive advantage (Edvinsson and Malone, 1997). Human capital is seen as the total of all knowledge, skill, innovativeness and abilities. It is not owned by the company; rather it is borrowed from the people (Edvinsson, 1997). Structural capital is further represented by customer capital and organisational capital and is seen as all of the IC that remains in a business when all of its employees have gone home (Skandia, 2002).
Figure 6: The Skandia Value Scheme

Source: Skandia (1998, p. 4)

In 1993 Edvinsson combined the presentation format of the Balanced Scorecard with the theoretical underpinnings of the Konrad framework and for the first time the term intellectual capital was used in place of the term intangible assets (Edvinsson and Malone, 1997). The parallels between these frameworks are identified in Table 5. The

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ability to draw parallels between these theories was seen by Sveiby (2002) as evidence of the emergence of a robust categorisation of intangibles based on a family of three elements being a human element, an internal element and an external element. These elements have become prominent in many of the theories of intangibles and IC that have emerged since (refer to Appendix 1 for an overview of different IC frameworks.)
Table 5: Parallels of the Konrad, Balanced Scorecard and Skandia Frameworks Konrad Theory Internal Structure External Structure Competence of Personnel Source: (Sveiby, 2002) Balanced Scorecard Internal Process Perspective Customer Perspective Learning & Growth Perspective Skandia Organisational Capital Customer Capital Human Capital

The Skandia Navigator differs from the Balanced Scorecard in that its framework emphasises renewal and development dynamics and includes the operating environment. These differences, when combined, are said to add up to the IC of the organisation (Edvinsson, 1997). The Scandia Navigator is presented in Figure 7 below.

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Figure 7: Skandia's Navigator

Source: (Skandia, 1994, p. 7)

The Skandia Navigator is another example of a tool that provides a balance between the past, present and future by looking at past financial results, current human resources and organisational processes, and future renewal and development. It delivers a business-planning methodology which integrates the concerns of yesterday, today and tomorrow (Edvinsson, 1997; Mouritsen et al., 2001). It utilises a number of different metrics to measure each of the five focus areas which, over time, can be used to track the progress and changes in IC in the organisation. Table 6 shows some of the metrics used by the Skandia Life UK Group for the period 1994 to 1997. This table is a good example of how key financial metrics are complemented by key intangible metrics. Additionally, the table shows how the metrics have evolved over the years in an easy-to-read format.

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Table 6: Navigator Metrics for Skandia Life UK Group 1994-1997

Source: Skandia (2002: 21)

Skandia recognised that by making the link between IC and value creation visible it could interpret the progress of the metrics in order to take a proactive stance on future development (Skandia, 2002). Indeed, the development of the Navigator had been so successful at Skandia that the key performance indicators were used in the daily operational management of the firm (Sveiby, 1997, p. 190). Skandia also used the Navigator to link employee performance appraisals and rewards. This was to create a rewards system that was based on both financial and non-financial metrics (Edvinsson, 1997). Thus, the Navigator had become an integral part of the way

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Skandia operated.

3.3.2.2.2 Critique
The Skandia Navigator has, without question, been an influential taxonomy that has encouraged others to look beyond traditional accounting frameworks to understand what creates value in organisations (Bontis, 2001; Leliaert et al., 2003). But, because it was specifically developed for Skandia, it can also be seen to have limited use for other companies (Marr et al., 2004b). As shown in Table 6, it offers the reader a onepage view of the metrics that are considered important to organisations. This is also one of its inherent weaknesses as there is no indication as to which metrics are required to increase, decrease or remain the same. For example, in Table 6 there seems to be a continued increase in the number of full-time staff, while the number of contracts handled per employee is decreasing. To the casual observer this looks like a decrease in productivity, but it could also be that this is intentional as premiums assets under management have increased in line with the operating result. Could it be that new employees are not as efficient as existing staff and that it will take time for them to become more efficient resulting in an increase in human capital? Or is the structural capital inadequate to handle the influx of new employees and customers, causing inefficiencies that cannot be blamed on the skills of the workforce? A more detailed understanding of the link to business strategy would be helpful and as Bontis (2001) espouses, there needs to be an acute understanding in the business of which intangible assets are adding to the value of the business and what metrics should be used to monitor their progress. Another critique of the Skandia Navigator concerns the real purpose behind reporting their intangibles externally (Marr et al., 2004b). Sveiby (2007) states that the 61

majority of companies that were the pioneers of IC reports, such as Skandia, did so mainly as a public relations exercise. This claim is supported by Skandias production and distribution of CD ROMs and videos about IC (Mouritsen et al., 2001). But Skandias stated purpose of the Navigator was to help understand what created value and competitive advantage. If the latter was true and successful, stakeholders should expect to see a continuing flow of IC reports and increasing IC value from Skandia. Unfortunately this is not the case. Skandia has not issued a separate IC report since 1998 and in the 2000 company report it appears that the Navigator was replaced by value chain analysis (Skandia, 2002). The last mention of the Navigator in an annual report was in 2002 (see Skandia, 2002) and subsequent reports have only retained a dialogue on the human capital element (Skandia, 2003; 2004). Thus the importance of disclosing IC to Skandias external stakeholders has significantly been reduced. Skandias share price and consequently its valuable IC have also suffered a decline since 2000. Figure 8 shows the decline of Skandias share price on the Swedish stock exchange from 2000 to 2004. Investors who may have purchased shares based on the strength of Skandias IC in the late 1990s and early 2000 would be disappointed (Sveiby, 2007). This loss of IC value also questions the validity of both the theory that IC is representative of the difference between market and book values and the impact that a framework such as the Navigator can have on developing the value of an organisations IC.

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Figure 8: Skandia Share Price on the SX: 2000-2004

Source: http://www.skandia.com/en/ir/skandiashare.jsp accessed on 14/04/2005

The last critique offered of the Navigator is also based on how it has been used, more specifically how it has been used internally at Skandia. The initial success of the Navigator encouraged its use as a basis for performance appraisals and rewards with the intent of establishing a reward system based on both financial and non-financial metrics. The danger of this, as discussed previously, is that it opens the system up to possible abuse: self interested behaviour can mean that the numbers stack up to what employees are rewarded for rather than for actually achieving the outcomes desired by the employer (Kerr, 1995; Sveiby, 2007). By doing so Skandia may be moving from focusing on value creation for the long-term development of capabilities and competencies (Mouritsen et al., 2001) to encouraging short-term behaviour based on achieving tomorrows key performance indicators.

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3.3.2.3 The Danish Ministry of Science Technology and Innovation Model

3.3.2.3.1 Theory
The current Danish Ministry of Science Technology and Innovation model (DMSTI) for IC statements (reports) is a revision of their original work which was published in 2000. This work had been developed with the co-operation of researchers, companies, industry organisations, consultants and civil servants. In 2001, the second phase of the project, headed by Dr. Jan Mouritsen, tested the guideline with 100 companies and public organisations and thus its concepts are supported by qualitative action researchbased empirical data and practice. These experiences have resulted in a fine tuning of the original work (Mouritsen et al., 2003a). The DMSTI sees the IC statement as a management tool that is part of an organisations knowledge management practices. Its purpose is to identify an organisations knowledge management strategy and to communicate the strategy to both internal and external stakeholders (Mouritsen et al., 2003a). Thus, it recognises that there are a number of objectives for organisations that produce IC statements from both an internal and external perspective and these are identified in Table 7.

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Table 7: Internal and External Objectives of IC Statements Internal objectives To support the business strategy External objectives To show that human resources are the most important aspect To show that the organisation is innovative To attract new employees To show that knowledge is the most important asset To show that the organisation is flexible To create an understanding for the companies products or services To supplement the financial reports To set up a position for themselves with respect to their competitors To attract new and retain existing customers Source: Mouritsen et al. (2003a, pp. 7-8)

To ensure knowledge is updated To ensure a systematic sharing of knowledge To implement systematic knowledge management

To identify key control indicators To manage and record competencies

To create innovation

The DMSTI model has four elements which, when combined, give an encompassing view of a companys knowledge management processes. These are shown in Figure 9. The elements link the consumers of the organisations output with the organisations knowledge resource requirement. The IC statement establishes the need for knowledge management, develops the initiatives required to improve knowledge management, and reports a set of indicators that define, measure and follow-up initiatives. The four elements of the IC statement are (Mouritsen et al., 2003a: 12-13): Knowledge narrative: The expression of how a companys products and 65

service create value for its customers; how the company has organised itself to deliver this value; and how knowledge will further enhance value for the user. Management challenges: A definitive list of challenges that management must face in order to realise the knowledge narrative. It must identify which resources should be strengthened and what new resources are needed. Initiatives: Each of the management challenges that have been identified must be met with an appropriate action to resolve the challenge. These initiatives need not only be identified, but must be prioritised as well. Indicators: Each initiative requires one or more measurement attributes so that once the initiatives have been carried out their progress can be monitored. The presentation of an external IC statement may also be supplemented with another element, that is, background information. It does not add to the knowledge management strategy but may help external stakeholders develop a more comprehensive view of the company (Mouritsen et al., 2003a).
Figure 9: The Danish Knowledge Management Model

Source: Mouritsen et al. (2003a, p. 13)

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3.3.2.3.2 Critique
One of the strengths of the DMSTI model is that it comes with samples of indicators from companies that have been involved in developing IC statements. It also gives practical advice and guidelines on how to prepare an IC statement and makes the important distinction between preparing an IC statement for internal or external purposes. Furthermore, it looks at implementation issues by examining the structures an organisation needs to have in place in order for the IC statement process to become embedded in the organisation (Mouritsen et al., 2003a). Thus, there is recognition that the development of IC statements is a process that requires organisations to clearly understand the ramifications of initiating the process of developing IC statements. But one of the areas that seems to have been overlooked is the issue of organisational culture or identity. The DMSTI model takes a static view of organisational identity in that it talks about communicating the identity of who we are but does not talk about how the organisational identity needs to change. This view is supported by Kjrgaard (2003) in her examination of the Danish electricity supplier Eltras experience with developing DMSTI-based IC statements. Eltra saw the process of working with IC statements as a way of establishing a knowledge-based identity. The issue is that Eltra is not a typical knowledge-based economy company, but rather a non-profit public company emerging from the protection of government regulation. If Eltra is to survive in their new competitive environment they need to operate in a different way, thus necessitating cultural, work process and internal relationship changes. These are dynamic changes and thus the issue of identity changes from who we are to who do we need to become in order to survive in the future. Some further improvements could be made to the guidelines by addressing this issue. 67

One of the issues with using the DMSTI model or indeed any other IC statement model is that the statements are developed on a yearly or bi-yearly basis and there is a time lag between the gathering of the data and the presentation of the statement. A best practice example that can be used to show how to overcome this issue is the Danish software company Systematic. Systematic used Kaplan & Nortons (2001) Balanced Scorecard as a management tool to provide a strategic foundation for actions and initiatives in order to prevent them (teams) from working against one another (Systematic, 2004: 10). Each of their strategic focus areas and their respective indicators are measured and reported using the scorecard. This is so that all of the companys employees are familiar with the strategy and the goals required in attaining the strategy. It also ensures that the implementation of business strategy is every employees job and not just that of top management. This seems an appropriate choice as the Balanced Scorecard has developed from its original purpose of performance measurement of non-financial measures to a tool for implementing strategy (Kaplan and Norton, 2001).

3.4

Summary and relationship to the thesis papers

This last part of the review concludes the discussion of IC theory and practice and offers some insights for future research. The first topic of the theory section discussed the importance of IC and demonstrated that interest in IC has been spurred on by the growing differences between market and book values of firms, the difference being what some authors have identified as the IC of an organisation. While this definition is useful, it is limited in that it describes the value of IC rather than the components which created it in the first place. Thus, the definition of IC used in this thesis relates to the identification of intangible assets that can be used to create wealth and help 68

develop a competitive advantage for firms. These assets can be classified as human, internal and external assets. The process of knowledge management is seen as vital for developing IC assets with a view to creating value and competitive advantage. The second topic of the theory section was the measurement and reporting of IC. Here it was identified that the issue of IC has not been ignored by business or academics in the past, but has been addressed as part of separate management disciplines such as human resource management, organisational development, change management, IT, brand and reputation management, performance management and valuation. Four issues were identified. It was also found that organisations have a number of different reasons for measuring IC, including helping organisations with strategy development, strategy execution, diversification and expansion decisions, employee compensation and to communicate measures to external stakeholders. Currently, financial accounting and reporting frameworks do not provide an adequate base for the reporting of IC. In order for IC management practices to be effective there needs to be in place a system for the measurement and reporting of IC assets. Some pundits claim that there is the need for a consistent reporting framework that allows businesses to measure and compare their IC, but this too poses problems. The review examined the evolution of frameworks for the measurement and reporting of IC dating back to the 1950s. One of the results of this work was the emergence of the family of three elements that have been used to classify intangible assets and IC. There are a number of name variants given to these elements in the different frameworks but in general the elements are identified as being linked to external, internal and human perspectives.

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The second section of the review deals with IC in practice. Organisations need to appreciate the benefits of internal reporting before they are in a position to realise the advantages of external reporting. Conversely a proliferation of external IC reports from organisations cannot occur until it can be shown or realised that they will be beneficial. This last proposition is supported by a review of the extant literature of IC reporting practices in external company reports in a number of different countries. While each of the studies mentioned is slightly different in methodology, the findings were similar, in that there was not a considerable amount of IC disclosure, there was a general lack of IC frameworks employed in the reports, and the disclosure that was reported usually concentrated on human assets. The initial models that helped develop and define the concept of IC and knowledge management came about from the work of Kaplan and Norton, and Sveiby and Edvinsson at the Swedish insurance firm Skandia. These works provided a base for the development of IC statements, which are the amalgamation of a knowledge narrative and a system to observe the knowledge management process. This process was enhanced with the support of the Commission of the European Communities by way of the Meritum Schema and the DMSTI guidelines. The DMSTI model is by far the most comprehensive work on the subject of IC statements. It is further supplemented by a framework for analysing a series of IC statements for a firm that allows the analyst to develop hypotheses and generate questions about the future direction and value of the firm in question. Each of the frameworks presented has its limitations and justified criticisms, but it is only by recognising these that future researchers and practitioners can build upon their merits and seek to improve their weaknesses. The continued development of research 70

and practice in the field of the measurement and reporting of IC should form an internal viewpoint to help organisations develop their IC management activities with a view to value creation. From an external viewpoint increased IC reporting should continue to reduce the information asymmetry that exists between the organisations management and stakeholders, thus leading to more effective ways of determining the future strategy and value of the organisation. As stated in the introduction, the main objective of this thesis is to critically investigate and examine contemporary theories of IC and how these are utilised in practice. Thus, the aim of this review was to investigate the theory and practice of IC as a management phenomenon. As a result, this review has identified that there are a number of shortcomings between the espoused theory of IC and the practice of IC in the field. A central issue highlighted is that while there are a plethora of theoretical frameworks developed for the measurement, management and reporting of IC, these frameworks have not been fully utilised by organisations despite the espoused benefits. Consequentially, a number of related issues served as the motivation for the papers that make up the empirical content of this thesis by publication, the result being that the papers presented question and critique the theory of IC by investigating and analysing IC in practice. The aim of Paper 1 (p. 236) stems from the literature that advocates that if a firm discloses their IC to the market it will both reduce information asymmetry amongst market actors and allow it to attain market valuations that better reflect the risk profile of the firm (Marr et al., 2003a). But it is the manner in which the firm reports IC to the market that is of particular interest. There is a proliferation of reporting frameworks and these have been questioned for their ability to communicate measures 71

consistently and coherently to external stakeholders who may influence the market price of a firms shares. In addition, these reporting frameworks have been questioned for their timeliness; at best they are published on a yearly or semi-annual basis and thus the immediacy value of this mode of disclosure is also questionable. Thus, the question posed in Paper 1 is: Is there another form of disclosure that companies could use to disclose IC information to the market, one that is more frequent and of higher immediacy value? In reply to this question this paper examines one possible mode of disclosure: price sensitive announcements to the stock exchange, specifically the Australian Stock Exchange (ASX). The aims of Papers 2 (p. 104) and 3 (p. 1) contrast with the monetary value creation perspective taken in Paper 1. In these papers it is recognised that the value public sector organisations create is intangible and, as identified earlier, there is scope to investigate IC from a public sector perspective. More specifically these two papers address the investigation of IC from an Australian public sector perspective. In Paper 2 the focus is on understanding why an organisation would utilise IC management practices. Even though the reasons why an organisation may want to embark on IC practice have been discussed (see Marr et al., 2003a), the forces at work that allow an organisation to create and implement IC practices have not been examined. Paper 3 is concerned with an issue that appears not to have been thoroughly addressed in the IC literature to date, that is, the construction of IC reports (ICRs) and their impact on organisations. As discussed, ICRs can be presented in many different forms, from simple one-page matrices such as the Intangible Assets Monitor (Sveiby, 1989) to supplements to annual reports (see NSW Department of Lands, 2005; 2006) and comprehensive independent documents (Systematic, 2002; 2004). The main 72

differentiation between the supplemental and comprehensive documents is the use of narrative to explain the reason for an organisations foray into IC management practices (Mouritsen et al., 2002, p. 14). The use of narrative, in conjunction with measures of IC, is seen as an important research topic in relation to IC disclosure because there are opposing camps: those that espouse its use and those that do not embrace it. Paper 3 investigates this aspect of IC practice by examining the depth that narrative has penetrated into IC practice and its subsequent utility. The aim of Paper 4 (p.1) extends from the proliferation of IC frameworks as identified by Sveiby (2007) and as expanded upon in the theory and practice review. While the proliferation of these frameworks has advanced an interest in IC as identified by Mouritsens (2006) ostensive approach to investigating IC, it has also added to the confusion about which framework is the right one to use, what is likely to be the effect of measuring and disclosing IC, or even if this is a worthwhile endeavour (van der Meer-Kooistra and Zijlstra, 2001). Therefore, it seems that any attempt to create another theoretical framework of what IC is would add little, if anything, to the knowledge and practice of IC measurement unless an examination of IC the organisational level, as espoused by Mouritsens (2006) performative approach, is taken. Thus, this paper, rather than examining how to measure IC in an organisation, examines the complex nature of IC and the interaction of IC in the value-creation process. The following section discusses each of these papers and links their contribution to the IC literature utilising Alvesson and Deetzs (2000) critical perspective framework.

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4 Contribution perspective
4.1 Introduction

of

the

papers

from

critical

This section contains an overarching discussion of the main features of the thesis from a critical perspective. The discussion does not include a detailed reworking of the individual papers contained in the thesis, but rather provides an overview of the contribution of the papers to the IC literature. By utilising the critical perspective framework, an overall synthesis of the four papers presented in Appendices 2, 3, 4 and 5 is made. In taking a critical approach to understanding IC the thesis does not advocate a specific set of changes to the theoretical basis and thinking, rather the papers and analysis as presented in this section help engender a wider discourse about IC practice instead of developing superior insight or truth (Alvesson and Deetz, 2000, p. 139). The development of such a discourse is important as it is both contingent upon and informs future IC practice (see Alvesson and Deetz, 2000, p. 97). Thus, by engendering a discussion about the contemporary theory of IC by examining contemporary IC in practice, hidden aspects can be revealed and alternative understandings can be developed (see Alvesson and Deetz, 2000, p. 17). The reader is now directed towards Appendices 2, 3, 4 and 5 which contain the four papers that inform this thesis by publication. In doing so the reader is asked to bear in mind the evolution of these papers during the development of the thesis. The purpose of this is to outline how the thinking about the gap between IC theory and practice developed during the thesis. Paper 1 was written in the early days of the thesis, at the same time that the review of theory and practice was developed. While this paper was not written using a specific critical framework from which to base the analysis of the 74

empirics it is considered to be crucial, as it begins the examination of the theory that disclosure of a firms IC can have an impact on the value of its share price. The critical contribution is the manner in which IC is disclosed as the paper examines the disclosure effects of announcements to the ASX instead of examining traditional modes of disclosure such as IC reports and annual reports. Paper 2 was written during the latter stages of research work at Lands. It examines the reason(s) why an organisation would implement IC as a management technology and the impact of such an implementation. Paper 3 was written after the main body of field research was conducted at Lands and while the author continued to attend the research site sitting as an observer member of the Organisational Capabilities Improvement Group (OCIG) which was charged with overseeing the implementation of the IC management program. Here observations were made of the committee members and their actions along with the impact of the use of narrative and how this was developing. The use of narrative was of interest as narrative is an integral and differentiating part of many IC frameworks. In addition, the research found evidence to suggest that the use of narrative in this setting was beginning to transcend the theoretical purpose of explaining the reasons behind an organisations foray into managing its IC. Paper 4 was written after the conclusion of research at AusFinCo. The initial research method utilised in this paper was based on complexity theory and was the result of the interest in narrative that emerged from the Lands study. The results of Paper 4 are emergent and display the potential that can occur when research is conducted using an open critical approach.

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In order to demonstrate the synthesis of the critical perspective approach, the findings of the papers in this thesis are not presented in chronological order. Doing so would likely only serve as a foundation for reiterating the findings of each of the papers. To review the findings of each of the individual papers please refer to the relevant sections as found in Paper 1 (Dumay and Tull, 2007, pp. 252-4), Paper 2 (Dumay and Guthrie, 2007, pp. 115-7), Paper 3 (Dumay, 2008, pp. 31-5) and Paper 4 (Dumay, in review, pp. 13-5). Instead, the findings are presented from Alvesson and Deetzs (2000, pp. 17-20, 139-65) overarching critical perspective framework using insight, critique and transformative redefinition as a framing device.

4.2

Insight

One of the major purposes of developing critical insight is to develop meaning and understanding, and this is accomplished through the theoretical frameworks utilised to conduct critical research. As Alvesson and Deetz (2000, p. 141) outline, insight is the result of successful interpretation that (a) addresses something non-obvious, (b) makes sense of something, and (c) is perceived as enriching and understanding it adds to what the subject understood prior to the insight. In Paper 1 a different approach is taken to examine the disclosure of IC. Price sensitive disclosures to the ASX are examined for their IC content rather than the traditional methods of external IC disclosure of annual reports or stand-alone IC reports. In addition, the paper uses a redefined framework of IC that was devised from several different sources in the literature which adds several elements that appear to have been overlooked by other authors (see Paper 1, p. 243). The IC framework offered to examine the impact of IC disclosure and the impact on 76

share price (see Paper 1, p. 241) contributes to the discussion in two ways. First, the research framework examines the disclosures for their tenor of Good, Bad or Neutral news. This distinction offers the opportunity to examine IC disclosure from the lauded benefits of attaining a higher market value for a companys securities, but identifies a way of examining disclosures that may actually contribute to lower share values. In turn, these disclosures could form the basis for identifying an organisations IC liabilities (Caddy, 2000), an outcome that is not likely from voluntary IC disclosure. Second, the framework allows for a timely assessment of IC disclosures which shows, as closely as possible, the immediate impact of disclosures. This is in preference to waiting for the release of annual reports or statements because, by the time they are released, the market may already be aware of any significant content that would have an impact upon the release of the report or statement. Paper 2 builds on the theme of the impact of IC by examining whether or not change is affected in an organisation. Here insight is generated by the use of Laughlins (1991) alternative models of organisational change. As outlined in the paper, the Colonization model was chosen as the main framework for analysis for two reasons. First, this model is able to portray the depth of change or lasting change within an organisation and second, the specific model of change presented is the most likely to occur in practice (Laughlin, 1991, p. 223; Paper 2, p. 108). More importantly, the framework offered by Laughlin not only outlines how lasting change can be analysed and determined, but it also helps identify the impetus for change, an insight which is often lacking in current IC models and literature (Paper 2, p. 108). Thus, the framework utilised in this paper allows a view of change brought about by the implementation of IC practice that has not been presented previously in the IC

77

literature. In Paper 3, Giddenss (1976; 1984) structuration theory and narrative theory (Weick and Browning, 1986; Czarniawska, 1998) are offered as analytical frameworks to develop insight into the use of narrative in IC practice. Insight is generated from the examination of how narrative, from an IC perspective, has changed from what Mouritsen (2004) identified as providing the raison dtre of an organisations IC management activities to providing examples of how narrative is utilised to change the organisation and its activities, becoming instead the modus operandi (Paper 3, p. 26-7). Thus, narrative becomes more than just a method for disclosing IC. Indeed, as a result of managing and developing IC resources, the role of narrative changed from telling stories of the field (Czarniawska, 1998) to espousing what is possible in the future. In its recursive role as both an enabler of organisational action and a modality providing the communicative interaction which allows actors to reflect on those actions, narrative was seen to have a wider application. Narrative has therefore become another tool in Landss management toolbox and was applied in a number of settings, an extension of the original intention of providing meaning and the raison dtre of IC. This is seen as the unintentional consequence of the application of narrative to disclose IC and thus provides insights into the impact of narrative in organisations. In Paper 4, a research method based on complexity theory is initially utilised to develop insights into IC. In this instance, instead of seeking the answer to the question What are the organisations measures of IC?, the question How is IC constructed within the organisation? is asked (Paper 4, p. 5 and also see O'Donnell et al., 2006, p. 7). To answer the question, Paper 4 provides an example of how the traditional 78

classification of IC (human, external and relational) can be utilised to develop a view from within an organisation, rather than trying to fit an existing contemporary IC framework to gather measurements that may have no relevance to the value-creation process. Here insights are developed into IC and value creation by using Snowdens (2006) pre-hypothesis research method that questioned not only the traditional frameworks employed to understand IC but also the manner in which this could be accomplished. In Paper 4 the interpretation of how IC existed in the organisation is exemplified and insight is developed in three ways. First, the use of narrative in the IC field is examined as here it is neither the raison dtre nor the modus operandi. Narrative is used to gather data that gives meaning to the context of IC and how it works from the employees perspective. Second, the use of the numerical interpretation of narrative offers an alternative process for measuring IC. Third, the eventual visual representations of IC provide an additional manner by which to view and make sense of IC. This is complemented by the ability to examine the narrative associated with the strong inter-relationships between IC elements leading to understandings as to how IC operates within a specific organisational setting.

4.3

Critique

As identified earlier, the review of IC theory and practice found a number of shortcomings between the espoused theory of IC and the practice of IC in the field. A central issue is that while there are a plethora of theoretical frameworks developed for the measurement, management and reporting of IC, these frameworks have yet to be fully utilised by organisations, despite the espoused benefits. The intention of the four

79

papers included in this thesis is not to develop more theoretical views but to examine IC practice in order to develop insight and understanding into IC practice so that a discourse can be developed that increases the understanding of the dynamics of IC in practice. Doing so develops a critique of IC theory that has the potential to influence future IC practice. Thus, each of the papers, discussed next, puts to the test specific aspects of IC theory. Paper 1 (p. 239) begins this critique by examining the theory behind the espoused benefits of IC disclosure contained in annual reports or IC statements. In the literature the latter are seen to suffer the problems of proliferation, confusion as to which framework should be used to communicate to stakeholders (Sveiby, 2007), and lack analytical tools which can be used by stakeholders to make comparisons between different firms IC and how IC is developed over time (Mouritsen et al., 2003a). But an additional issue is one of timeliness of the publication of company annual reports and external stand-alone IC reports. Since the theory of IC disclosure espouses that increased disclosure of IC can have an impact on a higher or fairer value of a firms share price the immediacy value of these forms of disclosure is questioned. In Paper 1 an alternative method of disclosure, that is, price sensitive announcements to the ASX, was examined. This tested two aspects of IC disclosure theory. First, the issue of timeliness of disclosure was examined through an event study to ascertain the immediacy value of IC disclosure. Second, the form of IC disclosure was examined to understand if other methods of disclosure beyond the traditional forms of annual reports and stand-alone IC statements could be utilised. As a result Paper 1 (p. 254) identifies that price sensitive disclosures from an IC perspective do have an

80

impact on share price and this may in turn encourage increased disclosure of IC. Paper 2 takes a different tack from Paper 1 in that, while there is recognition of the benefits of IC disclosure, Paper 2 (p. 104) is interested in the catalyst for the implementation of IC practice. The IC literature has examined the operationalisation of particular IC frameworks (for example Bounfour, 2003; Andriessen, 2004; Jacobsen et al., 2005) and how IC practice has been implemented (Chatzkel, 2000; Peppard and Rylander, 2001). By examining the catalyst that drives IC practice at an organisational level, Paper 2 develops an understanding of why IC is utilised and how it is managed, thus reducing some of the ambiguity that surrounds IC practice by delving into the black box of IC (see Habersam and Piber, 2003). By reducing this ambiguity, Paper 2 (p. 115) highlights that lasting change at an organisational level is possible from the implementation of IC practice. In Paper 3 the critique is focused on the theory of the use of narrative in relation to IC disclosure. The theory, as espoused by Mouritsen et al. (2002, p. 14), is that narrative offers the raison dtre behind an organisations management and subsequent disclosure of IC. Thus, narrative helps to understand an organisations actions in relation to IC management, measurement and reporting and as a basis for explicating IC from the perspective of the organisations actors who constructed the narrative (Paper 3, p.4). But while narrative is used to explain meaning, the subsequent impact of communicating meaning is not examined in the literature. In order to examine the impact of narrative, Paper 3 reaches beyond IC theory and utilises narrative theory (Weick and Browning, 1986; Czarniawska, 1998) and structuration theory (Giddens, 1976; 1984) to develop insights and understanding into the impact that IC narrative

81

has on organisations. Paper 3 identifies that the use of narrative in IC practice developed from the raison dtre to become a form of modus operandi as narrative became embedded in other IC practice activities beyond IC disclosure. This then questions the applicability of contemporary IC measurement and reporting frameworks based on the dominant influence of accounting for IC and the accountability to stakeholders as found in Lands annual reports. These annual reports, like other forms of IC reports, are again questioned for their relevance and their timeliness, as they were in Paper 1 , even if they do contain significant amounts of narrative. Rather, it was the project reports, the business plans, the newsletters and other documents produced by Lands, which contained both narrative and numbers, and are seen as more appropriate mechanisms for disclosing IC and for the focus of future IC practice. This is not to say that Landss annual reports and its IC section do not have relevance, as they can still play a pivotal role in the structure of the relationship that Lands has with its constituents, the elected Government and other stakeholders whose requirements are satisfied by the production of these documents. Paper 4 offers critique in relation to the theory of measuring IC. This theory is seen to be embedded in the plethora of contemporary IC frameworks that were identified in the review of theory and practice. The view taken here is that these frameworks do not offer a radically different view of valuing or measuring IC as they are seen to be bound within traditional accounting and performance management ideals (see for example Edvinsson and Malone, 1997; Sveiby, 1997; Mouritsen et al., 2003b, p. 5; Society for Knowledge Economics, 2005). Additionally, the dominance of traditional managerial ideals within IC practice has led to the misuse of some of the IC 82

measurement frameworks (Sveiby, 2007). Past critical IC research has concluded that the potential of IC will not be realised if management continues to force thinking about IC into traditional frameworks (Chaharbaghi and Cripps, 2006) based on accounting, management control and the management of intangibles (Guthrie et al., 2003, pp. 430-1). Thinking critically about IC measurement can help change the way it is understood; thus an understanding of how IC works and how IC is utilised in organisational change can be developed (Mouritsen, 2006). Paper 4 develops these insights into how IC is constructed within the organisational context of AusFinCo. The view offered in Paper 4 (p. 14) is that these contemporary IC measurement frameworks are reifying IC in the same manner in which tangible assets are portrayed within accounting, which is akin to attempting to make the intangible tangible. This is what is referred to as the accountingisation of IC. It is concluded that the accountingisation of IC has, at best, brought attention to the concept of IC and not its praxis; thus, the ability of contemporary IC frameworks to generate understanding is questioned. The implication for future IC practice is that there should be less of an emphasis on trying to account for IC and more effort in trying to understand how IC is constructed.

4.4

Transformative re-definition

As identified in section 1.1.3, the last task of the critical perspective is the development of critical, managerially relevant knowledge and practical

understandings that enable change and provide skills for new ways of operating (Alvesson and Deetz, 2000, p. 19). In essence, this develops the modes of future IC 83

practice and future IC research. Paper 1 accomplishes this task in three ways. First, it presents to firms a mechanism for disclosing IC to the market that can have a positive effect on share price which may encourage managers to disclose more information to the market about their internal workings rather than keep them hidden from view. Second, it presents a method by which firms can disseminate IC information in a more frequent and immediate manner, addressing the issues of timeliness and the frequency of disclosures. Last, it opens up the prospect of further research in the area of IC disclosure, such as through corporate websites, corporate blogs or promotional activities. Future research in these areas could add considerably to the discussion of IC disclosure. Paper 2 is more specific in its development of tools as it redefines the way that Laughlins (1991) colonization model can be viewed. In this case, the colonization model of organisational change was utilised as a skeletal framework for examining the black box of IC (Habersam and Piber, 2003) and the change brought about by the management challenge of the ageing workforce. This first-hand view of IC exemplifies how IC can penetrate into the depths of an organisation and become embedded in it. From this analysis it was contended that Laughlins (1991) framework of change may better be depicted from within the black box rather than from within a cloud as depicted in the original models offered by Laughlin. A second contribution is that this case provides an example of how Laughlins (1991) framework can be extended from its mainly accounting change perspective, to an analysis of change brought about by the management of IC, thus consolidating this framework as another tool in the analysis of IC. Paper 3 also accomplishes this task by showing how it is possible to break the 84

accounting and financial performance mindset that dominated Lands prior to the introduction of IC practices. In this light it is shown that accounting for IC provided the management of Lands a way of looking at the resources of the organisation and how these might be utilised to maintain the organisation into the future. This new knowledge, aided by the use of narrative, provided the opportunity for Landss management to change the way it tackled relevant management issues. This exemplifies and reinforces Weick & Brownings (1986) contention that the use of narrative enables the possibility for all members of the organisation to become involved and not just the accountants or the IC experts. Here narrative helps to transcended the boundaries of an internal and external accounting for IC via the annual report and become enveloped in a communicative discourse that involves not only Landss management, but their employees, stakeholders and constituents as well. Paper 4 builds on the concept of developing tools for understanding IC by offering an example how to apply alternative modes of investigating IC by utilising narrative, numerical and visual techniques. It outlines the potential skills that practitioners and researchers need to acquire in order to break free from the current domination of accounting-based frameworks of IC measurement. Paper 4 demonstrates how quantitative measures of IC can be developed in contrast to an accounting-based approach to IC measurement. In addition, a specific set of recommendations on what the management of BOP should do next is not made, as all that has been done to exemplify an alternative method of understanding IC within a particular organisational context. This, in turn, has the potential to develop more informed interventions into the organisation. Another contribution of the tools outlined in Paper 4 (p. 16) is the development of the 85

possibility of reducing the causal ambiguity that intangible resources create value and potentially competitive advantage for a firm (Dierickx and Cool, 1989, p. 15045). The issue of causal ambiguity is linked from a strategic management perspective with the Resource Based View (RBV) of the firm, and authors such as Wernerfelt (1984), Barney (1986b; a; 1991; 2001) Dierickx and Cool (1989) Aaker (1989) and Grant (1991) were among the early proponents of the benefits of looking at the firm from the perspective a firms resources rather than its activities in the marketplace, as espoused by other strategic management theorists (for example Porter, 1980; and Shapiro, 1989). Although this is mentioned in the findings of Paper 4 (p. 16), it is reemphasised here as the reduction of ambiguity in relation to value creating assets can have important implications for the practice of IC. From an IC perspective the resource-based view is aligned with the practice of IC by considering the managerial processes required for the development of new capabilities. As identified earlier, the utilisation of a firms distinctive and inimitable resources is the source of competitive advantage and thus superior rents; it then makes the management of these resources, which are by and large intangible, more important. Issues such as skill acquisition and learning are important strategic issues. Teece et al. (1997) see the process of the accumulation and management of intangible or invisible assets (IC) as having the greatest potential impact on the development of strategic management in the future. Thus, the development of tools to reduce causal ambiguity has the potential to raise the profile of IC as a strategic management technology.

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4.5

Limitations and implications for further research

As with any body of research, the findings of this thesis have several limitations. With regard to the individual papers contained in the thesis, the reader is directed to the discussion of the limitations contained in each paper (see Paper 1, p. 254; Paper 2, p. 117; Paper 3, p. 43; Paper 4, p. 16). But from the wider view of the critical perspective, it is not the intention of this thesis to prescribe specific formulae for the measuring, management and reporting of IC, nor does it intend to further develop theory. So while the individual papers may proffer that certain avenues proved productive in developing insights, critique and transformative re-definition, these avenues are not offered as the preferred way of investigating IC. More specifically the goal of a critical perspective, as outlined in the beginning of this section, is to open a discourse. Thus, it is the intention of this thesis to further open the discourse on the thinking behind contemporary IC theory, the resultant frameworks of IC and the consequent impact on the implementation of IC theory and frameworks into IC practice.

The opprurtinity for academics and practitioners to engage in discourse is enabled by the thesis focus on the issues identified by highlighting the gap between IC theory and practice in section 3. Furthermore, each of the included papers offers the opportunity for further discourse by way of the opportunities that remain for future research. This thesis achieves this as it has exemplified a number of different approaches to conducting research into IC practice that puts to the test particular aspects of IC theory in order to develop insights and understandings of IC in practice. As the empirical material contained in the four papers only examines a fraction of contemporary IC theory there is scope for further research and thus discourse into the 87

implementation of IC theory into IC practice. In particular, it is suggested that further research into the nature and form of IC disclosure would prove rewarding and would build on the empirics of Paper 1 and Papers 2 and 3. In addition, research that focuses on reducing ambiguity in relation to the combination of resources that create value for organisations, as was covered in Paper 4 (p. 16), would also prove fruitful. Last, future research should not be constrained by a particular method of research as exemplified in the variety of methods employed to gather the empirical material for the papers contained in this thesis that stretched long the continuum of qualitative and quantitative research. This too would provide an avenue of for future discourse.

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97

Appendix 1 Different Frameworks for Measuring Intellectual Capital

Year 2005

Label *Sustainability Reporting Guidelines

Major Proponent Global Reporting Initiative (GRI) (2005)

Category SC

Description of Measure The GRI Reporting Framework is a generally accepted framework for reporting on an organisations economic, environmental and social performance. It is designed for use by organisations of any size, sector or location. It takes into account the practical considerations faced by a diverse range of organisations from small enterprises to those with extensive and geographically dispersed operations. The GRI Reporting Framework contains general and sector-specific content that has been agreed by a wide range of stakeholders around the world to be generally applicable for reporting an organisations sustainability performance. Advocates the publishing of extended performance accounts which differ from traditional financial accounts by making visible an organisations knowledge intensive resources. The guidelines intend to provide managers and others with new insights into organisational performance and open up new opportunities for management intervention and financial valuation. An extended performance account is intended to complement the three existing financial accounts and is referred to as the fourth account of organisational performance.

2005

*Australian Guiding Principles

Society for Knowledge Economics (2005)

SC

2004

*Japanese Guidelines

Japanese Ministry of Economy Trade and Industry (METI) (2004)

SC

The Ministry of Economy, Trade and Industry (METI) established the guidelines to be used by companies to position intellectual property as a source of their competitiveness in the realm of their management strategies and strive to strategically acquire and manage intellectual property.

2004

*Intellectual Capital Statement Made in Germany

German Federal Ministry of Economics and Labour (Alwert et al., 2004)

SC

The German Guideline was issued by the Federal Ministry of Economics and Labour to foster the implementation of the intellectual capital statement (ICS) and of knowledge management in both small and medium-sized enterprises, and in the trades sector. The Guideline targets small and medium-sized enterprises. The German Guideline is based on the Danish Guideline and a pilot project was established to adjust it for German SMEs.

Appendix 1

2004

*Strategy Maps

Kaplan and Norton (2004)

VIS

A visual representation of how an organisation creates value by connecting its strategy to the Balanced Scorecard in order to identify and develop cause-and-effect relationships between intangible assets A modified version of the Skandia Navigator for nations. National Wealth is comprised of Financial Wealth and Intellectual Capital (Human Capital + Structural Capital) A combination of four indices: Identity Index; Human Capital Index; Knowledge Capital Index; Reputation Index. Developed in Norway by consulting firm Humankapitalgruppen. A project partly funded by the European Commission. The method follows the Skandia model with Human Capital, Organisational Capital, Market Capital and Innovation Capital.

2004

2004

National Intellectual Capital Index Topplinjen/ Business IQ MAGIC

Bontis (2004)

SC

Sandvik (2004)

SC

2004

EU research project Mouritsen et al. (2003) SC

2003

Danish guidelines

A recommendation by government-sponsored research project for how Danish firms should report their intangibles publicly. ICS consist of: 1) a knowledge narrative; 2) a set of management challenges; 3) a number of initiatives; and 4) relevant indicators. Dynamic Valuation of Intellectual Capital -Indicators from four dimensions of competitiveness are computed: Resources & Competencies; Processes; Outputs; and Intangible Assets (Structural Capital and Human Capital indices). The Performance Prism is a performance measurement and management framework that addresses all of an organisations stakeholders principally investors, customers and intermediaries, employees, suppliers, regulators and communities. It does this in two ways: by considering what the wants and needs of those stakeholders are and what the organisation wants and needs from its stakeholders. In this way, the reciprocal relationship with each stakeholder is examined. The Performance Prism then addresses the strategies, processes and the capabilities that are needed in order to satisfy these two sets of wants and needs. Gives an alternate activity-based view of IC and performance management. Develops a method for linking IC and value-creation based on modelling, measuring and action.

2003

IC-dVAL

Bounfour (2003)

SC

2002

*Performance Prism

Neely et al. (2002)

SC

2002

*Value+ Model

Bygdas et al. (2002)

VIS

Appendix 1

2002

FiMIAM

Rodov and Leliaert (2002)

DIC/MCM

Assesses monetary values of IC components. A combination of both tangible and intangible assets measurement. The method seeks to link the IC value to market valuation over and above book value. An extension of the Skandia Navigator framework incorporating ideas from the Intangible Assets Monitor, rating efficiency, renewal and risk. A matrix of non-financial indicators arranged in three categories according to the cycle of development: Discovery/Learning; Implementation; Commercialisation. An EU-sponsored research project, which has yielded a framework for management and disclosure of Intangible Assets: 1) Define strategic objectives; 2) Identify the intangible resources; 3) Actions to develop intangible resources. Three classes of intangibles: Human Capital; Structural Capital; and Relationship Capital. A method for assessing six knowledge dimensions of an organisations capabilities in four steps: 1) Define key knowledge assets; 2) Identify key knowledge processes; 3) Plan actions on knowledge processes; 4) Implement and monitor improvement, then return to 1). Accounting methodology proposed by KPMG for calculating and allocating value to five types of intangibles: (1) Assets and endowments; (2) Skills and tacit knowledge; (3) Collective values and norms; (4) Technology and explicit knowledge; (5) Primary and management processes. Methodology for assessing the value of Intellectual Property. A project initiated by the Canadian Institute of Chartered Accountants. TVC uses discounted projected cash-flows to re-examine how events affect planned activities. Knowledge Capital Earnings are calculated as the portion of normalised earnings over and above expected earnings attributable to book assets. Uses hierarchies of weighted indicators that are combined, and focuses on relative rather than absolute values. Combined Value Added = Monetary Value Added combined with Intangible Value Added.

2002

IC Rating

Edvinsson (2002)

SC

2002

Value Chain Scoreboard Meritum Guidelines

Lev (2002)

SC

2002

Meritum Project (2002)

SC

2001

Knowledge Audit Cycle

Schiuma and Marr (2001)

SC

2000

The Value Explorer

Andriessen & Tiessen (2000)

DIC

2000 2000

Intellectual Asset Valuation Total Value Creation, TVC Knowledge Capital Earnings Inclusive Valuation Methodology (IVM)

Sullivan (2000) McLean (1999)

DIC DIC

1999

Lev (1999)

ROA

1998

McPherson and Pike (2001)

DIC

Appendix 1

1998

1998

Accounting for the Future (AFTF) Investor assigned market value (IAMV) Market-to-Book Value Economic Value Added (EVA) Calculated Intangible Value Value Added Intellectual Coefficient (VAIC) IC-Index

Nash (1998)

DIC

A system of projected discounted cash-flows. The difference between AFTF value at the end and the beginning of the period is the value added during the period. Takes the Company's True Value to be its stock market value and divides it into Tangible Capital + (Realised IC + IC Erosion + SCA [Sustainable Competitive Advantage]). The value of IC is considered to be the difference between the firms stock market value and the companys book value. Calculated by adjusting the firms disclosed profit with charges related to intangibles. Changes in EVA provide an indication of whether the firms IC is productive or not. Calculates the excess return on hard assets then uses this figure as a basis for determining the proportion of return attributable to intangible assets. Measures how much and how efficiently IC and capital employed create value based on the relationship to three major components: (1) capital employed; (2) human capital; and (3) structural capital. Consolidates all individual indicators representing intellectual properties and components into a single index. Changes in the index are then related to changes in the firms market valuation. Value of IC of a firm is assessed based on diagnostic analysis of a firms response to 20 questions covering four major components of IC. A technology factor is calculated based on the patents developed by a firm. IC and its performance is measured according to the impact of research development efforts on a series of indices, such as number of patents and cost of patents to sales turnover, that describe the firms patents.

Standfield (2002)

MCM

1997

Stewart (1997) Luthy (1998) Stewart (1997)

MCM

1997

ROA

1997

Stewart (1997) Luthy (1998) Pulic (2000)

ROA

1997

ROA

1997

Roos et al (1997)

SC

1996

Technology Broker CitationWeighted Patents

Brooking (1996)

DIC

1996

Bontis, Dragonetti et al. (1999)

DIC

Appendix 1

1995

Holistic Accounts

Frandsen and Skou (1999) Rambll Group

SC

Rambll is a Danish consulting group which, since 1995, has reported according to its own Holistic Accounts report. Based on the EFQM Business Excellence model www.efqm.org. Describes nine key areas with indicators: Values and management; Strategic processes; Human Resources; Structural Resources; Consultancy; Customer Results; Employee Results; Society Results; and Financial Results. IC is measured through the analysis of up to 164 metric measures (91 intellectually-based and 73 traditional metrics) that cover five components: (1) financial; (2) customer; (3) process; (4) renewal and development; and (5) human. Management selects indicators, based on the strategic objectives of the firm, to measure four aspects of creating value from three classes of intangible assets labelled: Peoples competence; Internal structure; and External structure. Value Creation modes are: (1) growth (2) renewal; (3) utilisation/efficiency; and (4) risk reduction/stability. A companys performance is measured by indicators covering four major focus perspectives: (1) financial perspective; (2) customer perspective; (3) internal process perspective; and (4) learning perspective. The indicators are based on the strategic objectives of the firm. A management application of HRCA widespread in Finland. The HR profit and loss account divides personnel-related costs into three classes for the human resource costs: renewal costs, development costs, and exhaustion costs. One hundred and fifty listed Finnish companies prepared an HR statement in 1999. The difference between the stock market value of a firm and its net book value is explained by three interrelated families of capital: Human Capital, Organisational Capital; and Customer Capital. The three categories first published in this book have become a de facto standard. Calculates the hidden impact of HR-related costs which reduce a firms profits. Adjustments are made to the P&L. IC is measured by calculating the contribution of human assets held by the company divided by capitalised salary expenditures.

1994

Skandia Navigator

Edvinsson (1997)

SC

1994

Intangible Asset Monitor

Sveiby (1997)

SC

1992

Balanced Scorecard

Kaplan and Norton (1992)

SC

1990

HR statement

Ahonen (1998)

DIC

1989

The Invisible Balance Sheet

Sveiby (1989)

MCM

1988

Human Resource Costing & Accounting (HRCA)

Johansson (1996)

DIC

Appendix 1

1970s

1950s

Human Resource Costing & Accounting (HRCA) Tobins q

Flamholtz (1985)

DIC

The pioneering work on HR accounting. A number of methods for calculating the value of human resources.

See Tobin (1969)

MCM

Developed by the Nobel Laureate economist James Tobin. The q is the ratio of the stock market value of the firm divided by the replacement cost of its assets. Changes in q provide a proxy for measuring effective performance or not of a firms IC.

Source: (based on Sveiby, 2007 with additions (*) by the author)

Appendix 1

References
Ahonen, G. (1998), Henkilsttilinpts - yrityksen ikkuna menestykselliseen tulevaisuuteen, Kauppakaari, Helsinki. Alwert, K., Bornemann, M. and Kivikas, M. (2004), Intellectual Capital Statement Made in Germany: Guideline, Federal Ministry of Economics and Labour, Berlin. Andriessen, D. and Tissen, R. J. (2000), Weightless Wealth - Find Your Real Value in a Future of Intangible Assets, Pearson Education, London. Bontis, N. (2004), National Intellectual Capital Index: A United Nations initiative for the Arab region, Journal of Intellectual Capital, Vol 5 No 1, pp. 13-39. Bontis, N., Dragonetti, N. C., Jacobsen, K. and Roos, G. (1999), The knowledge toolbox: A review of the tools available to measure and manage intangible resources, European Management Journal, Vol 17 No 4, pp. 391-402. Bounfour, A. (2003), The IC-dVAL approach, Journal of Intellectual Capital, Vol 4 No 3, pp. 396-413. Brooking, A. (1996), Intellectual Capital: Core Assets for the Third Millennium Enterprise, Thomson Business Press, London. Bygdas, A. L., Royrvik, E. and Gjerde, B. (2002), Integrated Visualisation and Knowledge Enabled Value Creation, Retrieved 11/10/2007, www.kunne.no/.../Gamle%20publikasjoner/Konferansepaper/Integrative%20V isualisation_Bygds_Ryrvik_2002.pdf Edvinsson, L. (1997), Developing intellectual capital at Skandia, Long Range Planning, Vol 30 No 3, pp. 366-73. Edvinsson, L. (2002), IC Rating, http://www.intellectualcapital.se/rating.htm. Retrieved 27/4/05,

Flamholtz, E. (1985), Human Resource Accounting and Effective Organizational Control: Theory and Practice, Jossey Bass. Frandsen, L. T. and Skou, J. (1999), Holistic Accounting and Capitalization, Retrieved 2/8/07, http://www.ramboll.dk/docs/dan/Pressecenter/Publikationer/generelle/capitaliz ation.pdf. Global Reporting Initiative (GRI) (2005), Sustainability Reporting Guidelines, Global Reporting Initiative, Amsterdam. Johansson, U. (1996), Human http://www.sveiby.com/. Appendix 1 Resource Costing and Accounting,

Kaplan, R. S. and Norton, D. P. (1992), The balanced scorecard - Measures that drive performance, Harvard Business Review, Vol 70 No 1, pp. 71-9. Kaplan, R. S. and Norton, D. P. (2004), Strategy Maps: Converting Intangible Assets into Tangible Outcomes Harvard Business School Press, Boston. Lev, B. (1999), Seeing is Believing - A better approach to estimating market capital, CFO Asia, Vol 1999 No May. Lev, B. (2002), Intangibles: Management, Measurement and Reporting, Brookings Institution, Washington. Luthy, D. H. (1998), Intellectual Capital and its Measurement, College of Business, Utah State University, Logan, Utah. McLean, R. (1999), The Canadian Performance Reporting Initiative, Canadian Institute of Chartered Accountants found at http://cpri.matrixlinks.ca/tvc/Presentations/TVCPresent/index.htm, accessed on 6/5/05. McPherson, P. K. and Pike, S. (2001), Accounting, empirical measurement and intellectual capital, Journal of Intellectual Capital, Vol 2 No 3, pp. 246-60. Meritum Project (2002), Guidelines for Managing and Reporting on Intangibles (Intellectual Capital Report), European Commission, Madrid. Ministry of Economy Trade and Industry (METI) (2004), Reference Guideline for Intellectual Property Information Disclosure: In the Pursuit of Mutual Understanding Between Companies and Capital Markets Through Voluntary Disclosures of Information on Patent and Technology, Ministry of Economy, Trade and Industry, Tokyo. Mouritsen, J., Bukh, P. N., Flagstad, K., Thorbjrnsen, S., Johansen, M. R., Kotnis, S., Larsen, H. T., Nielsen, C., Kjrgaard, I., Krag, L., Jeppesen, G., Haisler, J. and Stakemann, B. (2003), Intellectual Capital Statements The New Guideline, Danish Ministry of Science, Technology and Innovation (DMSTI), Copenhagen. Nash, H. (1998), Accounting for the Future, a disciplined Approach to Value-Added Accounting, Retrieved 6/5/2005, http://home.sprintmail.com/~humphreynash/Draft_Proposal.htm. Neely, A., Adams, C. and Kennerly, M. (2002), Performance Prism: The Scorecard for Measuring and Managing Stakeholder Relationships Financial Times/ Prentice Hall, London. Pulic, A. (2000), VAIC an accounting tool for IC management, International Journal of Technology Management, Vol 20 No 5/6/7/8, pp. 702-14. Rodov, I. and Leliaert, P. (2002), FiMIAM: Financial method of intangible assets measurement, Journal of Intellectual Capital, Vol 3 No 3, pp. 323-36. Appendix 1 8

Roos, J., Roos, G., Dragonetti, N. C. and Edvinsson, L. (1997), Intellectual Capital: Navigating in the New Business Landscape, Macmillan, Houndmills, Basingstoke. Sandvik, E. (2004), Topplinjen - Sanseapparatet Som Gjr Bedriften Smartere, HumanKapitalGruppen DA, Hvik, Norway. Schiuma, G. and Marr, B. (2001), Managing Knowledge in eBusinesses: The Knowledge Audit Cycle, Deloitte & Touche. Society for Knowledge Economics (2005), Australian Guiding Principles on Extended Performance Management: A Guide to Better Managing, Measuring and Reporting Knowledge Intensive Organisational Resources, Society for Knowledge Economics, Sydney. Standfield, K. (2002), Intangible Management: Tools for Solving the Accounting and Management Crisis, Academic Press, San Diego. Stewart, T. A. (1997), Intellectual Capital: The New Wealth of Organisations, Doubleday - Currency, London. Sullivan, P. (2000), Value-driven Intellectual Capital. How to convert intangible corporate assets into market value., John Wiley & Sons. Sveiby, K. E. (1989), The Invisible Balance Sheet: Key Indicators for Accounting, Control and Valuation of Know-How Companies (translation), The Konrad Group, Stockholm. Sveiby, K. E. (1997), The New Organisational Wealth: Managing & Measuring Knowledge-Based Assets, Berrett-Koehler, San Francisco. Sveiby, K. E. (2007), Methods for measuring intangible assets, Retrieved 15/5/07, http://www.sveiby.com/portals/0/articles/IntangibleMethods.htm. Tobin, J. (1969), A general equilibrium approach to monetary theory, Journal of Money Credit and Banking, Vol 1 No 1, pp. 15-29.

Appendix 1

Appendix 2

Paper 1
Dumay, J. and Tull, J. (2007), Intellectual capital disclosure and price sensitive Australian stock exchange announcements, Journal of Intellectual Capital, Vol 8 No 2, pp. 236-55.

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1469-1930.htm

JIC 8,2

Intellectual capital disclosure and price-sensitive Australian Stock Exchange announcements

John C. Dumay
University of Sydney, Sydney, Australia, and

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John A. Tull
Macquarie University, North Ride, Australia
Abstract
Purpose The purpose of this paper is to examine an alternative way by which rms can disclose their intellectual capital to external stakeholders who have an inuence on their share price. Design/methodology/approach The paper shows that, by applying the empirical event studies methodology for the 2004-2005 nancial year, the components of intellectual capital are used to classify price-sensitive company announcements to the Australian Stock Exchange (ASX), and to examine any relationship between the disclosure of intellectual capital and the cumulative abnormal return of a rms share price. Findings The disclosure of intellectual capital elements in price sensitive company announcements can have an effect on the cumulative abnormal return of a rms share price. The market is found to be most responsive to disclosures of internal capital elements. Research limitations/implications The paper is limited to an analysis of the Australian stock market for a one-year period. It does not take into account the timing of announcement as a variable nor does it consider differences in regulation or operations pertaining to other stock markets. Practical implications Researchers and practitioners are now informed that price-sensitive disclosures to the market containing intellectual capital elements have a marginal effect on the subsequent market valuation of a rm beyond traditional nancial reports and external intellectual capital reports. Originality/value The paper is the rst to examine the disclosure of price-sensitive stock market information from an intellectual capital perspective, using Australian data. Keywords Intellectual capital, Disclosure, Share prices, Stock exchanges, Australia Paper type Research paper

Introduction The aim of this paper is to examine whether the disclosure of intellectual capital elements through price sensitive disclosures to the Australian Stock Exchange (ASX) has an effect on the short-term share price of a rm. To achieve this aim the paper is divided into three sections. The rst section examines some of the literature surrounding the benets of disclosure, some of the dangers to rms if intellectual capital is not disclosed, and how the disclosure of intellectual capital may be related to a rms share price. It discusses the limitations of using company annual reports and
Journal of Intellectual Capital Vol. 8 No. 2, 2007 pp. 236-255 q Emerald Group Publishing Limited 1469-1930 DOI 10.1108/14691930710742826

Thanks to Professor James Guthrie, University of Sydney, to Professor John Croucher, Dr Suresh Cuganesan and Professor Rae Weston, Macquarie Graduate School of Management, for their helpful comments and encouragement, and to the anonymous reviewers for their insightful comments.

examines the proliferation of external intellectual reporting frameworks, identifying price sensitive ASX disclosures as an alternative that can be used to disclose intellectual capital in a more frequent and immediate manner. The second section addresses the methodology used in this study by describing the research frameworks containing the questions to be examined, the manner in which data was collected and processed, and the details of the data analysis. The nal section of this paper provides a discussion of the results of the analysis and the implications of these results from an intellectual capital perspective. Intellectual capital disclosure and a rms share price Organisations are continually looking for ways to improve in order to achieve the Holy Grail of above average or superior performance, and for more than a decade non-nancial performance indicators have become an integral part of this search (Ittner and Larcker, 2003). Accountants, management consultants and spruikers of the latest performance management systems are all working towards this common goal, but the Grail has yet to be found. So is the measurement, management and reporting of intellectual capital the way forward? The answer is probably not, especially since, all too often, organisations do not identify and develop the correct measures (Ittner and Larcker, 2003). In addition there is scant and contradictory empirical evidence to link organisational performance to performance management systems (Franco and Bourne, 2003). In this case, the literature has focused more on how to negate the problems of other performance management reporting systems by replacing them with other a (2002) that different frameworks (Neely et al., 2004). But it is suggested by Pen organisations that have made an effort to manage and develop their intellectual capital have shown higher levels of performance. The intellectual capital of a rm is also seen as a critical element and the cause of the development of a sustainable competitive advantage (Kremp and Mairesse, 2002). Thus it is argued that rms should examine the way in which they both manage and report on their intellectual capital, as it is likely that both performance and competitive benets will accrue. In order to understand what drives an organisation to measure and report intellectual capital it is necessary to examine why it does so. Marr (2003), by way of a literature review and empirical research, identied ve main theoretical reasons why organisations measure and report their intellectual capital: (1) To help organisations with strategy formulation. (2) To help assess strategy execution. (3) To assist in strategic development, diversication and expansion decisions. (4) As a basis for employee compensation. (5) To communicate with external stakeholders. It is the last issue, the communication of intellectual capital measures to external stakeholders (especially those stakeholders that can have an inuence on the share price of a rm) that is of interest in this paper. This is because one of the measures of intellectual capital value is seen to be the difference between a rms balance sheet value and its market capitalisation, and this has become more signicant, especially over the last two decades (Fernandez, 2003; Burgman and Roos, 2004).

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Thus the issue of intellectual capital in relation to listed rms is seen to have increasing importance and relevance in todays knowledge economy (Burgman and Roos, 2004). For this reason, and because it is increasingly identied as a key enabler of organisational value, there is growing pressure on organisations to report on intellectual capital (Edvinsson and Malone, 1997). Conversely the failure to report on intellectual capital could have negative consequences for organisations. These consequences are identied by Marr (2003) as follows: . small shareholders may have less access to information than larger shareholders; . managers with inside knowledge of intangibles may exploit their positions and engage in insider trading; and . nanciers may perceive the incorrect valuation of rms as leading to higher risk proles, which could in turn lead to an increased cost of capital. The implication is that there exists an opportunity for rms to disclose their intellectual capital to the market in order to both reduce information asymmetry amongst market actors and to attain market valuations that better reect the risk prole of the rm. The existing empirical evidence seems to support the benets of the reporting of intellectual capital to external stakeholders. For example, there is an increasing number of companies who are now reporting on intellectual capital and the frameworks for doing so are well advanced (Edvinsson, 1997; Meritum Project, 2002; Mouritsen, 2002; Mouritsen and Bukh, 2003; Systematic, 2004). In addition there is evidence to support the proposition that nancial analysts are interested in intangibles and that companies that disclose on the long-term future of their rms have been rewarded with better market valuations (Marr, 2003). There is also evidence to support the argument that company managers believe that the disclosure of intellectual capital increases transparency to capital markets. Transparency leads to lower weighted cost of capital and therefore to higher market capitalisation as it helps create trustworthiness with important stakeholders, supports the long-term vision via the propagation of a long-term perspective, and lends itself for use as a marketing tool (van der Meer-Kooistra and Zijlstra, 2001). A recent empirical study of Fortune 500 company annual reports also supports the argument that intellectual capital disclosure has an effect on market valuations (Abdolmohammadi, 2005). Thus it is likely that communication with external stakeholders will continue to be an important foundation for the measurement and reporting of intellectual capital. It is the method by which rms disclose intellectual capital that is of further interest. So far the literature on intellectual capital disclosure has focused on two specic areas: the company annual report (Guthrie and Petty, 2000; Brennan, 2001; April and Bosma, 2003; Bontis, 2003; Bozzolan, 2003; Guthrie et al., 2004; Abeysekera and Guthrie, 2005); and the different intellectual capital reporting frameworks that have been proliferated over the last two decades (Sveiby, 2004). This is because annual reports and intellectual capital reporting frameworks are seen as appropriate vehicles for the public disclosure of intellectual capital (Edvinsson, 1997; Meritum Project, 2002; Mouritsen and Bukh 2003; Guthrie et al., 2004). To conduct this research, content analysis has been a popular method of determining the extent of intellectual capital reporting found in company reports (Guthrie et al., 2004) and in intellectual capital statements (Mouritsen and Bukh, 2003). But these methods of disclosure have

limitations in their ability to communicate measures consistently and coherently to external stakeholders who may inuence the market price of a rms shares. In the case of annual reports, the evidence of most studies parallels the ndings of Guthrie and Petty (2000) original content analysis study of Australian annual reports. Central to their study is the nding that the concept of intellectual capital is poorly understood, inadequately identied, inadequately managed, and the essential components of intellectual capital are not reported using a consistent framework. Thus the use of the annual report for intellectual capital disclosure does not seem to be utilised as much as it could be. From the perspective of the various intellectual capital frameworks, these appear to suffer the problems of proliferation, the confusion as to which framework should be used to best communicate to stakeholders (Sveiby, 2004), and the lack of analytical tools which can be used by stakeholders to make comparisons between different rms intellectual capital and how intellectual capital is developed over time (Mouritsen and Bukh, 2003). But an additional important issue is one of timeliness, in that company annual reports and external intellectual capital reporting frameworks are published at best on a yearly basis, and in the case of some best practice examples of intellectual capital disclosure, there is often a two-year gap between publication (see, Systematic, 2002, 2004). Since these reports are supposedly benecial for the disclosure of information that can affect a rms market valuation through movements in its share price, resulting in fairer or higher valuation, the immediacy value of these modes of information disclosure is questioned. Thus the question posed here is whether there is another form of disclosure that companies could use to disclose intellectual capital information to the market, one that is more frequent and of higher immediacy value. In reply to this question this paper examines one possible mode of disclosure: price sensitive announcements to the stock exchange, in this case the ASX. ASX price sensitive disclosures Disclosures to the ASX are made by a multitude of listed companies on each trading day and are released to the market on the day they are received by the ASX. The ASX requires listed companies to make certain disclosures to the market and also allows companies to make discretionary announcements for matters of some material signicance. A sub-set of all such announcements, be they mandatory disclosures in compliance with ASX rules or company initiated disclosures, are sometimes classied by the ASX as price sensitive. These announcements are agged as such by the ASX to the stock market at the time of posting and are listed on the ASX web site. No further clarication or granularity is provided by the ASX regarding the signicance of an announcement that has been agged price sensitive. Thus if these price sensitive announcements were viewed from an intellectual capital perspective the issue of whether or not the disclosure of intellectual capital has an effect on the share price of a rm could be empirically examined. A search of the extant literature has not found any evidence where the intellectual capital of price sensitive disclosures to the market has been examined; thus this represents a gap in the literature that warrants further investigation. An examination of the disclosures from this vantage point adds to the body of knowledge on intellectual capital in several ways. First, it provides empirical evidence

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as to whether or not disclosures of intellectual capital to the market can have an effect on the resultant share price. Second, in the event that a signicant effect is identied, this would suggest there is another effective way of disclosing intellectual capital to the market other than through the annual report or external intellectual capital reporting frameworks. Third, a preliminary analysis may also provide empirical evidence as to what type of intellectual capital information the market reacts to and therefore presumably seeks. In order to examine these issues a number of research questions need to be posed, and these are discussed next. Methodology Considering that the desired outcome of this study is to determine whether or not the disclosure of intellectual capital in price sensitive ASX announcements has an effect on share price, it should rst be determined whether or not the price sensitive ag has any information value at all. While the very fact of the classication may indicate that it does, this relationship should be rst examined as it provides a rm foundation for the subsequent examination of the intellectual capital aspects. Value here is correlated with abnormal stock price movements as opposed to the uctuations of the broader market over a dened period of time. These uctuations are known as the cumulative abnormal return (CAR) of a given stock. For the purpose of this investigation the examination of the broader market is conducted in the context of two ASX stock indices, representing the top 20 and 200 listed companies by market capitalisation respectively. Thus the rst research question is: RQ1. Is there any effect on the CAR of a stock when an announcement is classied as price sensitive by the ASX? When examining the price sensitive disclosure notices that were listed on the ASX it was noted that the reported disclosures could also be classied as good, bad or neutral by analysing the tenor of the content of each disclosure. Thus another issue arose as to whether or not price sensitive announcements had symmetrical information value: for disclosures of bad news, such as prot downturns or transaction failures, was there a corresponding negative CAR?; for disclosures of good news, such as meeting or exceeding prot expectations or making acquisitions, was there a positive CAR?; and for neutral news, such as the more administrative lings in set-piece processes such as announcements related to the timing of dividend payouts, was there no effect on CAR? This leads us to our second research question: RQ2. Is there any effect on the CAR of a stock when an announcement is classied as price sensitive by the ASX and when that announcement may be classied as good, bad or neutral news? This information was also considered important in adding additional rigor to the investigation as it allows a comparison of a variable that is extraneous to intellectual capital but which may also have a profound effect on a rms share price. The last research question deals with the issue of the disclosure of intellectual capital within price sensitive disclosures to the market and the effect of these disclosures on share prices. Thus the third research question is:

RQ3. Is there any effect on the CAR of a stock when an announcement is classied as price sensitive by the ASX and when such an announcement is aligned to an element of intellectual capital? Now that the questions needing examination have been identied, the manner in which the study will be conducted and the source of our data must be outlined in relation to the framework of these three questions. This can be seen in Figure 1. With this framework in mind, the manner in which the data was collected and processed to answer the questions posed is detailed in the following. Data collection and processing The analysis is based on the widely-used event studies methodology (Sirower, 1997; Bruner, 2004) which analyses stock price movements of the sample rms over a period of time straddling each price sensitive announcement. In the literature, the duration for such analysis is generally short (e.g. 2 5 to 2 days; even 2 1 to 1 day). Stock price changes are measured relative to all or part of the underlying market to derive the cumulative abnormal returns associated with the event; thus event effects are normalised for movements in the broader market or specic sectors. The CAR for each stock and therefore each announcement may then be analysed by comparison to the different market indices. In this study the ASX20 and the ASX200 indices were chosen for that comparison, as these are two of the most widely quoted indices of Australian stocks. The company shares chosen for the analysis are based on the ASX20 and ASX200, which represent the top 20 and top 200 stocks respectively in terms of market capitalisation in Australia. The ASX20 alone comprises over 56 percent of the total value of the Australian Stock Exchange, as at 30 June 2005; component stocks of this index are presented in Table I. The share price data history was obtained from a commercial supplier, Netquote Information Services Ltd, who provided a multi-year history of daily stock prices for open, high, low and close values, as well as volumes for

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Figure 1. Research framework

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every trading day, along with similar data for all ASX indices. The 12-month period from 1 July 2004 to 30 June 2005 was selected, representing a full scal year for most of the component companies, and all ASX stocks were included. Price sensitive ASX company announcements were obtained from the ASX web site at: www.asx.com.au/ asx/statistics/announcementSearch.do, and numbered over 400. Price data used in the analysis was determined in two ways. First, very short-term event study data were extracted for a two-day window, reecting the CAR effect of a price sensitive announcement on the day of announcement (day 0) and the day immediately following trading day (day 1). This represents the markets immediate response to an announcement, with no assumption of any anticipation or information leakage. This resulted in two data sets based on the ASX20 and ASX200, which are classied in this paper as ASX20(1) and ASX200(1), respectively. Second, a wider event study, encompassing CAR stock price movements from three trading days prior to a price sensitive announcement (day 2 3) to ve trading days post-announcement (day 5) was made. This allows for anticipation and expectation effects, as many price sensitive announcements are either presaged by earlier events, for example the many steps leading up to a merger and acquisition, or are scheduled by the ASX and widely anticipated, such as quarterly prot reports. Insider trading effects are also thereby accommodated. In addition, a longer window allows for the effects of absorption by the market of more complex disclosures, as may be the case with value assessments of decisions involving intellectual capital categories. This resulted in another two data sets based on the ASX20 and ASX200, classied in this paper as ASX20(35) and ASX200(35) respectively. The method for calculating the CAR for the ASX price dataset on a daily basis is as follows (in this illustration, for the ASX20 dataset, for the 2 3 to 5 event window):
ASX code AWC AMC AMP ANZ BHP CML CBA FGL NAB NWSLV NWS QBE RIO SGB TLS WES WDC WBC WPL WOW Company name Alumina Limited Amcor Limited AMP Limited Australia and New Zealand Banking Group Limited BHP Billiton Limited Coles Myer Limited Commonwealth Bank of Australia Fosters Group Limited National Australia Bank Limited News Corporation Inc. (non voting CDI) News Corporation Inc. (voting CDI) QBE Insurance Group Limited Rio Tinto Limited St George Bank Limited Telstra Corporation Limited Wesfarmers Limited Westeld Group Westpac Banking Corporation Woodside Petroleum Limited Woolworths Limited Industry sector Materials Materials Financials Financials Materials Consumer staples Financials Consumer staples Financials Consumer Discretionary Consumer Discretionary Financials Materials Financials Telecommunications Services Industrials Financials Financials Energy Consumer staples

Table I. List of ASX20 companies used in this study

(1) Calculate each companys cumulative return: Cumulative return Stock Closing priceDay5 2 Closing priceDay23 100 1 Closing priceDay23

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(2) Calculate the stock markets cumulative return for the same period: Closing priceDay5 2 Closing priceDay23 100 Cumulative return ASX20 1 Closing priceDay23 (3) Calculate each companys CAR: CARASX2035 CumulativeReturnStock CumulativeReturnASX20 A similar calculation is used for the shorter (day 0, 1) duration and both are repeated for the ASX200 datasets. In both approaches, price effects relating to the announcement date (day 0) are compared to equivalent durations spanning the dened number of trading dates to determine whether any signicant CAR can be identied specically for price sensitive announcements. The results from the initial analysis were placed in a database to allow further manipulation by sorting the data and classifying the announcements into different categories. First the price sensitive announcements were classied as good, bad or neutral in overall news content, as noted in the second research question in the previous items. This was a subjective classication based on the researchers interpretation of the announcements. Second, in relation to the third research question, each of the price sensitive announcements was examined and, based on the content of the announcement document, where possible aligned to an element of intellectual capital, as outlined in Table II. An inter-rater reliability regime was established to ensure comparability in content analysis and classication. Data sets were then developed from the database to test hypotheses based on our research questions. These data sets were subsequently used as input for the Minitab 14
Internal capital Management processes Internal networking systems Management philosophy Corporate culture Financial relations Research projects Infrastructure assets Information systems Copyright Designs Trade marks Company names External capital Research collaborations External networking systems Brand, company and product reputation Customers Customer relations Distribution channels Business collaborations Licensing agreements Supplier contracts Supply contracts Franchising agreements Human capital Know-how Education Employees Work-related knowledge Work-related competencies Entrepreneurial spirit Vocational qualication Condential information

243

Source: Adapted from Hall, 1993; Guthrie and Petty, 2000; April, 2003; Ricceri, 2004

Table II. Intellectual capital elements

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statistical analysis software. The following section outlines the hypotheses and the resulting analysis. Analysis In order to test our hypotheses, four sets of data formed the basis of the statistical tests performed (namely ASX20(1), ASX200(1), ASX20(35) and ASX200(35), as dened previously). These data sets represent a nite population of relative share price data and thus it is possible to develop descriptive statistics that can be used for analysis. In addition the absolute movement in share price data was also required, and this was determined by taking the absolute values of the data sets, e.g. jASX20(1)j. The descriptive statistical output from Minitab for both sets of population data is represented in Table III and Table IV, respectively. Question 1 H1. Absolute effect of price sensitive versus total market This hypothesis will test the rst research question and is presented in the following. H0: There are no differences in the absolute price movements of company share prices when company announcements that have been classied as price sensitive by the ASX are released to the market; versus

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HA: There are differences in absolute price movements of company share prices when company announcements that have been classied as price sensitive by the ASX are released to the market. This rst hypothesis was tested for each of the four types of absolute price movement data. In this case the z-test is the appropriate test because the sample size is large (. 25) and the value of s is known from the descriptive statistics presented previously. The results of the analysis are presented in Table V. These results provide support for rejecting the null hypothesis in the case of a longer event window (2 3 to 5 days) and for concluding that a difference does exist when price sensitive announcements are made in relation to either stock market index. Question 2 The rst test determined whether the tenor of the information disclosure (good, bad or neutral) is associated with any signicant effect on stock price relative to the market index. This was tested for the broader ASX200 index and the large-cap ASX20. To illustrate the analysis, the ASX200(35) Minitab analysis is shown here in full in Figure 2 and is graphically presented in Figure 3. H2. Effect of News Tenor ASX200(35) Event Study H0: There is no difference between relative price movements for shares in the ASX200 and relative price movements on the days when there have been announcements classied as price sensitive by the ASX and the groups we have classied as good, bad or neutral news-based on data group ASX200(35). versus

HA: There is a difference between relative price movements for shares in the ASX200

Variable 0 0 7 7 Q3 0.005628 0.005862 0.015189 0.016634 Maximum 0.048767 0.051104 0.120898 0.121807 2 0.000059 0.000090 2 0.000511 0.000660 0.000147 0.000148 0.000390 0.000392 0.010113 0.010151 0.026756 0.026888

N* Mean SE Mean St. Dev

Minimum 2 0.096604 2 0.094079 2 0.112040 2 0.104406

Q1 2 0.006042 2 0.005832 2 0.016982 2 0.015991

ASX200(1) ASX20(1) ASX200(35) ASX20(35)

4711 4711 4704 4704

Variable ASX200(1) ASX20(1) ASX200(35) ASX20(35)

Median 2 0.000070 0.000158 2 0.001641 2 0.000610

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Table III. Descriptive statistics of relative price movement data

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and relative price movements on the days when there have been announcements classied as price sensitive by the ASX and the groups we have classied as good, bad or neutral news-based on data group ASX200(35). This analysis identies that, using ASX200(35) as an example, a signicant difference does exist as a result of the tenor of price sensitive news being disclosed (p 0:000). Because an ANOVA indicates difference between two or more means without identifying whether any specic difference is signicant, a Tukey Pairwise Comparison was performed at a 95 percent Condence Interval to identify the source of this reported signicant difference between categories of news tenor. This is presented in Figure 4.
Variable ASX200(1) ASX20(1) ASX200(35) ASX20(35) Variable ASX200(1) ASX20(1) ASX200(35) ASX20(35) N 4716 4716 4699 4699 Median 0.005791 0.005836 0.016180 0.016336 0 0 17 17 Q3 0.010286 0.010480 0.028167 0.028835 N* Mean 0.007490 0.007564 0.020355 0.020567 Maximum 0.096604 0.094079 0.120898 0.121807 SE Mean 0.000099 0.000099 0.000254 0.000253 St. Dev 0.006789 0.006764 0.017388 0.017349 Minimum 0.000000 0.000000 0.000003 0.000004 Q1 0.002682 0.002784 0.007332 0.007491

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Table IV. Descriptive statistics of absolute price movement data

Dataset ASX200(1) ASX20(1) ASX200(35) ASX20(35)

Absolute price movements population N Mean St. dev 4716 4716 4699 4699 0.007490 0.007564 0.020355 0.020567 0.006789 0.006764 0.017388 0.017349

Absolute price sensitive movements sample N Mean St. dev 403 403 403 403 0.008117 0.008132 0.022358 0.023512 0.007084 0.006982 0.019557 0.019514

Hypothesis test 95% 99%

Table V. Hypothesis 1 results

0.064 Not reject Not reject 0.092 Not reject Not reject 0.012 Reject Not reject 0.001 Reject Reject

Figure 2. Minitab ANOVA news tenor ASX20(35) dataset

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Figure 3. ASX200(35) ANOVA for news tenor

Figure 4. Tukey analysis news tenor ASX20(35) dataset

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Perhaps not unsurprisingly, there is no differentiation between raw data and neutral news, whereas a signicant difference (at 95 percent CI) is identied between the good versus bad, and the bad versus neutral and raw categories. Good news and neutral news are not found to be different on this test, as shown in Table VI. An equivalent analysis for the ASX20 datasets provided similar results (p 0:000), suggesting that there is no difference between the ndings for the largest market value companies (ASX20) and the broader stock market. Results are summarised in Table VII. The next test examined whether each discrete classication of bad, good or neutral had an effect on the relative price movements as compared to the other price movements. In this case one-way z-tests were used to determine if there were directional changes in line with bad and good news, and a two-way z-test was used for neutral news. To do this, three hypotheses were tested (H3-5) and the results are presented for bad, good and neutral news in Tables VIII-X. Normality plots supported the assumption, based on a large sample size, of the existence of a normal distribution of data.

Comparison Good news raw data Bad news raw data Neutral news raw data Bad news good news Neutral news good news Neutral news bad news

Interval (0.003, (2 0.027, (2 0.002, (2 0.036, (2 0.012, (0.008, 0.013) 2 0.005) 0.008) 2 0.013) 0.003) 0.032)

Contains zero? No No Yes No Yes No

Table VI. Table VI. Hypothesis 2 results for ASX200 analysis

Comparison Good news raw data Bad news raw data Neutral news raw data Bad news good news Neutral news good news Neutral news bad news

Interval (0.002, (2 0.028, (2 0.002, (2 0.036, (2 0.011, (0.008, 0.012) 2 0.006) 0.010) 2 0.012) 0.004) 0.033)

Contains zero? No No Yes No Yes No

Table VII. Hypothesis 2 results ASX20 analysis

Dataset ASX200(1) ASX20(1) ASX200(35) ASX20(35)

Relative price movements population N Mean St. dev

Relative price sensitive movements bad news sample N Mean St. dev

Hypothesis test 95% 99%

Table VIII. Hypothesis 3 results

4711 2 00.000059 0.010113 40 2 00.000766 0.011568 0.329 Not reject Not reject 4711 0.000090 0.010151 40 2 0.001014 0.011371 0.246 Not reject Not reject 4704 2 00.000511 0.026756 40 2 00.016764 0.025107 0.000 Reject Reject 4704 0.000660 0.026888 40 2 00.016334 0.026187 0.000 Reject Reject

H3. Effect of bad news announcements H0: The price movement for announcements classied as price sensitive by the ASX and which we have classied as bad news results does not result in negative relative movements in share prices; versus

Intellectual capital disclosure

HA: The price movement for announcements classied as price sensitive by the ASX and which we have classied as bad news results does result in negative relative movements in share prices (see Table XIV). H4. Effect of good news announcements H0: The relative price movement for announcements classied as price sensitive by the ASX and which we have classied as good news results does not result in positive relative movements in share prices; versus

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HA: The relative price movement for announcements classied as price sensitive by the ASX and which we have classied as good news results does result in positive relative movements in share prices. H5. Effect of neutral news announcements H0: The relative price movement for announcements classied as price sensitive by the ASX and which we have classied as neutral news results does not have a different mean than the population of relative price movements; versus

HA: The relative price movement for announcements classied as price sensitive by the ASX and which we have classied as neutral news results does have a different mean than the population of relative price movements.
Relative price sensitive movements good news sample N Mean St. dev 0.001348 0.001434 0.007644 0.007852 0.011506 0.011288 0.029982 0.030516

Dataset ASX200(1) ASX20(1) ASX200(35) ASX20(35)

Relative price movements population N Mean St. dev

P 0.020 0.025 0.000 0.000

Hypothesis test 95% 99% Reject Not reject Reject Not reject Reject Reject Reject Reject

4711 2 00.000059 0.010113 219 4711 0.000090 0.010151 219 4704 2 00.000511 0.026756 219 4704 0.000660 0.026888 219

Table IX. Hypothesis 4 results

Dataset ASX200(1) ASX20(1) ASX200(35) ASX20(35)

Relative price movements population N Mean St. dev

Relative price sensitive movements neutral news sample N Mean St. dev 0.000403 0.000691 0.003150 0.004322 0.009236 0.000846 0.002230 0.028877

P 0.584 0.478 0.101 0.102

Hypothesis test 95% 99% Not reject Not reject Not reject Not reject Not reject Not reject Not reject Not reject

4711 2 00.000059 0.010113 144 4711 0.000090 0.000148 144 4704 2 00.000511 0.026756 144 4704 0.000660 0.026888 144

Table X. Hypothesis 5 Results

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From the previous tables there is support for rejecting the null hypothesis in relation to good and bad news and for concluding that the relevant means are different to those of the broader stock population. The support for good news is highly signicant for longer event windows (p 0:000). Question 3 The next test was to determine if the classication of intellectual capital categories had an effect on the absolute price movements compared with the markets absolute price movements. From H1, it was determined that ASX price sensitive announcements are associated with differences in stock price effects. In this case a z-test was used for the internal and external capital categories. Owing to the small sample size, a t-test was used in the case of human capital to determine whether there were differences in the sample means compared to the population. To do this, hypotheses were tested for each of the four intellectual capital classications: human, internal, external and other. H6. Effect of internal capital The only analysis to show any real differences between the means was the test against the internal element of intellectual capital. The hypothesis and results for this are presented in the following. H0: The absolute price movement for announcements classied as price sensitive by the ASX and which we have classied as internal capital-based announcements does not have a different mean than the population of absolute price movements; versus

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HA: The absolute price movement for announcements classied as price sensitive by the ASX and which we have classied as internal capital-based announcements does have a different mean than the population of absolute price movements. The previous results provide strong support for rejecting the null hypothesis and for therefore concluding that there is a difference between price sensitive announcements with predominantly internal capital content versus the market overall (see Table XI). The three other categories of intellectual capital did not display signicant differences when analysed using equivalent hypotheses. The most signicant results obtained in the previous manner were: . For External Capital, p 0:088 for ASX20(35). . For Human Capital, p 0:296 for ASX20(1).
Absolute price sensitive movements internal capital sample N Mean St. dev 196 196 196 196 0.008770 0.008573 0.023539 0.024478 0.007294 0.007155 0.021182 0.021396

Dataset ASX200(1) ASX20(1) ASX200(35) ASX20(35)

Absolute price movements population N Mean St. dev 4716 4716 4699 4699 0.007490 0.007564 0.020355 0.020567 0.006789 0.006764 0.017388 0.017349

P 0.008 0.037 0.010 0.002

Hypothesis test 95% 99% Reject Reject Reject Reject Reject Not reject Reject Reject

Table XI. Hypothesis 6 results

H7. Union of good news and internal capital Considering the results of H6, a further investigation was conducted to determine whether the tenor of the news content (good, bad or neutral) in conjunction with the internal capital classication would yield any further differences. This was performed by testing the union of good news and internal capital samples using a one-way z-test. The hypothesis and results for this are presented in the following. H0: The price movement for announcements classied as price sensitive by the ASX and which we have classied as good news results and as internal capital-based does not result in positive relative movements in share prices; versus

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HA: The price movement for announcements classied as price sensitive by the ASX and which we have classied as good news results and as internal capital-based does result in positive relative movements in share prices (see Table XII) The previous results provide additional support for rejecting the null hypothesis relating to disclosures that principally contain internal capital content with a positive tenor. In both very short and longer event windows, the null can be rejected with a p-value close to 0.000. H8. Union of good news and internal capital versus union of good news and external capital As a further renement, another test was conducted to determine whether there is a real difference between the union of good news and internal capital versus the union of good news and external capital, as it was possible that the result may have been largely driven by the good news component alone. This was performed by testing the union of good news and internal versus external capital samples using a two-way t-test. The hypothesis and results for the latter combination are presented in the following. Table XIII presents the Minitab output for the ASX200(35) data set and Table XIV presents a summary of results for all of the data sets. H0: The price movement for announcements classied as price sensitive by the ASX and which we have classied as good news results and as internal capital-based does not result in positive relative movements in share prices different to those resulting from the previous elements with external capital substituted; versus

Dataset ASX200(1) ASX20(1) ASX200(35) ASX20(35)

Relative price movements population N Mean St. dev 4711 4711 4704 4704 2 00.000059 0.000090 2 00.000511 0.000660 0.010113 0.010151 0.026756 0.026888

Relative price sensitive movements good news sample N Mean St. dev 99 99 99 99 0.002629 0.002780 0.012270 0.012288 0.012855 0.012286 0.032678 0.033414

Hypothesis test 95% 99% Reject Reject Reject Reject Reject Reject Reject Reject

0.004 0.004 0.000 0.000

Table XII. Hypothesis 7 results

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HA: The price movement for announcements classied as price sensitive by the ASX and which we have classied as good news results and as internal capital-based does result in positive relative movements in share prices compared to those resulting from the previouselements with external capital substituted. The previous indicates support at the 95 percent condence level for rejecting the null hypothesis and thereby concluding that a difference does exist between internal versus external disclosures that are good news in tenor, under the (2 3, 5) event window. Summary and conclusion Summary The analysis of price sensitive announcements for ASX20 stocks over a 12-month period provides statistically signicant results for several of the hypotheses raised in response to our three research questions. The rst research question is answered by our nding that the occurrence of an announcement labeled price sensitive by the ASX is associated with a difference in absolute stock price movement on the longer (2 3, 5 day) analysis compared to the population of such multi-day price movements in the ASX200 (p 0:012) or narrower ASX20 (p 0:001) indices. The results here suggest that the market does not respond immediately to these announcements because it needs time to absorb the impact of the announcements or because the market had expected the announcements or because the content of the announcements had been devolved through other mechanisms. It does however set a rm base for further examination of intellectual capital-based announcements. In analysing the second research question, it was rst established that the tenor of the information content is associated with differences in stock price movement, with the
N Mean St. dev SE mean 0.0033 0.0028

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Table XIII. Hypothesis 8 Two-Sample T-Test

ASX200(35)Int Good 99 0.0123 0.0327 ASX200(35)Ext Good 102 0.0032 0.0282 Difference mu (ASX200(35)Int Good)-mu (ASX200(35)Ext Good) Estimate for difference: 0.009095 95percent CI for difference: (0.000614, 0.017577) T-test of difference 0 (vs not ): T-value 2.11 P-value 0.036 DF 199 Both use pooled st. dev 0.0305 Note: Two-sample T for ASX200(35)Internal+Good vs ASX200(35)External+Good

Dataset ASX200(1) ASX20(1) ASX200(35) ASX20(35)

Relative CAR Internal Capital Good News N Mean St. dev 99 99 99 99 0.0026 0.0028 0.0123 0.0123 0.0129 0.0123 0.0327 0.0334

Relative CAR External Capital Good News N Mean St. dev 102 102 102 102 0.0004 0.0004 0.0032 0.0035 0.0106 0.0108 0.0282 0.0285

Hypothesis Test: Int Good V. Ext Good P 95% 99% 0.173 0.138 0.036 0.045 Not reject Not reject Reject Reject Not Not Not Not reject reject reject reject

Table XIV. Hypothesis 8 Results

pairings of good news versus bad news, and bad news versus merely neutral news differentiated at a 95 percent condence level, and all news displaying a similar difference to the raw population data. Therefore, stock prices do appear to respond differently to the categories of news content. The direction of stock price effects for announcements that had been classied as good or bad news was as expected. Good news has a signicant positive effect in both short duration (0, 1 day; p 0:025 or better) and longer duration (2 3, 5 day; p 0:000) analyses; bad news has a signicant negative effect in longer duration analysis only (2 3, 5 day; p 0:000), suggesting possible asymmetries in information absorption and valuation between the two types of news content. Neutral news displays no difference to movements in the broader market. The analysis of research question three identied that only internal capital displays a signicant difference as a discrete category of announcement (p , 0:05 for short duration studied, p # 0:01 for longer duration). That is, regardless of news tenor, price sensitive announcements that contain principally internal capital content have a signicantly different market effect as measured by CAR. The subset of internal capital-focused announcements that had been classied separately as good news provides a highly signicant positive effect on both short and longer duration analyses (p # 0:004). As a further test of whether good news in an internal capital context may be received differently to good news with an external capital context, we found that a difference does appear at a 95 percent condence level for the longer duration analysis, again possibly suggesting that a longer period of absorption may contribute to a differential effect on prices. As with any research this study has some limitations. First, this study is limited to an analysis of the Australian stock market for a one-year period and only includes intellectual capital disclosures made by way of announcements to the stock market. The manner in which these announcements are classied by the ASX represents the mechanism adopted in a purely Australian context. Researchers who may wish to replicate this study using data from other stock exchanges will have to take into consideration that the transparency required by their market regulators would be unique to that market, as would be the specic mechanism for making price sensitive disclosures. Second, this study does not take into account that timing of price sensitive announcements is another variable. By timing we infer that the timing of a specic announcement might or might not be in line with market expectations based on past experience, such as series of earnings increases or past successes with regulatory approvals, and thus can also affect price (see Lev and Zarowin, 1999). This was not considered in our study. Conclusion These ndings partially support the thesis that the disclosure of intellectual capital is perceived differentially by the market and has a different valuation effect dependent on whether the disclosure relates to human, internal or external capital; at least in the context of disclosures to the ASX that are deemed to be price sensitive. News tenor largely displays an associated response that might be expected, as measured by the direction of CAR. Indications of some difference between two primary intellectual capital categories (that is, internal and external capital), as seen in the context of good news, suggest that a rened evaluation based on sub-categories as presented in Table II may be fruitful for future research.

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More broadly the ndings in this paper have implications from an operational perspective. First, they present to rms a mechanism for disclosing intellectual capital to the market that can have an effect on share price. Armed with this knowledge, a greater number of rms may be encouraged to disclose more information to the market about their internal workings, rather than keep them hidden from view, as the evidence supports the view that stakeholders respond favourably to such disclosures. Second, they present a method by which rms can disseminate intellectual capital information in a more frequent and immediate manner without making stakeholders wait until the publication of formal company annual reports or external intellectual capital reports. Last, they open up the prospect of further research in the area of intellectual capital disclosure. In this regard, the present study examined only one non-traditional form of disclosure, but there are many other ways in which rms can disseminate intellectual capital information in a more frequent and immediate manner, such as through corporate web sites, corporate blogs or promotional activities. Future research in these areas could add considerably to the discussion of intellectual capital disclosure.
References Abdolmohammadi, M.J. (2005), Intellectual capital disclosure and market capitalization, Journal of Intellectual Capital, Vol. 6 No. 3, pp. 397-416. Abeysekera, I. and Guthrie, J. (2005), An empirical investigation of annual reporting trends of intellectual capital in Sri Lanka, Critical Perspectives on Accounting, Vol. 16 No. 3, pp. 151-63. April, K.A. and Bosma, P. (2003), IC measurement and reporting: establishing a practice in SA mining, Journal of Intellectual Capital, Vol. 4 No. 2, pp. 165-80. Bontis, N. (2003), Intellectual capital disclosures in Canadian corporations, Journal of Human Resource Costing and Accounting, Vol. 7 Nos 1/2, pp. 9-20. Bozzolan, S. (2003), Italian annual intellectual capital disclosure: an empirical analysis, Journal of Intellectual Capital, Vol. 4 No. 4, pp. 543-58. Brennan, N. (2001), Reporting intellectual capital in annual reports: evidence from Ireland, Accounting, Auditing & Accountability Journal, Vol. 14 No. 4, pp. 423-36. Bruner, R. (2004), Making Mergers Work, John Wiley & Sons, New York, NY. Burgman, R. and Roos, G. (2004), The New Economy A New Paradigm for Managing for Shareholder Value, Centre for Business Performance, Craneld University, Craneld. Edvinsson, L. (1997), Developing intellectual capital at Skandia, Long Range Planning, Vol. 30 No. 3, pp. 366-73. Edvinsson, L. and Malone, M.S. (1997), Intellectual Capital: The Proven Way to Establish Your Companys Real Value by Measuring its Hidden Values, Piatkus, London. Fernandez, P. (2003), Valuation Methods and Shareholder Value Creation, Academic Press, San Diego, CA. Franco, M. and Bourne, M.C.S. (2003), Business performance measurement systems: a systematic review, paper presented at the 10th EurOMA Conference, Lake Como. Guthrie, J. (2004), Using content analysis as a research method to inquire into intellectual capital reporting, Journal of Intellectual Capital, Vol. 5 No. 2, pp. 282-93. Guthrie, J. and Petty, R. (2000), Intellectual capital: Australian annual reporting practices, Journal of Intellectual Capital, Vol. 1 No. 3, pp. 241-51.

Guthrie, J. et al. (2004), External intellectual capital reporting: contemporary evidence from Hong Kong and Australia, paper presented at International IC Congress on Interpretation and Communication of Intellectual Capital, Hanken Business School, Helsinki. Hall, R. (1993), A framework linking intangible resources and capabilities to sustainable competitive advantage, Strategic Management Journal, Vol. 14 No. 8, pp. 607-18. Ittner, C.D. and Larcker, D.F. (2003), Coming up short on nonnancial performance measurement, Harvard Business Review, Vol. 81 No. 11, pp. 88-95. Kremp, E. and Mairesse, J. (2002), Knowledge Management in the Manufacturing Industry: An Asset for Innovation, Le 4 Pages des statistiques industrielles, Sessi-General Directorate for Industry, Information Technologies and the Post Ofce (France). Lev, B. and Zarowin, P. (1999), The boundaries of nancial reporting and how to extend them, Journal of Accounting Research, Vol. 37 No. 2, pp. 353-85. Marr, B. (2003), Why do rms measure their intellectual capital?, Journal of Intellectual Capital, Vol. 4 No. 4, pp. 441-64. Meritum Project (2002), Guidelines for Managing and Reporting on Intangibles (Intellectual Capital Report), European Commission, Madrid. Mouritsen, J. (2002), Developing and managing knowledge through intellectual capital statements, Journal of Intellectual Capital, Vol. 3 No. 1, pp. 10-29. Mouritsen, J. and Bukh, P.N. (2003), Intellectual Capital Statements The New Guideline, Danish Ministry of Science Technology and Innovation, Copenhagen. Neely, A. et al. (2004), Does the Balanced Scorecard Work? An Empirical Investigation, Centre for Business Performance, Craneld School of Management, Craneld. a, I. (2002), Intellectual capital and business start-up success, Journal of Intellectual Capital, Pen Vol. 3 No. 2, pp. 180-98. Ricceri, F. (2004), Intellectual capital statement: the case of an Italian non-knowledge intensive company, working paper, Department of Economic Sciences, Accounting and Finance Section, University of Padova, Padova. Sirower, M.L. (1997), The Synergy Trap, The Free Press, New York, NY. Sveiby, K.E. (2004), Methods for Measuring Intangible Assets, July, available at: www.sveiby. com/articles/IntangibleMethods.htm (accessed April 4, 2005). Systematic (2002), Intellectual Capital Report 2002, Systematic Software Engineering A/S, Aarhus. Systematic (2004), Intellectual Capital Report 2004, Systematic Software Engineering A/S, Aarhus. van der Meer-Kooistra, J. and Zijlstra, S.M. (2001), Reporting on intellectual capital, Accounting, Auditing & Accountability Journal, Vol. 14 No. 4, pp. 456-76. Further reading Mouritsen, J. et al. (2003), Analysing Intellectual Capital Statements, Danish Ministry of Science, Technology and Innovation, Copenhagen. Corresponding author John. C. Dumay can be contacted at: j.dumay@econ.usyd.edu.au

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Appendix 3

Paper 2
Dumay, J. and Guthrie, J. (2007), Disturbance and implementation of IC practice: A public sector organisation perspective, Journal of Human Resource Costing and Accounting, Vol 11 No 2, pp. 104-21.

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1401-338X.htm

JHRCA 11,2

Disturbance and implementation of IC practice: a public sector organisation perspective

John C. Dumay and James Guthrie
Discipline of Accounting, The University of Sydney, Sydney, Australia
Abstract
Purpose This paper seeks to discuss how an environmental change for an organisation can be a catalyst for the take-up of intellectual capital (IC). In particular, it uses Laughlins colonizing model of organisational change to understand the catalyst for change, being an ageing workforce, and the resultant formation of an accounting of IC. Design/methodology/approach This paper presents a case study of an Australian public sector organisation, which has created and implemented IC practice. Findings In this case, the impending retirements of the baby boomer generation were an environmental disturbance and a catalyst that allowed for an accounting of IC, especially its human capital. Research limitations/implications This case study is limited to the presentation of ndings of a phenomenon within a particular organisation within the Australian public sector context. Other forces may also have had an effect on the organisation, if not for the presence of the ageing workforce disturbance. Originality/value The paper contributes to the literature on IC by examining the impact of the take-up of IC from inside a public sector organisation perspective. Keywords Intellectual capital, Organizational change, Strategic management, Older workers, Public sector organizations Paper type Case study

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1. Introduction The concept and interest in intellectual capital (IC) has come from the wide recognition that knowledge is important to organisations and that technology has allowed for greater dissemination of knowledge (Meritum Project, 2002; Unerman et al., 2007). In the examination of this knowledge phenomenon, the IC literature has developed in two waves rst measuring and the second wave managing, taking over from measuring (Mouritsen and Larsen, 2005). In this paper, we focus on managing IC by examining the implementation of IC practices. This paper presents a case study of the New South Wales Department of Lands (Lands) in relation to an environmental disturbance, being the ageing of the workforce, which was seen as a catalyst for the implementation of IC management practices. To present this case study, Laughlins (1991) models of organisational change was used as the analytical framework.
Journal of Human Resource Costing & Accounting Vol. 11 No. 2, 2007 pp. 104-121 q Emerald Group Publishing Limited 1401-338X DOI 10.1108/14013380710778767

The authors thank the staff and management of the NSW Department of Lands, in particular Julie King, Warwick Watkins and Des Mooney, for their ongoing support in allowing them to conduct the research. Also, they thank the Sydney University Research Fund and the support staff, especially Fiona Crawford. Further, they thank the anonymous reviewers for their comments.

The paper is divided into four more sections. In Section 2, a literature review is presented to identify the gap surrounding the issue of the forces that are the catalysts for the implementation of IC practice. In addition, it discusses the appropriateness of Laughlins (1991) theory of organisational change which was used to analyse the empirical data in this case study. This is followed in Section 3 by an explanation of the case study research method employed. Section 4 applies the colonization model of change as espoused by Laughlin to argue how the environmental disturbance of an ageing workforce allowed Lands to implement IC practices, especially in relation to human capital. This is followed by Section 5 which presents a brief conclusion that summarises this papers ndings, identies the research limitations and discusses future research opportunities. 2. Intellectual capital In the rst wave in the development of the literature of IC (Mouritsen and Larsen, 2005), the early literature in the measurement paradigm worked on trying to either understand the value of IC (Roos et al., 1997; Stewart, 1997) or to measure IC components (Edvinsson, 1997). A second wave later emerged, the management approach, which identied the usefulness of IC in management decision-making processes (Habersam and Piber, 2003). This literature is concerned with the development of control over IC resources, so that managers can decide which IC resources are worthwhile developing (Mouritsen and Larsen, 2005). Several frameworks have been developed which provide for IC stakeholders and highlight IC resources under control (Meritum Project, 2002; Mouritsen et al., 2003). However, from a management perspective, the take-up of IC has been hampered by the view of some critics who consider it to be just another management fad (Brooking, 1997), since early proponents of IC reporting (ICR) have gone silent and have even abandoned the practice (e.g. Skandia). A particular area of interest, in the second wave, is the disclosure of IC in the annual reports of listed companies (Skandia, 1995; Guthrie and Petty, 2000; Olsson, 2001; Abeysekera and Guthrie, 2005; Vergauwen and van Alem, 2005; Guthrie et al., 2006). This research has been conducted mainly from a private sector orientation: only a few studies have examined IC from a public sector orientation. For instance, Collier (2001) explored IC utilisation and external reporting in the UK Police Service. He links ICR to a variety of media and explores the drivers for this reporting (e.g. external recognition of efforts to improve human capital, greater accountability and the invisible benets of IC investments). Also from a public sector perspective, Habersam and Piber (2003) examined the awareness of IC in a case study of two hospitals in Italy and Austria. Here, they utilised the Meritum IC taxonomy (Meritum Project, 2002) as the analytical basis of their study and expanded it by adding the term connectivity capital to represent the linking pin among human, relational, and organisational capital. They also identify four different spheres of IC transparency being metric, literal, intuitive, and black box capital. But while Habersam and Piber (2003, p. 775) call for further research on making IC less ambiguous, they do not address the issue. As far as the Australian public sector is concerned, there has also been a noticeable lack of discussion of IC in the academic literature, with the recent work of Boedker et al. (2005a, b) and Cuganesan et al. (2007) being the exceptions. In addition to the

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IC Statements (ICS) in Lands annual reports (Lands, 2004, 2005, 2006), there is a white paper by the Department of Industry Science and Resources (2001) and government discussion papers on the topic of intangibles (Boedker, 2005; Boedker et al., 2007). Thus, a gap also exists in the academic literature concerning the interest of Australian public sector organisations in managing IC. Also, found lacking was a discussion of the catalyst for an organisation to begin to implement IC practices. Although Marr et al. (2003) partly addressed this by examining different reasons that organisations have used to justify IC practice. The literature that deals with implementation generally discusses how to operationalise a particular IC framework (Bounfour, 2003; Andriessen, 2004; Jacobsen et al., 2005) or how IC practices were implemented at a particular organisation (Chatzkel, 2000; Peppard and Rylander, 2001). So, while the advent of the knowledge economy and service organisations were identied as reasons for interest in IC, the forces at work that allow an organisation to create and implement IC practices are not identied. Therefore, in the second wave of IC literature, there is a gap in terms of exploring the environmental force, at an organisational level, that is a catalyst for the implementation of IC. Doing so will add to our understanding of why IC is utilised, how IC is managed and thus will help reduce the ambiguity of IC by probing inside Habersam and Pibers (2003) black box. In order to analyse the catalyst for change at the organisational level, Laughlins (1991) models of organisational change provide a framework to capture the dynamics of change (Laughlin, 1991, p. 209). This framework has been used in the literature on change as it applies to the implementation of accounting (Laughlin et al., 1994; Richardson et al., 1996; Mobus, 2000; Larrinaga-Gonzalez et al., 2001; Haldma, 2004). Laughlins framework builds upon the seminal work of Greenwood and Hinings (1988), Hinings and Greenwood (1988), Miller and Friesen (1980a, b; 1984), Ranson et al. (1980) and Walsh et al. (1981). This framework has been associated with what has become known as the middle range thinking approach to accounting research (Laughlin, 1987, 1995). Frameworks such as Giddens (1984) structuration theory and Greenwood et al.s (2002) institutional change theory are examples of other theories used to frame the analysis of accounting change. But for the purpose of this paper, Laughlins (1991) model was seen as more appropriate as it is specically designed to view change from within an organisation, where as Greenwood et al.s (2002) model views change from a institutional eld perspective. Structuration theory also has been used to understand the dynamics of change from an accounting perspective (Roberts and Scapens, 1985; Macintosh and Scapens, 1990), but there has been conjecture among academics to its proper use (Boland, 1993, 1996; Scapens and Macintosh, 1996) and criticism of it as a social theory from its inception (Bertilsson, 1984). Additionally, Laughlins (1991) models of change are built on the premise that change is best understood by analysing the path that an environment disturbance (i.e. jolt or kick) progresses through an organisation. The models presented by Laughlin are, as he describes them, skeletal in nature, requiring the empirical esh to be added to them so that they can become whole beings (Laughlin, 1991, p. 210). The case of Lands is the empirical esh that builds on one of these models, that is the colonization model of organisational change. We also argue that this approach is applicable to the understanding of the systems which account for IC practices as these

can be seen as systems which account for the intangible elements of an organisation. Laughlin (1987, p. 479) has the . . . view that accounting systems in organisational contexts are more than technical phenomena and that to understand and change these technical elements, the social roots must also be both understood and changed. In order to frame our later discussion, a further two sub-sections are presented. In the rst sub-section, Laughlins model of organisation is discussed and in the second, the colonization model of change is explored. This is necessary so that we understand what is meant by organization in the context of this paper, as well as providing the framework for analysing IC management practices at Lands. 2.1 An organisation model Laughlin (1991, pp. 211-3) describes a model of organisation consisting of a combination of three major elements: interpretive schemes, design archetypes and sub-systems. A characteristic of the model is that organisations consist of tangible and intangible elements. The sub-systems of the organisation are seen as the tangible elements and examples of these elements are people, buildings and plant and equipment, of which there is impartial agreement as to their make-up. The intangible elements, as shown in Figure 1, consist of the design archetype and

Disturbance and implementation of IC practice 107

Level 1 Beliefs, Values and Norms Level 2 Mission / Purpose Interpretive Schemes Level 3 Metarules Intangible

Balance/ Coherence Design Archetype Organization Structure, Decision Processes, Communication System Balance/ Coherence Sub-systems Tangible Organizational Elements Tangible

Source: Laughlin (1991, p. 211)

Figure 1. An organisational model

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the interpretive schemes both of which are seen to give direction, meaning, signicance and interconnection to the sub-systems (Laughlin, 1991, p. 211). These elements are created and sustained by past and present members of the organisation. The design archetype is distinct from interpretive schemes as it consists of the management systems and structures that have been formed to implement the underlying values of the organisation (Greenwood and Hinings, 1988). Such structures give organisational members reasons why the organisation is constituted internally and how this structure helps deliver on the espoused organisational values. In essence, they are the glue that combines tangible sub-systems with organisational values (Laughlin, 1991, p. 212). In contrast, the interpretive schemes of an organisation are the cognitive elements of an organisation which guide behaviour and give the organisations members a common purpose and thus a coherence of the organisation. These interpretive schemes have been classied by Laughlin (1991) in three-nested levels, although the boundaries of these levels are considered ambiguous. Beliefs, values, and norms give direction to organisational members, the mission or purpose guides the specic functions of the organisation, while the metarules can be seen as giving guidance to the organisations participation in society (Laughlin, 1991, pp. 212-3). According to the model presented above, there is a state of dynamic balance and coherence within an organisation at any point in time, even though there may be some conict or disagreement in the organisation (Laughlin, 1991, p. 213). This state of dynamic balance is desired and is maintained as a form of organisational inertia until such time that an environmental disturbance destabilises the organisation to an extent that change processes take place. This time of change is a schizoid state and is not permanently desirable. This change takes place with the view of restabilising the organisation to a level of dynamic balance and coherence that allows the organisation to once again become inert (Laughlin, 1991, p. 213). 2.2 The colonization model of change Utilising the model of organisations presented in the previous section Laughlin (1991) outlines four models of organisational change. These are identied as rebuttal, reorientation, colonization, and evolution. It is claimed by Laughlin (1991, p. 222) that these four models provide a powerful heuristic device for clarifying the nature of any change pathway. As espoused earlier, the models require some empirical esh so that they can provide a richer understanding of how organisational change has occurred in a particular context. But, which models can be applied to a particular setting? Our argument is to utilise the colonization model of organisational change as the analytical framework for this paper. This is considered from two aspects. First, we examine the choice of models from the depth of change they describe and second, from the likelihood that a specic model of change is possible. From a depth of change perspective, the rebuttal and reorientation models are considered to be morphostatic or rst order models of change in that they do not advocate that the interpretive schemes of the organisation will change in response to environmental disturbances (Laughlin, 1991, p. 214). Colonization and evolution are considered to be morphogenetic or second order models of change as in these instances

there is a change in all three elements of the organisation. Morphogenetic change thus has a greater impact on the organisation as it effects the entire organisation, while morphostatic change is supercial as it does not penetrate the depths of the organisation (Laughlin, 1991, p. 214). As Larrinaga-Gonzalez et al. (2001, p. 216) espouse . . . it is only through a modication of the interpretive schemes that authentic change can happen, an alteration that penetrates the organizational code in such a way that all future generations will acquire and reect that change. Laughlin (1991, p. 223) espouses that while the rebuttal and evolution models are in theory possible and desirable, they are in practice not as likely to be found as the reorientation or colonization models. This is because rebuttal is difcult to design and maintain owing to the fact that organisations are unlikely to be unchanging and, evolution is difcult because organisations tend not to seek voluntary change in their interpretive schemes as they seek to avoid the trauma involved in such a change (Laughlin, 1991, p. 223). Thus, as stated above, morphostatic change is not as interesting as it is not seen as authentic change; thus, the colonization model of change is used as the skeleton on which we hang our empirical esh. This is so that we can determine whether IC management practices have penetrated the genetic code of the organisation and analyse the transformation of the way that Lands accounts for IC. The model of change that Laughlin (1991) terms colonization is shown in Figure 2. The diagram shows the path of an environmental disturbance that not only changes the organisations design archetype and sub-systems, but also changes the interpretive schemes of the organisation. This change results in a new philosophy that underpins the constitution of the organisation and this change can be considered revolutionary in

Disturbance and implementation of IC practice 109

Interpretive Schemes 1 Bal. Bal. DA1A SCH. ch p DA2A

Interpretive Schemes 2 Bal. ch p

Disturbance/Jolt/Kick

Design Archetype 1 Bal.

Design Archetype 2 Bal. ch p

Sub-systems 1

Sub-systems 2

Source: Laughlin (1991, p. 219)

Figure 2. Second order change: colonization

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nature (Dunphy and Stace, 1988). In this model, change is forced upon the organisation, rather than being consensual in nature and this change is led by a small group of people as a result of their recognition of an environmental disturbance. Other organisational members are required to accept these changes, even if it is with some reluctance, or they must choose to leave the organisation (Laughlin, 1991, pp. 219-20). 3. Research method Our research method is discussed from two perspectives. First, the use and justication of the case study as a method of enquiry; and second the use of semi-structured interviews as our primary source of empirical data. In the rst perspective, case studies are seen as an appropriate method for qualitative research as they are a familiar approach that has a long tradition of use among many academic disciplines (Creswell, 1998) and has applicability for the study of management accounting processes (Scapens, 1990). Case studies are a bounded system consisting of a phenomenon related to a specic time and place (Creswell, 1998). In the case of Lands, the phenomenon being studied which the implementation of IC practices and the time span of the case study is from July 2004 to January 2007. The advantage of using the case study method is that it is able to explore and understand a phenomenon in a particular context, it has exibility as to the limits within which the study can be directed and different methods of collecting data can be used, including but not limited to, interviews, focus groups, internal documentation, external documentation, participant observations and direct observations (Creswell, 1998; Collis and Hussey, 2003; Yin, 2003). Also, the use of multiple methods of data collection offers researchers a rich source of data from organisational settings (Yin, 2003). In the case of Lands, the researchers were given full access to both internal and external documents, access to organisational actors, permission to attend meetings of their choosing and access to the corridors of the organisation to allow for observation of interactions between actors. The main source of empirical data for this study is based upon the analysis of semi-structured interviews. The use of interviews in case studies is seen as an important, if not the primary, method by which data is collected for case studies (Yin, 2003) and is a primary method which is utilised across the spectrum of qualitative research methods (Creswell, 1998). Yin (2003, p. 90) advocates the use of two interview styles open ended and focused interviews. Our study used focused interviews (also known as semi-structured interviews) as they allowed for the use of a specic set of questions aimed at why a particular process occurred. Semi-structured interviews are an intepretivist approach to research. They are based on the assumption that the actions of people, individually and collectively, are based on their constructions of the nature of the world in which they operate (Dunford, 2004, p. 55). Therefore, the meanings people attribute to situations determine the actions they take. Thus, the semi-structured interview questions used in this research were designed (Patton, 2002) to elicit insights into how the organisation and its members were impacted by the introduction of IC practices. Doing so provided a dynamic perspective on the impact of IC management practices from inside the organisation, as interpreted by the respondents. The authors were part of a research group that has studied IC at Lands since 2004 and this has involved two distinct stages. The rst stage, in 2004, identied the gaps

110

between the perceived IC-based management challenges and how these were reported at Lands. The second stage commenced in 2005 and investigated the take up of IC practice and examined how this impacted the organisation. Table I presents a summary of the data sources for both stages. In the second stage, the primary source of information was the semi-structured interviews conducted with senior Lands managers. In total, 15 executive and senior managers were interviewed. The interviewees were chosen because they represented as closely as possible the same group of people who were interviewed in the rst stage. The managers included the director general (DG), six managers who were one level below the DG and eight managers who were two levels below. As a result of investigation by the researchers and Lands, several managerial challenges were identied which are aligned with the elements of IC. These management challenges were summarised as follows (NSW Department of Lands, 2005, p. 10): . Employee demographics (human capital) identifying, sharing and retaining knowledge; employee attitudes and motivations; learning and development and innovation; . Service delivery (internal capital) developing cross-functional processes; agile organisational structures; integrated information technology systems; and a dynamic knowledge culture; and

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Data source Stage 1: 2004 2002/2003 annual report Interview notes with senior management 2004 annual report Stage 2: 2005-2006 Divisional business plans Executive committee meeting minutes Focus group interviews conducted with lands divisions Organisational capabilities improvement group meeting minutes Semi-structured interviews with senior management Observations 2005 annual report Vision 2013 LPI workforce plan 2006 annual report (draft)

Primary format Pdf le Excel spreadsheet Pdf le Pdf le Word documents Handwritten notes Word documents Digital voice recordings and transcripts Handwritten notes Pdf le Internal publication Internal publication

Date produced Late 2003 August 2004 Late 2004 2003-2005 December 2004September 2005 August 2005 September 2005February 2007 September 2005October 2005 August 2005September 2006 Late 2005 July 2006 September 2006 Table I. Lands data sources and timelines

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External relationships (external capital) improving relationships with the community, other agencies and organisations; multi-channel distribution strategies; customer focus and responsiveness and our corporate image and identity.

112

As a result of investigating these management challenges, one element, that is an ageing workforce was singled out as having a major inuence on the implementation of IC practice at Lands. 4. Colonization of Lands IC in practice This section focuses on the management challenge of managing an ageing workforce to understand how this was seen as an environmental disturbance in Lands. To analyse this, the three preconditions to colonization are used. First, the context of the ageing workforce as an environmental disturbance from a macro and Lands perspective is discussed. Second, discussion on how IC penetrated Lands causing changes to the design archetypes and sub-systems is presented. Third, how IC changed the interpretive schemes, thus effecting colonization change at Lands is explored. 4.1 An ageing workforce as an environmental disturbance Early in the twenty-rst century, the economies of many industrialised nations are beginning to feel the effects of the reduced participation of the baby boomer generation in the workforce and the possible effects that this may have on organisations and the economy in general (APSC, 2003; Gandossy and Effron, 2004; Kiyonaga, 2004). There is a perceived risk that this group will leave with tacit knowledge and skills which are valuable to the organisation. Additionally, many sectors of the economy, government in particular, have experienced the effects of downsizing and employment freezes (Kiyonaga, 2004), therefore not allowing for younger workers to take their place in organisations. Australia has not been any different to the rest of the world in this regard (APSC, 2003). Also, the birth rate has been falling in industrialised nations (Green, 2003; Brockbank and Ulrich, 2005; Geissler et al., 2005), in many cases well below natural population replacement levels for the past few decades (Larwood et al., 2001). As the ageing of the workforce is a challenge for managers of public, private and third-sector organisations, governments and organisations have responded in several ways. These include increasing the retirement age, modifying wage systems (Sasajima, 1993), increasing immigration (Betts, 2006), nancial incentives to delay retirement, improvements to physical and emotional health (Brockbank and Ulrich, 2005), allowing work beyond retirement age (Shannon and Grierson, 2004), re-skilling older workers (Green, 2003) and programs for hiring mature workers (Westpac Banking Corporation, 2005). In Australia, the Australian Public Service (APS) has also been affected, according to a Management Advisory Commission (MAC) report on organisational renewal and the challenge of building ongoing capability with the APS workforce (APSC, 2003). In this report it was identied that, while about 23 percent of its workforce was to retire in the next ve years (by 2008), this did not present a crisis, but rather presented a challenge that would require active management (APSC, 2003, p.3). Our research site, Lands, an APS organisation employing approximately 1,500 people, is also experiencing the effects of an ageing population of employees. Indeed, the situation is more acute in 2005 Lands, as senior management concluded that 44 percent of their

workforce was eligible for retirement within the next ten years (Lands, 2005). As with other APS organisations facing the same challenge, a major concern is that as these workers begin to leave the organisation they will leave with unrecorded tacit knowledge which is still valid and valuable to the organisation (Lands, 2005, p. 11). As will be argued below, in response to this Lands saw the use of IC management practices as an appropriate technology for the retention and transfer of knowledge within the organisation. When the management of Lands was questioned as to their motivation for the use of IC practice during the rst research phase, many managers reported the ageing workforce disturbance as the primary reason as to why IC practice was being used. One senior manager expressed his view of IC practices as being A means to avoid disaster . . . it will help us retain knowledge and hold on to a great store of knowledge. Therefore, the ageing workforce disturbance is seen as a catalyst that has allowed for the implementation of IC practices at Lands, thus establishing the rst precondition required for colonization change. The next precondition to lasting change as theorised by Laughlin is change in the design archetype and sub-systems by way of IC practice and this is discussed in the next subsection. 4.2 Changes in the design archetype and sub-systems IC practices are seen to directly affect the elements of the design archetypes and the sub-systems of Lands. According to Laughlins (1991, pp. 211-2) organisational model the design archetype consists of organisation structure, decision processes and communication systems. The design archetypes elements of organisation structure and decision processes are affected by the creation of structures that are required for the implementation of IC practices. In the case of Lands, the Organisational Capabilities Improvement Group (OCIG) was formed as an organisation-wide vehicle responsible for the establishment of IC practices as the Director of Policy stated:
The purpose is to facilitate communication of the signicance of intangible assets within the organisation, to provide data on a quarterly basis to the Executive Team as to progress being made and to facilitate the development of the annual Intellectual Capital Statement.

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A change in communication, from an IC perspective, was the development of an annual ICS. The rst of these statements was published as part of the 2005 Lands Annual Report (Lands, 2005) and forms part of the 2006 Annual Report (Lands, 2006). In addition, there is evidence that IC is also forming part of the language of Lands (Cuganesan et al., 2007), which has enabled managers to communicate with each other using IC terms, although there has been some difculty in establishing a common ontology of terms, as espoused by the senior IT manager:
Ive also seen theres been a much better understanding of some of the concepts. We started off looking at some of the earlier papers we got . . . and early demonstrations and presentations . . . as key players in the organisation had immersed themselves in the literature, they started to have a body of language, and to talk about some concepts, which initially was just academic, but now we understand and we consider the practice.

According to Laughlin (1991, p. 211) the sub-systems of an organisation consist of tangible elements about which inter-subjective agreement is possible. These consist of buildings, people, machines, nance and the behaviours and natures of these elements. There is no doubt that the ageing workforce disturbance affected this part of the organisation. The rst effect was the change in the makeup of the staff

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of the organisation. As a result of the disturbance, there has and will continue to be the resultant turnover of staff as employees retire and are replaced or otherwise (Douse, 2006). Additionally, there were the planned management actions that have resulted as a response to the disturbance. Examples of these changes include the development of traineeships, graduate programs and mentoring programs all intended to either capture, pass on and/or develop knowledge in response to the ageing workforce disturbance (Douse, 2006). All of these responses are also valid constructs within the IC management paradigm. Now that it has been established that the response to the ageing workforce disturbance is the development of IC practices, the rst two preconditions of colonization change have also been established. In order to determine that colonization has taken place, an examination of how IC practice helped transform the interpretive schemes of the organisation is discussed next. 4.3 Transformation in Lands interpretive schemes This section of the paper examines changes in interpretive schemes of Lands. Here, it is argued that the accounting and management practices of Lands have been transformed from practices based on a nancial focus to incorporate a longer term non-nancial view based on the management practices which incorporate the accounting of IC, especially human capital. This was espoused as a reason for the foray into the domain of IC practice. As Lands (2005, p. 7) states: To concentrate only upon scal measures may cause managers to miss out on critical information important to current and future performance. The focus on nance in the past had brought about tension in the organisation in relation to the allocation of resources. A common view now is that the discourse based on IC at Lands has brought about a more equitable and targeted allocation of organisational resources that enables people to carry out the basic organisational functions. This is outlined by an operations manager:
. . . ensuring that into the future Ive got people here who have sufcient resource[s], not necessarily be trained, but have sufcient resource[s] to access, to be able to make the decisions and to be able to process the transactions that they are required to do in their daily work.

Thus, the benets of better resource allocation were seen to be derived through a greater understanding of the impact of managing IC. This is seen to have positive nancial benets as one senior LPI manager commented:
So I suppose overall were moving towards documenting our information more precisely and understanding what we do to a far greater degree than what weve done in the past. And at the end of the day that has to me, as Ive said, tremendous benets nancially to our organisation because it takes a lot of the guess work out. It allows you to structure your organisation with the resources that you actually need to operate the business properly.

In addition to the nancial benets, managers have broken the cost and nancial outcome mindset that has dominated accounting in the past. Managers see that by accounting for IC, it helps change the way that the organisation is managed as espoused by the head of HR:
. . .[it] has got us over the, I guess, the mentality of reporting nancially only; and got us thinking about how the organisation can be more successful. And how we can use the knowledge, but on a grander scale, by the way that we actually manage the organisation.

Since, the nancial outcomes were no longer the sole measure of success, it allowed for the accounting of the measures of IC to have an impact on the strategy of the organisation, as another HR manager comments:
I think were now starting to nd some direction, in terms of translating it into things like our annual reporting frameworks, and the draft intellectual capital report. I think were trying to turn it into something concrete, but were trying to also turn it into a strategic direction that assists the businesses [to] move forward.

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An example of how human capital became a main focus of the development of IC practice at Lands is evidenced in the Vision 2013 project. The program emerged out of the need to develop, design and implement a comprehensive workforce plan to successfully manage LPIs human capital into the future (Douse, 2006, p. 5). The main issue of concern for the instigation of this project was the ageing workforce, and the proposed strategic plan incorporates not only how this issue is to be managed but also how it integrates with other strategic initiatives at Lands. In the document that outlines the plan initiatives (Douse, 2006), numerous indicators have been developed that account for human capital and these have been integrated with nancial accounting measures of cost. Surrounding these measures are substantial narratives that explain what the indicators mean and describe resultant current and future management. In essence, this document doubles as a human-capital based ICR for LPI. Additionally, this report supplies the narrative and indicators that are part of the next Lands IC statement which is integrated with the forthcoming annual report (Lands, 2006). During 2006, as the accounting of IC becomes part of the strategy of the organisation, the concept of IC practice has become engrained and forms the basis of current and future management action as evidenced in the Vision 2013 project documentation (Douse, 2006), and the Annual Reports (Lands, 2005, 2006). These documents are supporting evidence to our argument that the interpretive schemes of Lands have been effected. As a department head commented on the accounting of IC:
[IC] helped highlight and bring it more into awareness that we need to do something about that in a more formal [and] structured way.

This then establishes the nal precondition of colonization change within Lands as affected by the environmental disturbance of an ageing workforce. 5. Discussion and conclusion The study paper makes several contributions to the literature on IC. First, it addresses a gap in the IC literature by providing a case study of a public sector organisation that deals with the management of IC from within, thus giving a rst-hand account of what is inside the IC management black box in a particular setting. In this case, we utilised Laughlins (1991) colonization model of organisational change as a skeletal framework for examining the black box of IC and the change brought about by the management challenge of the ageing workforce which was an environmental disturbance and a catalyst for the implementation of IC practices. This rst-hand view of IC allows us to exemplify how IC can penetrate into the depths of an organisation and become embedded. Thus, we contend that Laughlins (1991) framework of change may better be depicted, as shown in Figure 3, from within a black box rather than from within a cloud as was shown in Figures 1 and 2. In this case, we see the disturbance as input, the process of change (colonization) as the insides of the black box,

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Interpretive Schemes 1 Bal. Bal. Bal. DA1A SCH. ch p Bal. DA2A

Interpretive Schemes 2 ch p

116

Disturbance/Jolt/Kick

Design Archetype 1 Bal.

Design Archetype 2

Impacts of change

ch p

Figure 3. The Black Box view

Sub-systems 1 The Black Box

Sub-systems 2

and the impacts of change as the output of the black box. Whether the impacts change at Lands can be seen as forms of positive or negative colonization (Laughlin, 1991, p. 229) is also debateable, as we believe it is too early as the impacts of change have not yet been fully assessed. A second contribution is that this case provides an example of how Laughlins (1991) framework can be extended from its mainly accounting change perspective, to an analysis of change brought about by the management of IC. In this regard, Gurd (2007, p. 5) has identied four issues that emerge when this framework was applied to the accounting arena and we now adjust and examine these issues in relation to our case study and its contribution to an understanding of IC: (1) First order change is the likely result of any change programme our case study revealed second order change. This contributes to an understanding of IC as it provides an illustration where IC has been implemented within an organisation allowing us to exemplify that IC management can have lasting impact on an organisation and not be passed off as a fad. (2) Some organisational members will see changes as reform and push to colonize change as evidenced by the existence of the OCIG committee, within Lands there is a core group of managers who believe in the reform and are duty bound to help engender IC within Lands. This combined with other changes to the sub-systems, such as the production of the IC statement, exemplies that these types of changes in the design-archetype are enabling mechanisms that are necessary pre-cursors to second-order change. This reinforces Laughlins (1991, p. 223) position that evolutionary change is an unlikely from of second-order change as the change examined at Lands cannot be deemed voluntary. (3) Colonization can result from the inuence of the top of the organization at Lands, the implementation of IC is largely a result of the commitment of the executive management ranks to the process. Although there was some dissension at rst, it was this top-down approach that was seen by the management as a key enabler of change. Thus, we question whether or not a bottom up approach to engendering IC within an organisation would have had the same impact as exemplied at Lands.

(4) IC management practices are only one element of the design archetype which can be an enabler of change IC is a management technology that has been exemplied in the case of Lands to bring about the change that was required to move managers from a management culture that concentrated on a short-term nancial focus to incorporate a longer term non-nancial view. This change was deemed necessary as a key-organisation resource, being human capital, would fast deteriorate if action was not taken to address the disturbance caused by the ageing workforce. Other managerial frameworks could have been used to address the issue, however, IC has been shown to be a management technology that not only addresses this issue, but also has the potential to identify the specic resources that need developing as well as integrating that development with other strategic initiatives within the organisation. While this paper makes a number of contributions, it also leaves some questions or issues open for further research and discussion. As this case study is presented from a large public sector organisation perspective, there also exists the opportunity to investigate this topic from a private and third sector perspective, as well as from the perspective of organisations of various sizes. By continuing this research path, we will continue to improve our understanding of what other forces act as catalysts for the implementation of IC management practice and how managing IC can transform organisations. The second issue emanates from our use of Laughlins (1991) theory of change, as other theories may be more applicable to the analysis of IC and change. For example, we originally discounted the use of Giddens (1984) structuration theory, but recently it has been compared with Laughlin in the study of accounting change and was found to be a useful tool that dealt better with the role of human agency, the issue of power and the implications of morality (Gurd, 2007, p. 19). Additionally, structuration theory views change through the recursiveness of social structures within organisations, in that they are in a constant state of ux as human actors constantly monitor their actions and the actions of others (Giddens, 1984). In comparison, Laughlins models offer a more static view of change in that he advocates that organisations go through a schizoid state before returning to a state of dynamic balance (Laughlin, 1991, pp. 213-22). Alternately, Laughlins model was found to better understand change over shorter time frames (Gurd, 2007, p. 19), thus indicating that structuration theory could be better suited to longitudinal studies spanning great lengths of time. Thus, an opportunity exists to further examine IC and change from a structuration theory perspective, or using another theoretical framework, which opens the way to developing new and different insights into our understanding of IC. While this paper contributes to the literature on managing IC, it also has some limitations. First, it is limited to the presentation of the ndings of a particular phenomenon within one particular organisation within the Australian public sector context. Second, there may be other inuencing factors that could be classied as environmental disturbances which may also have been a catalyst for the development of IC practice at Lands. Thus, caution must be made in generalising our ndings to other organisations.

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Appendix 4

Paper 3
Dumay, J. (2008), Narrative disclosure of intellectual capital: A structurational analysis, Management Research News, Vol 31 No 7, forthcoming.

Narrative Disclosure of Intellectual Capital: A Structurational Analysis

by John C Dumay* Discipline of Accounting, The University of Sydney Economics and Business Building H69 The University of Sydney, NSW 2006 Australia j.dumay@econ.usyd.edu.au

Abstract Purpose of this paper: The aim of this paper is to investigate the manner and impact of intellectual capital (IC) disclosure. To frame the discussion, elements of Giddens structuration theory and narrative theory are used to analyse change from within an organisation. Design/methodology/approach: Using a case study approach, this paper explores the impact of the narrative disclosure of IC by an Australian public sector organisation, the NSW Department of Lands (Lands), which is the first Australian government organisation to externally disclose IC. Findings: By taking a structuralist approach to analysing the narrative disclosure of IC this paper moved beyond attempting to quantify or identify the wealth created by IC, and thus account for IC. By investigating the narrative disclosure of IC, initially in the form of the IC statement as a supplement to the annual report, it was shown how at Lands the use of narrative became routinized in the activities of management. Thus narrative was no longer used to only provide understanding of the IC measures and the reasoning behind the use of IC, but to provide a mechanism the engendered further management action and subsequent organisational change. Research limitations/implications: The limitation of this study is that it provides a lone example of a particular organisation from which generalisations are not possible. But it is possible to extend this research, using the structuration framework, to other organisations that have engendered the use of narrative to disclose IC to both internal and external stakeholders. Doing so will further question the domination of accounting within the IC paradigm and provide additional insights that allows

practitioners and academics to develop additional tools for understanding and utilising IC. Originality/value of paper: This paper investigates the manner and impact of IC disclosure from within an organisation by use of structuration and narrative theory to analyse change as a result of the implementation of IC practices. Keywords: Intellectual capital, organisational change, structuration, narrative, communicative interaction, agency Paper type: Case study

Introduction

The development of the concept of intellectual capital (IC) has garnered interest in the academic, management, practitioner and equity market environments in an attempt to study and understand how the non-financial resources of an organisation contribute to the creation of value (Fernandez, 2003; Skoog, 2003; Marr et al., 2004; Roslender and Fincham, 2004; Ashton, 2005; Cuganesan, 2005). This is because at an organisational level, rapid technological change, emergence of knowledge workers, increasingly sophisticated customers and innovation has highlighted the importance of IC in comparison to physical and financial capital (Petty and Guthrie, 2000; Ordez de Pablos, 2002). IC is often represented as the intangible wealth of an organisation comprising of human, structural and relational capital (Petty and Guthrie, 2000). Another interest in IC concerns the form of disclosure to stakeholders, both internal and external, and the use of narrative within these disclosures (Mouritsen et al., 2001). The use of narrative, in conjunction with measures of IC, is seen as an important research topic in relation to IC disclosure because there are opposing camps, those that espouse its use and those that do not embrace it. Thus, to address the research interest in relation to the use of narrative, this paper examines the use of narrative in IC disclosure and the subsequent impact on the social structure of an organisation. To frame the discussion, elements of Giddens (1976; 1984) structuration theory and narrative theory (Weick and Browning, 1986; Czarniawska, 1998) is used. This examination is achieved by way of a case study of the NSW Department of Lands (Lands) which utilises narrative in its IC disclosures. This paper is divided into the following sections. In section 2, the topic of narrative IC 3

disclosure is discussed. In section 3, the theoretical insights from structuration and narrative theory are presented, whilst section 4 presents an overview of Lands and the research methods employed. Section 5 utilises the insights from the previous sections to describe first, the initial structure of Lands in relation to accounting; second, the need for change at Lands; and third, the narrative-based communicative interaction of an accounting of IC and how this has helped shape recursive structural change at Lands. Section 6 concludes the paper and includes a discussion of further research opportunities and the limitations of this case study. 2 Narrative IC Disclosure

An issue that appears not to have been thoroughly addressed in the IC literature to date is the form of IC reports (ICRs) and their impact on organisations. ICRs can be presented in many different forms, from simple one page matrices such as the Intangible Assets Monitor (Sveiby, 1989), supplements to annual reports (see NSW Department of Lands, 2005; 2006a), as well as comprehensive independent documents (Systematic, 2002; 2004). The main differentiating feature of the supplemental and comprehensive documents is the use of narrative to compliment the reporting of the measures of IC. Some proponents take the view that disclosure should primarily take the form of the simple, one-page, accounting-style reports (for example Society for Knowledge Economics, 2005) based solely on measures of the elements of IC. Alternately the use of narrative is well established in the IC literature (Mouritsen et al., 2001; Mouritsen et al., 2003) and its proponents advocate the use of narrative in the disclosure of IC, as it adds to the reasoning behind an organisations management and subsequent

disclosure of IC as espoused by Mouritsen et al. (2002, p. 14) :

The narrative presents something close to the identity of the firm, and therefore presents some kind of raison dtre of its activities. Therefore, when understanding knowledge as a narrative it is part of a wider justification of its role in helping the firm to develop and produce something good, and it also suggests where it is different from things, which in the situation is considered bad.

So here narrative is seen to be giving meaningful explanations of why and how an organisation is concerned with managing its IC in addition to disclosing its IC measures. Thus, narrative helps in understanding organisations actions in relation to IC management, measurement and reporting and as a basis for explicating IC from the perspective of the organisations actors who constructed the narrative. According to Czarniawska (1998, p. 2), a narrative consists of three basic elements: an original state of affairs, an action or an event and the consequent state of affairs. She also states that having these three elements present does not constitute a narrative, but what is also required is a plot that brings these elements together so that the narrative has meaning. So while, narrative can be used to tell tales of the field (Czarniawska, 1998, pp. 13-4) in relation to IC, what is the impact of telling these tales? More importantly the main question is to deal with organisational change by asking; Does the application of narrative in giving meaning to IC have any impact on an organisation? To address this main question, elements of Giddens (1976; 1984) structuration theory is used as it is seen to provide a framework from which deep insights can be generated about organisational change, (Gurd, 2007, p. 1). While structuration theory is not a theory that specifically explicates organisational change, it does however provide a framework that allows us to think about the maintenance, reproduction and

changes of social structures (Gurd, 2007, p. 5). 3 Structuration and Narrative

The purpose of this section is to establish the theoretical priors used to frame the discussion of narrative IC disclosure and change at Lands. It is developed in two parts. First, it reviews the theory of structuration as espoused by Giddens (1976; 1984), and its applicability to management accounting and thus the IC paradigm. Second, it discusses the concept of agency within structuration theory and advocates the use of narratives as a preferred form of communicative interactions by agents. 3.1 Structuration Theory and IC

Weick and Browning (1986) assert that structure guides the interactions involved in the process of communication in organisations and that structure is also a result of communication. They base their argument on the theory of structuration as espoused by Giddens (1976; 1984) which is based on the notion of the duality of structure and the structuring of social relations across time and space (Giddens, 1984, p. 376). The term structure in structuration theory is not used in the classical organisational science sense to depict the interrelated functions of an entity. Here, Giddens (1984, p. 377) creates a neologism for the term structure and defines it as the rules and resources, recursively implicated in the reproduction of social systems. As a result of this recursiveness, in structuration theory, structure is both a product of and the basis for the interactions of agents (Macintosh and Scapens, 1990). Giddens (1984, p. 29) explains that in structuration theory (see Figure 1) interactions (communication, power and sanction) are transformed into structure (signification, domination and legitmation) by way of modalities (interpretive schemes, facilities and

norms) and vice versa. From the structuration perspective the disclosure of IC can have a possible impact on the way that members of an organisation understand IC; allocate resources to the management and measurement of IC; and legitimise the use of IC as a management technology. Utilising the concept of the duality of structure it is further argued that this changes the basis of future interactions about, including communicative interactions. Thus, it is these communicative interactions, by means of IC disclosure, which is of interest in this paper. [Take in Figure 1 here] While structuration theory is a social theory grounded in developing critical insights (Giddens, 1984, p. 287; Bernstein, 1986; Laughlin, 1995, pp. 69-70) it has been used on several occasions in the study of management accounting to examine the results or impacts brought about by accounting change (Roberts and Scapens, 1985; Macintosh and Scapens, 1990). Scapens and Macintosh (1996, pp. 679-80) generalise management accounting from a structuration theory perspective and outline that it can be viewed from three aspects. First, interpretive schemes are used by management to understand the past, to plan and to act. Second, it provides the norms by which the values and ideals of the organisation are communicated. Third, it provides the facilities by which managers control and coordinate the activities of people in the organisation. From this perspective an accounting of IC is included as evidenced in the publication of IC reports and statements supplemental to annual reports (see NSW Department of Lands, 2005; 2006a) and internal organisational documents such as IC scorecards (for example the Balanced Scorecard, Kaplan and Norton, 1992). The accounting of IC and the resultant internal and external disclosure of IC can also

provide interpretive schemes, norms and facilities from which to view the duality of an organisations interactions and structure. In addition, there is evidence in the literature of IC, to show that structuration is also a valid tool for understanding the dynamics of change within organisations that have embarked upon implementing IC practices (Johanson et al., 2001, p. 724; Skoog, 2003; Johanson et al., 2006, p. 485). Thus, it is contended that structuration theory is a frame by which IC practices, such as the narrative disclosure of IC, can be discussed. 3.2 Structuration, Agency and Narrative

The purpose of this section is to establish narrative within the context of structuration theory as a preferred form of communicative interaction. This is done by describing the concept of agency and identifying that communicative interaction is one of the outcomes of agency. Communicative interactions can have two forms,

argumentative or narrative, and it is advocated that narrative is a preferred form of communicative interaction. To help frame this discussion, the relationship between structuration, agency and narrative is presented in Figure 2. [Take in Figure 2 here] An important aspect of structuration theory is the concept of agency which is the actions taken by individuals in social settings (Macintosh and Scapens, 1990, p. 458). Here, agents (individuals) are seen to intervene, rather than just automatically react to social a situation, which in turn allows agents to influence or fundamentally alter social structures. But in every intervention it is impossible for agents to: pause, reflect and make conscious choices about their behaviour (Macintosh and Scapens, 1990, p. 458). Thus, the actions of agents are seen to be reflexive and are

dependent on different levels of consciousness (Giddens, 1984, p. 7). The unconscious level is based upon a concept of ontological security which allows actors to act because, as Giddens (1984, p. 375) explains, they have confidence or trust that the natural and social worlds are as they appear to be, including the basic existential parameters of self and social identity. From a management accounting perspective ontological security can be derived indirectly from trust in the modalities of the interpretive schemes of the signification structures, for example a budgetary system (Macintosh and Scapens, 1990; Moore, 2006). On the conscious level, actors behaviour is considered reflexive, and according to Giddens (1984, p. 7) this conscious reflexivity occurs on two levels: practical and discursive. At the practical level agents use their tacit knowledge about how to act and interpret the world (Rose, 1998). It is this behaviour that Giddens (1984, p. xxiii) refers to as routine or day-today social activity. This concept of routinization binds our unconsciousness with our discursive reflexivity and establishes changes in agents behaviours which become part of day-to-day organisational life (Giddens, 1984, pp. 60-4). At the discursive level, agents can imply reasoning and rationale to explain their actions within social settings; and they use linguistic skills to communicate about their actions. It is from this perspective that Weick and Browning (1986) argue that discourse can affect structure in addition to the modalities of interpretive schemes, norms and facilities. It is this discursive aspect of structuration theory that is of interest in this paper, especially from the perspective of how organisational agents communicate an accounting of IC using narrative and if this is part of recursive changes in the structure of the organisation. These changes can be the result of both the intended or unintended consequences of action and interaction and are a direct 9

result of recognition by an agent, at the level of discursive consciousness, of the need to change structure (Giddens, 1984, pp. 8-12). Giddens (1976, p. 94) espouses that the communicative act within structuration theory can have two meanings: to be persuasive or to be propositional. Similarly, Weick and Browning (1986, pp. 243-5) identify two forms of communication which can effect organisational structure, more specifically the structure of signification or meaning, being argument and narration. They contend that the application of structuration theory to the process of communication emphasises the relevance of narration as a preferred form of communication because narration is seen to give greater meaning to the organisation as a whole. This is because argument only emphasises the transmission of information from the sender to receiver, whereas narration represents interactions that create social reality (Weick and Browning, 1986, pp. 248-9). Thus, the production of a narrative-based IC disclosure is based on an agents reflexivity at the practical level of consciousness is, in effect, a reproduction of the structure of the meaning of IC within an organisation. In addition, Weick and Browning (1986) claim that argument emphasises the need for a hierarchical system where qualified agents are required to judge the argument and other agents are meant to follow those who judge. Thus, they claim narration opposes argument because it can involve all members of the organisation. This is because it is asserted that all people have narrative capacity, that is, the ability to judge the probability and fidelity of narratives. This is what allows for all members of the organisation to become involved in communicative interactions rather than just the experts who can judge (Weick and Browning, 1986, p. 249). From the perspective of the narrative disclosure of IC, this implies that all organisational participants can 10

potentially become involved, rather than just the accountants, managers and stakeholders who understand the meaning of management accounting and or the meaning of IC. 4 The Research Site and Methodology

The research site for this paper is the NSW Department of Lands (Lands), an Australian public sector organisation employing 1500 people. It is an organisation facing the effects of reforms that have instigated Public Trading Enterprise structures and more stringent financial performance requirements, which are typical of contemporary reforms found in the Australian public sector (English et al., 2005). These broader reforms have focused Lands to improve performance and the manner in which it is articulated to the wider community and a specific senior management objective was to seek to identify, value and demonstrate the Knowledge (Intellectual) Capital within the Department (NSW Department of Lands, 2004, 4). As a result of this objective, a commitment was made by the Director General to publish Lands first IC statement in their 2004/2005 annual report and this was carried out in the subsequent years report (see NSW Department of Lands, 2005; 2006a). Notably, Lands is the first Australian Government organisation to publish a specific IC statement and in doing so have utilised extensive narrative as part of that process. In addition to the external reporting of IC the use of narrative has also been used in other internal documents such as project reports, business plans and newsletters. The purpose of this current research is not to judge the short-term impact that the use of narrative has on external stakeholders1, but to examine the impact that internal and

This is planned future research by the current author.

11

external narrative disclosure of IC, has on the people and management processes within Lands. The advantage of the case study method is that it can be used to explore and understand a phenomena in a particular context, it has flexibility as to the limits that the study can be directed, and different methods of collecting data can be used, including but not limited to, interviews, focus groups, internal documentation, external documentation, participant observations and direct observations (Creswell, 1998; Collis and Hussey, 2003; Yin, 2003). The use of multiple methods of data collection offers researchers a rich source of data from real settings (Yin, 2003). In the case of Lands, the researchers were given full access to both internal and external documents, access to organisational actors, permission to attend meetings of and access to the corridors of the organisation to allow for observations of interactions between actors. In addition, the researcher obtained internal and external reports, and combined this with original data from observations. A detailed list of data sources for this case study is outlined in Table I. [Take in Table I] A main source of empirical data for this study is based upon the analysis of semistructured interviews. In this case 15 executive and senior managers were interviewed. The interviewees were chosen because they represented as near as possible the managers who were impacted by Lands foray into the utilisation of IC as a management tool. The managers included the Director General (DG), six managers who were one level below the DG and eight managers who were two levels below. The use of interviews in case studies is seen as an important if not the primary method

12

by which data is collected for case studies (Yin, 2003) and is a primary method which is utilised across the spectrum of qualitative research methods (Creswell, 1998). The strength of interviews in case studies is that they are targeted in that they focus directly on the topic at hand and that they can provide insight into a phenomenon by implying causal inferences (Yin, 2003). Yin (2003, 90) also advocates the use of two interview styles which are open ended and focussed interviews. Focussed interviews also known as semi-structured interviews were chosen as the main source of data collection as they allow for the use of a specific set of questions aimed at why a particular process occurred. Semi-structured interviews are an intepretivist approach to research. It is based on the assumption that the actions of people, individually and collectively, are based on their constructions of the nature of the world in which they operate (Dunford, 2004, 55). Therefore, the meanings people attribute to situations determine the actions they take. Thus the semi-structured interviews used in this research were designed (see, Patton, 2002) to elicit insights into how the organisation and its members were impacted by the introduction IC practices. Doing so provided a more dynamic and future-oriented perspective on the impact of the discourse of IC from inside the organisation Thus using the interview data in conjunction with the diverse range of other data collected as outlined in Table I it was then possible to construct from the evidence the story of narrative IC disclosure at Lands and to observe the impacts that it has had on the organisation. 5 Narrative and Disclosure of IC at Lands

Lands provides the setting for the following analysis of the use of narrative to disclose IC and its impact on structure from the perspective of structuration theory. To do so, 13

this section will be presented as follows.

First, it will discuss communicative

discourse at Lands and identify structure from a management accounting perspective, prior to Lands embarking on the narrative disclosure of IC. Second, it will establish that there was a recognised need for change at Lands which was brought about by the management challenge of an ageing workforce and this was a significant catalyst for the implementation of IC practices at Lands. Third, it will discuss how the narrative disclosure of IC has impacted structure at Lands. To help frame the discussion a time-line of critical events from a structuration theory perspective is presented in Figure 3. [Insert Figure 3 here] 5.1 Structure and Management Accounting at Lands

Macintosh and Scapens, (1990, p. 461) summarise management accounting in terms of the signification, legitimation and domination structures of structuration theory as follows:
In the signification dimension, management accounting systems are the interpretative schemes which managers use to interpret past results, take actions, and make plans. In the domination dimension, management accounting systems are a facility that management at all levels can use to co-ordinate and control other participants. And in the legitimation dimension, management accounting systems communicate a set of values and ideals about what is approved and what is disapproved; justify the rights of some participants to hold others accountable; and legitimate the use of certain rewards and sanctions.

In addition, they point out that the three dimensions of structure are intertwined, not completely explicit, nor unchanging (Macintosh and Scapens, 1990, p. 461). But to analyse change and impact in an organisation, a starting point for the analysis is required and the following provides a view of management accounting at Lands from

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a structuration perspective in 2003 and 2004. Noteworthy to the initial management accounting structure at Lands was that the organisation had only recently been formed in April 2003, as a result of combining several other entities. As such, when Lands was constituted, its management accounting structure was as diverse as the combination of entities that comprised Lands as an organisation. Therefore, at that point in time, the signification, domination and legitimating structures of management accounting were different for each of the entities involved. For example, the Land and Property Information (LPI) division of Lands was formed as a Government Business Enterprise (GBE) and existed not only to provide services to the public, but to generate profit as well. This is compared to other entities of the combined Lands whose main focus was to provide services for the benefit of the people of NSW. Thus, the rules and resources that comprised the basis of structure of management accounting for each area were different at the time of Lands formation.
5.1.1 Signification Structure

From a signification structure perspective, management accounting concepts and theories such as cost, profit, investment and surplus would, at the time of the formation of Lands, have had different meanings for agents. Thus different interpretive schemes would have been required at Lands to make sense of management accounting, with each requiring different modes of communicating. But regardless of whether agents were responsible for either cost or profit, they were commonly responsible, first and foremost, for delivering a fiscal outcome for Government. According to Weick and Browning (1986), the way to communicate this rationally is via a discourse based on argument. The evidence of a rational argument is 15

found in the text of the 2002/2003 annual report (NSW Department of Lands, 2003). The text of the report is descriptive, with only some narrative elements present. In most instances, the text contains a recounting of an original state of affairs and some action or events but is lacking a coherent plot. The text is seen to explicate the argument for the existence of Lands and the functions of its various divisions.
5.1.2 Legitimation Structure

The discourse within the 2002/03 annual report is based upon the structuration of the relationship between Lands and the Government, guided by the prevailing requirements of accounting and disclosure under NSWs statutory requirements. As the Director General outlined in the covering letter to the Minister (NSW Department of Lands, 2003, p. 1):
This report has been prepared in accordance with the Annual Reports (Departments) Act 1985, the Annual Reports (Statutory Bodies) Act 1984 and the Public Finance and Audit Act 1983.

This a point of intersection between the interpretive schemes and the norms where the accountability of the organisation is explicated and the justification for the existence of the annual report and the associated management accounts are made (see Giddens, 1984, p. 30). This gives rise to implications from the legitimisation structure perspective. Here the argumentative discourse is based on the discursive consciousness of the Director General of Lands as he establishes increased synergy as the norm which sanctions Lands existence (NSW Department of Lands, 2003, p. 5):
The creation of the Department of Lands on 2nd April 2003 offers a significant opportunity to build an organisation using the best from the past and trying to position it for the future. The Department has a wealth of skill and experience and the marriage of the spatial components of land and property information with the historic and contemporary nature of the Crown Lands portfolio brings

16

increased synergy.

It is at this level of discursive consciousness where the Director General recognises that there is a need to change structure and that at this point in time he has also recognised the need for Lands to capitalise on the potential synergy available as a result of the formation of Lands. It is this notion of synergy which communicates to the organisation what type of interactions and actions are sanctioned by the organisation. In this case it sanctions behaviours that are seen to help create these synergies. As the IT Manager explained in 2004:
We need to restructure information systems and reorganise ourselves, horizontally reposition ourselves, the old structure must be crushed and broken down, then we can go forward, I think that is the challenge we have to tackle going forward. 5.1.3 Domination Structure

Once a need for structural change had been recognised, this change was not without its challenges and it also impacted on the domination structure of Lands. In July 2004, the senior policy manger identified difficulties associated with the redistribution of authoritative resources in integrating three divisions into one organisation. Specifically, she identified that there would be difficulties in overcoming the old public sector notion of how people report, with management unwilling to release old lines of authority and not allowing people to make decisions towards developing synergy. Thus, in order for the structure of Lands to change, the personal powerbases of agents needed to change. Managers and employees who resisted this change were in danger of finding their level of power in the organisation receding. In addition to the authoritative dimension of the domination structure there was also a potential impact on the allocative resources of Lands. Here, different levels of

17

accountability were found in the organisation, with some agents accountable for profits and others accountable for the timely delivery of services at a budgeted cost. The nature of this accountability varied according to which part of the organisation the agents worked in. This in turn was seen to have an impact on the resource allocations within Lands which were recognised by some members of the organisation as being inequitable (Boedker et al., 2005, p. 512). For example, as LPI was a GBE and was generating profits within its division, it was able to allocate resources to projects that it viewed as contributing to the bottom line. On the other hand, the Soil Services Division, which was responsible for carrying out public works, believed it had to fight hard for resources to achieve its objectives and viewed itself as under resourced. As the Soil Services department head commented in mid-2004, there was a:
need to smooth out fluctuations in operations, improve cyclical resource allocations and become more proactive in attracting new business and planning for future horizons.

5.2

The Need for Change

The development of IC management practices, and thence an accounting of IC and subsequent disclosure of IC, has its origins in the further commitment of the Director General of Lands to develop its IC resources. This is seen as a critical situation from a structuration perspective as it once again symbolised the Director Generals need to change structure at the discursive level of consciousness. As he remarked in an interview in 2004, this commitment was intended to try and unpack and unlock the true value of the Department of Lands, much of which doesnt appear on a traditional balance sheet. He gave this commitment both at public meetings in 2003 and in the 2003/04 annual report (NSW Department of Lands, 2004, p. 6) to develop

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management practices in relation to the:

management, measurement and reporting of intellectual capital with the intention of including the Departments first Intellectual Capital Report [Statement] in the Departments 2004/05 Annual Report.

But the questions are: Why was this change necessary? and Where did the pressure for change come from? The evidence points to the management challenge of an ageing workforce as being one prominent answer to these questions (see Dumay and Guthrie, 2007). The ageing workforce was a challenge that was not only confronting Lands, but was an issue that had gained the attention of governments and organisations in many industrialised nations as the effect of reduced workforce participation by the baby boomer generation took effect (APSC, 2003; Gandossy and Effron, 2004; Kiyonaga, 2004). Many sectors of the economy, especially government, have also experienced the effects of downsizing and employment freezes (Kiyonaga, 2004) and Australia is similarly affected (APSC, 2003). Thus, as the baby boomers retire their replacements are hard to find (Dumay and Guthrie, 2007). The situation at Lands was no different, as they too were experiencing the effects of an ageing population of workers. Thus, the management challenge of an ageing workforce is identified as one the prominent reason for the need for change at the discursive level of consciousness at Lands. It was also a catalyst for the introduction of IC practices at Lands (Dumay and Guthrie, 2007). 5.3 Structure and Narrative IC Disclosure

The purpose of this section is to examine the communicative interaction of the narrative disclosure of IC by Lands and the impact that this has had from a structuration perspective after the need for change was established. To do this, the

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interpretive schemes of annual reports, IC statements and internal documentation such as business plans, project reports and newsletters are used to frame the discussion of how the structure of IC was reproduced. In particular, in the analysis of the signification structure the discussion centres around narrative to disclose IC and how narrative is seen to influence routinized behaviour at Lands. As with the discussion of the structure of management accounting the subsequent impacts on the structures of legitimisation and domination are also examined.
5.3.1 Signification Structure

As identified earlier, the Lands annual report is an example of how the structure of management accounting was reproduced at Lands. Thus the forms by which lands reports and discusses its activities can be used as interpretive schemes for the reproduction of the structure of an accounting for IC. As identified in the previous section, there was change at Lands and this change was manifested through the introduction of IC practices which lead initially to the introduction of an IC statement in the 2004/05 annual report (NSW Department of Lands, 2005). Thus, as the signification structure changes it is expected that IC practices would become part of the routines of the organisation as the communicative interactions surrounding the need to develop Lands IC resources cause the organisations stakeholders to, in turn, be more concerned with the development of IC resources. This parallels the argument used by Buhr (2002, p. 27) in her analysis of the introduction of environmental reporting in the Canadian paper industry to imply that the notion of the duality of structure, combined with agent-structure interplay, develops a reinforcing cycle of structure development by communicating reality that in turn creates reality. Thus, the IC statement initially acted as a mechanism by which to monitor and control agents

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behaviour associated with IC practice (see Dierkes and Antal, 1985, p. 33; Buhr, 2002, p. 27), and is part of the pathway of change. In the case of Lands, the IC statement was one such modality used to create an awareness of IC and this appears as an addendum to the annual report. It was earlier identified that the text of the 2002/03 annual report was based on argument to explicate the existence of Lands. But with the inclusion of IC information in the annual report, the report takes on a more narrative style in order to convey the meaning of IC. Analysis of the narrative content of the Lands annual reports is presented in Table II. The initial evidence of a narrative approach to organisational discourse is seen to have begun in the 2003/04 annual report which correlated with the introduction of an organisational-wide discourse of the concepts of IC, by way of an initial series of interviews and research within the organisation prior to its publication. It was at these interviews in 2004 that the concept of IC was initially observed in Lands senior management. [Take in Table II here] As shown in Table II, the content of the Lands annual report changed in 2003/04 and foremost was the inclusion of a communicative interaction in the form of the Director Generals Foreword. In this section the Director General uses narrative to reflexively monitor past actions of Lands to describe the current state of affairs by offering a prcis of the actions undertaken in the past year; describing the future direction of actions the organisation would be taking; describing the anticipated outcomes of actions; and offering a plot along the lines of stewardship and accountability for land and property information, spatial information and the Crown Lands of NSW.

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Additional narrative and reflexive monitoring is provided in a section entitled The Department which presents a story in which the plot centres on the strategic orientation of Lands and the actions to be undertaken to address these priorities. Prior to the publication of the 2004/05 annual report and IC statement, the IC framework concepts of human, structural and relational capital and their elements were introduced to Lands and these began to create new meanings within the organisation, challenging old ways of doing things. This was explained by a human resources manager:
At that particular point in time, when I realised that the approach to intellectual capital is taking management thinking from the past in how you manage people. The quality approach, taking all of those things, wrapping them up and taking them to another level that is more people centric, more focused on what we can do intellectually within the organisation. Once that switch went on, I had a different approach to it.

The development of reflexive monitoring via narrative discourse continued with the publication of Lands first IC statement, an intentional consequence of the action of Director General (NSW Department of Lands, 2005). During this period, communicative interactions also helped build the internal discourse of IC and allowed the meaning of IC to penetrate into the depths of the organisation, as the head of Soil Services reflected in late 2005:
Well number one we wont let it fall over now, were on the way with it. Its been talked about more now than it ever has been. So there is a greater awareness, particularly amongst all our staff here. Our field staff, I think they realise that they do have something very valuable to offer.

Therefore, at the time of the publication of Lands first IC statement, the concept of IC had begun to establish meaning within Lands, thus evidencing a change in the signification structure.

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Lands chose to use a narrative style of reporting in favour of the one-page scorecards to convey the meaning of IC for three main reasons. First, when Lands wanted to develop a framework for the reporting of IC they were influenced by the Danish guidelines for IC reporting (see Figure 4), which espouse the use of narrative, in particular a knowledge narrative (Mouritsen et al., 2003, 35), to explain the companys knowledge management ambition and show how the company intends to realise it. Second, there was influence from the NSW government for their departments to better explain how their activities contributed to the State plan and what was the expected impact of future action (see Pierce, 2006a; b). The senior policy advisor for Lands identified that the use of narrative in the 2004/05 IC statement was:
often linked back to the Auditor Generals annual reporting requirement, which has, without using the terminology of intellectual capital, being implying that, because theyve been demanding or seeking more narrative, more discussion, more forward planning, more links between past action and our position today and where were heading in the future.

Third, Lands management considered that the selected measures of IC should be accompanied by a narrative explanation of the significance of the measures. Thus, the narrative is used to give meaning not only to what IC is, but to tell the story of how Lands intends to utilise IC to create outcomes in the future and to give meaning to the measures of IC. [Take in Figure 4 here] Additional evidence of change in the signification structure occurred in the period between the publication of the 2004/05 and 2005/06 annual reports. Here, the use of narrative is becoming routinized in the communicative interactions at Lands and has

23

recursively become part of the signification structure amongst senior Lands management. By routinization, it is meant that the use of narrative at Lands is not only a method of communicating about IC, but is used to deliver other messages in relation to managerial functions. For example, a senior LPI manager commented in late 2005 that:
We try to deal with different issues. For example in our 2005 Business Plan we take a more narrative approach and we are changing our reporting to create better understanding.

In the case of LPI, a writer was specifically engaged to assist in the development of narrative for reporting purposes. In addition, LPI used narrative in the development and presentation of their Vision 2013 project (see Douse, 2006) which tackled the management challenge of an ageing workforce. The LPI managers involved in developing the plan saw that narrative helped make cognitive links between the accounting numbers and helped guide them through the process of understanding the numbers, be they accounting or IC-based measures. The Vision 2013 Project plan was seen as an implementation of the narrative approach to communication and engendered effective communication with its stakeholders. A senior LPI manager commented in 2007 that the NSW Treasury had accepted the Vision 2013 project as irrefutable evidence of the investment required for the development of staff at Lands. Thus, it provided a way of transferring meaning about what resources were required and what actions were required by management. In addition to the use of narrative within business plans, the same manager also explained how he uses narrative in project evaluations. In the past, these evaluations were heavily numbers based. He now requires that his mangers provide a narrative report on their projects and not just the numbers. Evidence of this is seen in the 24

publication of a series of project reports which are made available to all Lands staff via the Lands Intranet (NSW Department of Lands, 2006b; c; d; e; f; g). This manager saw that this style of reporting was more beneficial as it told the story of the project and did not just present an argument based on numbers. In addition, the Senior Policy Manager commented that it was also evidence of good record keeping and communication practice to place the document in a context and establish a frame of reference rather than making open statements or reporting unrelated data. She saw that narrative improves the worth of the documents as a record and as a means of disclosure. Thus, from these observations, it is seen that the use of narrative has not only extended to explaining and disclosing an accounting of IC, but was now being used in the routine day-to-day activities of mangers at Lands. The routinization of the use of narrative is seen to add value to measures and helps tell the story of the organisation and its actions to its stakeholders, both internal and external, thus continually effecting the structuration of these relationships.
5.3.2 Legitimation Structure

Buhr (2002, p. 26) contends that the legitimation dimension of structuration is the basis of the normative elements of corporate activity. Here the moral values of the organisation guide the activities of the organisation and organisational legitimacy is an outcome. Thus, if an organisation is to avoid legal, economic or social sanctions, it must establish its legitimacy within the eyes of its constituents. Accordingly, at Lands, the development of increased legitimacy in the eyes of its stakeholders is given as a desired outcome of the disclosure of IC. In the model of IC presented in Figure 4 this is represented by the terms Public Trust, Value and Confidence and is conveyed in 25

the 2004/05 IC statement as follows (NSW Department of Lands, 2005, p. 13):

The Department of Lands encourages public trust and confidence in its products and services in several ways. Over time we have developed a reputation as fair and equitable providers of quality information and sound advice. For example, our titling services underpin land conveyancing processes; our expertise in environmental Soil Conservation Service is well recognised through industry awards and we continue to manage public land assets fairly and equitably to ensure the best social, economic and environmental returns to the community.

One of the issues that were relevant to Lands affected the way in which Land valuations were conducted and is in line with the narrative approach of being able to disclose the good with the bad. According to Buhr (2002, p. 26), a strategy that an organisation can take to change the level of legitimation is based upon the organisation disclosing the changes that have been made in order to bring its interactions into conformity with the stakeholders view of what is appropriate. This strategy is seen to be implemented by Lands in relation to land valuation when Lands talks about this issue in the 2004/05 IC statement (NSW Department of Lands, 2005, p. 13). They report that it:
has actively sought to improve public confidence in the land valuation system by improving available information concerning the valuation process to landholders by way of a newsletter and by providing supporting sales information and clarification of valuation issues to landholders upon objection.

In addition, in the 2005/06 annual report, they continue to tell the story of how they changed their communication strategy to improve their relationships with their stakeholders and provide more detailed information on the property market (NSW Department of Lands, 2006a, pp. 42-3). As a result of this narrative through the IC statement and direct communication with affected stakeholders, there have been positive outcomes for Lands:
The success of this process may be measured by the number of Local Councils that are

26

including the valuation newsletter with their rate notices and by the relatively low number of valuation objections received by the Department of Lands, which has one of the lowest objection rates of any Australian State.

Thus, the communicative discourse that the organisation has with its stakeholders through the narrative disclosure of IC can have impacts on the organisation and help to change the level of legitimisation the organisation has with its stakeholders.
5.3.3 Domination Structure

If the rules by which organisations operate change by way of changes to the signification and legitimation structures, there will also be an impact on the way resources are allocated in the organisation to allow this to happen. In reality, the changes to resource allocations will happen in concert with the changes to the signification and legitimation structures as they are seen to be inextricably intertwined (Giddens, 1984, p. 31; Macintosh and Scapens, 1990, p. 461). The two types of resources that form the domination structure are, as previously mentioned, authoritative and allocative, and this section will present two examples of change in these resources as a result of the communicative interaction of narrative IC disclosure. 5.3.3.1 The changing power of employees knowledge was power In the earlier discussion of the domination structure in relation to management accounting at Lands, it was identified that in order for the synergies sought by the Director General to be realised there would need to be changes in the authoritative power base of agents. As a result of the introduction of the narrative discourse on IC, this appears to have occurred in relation to the power that is wielded by the employees of Lands, especially those who have a long tenure with the organisation. This can be analysed through what Giddens (1984, p. 374) terms the dialectic of control which

27

he defines as:
The two-way character of the distributive aspect of power (power as control); how the less powerful manage resources in such a way as to exert control over the more powerful in established power relationships.

In this case, the more powerful are the Lands managers who have authoritative power over employees in that they can give direction and command that their subordinates to carry out these directions. Thus, the less powerful are the subordinate employees. But this form of allocative power is not always unidirectional, in that subordinates can, at times, influence the activities of their superiors (Giddens, 1984, p. 16) and in the case of Lands, power was seen to have been wielded by the employees by way of retaining knowledge about their jobs. This situation is explained by a senior LPI manager in late 2005:
its probably more a cultural thing within the organisation where people havent been willing to contribute in the past. They saw contributing as probably undermining their power base, if they pass the information out somebody else will know it, the information, and know how to do their job.

Thus, it was recognised by the employees of Lands that they retained a level of safety and security about their jobs through this retention of knowledge, and that they could wield some control over their superiors, in that they were forced to allocate work to those who held the knowledge of how to get the job done. So while the employees in the past believed that this use of power consolidated their job security, the introduction of the narrative discourse on IC, especially in response to the management challenge of the ageing workforce, is seen to have begun to change the way this power is wielded. The very realisation by many of these knowledgeable employees that their careers are coming to an end is changing the

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way knowledge impacts on the execution of power between management and employees. In this case, the directive of managers for employees to now share their knowledge is more likely to be adhered to than in the past. This is because the knowledge that impending retirees have is most likely to be of little use to them and go to waste once they leave Lands, as the same manager explained:
I think theres been a slow realisation that theyve been holding this information all these years, and its been a source of power, now all of a sudden theyre realising, gee, if we dont let this go, all this goodwill that weve built up over the years is going to go down the drain. so I think peoples realisation of, hang on were winding down our working career, we really need to make sure the information is preserved in some manner, has made it to a lot of them, it has been the main imperative to them giving information [and] if the values that Ive worked towards all through my life in this organisation, that is making sure things are right, making sure things are accurate, and knowing well Ive got to pass them that information otherwise people cant do it.

5.3.3.2 Changes in the allocation of resources The allocation of resources is another way that agents within organisations wield power. In the case of Lands, the introduction of the narrative IC discourse has had an effect on the way that resources are allocated. Foremost from this perspective is the change that was seen in the way that Lands senior management, led by the Director General, utilised their power to change the priority of both time and money resource allocations. This change in resource allocation towards the development of IC resources was observed by a senior HR manger in late 2005:
Oh its commitment to resources across the department, because nothing happens without resource, all the stuff precedes it in terms of it. And that resource that also involves the senior management across all the divisions to talk about processes, and theres the resource of time as well. And this has been driven by the DG [Director General], so the commitment of the DG I guess. You dont achieve much if youre trying to go off into it without senior management support, because there [are] many competitions for resources.

As a result of the utilisation of managements power, the way resources were 29

allocated towards was changed towards the development of IC in association with an observed change in the focus of resource allocations. Under the management accounting structure, resource allocations were based on a short-term financial focus. But under the IC structure, a longer-term non-financial view was incorporated, based on management practices which incorporated the accounting of IC. This was espoused as another reason for the foray into the domain of IC practice. As the Lands 2004/05 annual report states (NSW Department of Lands, 2005, p. 7):
To concentrate only upon fiscal measures may cause managers to miss out on critical information important to current and future performance.

The focus on short-term management accounting also brought about tension in Lands as resource allocations were not seen to be adequately distributed. The narrative discourse of IC at Lands has now brought about a more equitable and targeted allocation of organisational resources in that it that it has enabled people to better carry out the basic organisational functions as outlined by an operations manager:
ensuring that into the future Ive got people here who have sufficient resource[s], not necessarily be trained, but have sufficient resource[s] to access, to be able to make the decisions and to be able to process the transactions that they are required to do in their daily work..

This reflective monitoring by management has broken the cost and financial outcome mindset that predominated in the management accounting structure of the past. Managers now see that by combining the structure and meaning of IC with the remaining structure and meaning of management accounting, that it changes the way that the organisation is managed, as espoused by the head of HR:
[it] has got us over the, I guess, the mentality of reporting financially only; and got us thinking about how the organisation can be more successful. And how we can use the knowledge, but on a grander scale, by the way that we actually manage the organisation.

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Since the financial outcomes are no longer seen as the sole measure of success it allows for the accounting of the measures of IC, combined with the associated narrative about the development of IC resources, to have an impact on the strategy of the organisation, as observed by another senior HR manager:
I think were now starting to find some direction, in terms of translating it into things like our annual reporting frameworks, and the draft intellectual capital report. I think were trying to turn it into something concrete, but were trying to also turn it into a strategic direction that assists the businesses [to] move forward.

Discussion and Conclusion

As identified earlier, structuration theory takes a critical approach to understanding social structures. According to Alvesson and Deetz (2000, pp. 17-20) there are three tasks of any critical approach to research, these being insight, critique and transformative redefinitions. Thus to frame this final section a discussion of the case study is offered from each of these perspectives along with a brief conclusion. 6.1 Insight

According to Alvesson and Deetz (2000, pp. 17) the task of insight is to demonstrate our commitment to the hermeneutic, interpretive and ethnographic goals of local understandings closely connected to and appreciative of the lives of real people in real situations. So insight from a critical intellectual capital perspective deals with trying to understand the impact of intellectual capital practices on both the people and the organisations they belong to. This paper addresses both of these aspects as it provides an example of using structuration theory as an alternate framework for analysing the use of narrative by an organisations actors to disclose intellectual capital and in turn how the structure of the organisation changed as narrative became part of the routine

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day to day structure of Lands. As Alvesson and Deetz (2000, pp. 148-9) also outline, the development of critical insight is about the art of interpretation, so that in the end new meanings and unexpected light is shed on the subject. In this case the use of narrative from an intellectual capital perspective has changed from what Mouritsen identified as providing the raison dtre of an organisations intellectual capital management activities to providing examples of how narrative is utilised to change the organisation and its activities, beyond just as a way of disclosing intellectual capital. Most importantly, it was observed how the reflective monitoring by individual actors caused them to change their perceptions from what intellectual capital was to what it did, such as changing from a short-term financial focus to a longer term focus on developing the IC resources of the organisation, changing the way power was distributed and how resources were allocated. Thus the role of narrative has changed from telling stories of the field and espousing what is possible in the future as a result of managing and developing IC resources. Here narrative was seen to have a wider application in its recursive role as both an enabler of organisational action and as a modality providing the communicative interaction which allows actors to reflect on those actions. Narrative has become another tool in Lands management tool box and was applied in a number of settings, extending from the original intention of providing new meaning and the raison dtre of IC. This is seen as the unintentional consequences of the application of narrative to disclose IC. 6.2 Critique

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The objective of critique is to counteract the dominance of taken-for-granted goals, ideas, ideologies and discourses which put their imprints on management and organization phenomena (Alvesson and Deetz, 2000, p. 18). One of the more takenfor-granted aspects of IC is that it needs to be managed and measured in the same way that tangible assets are. As Newman (as quoted in Chaharbaghi and Cripps, 2006, p. 42) explains, the word capital implies that knowledge is some form of material wealth that can be managed and that by investing in these assets this leads to the creation and possession of knowledge resulting in more wealth, both of which are empirically unproven. One only has to look at the proliferation of the frameworks which attempt to ascribe a dollar value to IC or the balance sheets of IC in the format of scorecards as ample evidence of this thinking (see Sveiby, 2007, for a review). The evidence presented in this paper agrees with Newmans position as it identifies that is it is not the measurement of IC that is most important. What can be gleaned from this analysis of narrative in disclosing IC at Lands is that it is the narrative which is the enabler of change and not the accounting measures of IC that the narrative was supposed to complement. While narrative is seen to be useful by those trying to account for IC in the annual report, it goes much further than its original intention in that actors use narrative to achieve outcomes as evidenced by the use of narrative in the business plans, project reports and newsletters. Thus the raison dtre becomes the modus operandi as the focus shifts from trying to account for IC to enabling it. This then questions the relevance of trying to reify IC measurement and reporting frameworks based on the dominant frameworks of accounting and accountability to stakeholders as found in Lands annual reports. These annual reports, like other forms of ICRs, are questioned for their relevance and their timeliness (see Dumay and Tull,

33

2007) even if they do contain significant amounts of narrative. Rather it is these project reports, the business plans, the newsletters and other documents produced by Lands, which contain both narrative and numbers, are seen as more appropriate mechanisms for disclosing IC. This is because their timeliness is more suited to the specific management issue that is being addressed and the narratives are targeted at the stakeholders who are directly affected by the content. This is not to say that Lands annual reports and ICRs do not have relevance, as they still play a pivotal role in the structure of the relationship that Lands has with its constituents, the elected Government and other stakeholders whose requirements are satisfied by the production of these documents. But what this does highlight is the possibility for organisations to break free of the dominant role of accounting which heavily influences IC and its subsequent disclosure and the use of narrative is one possible way of achieving this outcome. 6.3 Transformative Re-definition

The last task of a critical approach is the development of critical, managerially relevant knowledge and practical understandings that enable change and provide skills for new ways of operating (Alvesson and Deetz, 2000, p. 19). This paper accomplishes such a task by showing how it is possible to break the accounting and financial performance mindset that dominated Lands prior to the introduction of the IC paradigm. In this light it is shown that IC provided the management of Lands a new way of looking at the resources of the organisation and how these might be utilised to maintain the organisation into the future. This new knowledge, aided by the use of narrative, provided the opportunity for Lands management to change the way it tackled relevant management issues. This is important as it exemplifies Weick & 34

Brownings (1986) contention that the use of narrative enables the possibility for all members of the organisation to become involved and not just the accountants or the IC experts. Here narrative helps to transcended the boundaries of an external accounting for IC via the annual report and became enveloped in a communicative discourse that involves not only Lands management but their employees, stakeholders and constituents as well. 6.4 Conclusion

By taking a structuralist approach to analysing the narrative disclosure of IC this paper moves beyond attempting to quantify or identify the wealth created by IC, and thus account for IC, that is so often the purpose of the plethora of current IC frameworks. By investigating the narrative disclosure of IC, initially in the form of the IC statement as a supplement to the annual report, it was shown how at Lands the use of narrative became routinized in the activities of management. Thus narrative was no longer used to only provide understanding of the IC measures and the reasoning behind the use of IC, but to provide a mechanism the engendered further management action and subsequent organisational change. Furthermore it was shown how narrative extends the boundaries of involvement by allowing management, employees, stakeholders and constituents to become involved; not just the accountants and IC experts. Thus narrative, in conjunction with IC, has become another tool in the tool box of Lands management. Furthermore, the use of structuration theory demonstrates that organisational change is not an event, but how change is continuous and recursive and that change in organisations happens not in indifference to its members but requires the reflective monitoring of agents and their continued input and involvement into the process of 35

change. Thus in this paper it is shown how narrative can form an essential part of that process. This is not to say that narrative is the only enabler of change, but an essential part of the communicative interactions which is essential to recursive structural change in organisations. The limitation of this study is that it provides a lone example of a particular organisation from which generalisations are not possible. But it is possible to extend this research, using the structuration framework, to other organisations that have engendered the use of narrative to disclose IC to both internal and external stakeholders. Doing so will further question the domination of accounting within the IC paradigm and provide additional insights that allows practitioners and academics to develop additional tools for understanding and utilising IC.

36

Table I: Lands data sources 2004-2007

Data Source 2002/2003 Annual Report Interview Notes with Senior Management 2004 Annual Report Divisional Business Plans Executive Committee Meeting Minutes Focus Group Interviews Conducted with Lands Divisions

Primary Format PDF File Excel Spreadsheet

Date Produced Late 2003 August 2004

PDF File PDF Files Word Documents

Late 2004 2003 to 2005 December 2004 to September 2005 August 2005

Handwritten Notes

Organisational Capabilities Word Documents Improvement Group Meeting Minutes Semi-structured Interviews Digital Voice Recordings with Senior Management and Transcripts Observations Handwritten Notes

September 2005 to December 2006

September 2005 to October 2005 August 2005 to January 2007 Late 2005 July 2006

2005 Annual Report Vision 2013 LPI Workforce Plan 2006 Annual Report Lands Project Overviews

PDF File Internal Publication

Internal Publication Internal Publications

November 2006 August to November 2006

37

Table II: Lands Annual Reports Breakdown of Text Sections and Pages

Report Section Director Generals Foreword Intellectual Capital Statement The Department Performance Against Strategic Objectives (Balanced Scorecard) Key Performance Indicators Financial Summary Corporate Governance Corporate Support Report from the Surveyor General Geographical Names Board Report from the Registrar General Report from the Valuer General Land and Property Information Division Crown Lands Division Soil Services Division Office of Rural Affairs The Board of Surveying and Spatial Information Pages

2002/ 2003

2003/ 2004 1 5

2004/ 2005 2 14

0.5 8.5 2 2 12 11 5 3 4 16 10 2 2 7 54 7 3 6 14 11 4 1 8 54

2005/ 2006 2 4 2 4 4 2 6 2 5 3 5 10 6 4 2 5 60

7 46

38

Figure 1: Giddens' 'structuration' theory model

Source: Giddens (1984, p. 29)

39

Figure 2: Structuration, Agency and Narrative

Adapted from Macintosh and Scapens (1990, p. 459)

40

Figure 3: Lands Time-Line of Critical Events

41

Figure 4: Lands IC Reporting Framework

Source: NSW Department of Lands (2005, p. 8)

42

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Moore, D. R. J. (2006), Structuration theory: NPM change and trust in the public sector, paper presented at the 18th Asia-Pacific Conference on International Accounting Issues, Maui, Hawaii, October 15-8, 2006. Mouritsen, J., Bukh, P. N., Flagstad, K., Thorbjrnsen, S., Johansen, M. R., Kotnis, S., Larsen, H. T., Nielsen, C., Kjrgaard, I., Krag, L., Jeppesen, G., Haisler, J. and Stakemann, B. (2003), Intellectual Capital Statements The New Guideline, Danish Ministry of Science, Technology and Innovation, Copenhagen. Mouritsen, J., Bukh, P. N., Larsen, H. T. and Johansen, M. R. (2002), Developing and managing knowledge through intellectual capital statements, Journal of Intellectual Capital, Vol 3 No 1, pp. 10-29. Mouritsen, J., Larsen, H. T. and Bukh, P. N. D. (2001), Intellectual capital and the 'capable firm': Narrating, visualising and numbering for managing knowledge, Accounting, Organizations and Society, Vol 26 No 7-8, pp. 73562. NSW Department of Lands (2003), 2002/2003 Annual Report, New South Wales Government, Sydney. NSW Department of Lands (2004), 2003/2004 Annual Report, New South Wales Government, Sydney. NSW Department of Lands (2005), 2004/2005 Annual Report, New South Wales Government, Sydney. NSW Department of Lands (2006a), 2005/2006 Annual Report, New South Wales Government, Sydney. NSW Department of Lands (2006b), Crown Reserves and Assets Management Project: Project Overview August 2006, New South Wales Government, Sydney. NSW Department of Lands (2006c), Data Cleansing Project: Project Overview August 2006, New South Wales Government, Sydney. NSW Department of Lands (2006d), Government Property Register Redevelopment Project: Project Overview August 2006, New South Wales Government, Sydney. NSW Department of Lands (2006e), Historical Arial Photography Project: Project Overview August 2006, New South Wales Government, Sydney. NSW Department of Lands (2006f), Manual Torrens Title Conversion Project: Project Overview August 2006, New South Wales Government, Sydney. NSW Department of Lands (2006g), "Merlin" The Customer Contact Database Project: Project Overview November 2006, New South Wales Government, Sydney. 45

Ordez de Pablos, P. (2002), Evidence of intellectual capital measurement from Asia, Europe and the Middle East, Journal of Intellectual Capital, Vol 3 No 3, pp. 287-302. Patton, M. Q. (2002), Qualitative Research and Evaluation Methods, Sage, London. Petty, R. and Guthrie, J. (2000), Intellectual capital literature review: Measurement, reporting and management, Journal of Intellectual Capital, Vol 1 No 2, pp. 155-76. Pierce, J. (2006a), Policy & Guidelines Paper: Financial Management Framework What you do and Why: An Agency Guide to Defining Results and Services, New South Wales Treasury. Pierce, J. (2006b), Treasury Circular: Results and Services Plans (RSPs), New South Wales Government. Roberts, J. and Scapens, R. (1985), Accounting systems and systems of accountability: Understanding accounting practices in their organisational contexts, Accounting, Organizations and Society, Vol 10 No 4, pp. 443-56. Rose, J. (1998), Evaluating the contribution of structuration theory to the IS discipline, paper presented at the Proceedings of the Sixth European Conference on Information Systems, Aix-en-Provence, France. Roslender, R. and Fincham, R. (2004), Intellectual capital accounting in the UK: A field study perspective, Accounting, Auditing & Accountability Journal, Vol 17 No 2, pp. 178-209. Scapens, R. W. and Macintosh, N. B. (1996), Structure and agency in management accounting research: A response to Boland's interpretive act, Accounting, Organizations and Society, Vol 21 No 7-8, pp. 675-90. Skoog, M. (2003), Visualizing value creation through the management control of intangibles, Journal of Intellectual Capital, Vol 4 No 4, pp. 487-504. Society for Knowledge Economics (2005), Australian Guiding Principles on Extended Performance Management: A Guide to Better Managing, Measuring and Reporting Knowledge Intensive Organisational Resources, Society for Knowledge Economics, Sydney. Sveiby, K. E. (1989), The Invisible Balance Sheet: Key Indicators for Accounting, Control and Valuation of Know-How Companies (translation), The Konrad Group, Stockholm. Sveiby, K. E. (2007), Methods for measuring intangible assets, Retrieved 15/5/07, http://www.sveiby.com/portals/0/articles/IntangibleMethods.htm. Systematic (2002), Intellectual Capital Report 2002, Systematic Software Engineering A/S, Aarhus, Denmark. 46

Systematic (2004), Intellectual Capital Report 2004, Systematic Software Engineering A/S, Aarhus, Denmark. Weick, K. E. and Browning, L. D. (1986), Argument and narration in organizational communication, Journal of Management, Vol 12 No 2, pp. 243-59. Yin, R. K. (2003), Case Study Research: Design and Methods, Sage, Thousand Oaks, California.

47

Appendix 5

Paper 4
Dumay, J. (in review), Intellectual capital measurement: A critical approach, Journal of Intellectual Capital.

INTELLECTUAL CAPITAL MEASUREMENT: A CRITICAL APPROACH

John C Dumay*
Discipline of Accounting Economics and Business Building H69 The University of Sydney, NSW 2006 Australia j.dumay@econ.usyd.edu.au +61 2 8006 2323

*Contact for correspondence C/o Prof. James Guthrie Discipline of Accounting Economics and Business Building H69 The University of Sydney, NSW 2006 Australia j.guthrie@econ.usyd.edu.au +61 2 9036 6236

Abstract
Purpose of this paper To investigate IC measurement critically so that the dynamics of intangible value creation can be better understood and to provide insights into how IC is constructed rather than what IC is. Design/methodology/approach This paper presents a case study on how a division of a large Australian financial institution utilised an approach based on complexity theory to investigate IC in practice. The method utilises narrative, numbers and visualisations to make sense of IC at a particular point in time. Findings It is argued that trying to fit existing popular frameworks to gather IC measurements inside organisations has little relevance to understanding the value creation process. As a result of the investigation of IC in this paper, it is found that to date IC measurement has relied heavily on accountingisation and that alternate methods to understand IC need to be developed. The paper highlights that academics and practitioners need to develop new skills. Research limitations/implications The case study is limited to the use of an alternate method to investigate IC in a particular organisational setting. The research opens the possibility of the benefits of changing thinking about both research into, and the practice of, measuring IC. Practical implications Rather than being constrained by the traditional models of measuring intangibles, by way of contemporary IC reporting frameworks, a more open process is outlined that could improve the timeliness and use value of the information. What is original/value of paper? This paper has relevance to both IC academics and practitioners as it critically examines the contemporary IC frameworks and offers an alternate method for examining IC which has the potential to add to a discourse which focuses on additional understanding of IC. Keywords: Intellectual Capital, narrative, measurement, Complexity Theory, Critical research

1 Introduction
The concept of intellectual capital (IC) is based on the wide recognition that organisational knowledge needs to be managed (Mouritsen and Larsen, 2005) and that technology has allowed for greater dissemination of this knowledge (Meritum Project, 2002; Unerman et al., 2007). Prior research suggests that the development of IC resources creates value for organisations, especially since the majority of an organisations assets are intangibles that cannot represented on the balance sheet (Stewart, 1997). The identification and measurement of an organisations IC is important because these provide insights into the impact that the measurement of IC may have on management action. This paper investigates IC from a measurement perspective by presenting a critical case study. In part, this paper has been inspired by the call for more critical research into IC in the 2006 special edition of the Journal of Intellectual Capital (Vol. 7 No. 1). More specifically, it answers the call for deeper thinking and real research on the dynamics of intangible value creation, an acceptance of complexity and not knowing and more how questions? (O'Donnell et al., 2006, p. 10). Thus, this study attempts to understand how intellectual capital can be represented by considering the role of organisational actors and by questioning the suitability of the tenets of contemporary IC measurement frameworks. To do so, this case study utilises research inspired by complexity theory (see Snowden and Boone, 2007, p.71) to present numerical, statistical, narrative and visual representations of IC. The aim is to make sense of how IC is constructed at a particular point in time and to provide insights into how IC can be examined, how IC can be understood and how management interventions into the development of IC to engender value creation can be informed. Complexity theory has been chosen in an attempt to understand the complex and fluid nature of IC (see Cuganesan, 2005) and how it related to value creation in the case study organisation. The case study organisation has been chosen because of its ongoing attempts to understand how it created value at a time where its outputs were seen as costs. The examination of how IC is constructed at the case study organisation suggests that measuring IC does impact organisations and that by taking a critical approach to examining IC; that insights, critique and transformative redefinitions (change in praxis) of IC are possible. This in turn suggests that the traditional frameworks used to manage, measure and report IC need to be transformed and that the one size fits all approach to IC taken to date is unsatisfactory. To address IC measurement critically this paper is presented in a further four sections. In section 2 a discussion of the evolution of IC measurement is presented and a critique of its current status is proffered. Section 3 presents empirical evidence from a case study, influenced by complexity theory, to exemplify a novel approach to measuring IC. Section 4 discusses the findings of the paper and section 5 presents the conclusion.

Intellectual Capital Measurement

3

There can be little argument that the worlds economy has shifted, and is continuing to shift, from an economy driven by the use of tangible assets such as plant,

equipment and real-estate to an economy driven by the use of intangible resources such as knowledge, technology, core competencies and innovation (Meritum Project, 2002). An example of this shift is that NASDAQ listed companies, such as Microsoft, Cisco, Amazon and Yahoo, who are representative of the knowledge-based economy, have become permanent members of the Standard & Poors S&P 500 index. Towards the end of 2002, knowledge-based economy companies represented 11.9% of the S&Ps market value (Burgman and Roos, 2004). While the definition of the knowledge-based economy is ambiguous, several structural changes have been identified (Meritum Project, 2002) as central to the concept: Knowledge is being recognised as a commodity and is being utilised in transactions; The connectivity between knowledge agents has increased remarkably; and Information and Communications Technology (ICT) has allowed for greater creation and diffusion of knowledge and thus the network of knowledge agents has expanded globally.

The increasing relevance of intangible assets can be seen in the valuation of companies over the last few decades, where the ratio of the market value to balance sheet or book value of a company has been constantly growing, especially since the 1990s. The difference in the market-to-book ratios shows that the current financial accounting systems in practice are not adequate definers of economic value or resources. The Meritum Project (2002) theorised that this may result in the inefficient allocation of resources, both human and financial. Stewart (1997) espouses the view that this difference between the tangible accounting assets base of a firm and the market value of a firm is considered to be intellectual capital from which value emanates. While the market to book ratio is a simplistic way of conceptualising IC, Brennan and Connell (2000) identify that it has three weaknesses. First, IC does not comprise the entire difference between market and book values. Second, the continual fluctuation of share prices distorts the value of IC. Last, it is a singular measure of the value of IC that does not give a breakdown of the individual components of IC. Thus, the value of utilising such a simplistic framework to view IC is questionable. In addition, a plethora of frameworks for the measurement of IC have been developed. Sveiby (2007) identifies 34 different frameworks for the measurement and reporting of IC, the majority of which attempt to identify the components of IC. One problem with the plethora of views about measuring the components of IC is that no one view, other than the concept of intangibility, has consensus among practitioners and researchers. The closest to any single unifying model of what IC measurement should encompass seems to be founded in the general acceptance of the tri-partite representation of IC categories as human, structural and relational capital. Even here the terminology can differ (see Petty and Guthrie, 2000, p. 159), other categories may be added to the model (see Habersam and Piber, 2003, p. 767), or the whole model can be completely redefined (see Leliaert et al., 2003). Thus, the lack of agreement among academics and practitioners into the correct way to represent the components of IC also brings into question the utility of these contemporary frameworks. Accordingly, research into developing other types of IC measurement frameworks based on the existing models but attempting to fit further IC components into familiar
4

accounting and management reporting frameworks (see for example Edvinsson and Malone, 1997; Sveiby, 1997; Mouritsen et al., 2003, p. 5; Society for Knowledge Economics, 2005) may be a fruitless task. This is because, as Andriessen (2004, p. 231) points out, contemporary IC measurement frameworks have, for the most part, been developed by practitioners rather than academics, and as a result the validity and motives behind their development is questioned as well. The development of IC measurement frameworks based on the self-interest of their developers appears to add to the confusion about what is the right framework to apply, what is likely to be the effect of measuring and disclosing IC or even if this is a worthwhile endeavour (van der Meer-Kooistra and Zijlstra, 2001). Therefore, it seems that any attempt to once again redefine what IC is would add little, if anything, to the knowledge and practice of IC measurement. This is not to say that the measurement of IC is inherently flawed or that it creates more confusion than it is worth. The message that all the models, frameworks, discussions and literature appear to be conveying is that IC is interesting (Chatzkel, 2004, p. 337); IC is complex and complicated (Cuganesan, 2005; Bueno et al., 2006); IC needs to be understood better (Mouritsen, 2006); and IC needs to have a diverse set of tools for its management and measurement dependent on the purpose of the measurements (Sveiby, 2007). But more importantly, the literature shows that for the last two decades the concept of IC has become a consideration for all organisations and that organisations need to be able to assess how IC works within their operational context. So the aim of this paper is not to answer the all encompassing question of What are the organisations measures of IC?, but rather to answer How is IC constructed within the organisation? This questioning is akin to taking a critical approach to contemporary thinking on IC measurement. But what is meant by being critical and what does taking a critical approach have to do with IC? The notion of a critical approach has developed in response to similar conditions to those under which the concept of IC has developed. Alvesson and Deetz (2000, p. 14) consider that a critical approach to management research was developed as a response to changing social conditions as the result of developments in science, industrialization and communication/information technologies. Similarly, the concept of IC has come in to prominence due to structural changes in the economy as knowledge, communication and the importance of intangibles have changed the conditions under which organisations now operate (Meritum Project, 2002). These changing conditions in society and in organisations have usually been lauded for their positive impacts, especially in Western societies, but the domination of these changes can also have negative impacts (Alvesson and Deetz, 2000) and this has also been recognised in the IC literature (see for example Caddy, 2000; Leitner and ODonnell, 2007). In this paper the term critical is not used to find fault with current thinking about IC measurement, but to question its current tenets, thus the focus is on critique1 rather

Critique is to discuss or comment on something such as a creative work, giving an assessment of its good and bad qualities (MSN, 2007).

than criticism2 (Alvesson and Deetz, 2000, p. 8). Questioning the tenets of contemporary IC measurement comes from the recognition that the achievements of two decades of management practice and academic research surrounding IC has mainly concentrated on establishing these tenets, that is, the definitions, the measures and frameworks of IC (Chatzkel, 2004). But currently, the IC paradigm suffers from a lack of proliferation as evidenced by the relatively few organisations that measure and disclose their IC (Brennan, 2001; April et al., 2003; Bontis, 2003; Ordez de Pablos, 2003; Guthrie et al., 2006; Unerman et al., 2007). Thus, if the tenets of the IC paradigm were as fruitful as some of its pundits have declared the question is Why have not more organisations taken it up? One reason proffered for this is that the measurement, management and reporting of IC is at a crossroads because the creation of these tenets of IC have only gone to raise its awareness (Marr and Chatzkel, 2004, pp. 224-5). As Chatzkel (2004, p. 337) explains, in order to move through the crossroads academics and practitioners;
must substantially demonstrate the relevance of intellectual capital as a working discipline that is useful to organizations to use to gauge and generate significant value and to effectively navigate to achieve strategic goals. Otherwise, the notion of intellectual capital and all it stands for will be seen as merely one more set of very interesting ideas that is continuingly elusive to grasp and use.

As a result, there has been interest in the exploration of a more critical stance towards the research and understanding of IC (O'Donnell et al., 2006). By thinking critically about IC measurement, it is intended to help change the way it is understood and to break free from the construction of IC that the current dialogue appears not to have been able to progress. Past critical IC research has concluded that the potential of IC will not be realised if management continues to force thinking about IC into the existing frameworks (Chaharbaghi and Cripps, 2006) based on accounting, management control and the management of intangibles (Guthrie et al., 2003, pp. 430-1). This thinking is not only advocated for practitioners, but for academic researchers as well, so that a deeper understanding of how IC works and how IC is utilised in organisational change can be developed (Mouritsen, 2006). As O'Donnell et al. explain (2006, p. 7) this way of viewing IC research will not answer the question of What is IC?, rather the question asked should be How is IC?. This is because asking how is more revealing (O'Donnell et al., 2006, p. 7) as it addresses the praxis of IC as it is implemented in organisations, rather than re-creating a static representation of IC, as is represented by contemporary measurement frameworks and their associated theory or theories. In considering the how question, this paper builds upon the identification of IC as a complex phenomenon and the growing need to acknowledge and empirically investigate the complexity of IC in organisational settings (Cuganesan, 2005; Bueno et al., 2006; Mouritsen, 2006; O'Donnell et al., 2006, p. 10). From the perspective of complexity, there is a growing literature that explores complexity from an

Criticism is a spoken or written opinion or judgment of what is wrong or bad about somebody or something (MSN, 2007).

organisation theory perspective (Anderson, 1999; Anderson et al., 1999; Lewin, 1999) and in particular, it focuses on exploring the links between complexity and organisational strategy (Lewin, 1999; Kurtz and Snowden, 2003). Complexity theory deals with understanding systems where there is a non-linear relationship in the interactions between the elements of a system. These systems are characterised by the fact that small changes to one or two parameters may have significant, emerging and unexpected effect(s) on the entire system (Anderson, 1999; Browning and Bouds, 2005; Snowden and Boone, 2007). Thus, if organisations are viewed as complex systems, the application of complexity theory based methods when researching IC, allows an opportunity to develop insights into IC which may not be gleaned by utilising contemporary IC measurement and research frameworks. This may then help make sense of how the complex interactions between IC resources contribute to value creation thus reducing their ambiguity, especially when examining an organisations intangible resources (see Dierickx and Cool, 1989, p. 1508-9). To explore the how question further, the findings of a case study into the attempt to understand IC in a division of a large Australia financial services company with over 25,000 employees is presented (herein named AusFinCo). The next section discusses the research at AusFinCo, how a critical view of IC measurement emerged and how the complexity theory and other tools were applied to develop this view.

3 Measuring IC at AusFinCo
This paper is presented as a case study. The advantage of case studies is that it they can be used to explore and understand a phenomena in a particular context, they have flexibility as to the boundaries that the study can be directed, and different methods of collecting data can be used, including but not limited to, interviews, focus groups, internal documentation, external documentation, participant observations and direct observations (Creswell, 1998; Collis and Hussey, 2003; Yin, 2003). The use of multiple methods of data collection offers researchers a rich source of data from real settings (Yin, 2003) and in the case of AusFinCo allowed for the use of different data sources to suit the emergent pattern of research employed. What is important to consider here is that the process utilised to research IC measurement was an emergent one. So, unlike a traditional format, where method and data analysis are separated, the development of the method and the data as it emerged in the research is presented together. Therefore this section is separated into the following three sub-sections. First, sub-section 3.1 describes the research site and project. Second, sub-section 3.2 describes the first stage of the research based on an audit of the then current performance management reporting systems. As a result of the audit, a critical approach to understanding IC measurement was developed and this is the topic of sub-section 3.3.

3.1

The research site and project

The BOP division of AusFinCo performs the back office functions for AusFinCos products; they manage the overall information technology (IT) architecture, support and enhance software systems, and manage and implement major projects. They make available infrastructure support for cash management, fraud, physical security, business services and records management. In addition, BOP manages AusFinCos property portfolio and outsourcing contracts. BOP employs 16% of AusFinCos staff
7

representing about 4,000 employees and is responsible for 45% of AusFinCos expense base. AusFinCos, or more precisely BOPs, motivation for commencing this research project was to demonstrate the value that BOP created for both its partner business divisions, who are the recipients of BOP services, and end users of AusFinCos products and services. The problem perceived by BOP management was that the value that BOP creates for its partner business divisions and end customers is intangible. This problem was seen to be compounded by AusFinCos internal accounting systems which allocate the cost of the services provided by BOP to the end users of these services. This has, in the view of BOP management, led to the perception that BOP is considered a cost to the other divisions and not a partner in the creation of value. Thus, BOPs challenge was to articulate how it creates value for the other divisions and to understand the interaction of the intangible resources utilised in creating this value. Value here can be defined in two ways. First, it can be defined in economic terms from the view point of helping to generate income and reduce costs. Second, value can also be defined from the position of the worth or importance of the services provided by BOP from the view point of individuals who are the constituents of the groups that make up BOP, the other AusFinCo divisions and customers. To understand how AusFinCo and BOP articulated value creation, the research was conducted in two parts. The first part consisted of content analysis of relevant strategic and reporting documentation. This research was completed in October/November 2005. The use of content analysis as a method for collecting empirical data about an organisations IC is well established as it allows for the identification of the types of IC and the measures of IC utilised by an organisation (see Guthrie et al., 2004). The objective of this research was not only to identify the key types and measures of IC in AusFinCos documentation, but also to establish any link between these and the challenges that AusFinCos management identified towards the value creation objectives espoused in the same documents. The second part of the research took a different path by collecting organisational narratives about IC from BOP employees in March/April 2006. The particular method employed here is known as pre-hypothesis research (see Snowden, 2006) and was designed to elicit narratives about IC and value creation as it was constructed at that particular time. Traditionally the use of narrative in IC has been seen to offer reasoning behind an organisations management and subsequent disclosure of IC (Mouritsen et al., 2002, p. 14). But the espoused use of narrative solely as an explanation of the reasons behind an organisations management of IC it is seen as too narrow. This is because narrative has been identified as not only allowing for organisations to explain their actions, but it can also be used to reveal the individual, human projects within organizations and construct and identify emerging organizational strategies (Llewellyn, 1999, p. 233). Additionally narrative can be used to represent communicative interactions that create social reality offering greater involvement of organisational actors (Weick and Browning, 1986). This expanded view of the usefulness of narrative led to its use in this part of the research as a data source rather than as an output of research. In addition to utilising the pre-hypothesis method, and in keeping with the emergent theme within complexity theory (Snowden

and Boone, 2007, p. 71), other methods of analysis were developed to represent and thus articulate how the dynamics of IC and value creation were constructed at BOP.

3.2

Identifying IC and Value Creation Themes

For BOP to show that it adds value to the organisation, it has to communicate information about its performance. Here in the first stage of the research, the alignment of BOPs performance measurement systems with strategic management objectives was examined through a content analysis of internal and external BOP performance measurement and reporting documents. In this analysis the following documents, as presented in Table 1, were used. [Insert Table 1 Here] From the examination of these documents it was determined that AusFinCo is following what can be described as a customer service oriented strategy (see Rucci et al., 1998). The examination of the 2005 BOP Strategic Plan provided the strategic objectives articulated below, the first and third of which related to the overall AusFinCo strategy statements. The major BOP strategic objectives were identified as: enhance the customer experience to be number one in customer service; significantly improve our operational efficiency at a unit cost level to achieve a significantly lower expense profile; build an achievement based culture focused on customer service and innovation; and optimise capital usage by reducing our operating risk and leverage profiles. In order to assess whether key performance indicators (KPIs) contained in the July 2005 BOP Performance Report reflected the extent to which they measured the strategic objectives of BOP, an analysis of the KPIs was conducted. In addition, the measures were categorised in terms of whether they reflected attributes of tangible resources, being either physical or financial capital; or intangible resources, being either relational, structural or human capital. The results of the measurement audit are contained in Table 2. [Insert Table 2 Here] The resultant analysis of this examination of KPIs highlighted the following four issues. First, while the strategic objectives of BOP highlighted the role of IC (in terms of enhancing customer experiences, culture and innovation), management were concerned that existing key performance indicators (KPIs) contained in quarterly BOP performance reports were insufficient in measuring and reporting the attainment of strategic objectives. Second, in keeping with BOP being a cost centre, almost half of the measures reported focused on operational efficiency. Examples of these included departmental expense reporting, outsourced expenses, IT costs per full-time equivalent employee (FTEs) and number of FTEs. Third, there were limited human capital measures or those that related to the building of an achievement based culture. Fourth, no attempts had been made by BOP management to develop strategic links between measures. Overall, while there
9

were measures relating to relational, structural and human capital, their strategic importance and how they demonstrate how BOP creates value was often unclear. More importantly from a critical IC perspective it brings into question the ability of the current performance measurement framework to represent BOPs IC. Thus, if the current framework cannot deliver such an outcome then the ability of BOP to understand how IC works and how it is utilised in organisational change is also questioned. But as identified earlier, the traditional approaches and frameworks to measure IC have also been questioned and it was also the opinion of BOP management that it did not see the value in creating an additional IC report. Thus, it presented an opportunity to take an alternative approach to understanding IC within the BOP context and this is outlined next.

3.3

Understanding IC

In the second phase of the research, a critical research method referred to as prehypothesis research was utilised (see Snowden, 2006). This method utilises complexity theory by way of the Cynefin3 framework (Kurtz and Snowden, 2003; Snowden, 2006; Snowden and Boone, 2007) which was linked to IBMs Knowledge and Differentiation Programme in Europe in 1997. This framework makes use of both qualitative and quantitative data to provide context and explanation about IC (and other phenomena) within a particular organisational setting. This method was also chosen as AusFinCo had already been using complexity theory in the initial and ongoing development of a strategic innovation capability within the organisation with the purpose of increasing the resilience of the organisation in the face of changing environmental characteristics (Kay, 2007, p. 1). At the heart the pre-hypothesis method is what Snowden (2006) refers to as a sense making item (SMI). A SMI is defined as anything that helps people make sense of the world they live in (Snowden, 2006, p. 1). The most common SMI form is that of an anecdote or short fragments of fully formed stories that are seen as part of human discourse and are at the heart of how people transfer knowledge to each other (Czarniawska, 1998). The use of SMIs is enabled by prompting respondents to give narrative responses to non-directive questions. The theory is that when a person is asked a non-directive question that is answered with a narrative from either their point of view or a third-party perspective, they will more likely give answers based on their experiences. Allowing these narratives to be told from a third party perspective also allows for more open answers, especially when the narrative could be embarrassing or negative from the respondents perspective. In the case of BOP, 208 narratives were gathered from 41 employees who were selected using a random sampling process. Each of the employees was asked to provide five narratives based on open questions about their experiences of work life at BOP. Each of these narratives were indexed (scored) using a set of filters based on themes that were developed to elicit understanding about elements of IC that were identified by BOP management as being relevant to improving organisational

See www.cognitive-edge.com for further details

10

performance. The indexing was based on a 0 to 10 scale and was only scored if the respondent felt that the particular index applied to the narrative in question. Table 3 identifies the filters used to self-analyse the narratives and the frequency of narratives scored by each of the filters. [Insert Table 3 Here] Examining Table 3 provides both a confirmation and more detail on the IC components that are relevant to the conduct of business activities that impact IC, as envisaged by BOP employees. In examining relational and structural capital, there is a strong emphasis on knowledge, communication, the use of technology and the right mix of human intervention and automation. The role of technology in creating value was confirmed with three of the top five structural capital indexes being about the impact on processes and customers. Importantly, the role of human intervention should not be overlooked with communication and people helping customers being seen as strong themes of work at BOP and AusFinCo. Finally, examining human capital components in Table 3 indicates the importance of attracting, engaging and retaining employees. Also confirmed was the importance of knowledge workers, with employees emphasising the need to learn through training and from knowledge sharing with other staff. Given the complexities of IC, it was necessary to consider how each of the IC components influenced each other and the overall pattern of interaction. Thus, in addition to investigating the perceived importance of each IC component, the interaction between them was also analysed. This is where the research departed from the pre-hypothesis method as outlined above, yet still remained coherent with the emergent theme from within complexity theory as it attempted to further make sense of IC within the BOP context. This innovation emerged from the authors desire to achieve two ends. First, was to explore the complex web of inter-relationships between the IC components. Second, was to make sense of how these complex interactions could reduce the ambiguity between the organisations IC resources and value creation. The following describes the authors analytical innovation by way of the development of visual maps which display the interaction pattern of IC at BOP. These are presented in Table 4 and 5. [Insert Table 4 Here] [Insert Table 5 Here] The basis of these maps is a pair wise correlation analysis of the ranking scores provided by the employees for each of the IC components. According to probability theory and statistics, pair wise correlation, also called correlation coefficients, indicates the strength and direction of a linear relationship between two random variables (see Kenkel, 1989, pp. 649-58). The identification of strong relationships between IC elements should be taken as a method for establishing retrospective coherence about what has happened in the past rather than as a basis for future predictions, although they can be used to influence future interventions (see Snowden and Boone, 2007, p. 71). These relationships are represented in the tables at the intersection of the elements and are shaded to represent the strength of the potential
11

interaction between them. Black denotes very strong interactions; grey denotes a strong interaction and white denotes little or no interaction. While Table 4 represents the overall pattern of relationships, the desire of the research was to reduce the ambiguity between resources and value creation. Thus, in order to achieve this end and to simplify the analysis, the relational capital components considered to most identify with customer and shareholder value were selected as the value dimensions, and again the relationships between the IC components and these dimensions have been represented in Table 5. This analysis thus provides insights into reducing the ambiguity as to how IC works within BOP and the complexities of the IC-value creation nexus. From this perspective, three points were identified that reduced this ambiguity. First, there are strong inter-relationships between the four value dimensions, indicating value bundling across customer and shareholder value dimensions. Employees perceive that delivering customer value will in turn translate into value creation for AusFinCo in a competitive context and for its shareholders. Second, the importance of managing knowledge flows and knowledge workers is emphasised, with strong relationships not only between the requirement for knowledge workers and people helping customers and the four value dimensions as has been noted earlier, but also for the need to share knowledge externally and innovation in terms of products, both of which have strong and very strong relationships with the four value dimensions. Last, it confirms in more comprehensive fashion the role of technology. While technology helping customers was not within the top five indices relevant to work life at AusFinCo as indicated in Table 3, it is an important enabler of customer and shareholder value, having very strong relationships with all four value dimensions. Overall, a relationship between elements of human, structural capital and improvements in relational capital at AusFinCo is indicated from the perspective of BOP employees. The analysis indicates that people in BOP believe there is a relationship between a work environment that is seen to be attractive and engaging, develops competencies and offers employees a career that is both enabled by and allows the application of information and communication technology (ICT) and the flow of knowledge. It is the view of BOP employees that the interaction of these intangible resources creates value for AusFinCo and its customers. Thus, from a value creation perspective, managerial interventions into the organisation that, for example, develops the work environment, develops career paths and ICT resources are seen to be beneficial and focused. This is seen to offer a potential advantage over contemporary IC frameworks which are capable of identifying the important components of IC but are still plagued by continued ambiguity over the combination of intangible resources that create value. Thus it is demonstrated above that it is possible to take a snapshot of an organisation at a desired point in time and report, by way of organisational narratives, a visual display, supported by the analysis of IC interactions, of how an organisations IC is constructed. While this has the potential to disseminate information about the state of the interactions between the elements of the organisations IC, what can add further value to the organisation is that it is also possible to take another snap shot of the organisation after informed interventions take place to see if the pattern of interaction
12

of IC elements changes. The benefit of taking a snapshot beforehand allows for the development and implementation of organisational interventions or probes that have the potential to influence the development of patterns of interactions that are desirable for the organisation. The subsequent post intervention snapshot analysis will help the organisation understand what interventions were successful and those that were not. Additionally, should the results of a specific intervention become reliably predictable it may be possible to move the intervention from the complex to the known domain (see Kurtz and Snowden, 2003; Snowden and Boone, 2007).

4 Discussion from a Critical stance

The purpose of this section is to use the critical approach to management research and link it to the empirical evidence. According to Alvesson and Deetz (2000, pp. 1720) there are three tasks to be undertaken in a critical approach to research. These are insight, critique and transformative redefinitions. Thus this papers contribution to the literature on IC measurement is offered from these perspectives. Each of these elements of the critical framework will now be presented in the following sub-sections.

4.1

Insight

According to Alvesson and Deetz (2000, pp. 17), the task of insight is to demonstrate our commitment to the hermeneutic, interpretive and ethnographic goals of local understandings closely connected to and appreciative of the lives of real people in real situations. So insight from a critical IC measurement perspective deals with trying to understand the impact of IC practices on both the people and the organisations they belong to. Thus when viewing IC in this way the answer to O'Donnell et al.s (2006, p. 7) question of How is IC? can be addressed. The current research addresses such a question as it provides an example of how the traditional frameworks of IC can be utilised to develop a view from within an organisation rather than trying to fit an existing framework to gather measurements that may have no relevance to the value creation process. Thus, the insight that was developed to understand IC and value creation at BOP was achieved using a critical research method, being Snowdens pre-hypothesis method in conjunction with the authors development of a visual representation of IC interactions. The application of these methods to examine IC measurement questions not only the contemporary IC measurement frameworks but also the manner in which this could be accomplished. This is evidenced by the ability of the analysis to reduce some of the ambiguity surrounding the combination of intangible resources that create value as demonstrated in Table 5. As Alvesson and Deetz (2000, pp. 148-9) explain, the development of critical insight is all about the art of interpretation so that in the end new meanings and unexpected light is shed on the subject. In this case the visual representation of IC and value dimensions develops this new meaning and provides for greater understanding of IC within the BOP context.

4.2

Critique

The objective of critique is to counteract the dominance of taken-for-granted goals, ideas, ideologies and discourses which put their imprints on management and organization phenomena (Alvesson and Deetz, 2000, p. 18). By critiquing the
13

applicability of contemporary IC measurement frameworks it opens the possibility of examining IC differently. This is important because, as was earlier argued, one of the problems of the current view of IC measurement is that many of the ideas and terminology of IC that have been developed are the result of past management thinking and that as a new concept IC is heavily influenced by old ideals. The most prominent of these relates to the term IC in that the terminology itself is the source of misunderstandings of its very nature. The word capital implies that knowledge is some form of material wealth that can be managed in the same way as physical assets and that investing in these assets leads to the creation and possession of knowledge resulting in more wealth, both of which are empirically unproven (Newman as quoted in Chaharbaghi and Cripps, 2006, p. 42). One only has to look at the proliferation of the original frameworks which attempted to ascribe a dollar value to IC or the balance sheets of IC in the format of scorecards as ample evidence of this thinking (see Sveiby, 2007; and Ricceri and Guthrie, Forthcoming for a review). The subsequent unwillingness of the practitioner and academic communities to universally adopt any of these frameworks coupled with the fact that many of the new frameworks do not offer a radically different view of valuing or measuring IC continues to bind the IC paradigm to old accounting and performance management ideals. Additionally, the continued dominance of old managerial ideals has led to the misuse of the IC measurement frameworks. Sveiby (2007) outlines examples of IC measurement as being used as either a management control tool or for enhancing an organisations public relations and how this has had negative consequences for organisations. The investigation of IC measurement in this paper offers critique in that it exemplifies the ability to break free from the current frameworks of IC measurement that have been identified as being constructed by management practitioners and academics with the accounting of intangibles in mind. The view offered in this paper is that these contemporary IC measurement frameworks are reifying IC in the same manner in which tangible assets are portrayed within accounting, which is akin to attempting to make the intangible tangible. This is what the author defines as an accountingisation of IC. This practice of the accountingisation of IC has at best brought attention to the concept of IC and not its praxis, thus the ability of contemporary IC frameworks to generate understanding is questioned. The converse to contemporary IC measurement is demonstrated in this case by the production of the correlations between IC elements and the resulting patterns, which by their very nature remain intangible. These measurements of IC interactions are remarkably different from the contemporary IC measures found in BOPs performance management reports.

4.3

Transformative Redefinition

The last task of critical research is the development of critical, managerially relevant knowledge and practical understandings that enable change and provide skills for new ways of operating (Alvesson and Deetz, 2000, p. 19). This last task is especially important to measuring an organisations IC as there are inherent contradictions between the espoused benefits of IC and the reality of organisational practices. For example, as Mouritsen (2006, p. 835-6) points out, organisations are more likely to invest in human capital when they are in the black and to reduce the number of employees when they are in the red. This contradicts the espoused benefits of
14

human capital which, by the logic and argument of the IC paradigm, advocate the need to invest in employees as investments in human capital, and other forms of IC, are required for the long term financial success of the organisation. These and other contradictions will continue to evolve from the ongoing research into IC but should be taken as opportunities to develop insights that encourage more progressive management practices (see Alvesson and Deetz, 2000, p. 20). Previous thinking about IC that has forced the analysis, understanding and management practice of IC into entrenched management and accounting paradigms has resulted in a co-optation of IC into management practice. This can in part be to blame for the lack of take up of IC identified earlier and as evidenced by a number of organisations that have adopted IC management practices, lauded the benefits and then quietly withdrawn, especially when the going gets tough or they lose interest in the concept. Thus, IC is not a concept that translates automatically into beneficial organisational outcomes. The changes and benefits that accrue from managing IC are more likely to be developed in an ongoing struggle including much practice and frequent false starts (Alvesson and Deetz, 2000, p. 20). In order to progress the critical agenda on IC, managers will need to learn new skills (Alvesson and Deetz, 2000, p. 20) that will enable them to better understand the evolving insights and critiques of IC. By utilising these new skills and understandings, better decisions about how IC can be utilised in a particular organisational setting can be made rather than attempting to fit a particular organisations IC into one of the contemporary IC measurement frameworks (see Mouritsen, 2006, p. 829-32). This paper offers an example of such skills. The ability to apply alternative modes of investigating IC by utilising complexity, narrative, numerical, statistical and visual techniques outlines the types of skills that practitioners and researchers may need to acquire and develop in order to break free from the constraints of the current domination of contemporary accounting based frameworks of IC measurement. One objective of the critical approach is not to direct what needs to be done, but rather to build upon critique to offer a more positive future or more cautiously, alternative routes towards engagement with the world (Alvesson and Deetz, 2000, p. 152). In this light it is emphasised that retaining the accountingisation of IC measurement will only stifle the future of IC; utilising other approaches is not only possible but is likely to bear fruit, such as reducing the ambiguity in relation to intangible resources and value creation. Thus, a specific set of recommendations is not made, nor is advice offered on what exactly the management of BOP should do next other than offering the opportunity to utilise a different way of measuring IC. In reality, all that has been done is to open the door to a possible productive way of understanding IC and the complexities of value creation within the specific organisational context of BOP.

5 Conclusion
The insight offered in this paper is that the traditional frameworks used to manage, measure and report IC need to be transformed and the one size fits all approach to IC is unlikely to provide any more answers than it already has. This is because of the inability of contemporary measures of IC to reduce the ambiguity between the interaction of intangible resources and value creation at a specific point in time. What
15

has been demonstrated in this paper is the ability to view both the research and application of IC measurement differently by examining how IC is constructed in an organisation so that there is the potential to reduce the ambiguity between the intangible resources of an organisation and the ability to create value. Thus trying to fit contemporary frameworks to gather IC measurements to specific settings within organisations may have no relevance to understanding their value creation process. It is this papers argument that it is appropriate for a more critical view of IC measurement to be taken in both research and practice. As a result of the investigation of IC measurement in this paper, the ability to break free from an accountingisation of IC that to date only seems to have raised the awareness of IC and not the praxis of IC is explored. The measurements of IC interactions outlined here are remarkably different from the IC measures found in contemporary performance management reports and IC measurement frameworks. By learning and utilising new skills and understandings, managers can make better decisions about how IC can be utilised, this is in opposition to attempting to fit a specific IC context into one of the contemporary IC measurement frameworks. Thus, the ability to apply alternative modes of investigating IC by utilising other techniques shows that practitioners and researchers need to acquire and develop new skills in order to break free from the constraints of the current domination of contemporary accounting based frameworks of IC measurement. The main limitation of this case study is that the use of an alternate method to investigate IC in a particular organisational setting. So while the process outlined suits this particular organisation it does however open up the general understanding of the benefits of changing our thinking about both research into, and the practice of, measuring IC. Thus, rather than being constrained by the traditional models of measuring intangibles, by way of contemporary IC reporting frameworks, a more open process is outlined that could improve the timeliness and use value of the information.

16

Table 1: List of internal and external documents examined

Internal documents 2004 BOP Strategic Plan 2005 BOP Strategic Plan May 2005 BOP Performance Report July 2005 BOP Performance Report

External documents 2004 Annual Report 2005 Annual Report 2004 Social Impact Report 2005 Social Impact Report

17

Table 2: Content Analysis - Measurement Results

BOP OBJECTIVES1
Resources Financial/ Physical Capital Enhance the customer experience Customer Satisfaction various ATM Cash Availability % Improve operational efficiency Gross Expenses Monthly Expenses BOP Projects Financial Performance Profit Performance o Underlying Profit o BOP Area Contribution After Tax o Balance Sheet Information o Project Financials Outsource Expenses Build an achievement based culture Optimise capital usage (risk/leverage)

Relational Capital Structural Capital

Customer Satisfaction various Customer Experience Goals Met Channel Availability and Response Service Levels Operational Excellence KVDs Projects with Green Status

Community Days/FTE

IT Expenses, IT as % of Revenue, IT cost/FTE Operational Excellence KVDs Projects with Green Status

Projects with Green Status

Risk Rating BOP Non Lending Losses; Complaints Risk Rating WIRES Incidents and Audit Results Risk Rating Compliance Breach/ Incidents Indicators Projects with Green Status

Human Capital

One-day absences/FTE FTE and Personnel Expenses Analysis Average Annual Leave Outstanding Days 1 Note: Some measures have been classified into more than one category

Resignation Rate

Quarterly Staff Commitment BOP Compliance Training - % Attended

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Table 3: Ranking of IC components

IC Component

Frequency of Self-Indexing Relational Capital Creates value for AusFinCo 187 Beating the competition 148 Creates value for customer 146 Requires a knowledge worker 145 Positive customer experience 140 Technology helping customers 117 Requires a process worker 109 Sharing knowledge externally 98 I can see the customer 94 Structural Capital Effective lines of communication 159 Technology supports processes 135 People helping customers 131 Easy to use technology 126 Technology supports customers 117 Performance is product based 107 Innovative products 99 Product focused 87 Human Capital An attractive place to work 172 Trained and competent staff 159 Learning from others 146 The work is engaging 145 Long term career 134 Set in their ways 108 The new generation 92 Looking to retire 75

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Table 4: Map of inter-relationships of IC

IC Elements Creates value for the AusFinCo Relational Capital Technology helping customers Structural Capital Effective lines of communication Technology supports customers Technology supports processes Performance is product based Human Capital

Requires a knowledge worker

Positive customer experience

Sharing knowledge externally

Trained and competent staff

Creates value for customer

Requires a process worker

An attractive place to work

People helping customers

Beating the competition

IC Elements

Easy to use technology

I can see the customer

The work is engaging

Learning from others

Long term career

Set in their ways

Product focused

Positive customer experience Creates value for the AusFinCo Relational Capital I can see the customer Sharing knowledge externally Requires a knowledge worker Beating the competition Creates value for customer Requires a process worker Technology helping customers Product focussed Structural Capital Innovative products Performance is product based Easy to use technology People helping customers Effective lines of communication Technology supports customers Technology supports processes The work is engaging Trained and competent staff Human Capital Learning from others Long term career Set in their ways An attractive place to work The new generation Looking to retire

Looking to retire

Filters

The new generation

Innovative products

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Table 5: Value dimensions and interactions between IC components.

IC Elements Value Dimension Creates value for AusFinCo IC Components Creates value for customer Beating the competition Positive customer experience

Positive customer experience Creates value for AusFinCo Relational Capital Structural Capital Human Capital I can see the customer Sharing knowledge externally Requires a knowledge worker Beating the competition Creates value for customer Requires a process worker Technology helping customers Product focused Innovative products Performance is product based Easy to use technology People helping customers Effective lines of communication Technology supports customers Technology supports processes The work is engaging Trained and competent staff Learning from others Long term career Set in their ways An attractive place to work The new generation Looking to retire

21

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