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Intellectual capital Intellectual

capital literature
literature review review

Measurement, reporting
and management 155
Richard Petty
The University of Hong Kong, Hong Kong, and
James Guthrie
Macquarie Graduate School of Management, Sydney, Australia
Keywords Intellectual capital, Knowledge management, Intangible assets, Research,
Methodology
Abstract The rise of the ``new economy'', one principally driven by information and knowledge, is
attributed to the increased prominence of intellectual capital (IC) as a business and research topic.
Intellectual capital is implicated in recent economic, managerial, technological, and sociological
developments in a manner previously unknown and largely unforeseen. Whether these
developments are viewed through the filter of the information society, the knowledge-based
economy, the network society, or innovation, there is much to support the assertion that IC is
instrumental in the determination of enterprise value and national economic performance. First, we
seek to review some of the most significant extant literature on intellectual capital and its developed
path. The emphasis is on important theoretical and empirical contributions relating to the
measurement and reporting of intellectual capital. The second part of this paper identifies possible
future research issues into the nature, impact and value of intellectual management and reporting.

1. Introduction
It is an interesting time to be active in the field of research into intellectual
capital (IC). In many respects, the community of intellectual capital researchers
and practitioners is at an important juncture. The battle for acceptance of IC as
a topic worthy of boardroom discussion and serious academic investigation has
largely been won. The proliferation of conferences on intellectual capital, the
myriad of books, working papers, and journal articles that grapple with the
topic, and the large number of consulting firms offering products (services)
centred around intellectual capital, are testament to this. However, much of the
work to date belongs to what we classify as the first stage of development of a
framework of intellectual capital. First-stage efforts have typically focused on
consciousness raising activities that strive to communicate the importance of
recognising and understanding the potential for intellectual capital in creating

The authors would like to thank Dr Armen Gakavian, MGSM, for his valuable editorial work.
Also we have been greatly assisted by comments by Professor Ulf Johanson (Stockholm
University) and Professor Jan Mouritsen (Copenhagen Business School). We are also indebted to
the OECD secretariat for the recent symposium as this provided the intellectual stimulation to
Journal of Intellectual Capital,
advance the area of intellectual capital measuring and reporting. The responsibility for the Vol. 1 No. 2, 2000, pp. 155-176.
contents of this paper nonetheless remains entirely that of the authors. # MCB University Press, 1469-1930
JIC and managing a sustainable competitive advantage. The aim of stage one was
1,2 to render the invisible visible by creating a discourse that all could engage in.
Mission accomplished.
The research challenge now is to consolidate the second stage of development,
one that establishes research into intellectual capital as a legitimate undertaking
and gathers robust evidence in support of its further development.
156 We have two aims in writing this paper. First, we seek to review some of the
most significant extant literature on intellectual capital and categorise it in a
way that provides a useful understanding of how and why the IC movement
has developed in the way it has. The particular emphasis of the review will be
on important theoretical and empirical contributions relating to IC
measurement and reporting. Understanding the state of play is a logical first
step in strategically orienting the discipline and establishing paths for future
progress. The second aim is to use the literature review as a platform to
identify those avenues for future research that we consider likely to deliver
results for understanding the nature, impact and value of intellectual capital
measurement, reporting and management.
Our review and ensuing recommendations, are not intended to be exhaustive
or definitive. As academic accountants[1], our discussion no doubt exhibits a bias
that favours work that comes from a quantitative/numerical/calculative
framework. Perhaps our initial training has indelibly shaped our worldview. In
any case, the work we have done to date (Guthrie and Petty, 1999a, 1999b; Petty
and Guthrie, 2000; Guthrie et al., 1999) has focussed on IC measurement and
reporting. This paper will likely be of greatest interest, therefore, to those who
share our worldview, but we hope others may also find some common threads
that bind the intellectual capital movement and relate in some way to their own
individual interests. In some respects, we explore a particular patch of the IC quilt
for some clues as to how it should be represented and managed. All individual
pieces are required to complete the puzzle. We hope that our piece fills one gap.

2. Locating intellectual capital in various movements

Plenty of convincing arguments have been forwarded in support of the need to
understand intellectual capital better (e.g. Brooking, 1996; DATI, 1998; 1999;
Petty and Guthrie, 2000b; SMAC, 1998; Sveiby, 1998). These range from an
intuitive understanding that it ``matters'' (Stewart, 1997) to evidence that
recognising intellectual capital has the potential to improve the efficiency of both
capital and labour markets (Bukh et al., 1999; OECD, 1999). Few authors (Brennan
and Connell (2000) being an exception), however, have traced the sequence of
events involved in its development. We think the historical perspective an
essential component in fostering an understanding of the context within which IC
came to be viewed as the essential business element that it is today.
The rise of the ``new economy'', one principally driven by information and
knowledge, is identified by the OECD (forthcoming) as explaining the increased
prominence of IC as a business and research topic. There is scant agreement as to
what extent our current understanding of IC is new (Hornery, 1999). Intellectual
capital, in one form or another, is implicated in recent economic, managerial, Intellectual
technological, and sociological developments in a manner previously unknown capital literature
and largely unforeseen. Specifically, the importance of IC is emphasised in[2]: review
. the revolution in information technology and the information society;
. the rising importance of knowledge and the knowledge-based economy;
. the changing patterns of interpersonal activities and the network 157
society; and
. the emergence of innovation as the principal determinant of competitiveness.
However, whether these developments are viewed through the filter of the
information society, the knowledge-based economy, the network society, or
innovation, there is much to support the assertion that IC is instrumental in the
determination of enterprise value and national economic performance (OECD,
forthcoming; Burton-Jones, 1999; Boisot, 1999; Mouritsen, 1998).
Roos et al. (1997) argue that IC can be linked to other disciplines such as
corporate strategy and the production of measurement tools. From a strategic
perspective, intellectual capital is used to create and use knowledge to enhance
firm value. In contrast, the measurement angle focuses on how new reporting
mechanisms can be constructed that enable non-financial, qualitative, items of
intellectual capital to be measured alongside traditional, quantifiable, financial
data (Johanson et al., 1999).
A slightly modified figure for locating IC appears as Figure 1 (Roos et al.,
1997, p. 15).

Figure 1.
Model representing how
intellectual capital can
be located
JIC Our review focuses partly on evaluating the extent to which intellectual capital
1,2 is implicated in the process of leveraging and developing organisational
knowledge. However, our main focus is on assessing the legitimacy conferred
upon intellectual capital through rendering it visible by including explicit IC
measures and statements in the company annual report and for internal
management purposes.
158
3. Understanding intellectual capital
Establishing some boundaries is essential. The term ``intellectual capital'' is
frequently used in an all-encompassing fashion with the risk that in time the
identity of the object will become unclear. Seldom has the question, ``What is
intellectual capital?'', been adequately addressed.
One of the most workable definitions of intellectual capital in our opinion is
that offered by the Organisation for Economic Co-operation and Development
(OECD, 1999)[3] which describes intellectual capital as ``the economic value of
two categories of intangible assets of a company:
(1) organisational (``structural'') capital; and
(2) human capital.
More precisely, structural capital refers to things like proprietary software
systems, distribution networks, and supply chains. Human Capital includes
human resources within the organisation (i.e. staff resources) and resources
external to the organisation, namely customers and suppliers. Often, the term
``intellectual capital'' is treated as being synonymous with ``intangible assets''.
The definition offered by the OECD, however, makes an appropriate distinction
by locating intellectual capital as a subset of, rather than the same as, the
overall intangible asset base of a business. As such, there are items of an
intangible nature that do not logically form part of a company's intellectual
capital. A firm's reputation is one such item. Reputation may be a by-product
(or a result) of the judicious use of a firm's intellectual capital, but it is not part
of intellectual capital per se.
Historically, the distinction between intangible assets and intellectual
capital has been vague at best. Intangibles have been referred to as ``goodwill''
(APC, 1970; ASB, 1997; IASC, 1998), and intellectual capital as part of this
goodwill. Recently, a number of contemporary classification schemes have
refined the distinction by specifically dividing intellectual capital into the
categories of external (customer-related) capital, internal (structural) capital,
and human capital (e.g. Sveiby, 1997; Roos et al., 1997; Stewart, 1997;
Edvinsson and Stenfelt, 1999; Edvinsson and Malone, 1997). From a utilitarian
point of view, the distinction has proved a winner by facilitating the
preparation of ``intellectual capital accounts'' (typically included in the
traditional annual report) which are employed differently in making decisions
regarding organisational value that are more encompassing than decisions
made previously (Guthrie and Petty, 1999a; ICAEW, 1998; Sveiby, 1998).
 The delineation between the terms ``knowledge management'' and Intellectual
``intellectual capital'' also seems unclear at times. In our view, knowledge capital literature
management is about the management of the intellectual capital controlled by a review
company. Knowledge management, as a function, describes the act of
managing the object, intellectual capital (Petty and Guthrie, 2000; Guthrie and
Petty, 1999).
A hurdle associated with this increased complexity of classification is that 159
traditional accounting practice does not provide for the identification and
measurement of these ``new'' intangibles in organisations, especially
knowledge-based organisations (Guthrie et al., 1999; IFAC, 1998; SMAC, 1998).
``New'' intangibles such as staff competencies, customer relationships, models,
and computer and administrative systems receive no recognition in the
traditional financial and management reporting model. Interestingly, even
traditional intangibles like brand equity, patents, and goodwill are reported in
the financial statements only when they meet stringent recognition criteria,
otherwise they have, until recently, also been omitted from the financial
statements (see IFAC, 1998; IASC, 1998).
The limitations of the existing financial reporting system for capital
markets[4] and other stakeholders have motivated an evolving dialogue on
finding new ways to measure and report on a company's intellectual capital.
The product of this dialogue is a plethora of new measurement approaches that
all have the aim, to a greater or lesser extent, of synthesising the financial and
non-financial value-generating aspects of the company into one external report.
Principal among the new reporting models are the intangible asset monitor
(Sveiby, 1988; 1997; Celemi, 1998); the balanced scorecard (Kaplan and Norton,
1992; 1996); the Skandia value scheme (Edvinsson and Malone, 1997;
Edvinsson, 1997); and the intellectual capital accounts (DATI, 1998).
Brennan and Connell (2000) provide an interesting framework for comparing
several of the main classification schemas and this is summarised in Table I.

Developed by Framework Classification

Sveiby (1998; 1997) The intangible asset Internal structure

monitor External structure
Competence of personnel
Kaplan and Norton (1992) The balanced scorecard Internal processes perspective
Customer perspective
Learning and growth perspective
Financial perspective
Classification of Competence
resources Relational Table I.
Classification of Competence Frameworks for
resources Relational classifying intellectual
Edvinsson and Malone (1997) Skandia Value Scheme Human capital capital reporting
Structural capital models
JIC Many of the frameworks have the same three broad classification categories ±
1,2 human, customer and structural capital. However, these classification schemes
are presented differently in each of the models.

4. Comparing the different classification schemas

Although not clear at first, perhaps, there are major differences between the
160 different classification schemas. For instance, the intangible asset monitor
(Sveiby, 1988; 1997) and the balanced scorecard (Kaplan and Norton, 1992) both
classify intangibles into three categories. Both theories suggest that non-
financial measures provide a means of complementing financial measures and
should also be present at the strategic level of the firm. However, Kaplan and
Norton attempt to link the non-financial and financial factors in a more obvious
and explicit manner. One of the four balanced scorecard ``perspectives'' is in fact
financial. A major area of difference lies in the priority given to measuring
internal human capital (i.e. employees) ± the balanced scorecard tends to focus
more on customer capital, though many of the metrics that could be used in any
particular balanced scorecard also provide incidental information on employee
capital.
Johansson et al. (1998) argue that the frameworks of the two tools make very
different basic assumptions. First, Sveiby (1997) regards people as the only
profit generators in an enterprise, an assumption not shared by Kaplan and
Norton (1992). In addition, the intangible asset monitor puts forward the idea
that indicators should be found for the growth, renewal, stability and efficiency
of intangible assets to assess how the intangibles base is developing. The
balanced scorecard, on the other hand, aims to balance the traditional
perspective by adding the customer, process and learning, and growth
perspectives. Finally, the balanced scorecard does not question ``what
constitutes a firm'', while Sveiby attempts to redefine/re-evaluate the firm from
a ``knowledge perspective''[5].

5. From practice to theory

The intellectual capital movement is undeniably grounded in practice (Roos et
al., 1997; Larsen et al., 1999; Mouritsen, 1998). The development of intellectual
capital reports, for instance, can be traced back to the desire for individuals
working with or within businesses to improve their understanding of what
comprised the value of the business so as to manage better those things that
generate value (Sveiby, 1997; Edvinsson and Malone, 1997; Johanson et al.,
1999).
A general timeline of major intellectual capital practice and research
milestones appears in Table II.
Table II communicates a general sense of the extent to which theory and
research have been guided by practice. This timeline is, of course, a gross
simplification of the richness of the development process. For instance, we
acknowledge that overtures to many of the ideas being formalised today can be
Period Progress Intellectual
capital literature
Early 1980s General notion of intangible value (often generically, labelled ``goodwill'') review
Mid-1980s The ``information age'' takes hold and the gap between book value and
market value widens noticeably for many companies
161
Late 1980s Early attempts by practitioner consultants to construct statements/accounts
that measure intellectual capital (Sveiby, 1988)

Early 1990s Initiatives systematically to measure and report on company stocks of

intellectual capital to external parties (e.g. Celemi and Skandia; SCSI, 1995)
In 1990, Skandia AFS appoints Leif Edvinsson ``Director of intellectual
capital''. This is the first time that the role of managing intellectual capital
is elevated to a position of formal status and given an air of corporate
legitimacy
Kaplan and Norton introduce the concept of a balanced scorecard (1992).
The scorecard evolved around the premise that ``what you measure is what
you get''

Mid-1990s Nonaka and Takeuchi (1995)[6] present their highly influential work on
``the knowledge creating company''. Although the book concentrates on
``knowledge'', the distinction between knowledge and intellectual capital is
sufficiently fine as to make the book relevant to those with a pure focus on
intellectual capital
Celemi's Tango simulation tool is launched in 1994. Tango is the first
widely marketed product to enable executive education on the importance
of intangibles
Also in 1994, a supplement to Skandia's annual report is produced which
focuses on presenting an evaluation of the company's stock of intellectual
capital. ``Visualizing intellectual capital'' generates a great deal of interest
from other companies seeking to follow Skandia's lead (Edvinsson, 1997)
Another sensation is caused in 1995 when Celemi uses a ``knowledge audit''
to offer a detailed assessment of the state of its intellectual capital
Pioneers of the intellectual capital movement publish bestselling books on
the topic (Kaplan and Norton, 1996; Edvinsson and Malone, 1997; Sveiby
1997). Edvinsson and Malone's work, in particular, is very much about the
process and the ``how'' of measuring intellectual capital[7]
Table II.
Late 1990s intellectual capital becomes a popular topic with researchers and academic
Milestones ± a
conferences, working papers, and other publications find an audience
chronological review of
An increasing number of large-scale projects (e.g. the MERITUM project; significant
Danish; Stockholm) commence which aim, in part, to introduce some contributions to the
academic rigour into research on intellectual capital identification,
measurement and
In 1999, the OECD convenes an international symposium in Amsterdam on reporting of intellectual
intellectual capital[8] capital
JIC traced back many years ± Tobin's ``q'' being a well-known case in point (Chung
1,2 and Pruitt, 1994). The timeline does, however, further an appreciation of the
distinction between first-stage and second-stage intellectual capital projects.
Activity during and prior to the mid-1990s largely belongs to the first stage;
much of the work since may be characterised as the second stage. What exactly
distinguishes the two stages? First-stage work is primarily concerned with
162 consciousness raising and creating mass awareness of the relevance of
intellectual capital. A great deal of first-stage work is purely descriptive of
what was happening in various organisations. Publications falling under the
first-stage umbrella tend to take the position that ``intellectual capital is
something significant and should be measured and reported'' without
specifically relating the generalised comments to an organisational context.
The second stage of the development of intellectual capital as a discipline has
seen researchers begin to investigate ideas relating to the influence of micro-
level (i.e. organisation-specific) conceptualisations of the value of intellectual
capital on the behaviour of the capital and labour markets (Bassi and
McMurrer, 1999; Holland, 1999; Lev and Mintz, 1999; DCTU, 1999; Westphalen,
1999; Leadbeater, 1999; Canibano et al., 1999a; Bukh et al., 1999; OECD, 1999).
Most of the ideas that are now being vetted by researchers were formulated, or
at least alluded to, initially during the first-stage process. Second-stage activity
is in its infancy and there are countless opportunities to explore the hypotheses
already developed. Our discussion of directions for future research will revisit
this theme.
Although much of the work undertaken prior to the mid-1990s may be
categorised as being first-stage in nature, we do not view the line between first-
and second-stage development of the intellectual capital movement as
primarily a chronological one. Rather, the distinction relies more upon the
substance of the work undertaken by the interested party. Efforts that
concentrate on the ``why, what, and, where'' issues deal primarily with creating
an understanding, or definition, of the intellectual capital domain and may be
characterised as first stage in nature. Investigations that focus on the ``how'' are
second stage in nature and deal mainly with the process of measuring and
managing the intellectual capital that has already been identified and situated
in the context of the firm. High quality work progresses on both fronts
concurrently. However, forays into the ``how'' seem more likely to further the
discipline in the short term. The development of better, more refined, multi-
dimensional tools will inevitably lead to a broader acceptance of the viability of
its measurement and management. Both Sveiby's intangible assets monitor
and Kaplan and Norton's balanced scorecard are excellent tools, but each
represents a first attempt at solving the problem of visually representing (in
numbers or other means) the IC of a specific organisation.
Using the timeline presented above as a point of reference to chart progress
to date, it should be noted that a number of types of activity combined to keep
the momentum to continue investigating intellectual capital. Specifically, the
movement evolved via experimentation within companies (e.g. Skandia, 1998),
the development of educational tools and products (e.g. Tango), publication of Intellectual
key papers on the topic (OECD, 1999), and exposure on the public speaking capital literature
circuit. Also, the patronage and interest of key firms and individuals cannot be review
overstated.

6. Brief survey of the empirical research literature

In line with our first major aim of this paper, we now provide a brief overview 163
of some of the empirical research into IC. We propose three different frames for
viewing this material. The first frame introduces readers to several major
research projects that are currently examining aspects of IC in Europe and
elsewhere. The second frame is a brief review by type of research methods,
namely case studies, interviews, survey of annual reports. The third frame
briefly reviews some work into developing IC indicators associated with
corporate reporting.

6.1 Current major research projects

MERITUM Project. Several of the empirical academic research studies
referenced in this paper form part of an ongoing project investigating IC called
MERITUM ± measuring intangibles to understand and improve innovation
management[9]. The project is financially supported by the European
Commission. The principle aim is to produce guidelines to measure and
disclose intangibles for the purpose of improving decision making for
managers and stakeholders. The project has four main aims: establish a
classification scheme for intangibles; document company management and
control systems for identifying European best practices in measuring
intangibles; assess the relevance of intangibles in the functioning of capital
markets by means of market data analysis; and produce guidelines for the
measurement and reporting of intangibles.
Work Life 2000. The workshop on intellectual capital and in particular
human capital in February 1999 was one of 60 specialised workshops
concerned with the working life of the EEC constituents on the European
agenda (see, Work Life 2000, 1998a; 1998b). The overall project ± referred to as
Work Life 2000 ± is hosted by Sweden and draws in all European Union
member states. The researchers at the intellectual capital workshop came from
ten European countries, Australia and the USA (see Grojer and Johanson, 1999).
The aim of this workshop was to summarise the state of the art with respect to
managing and accounting for intangibles. From this review, a second purpose
was to draw conclusions for future research and potential European policy
declarations (Grojer and Johanson, 1999).
OECD. In June 1999, the OECD co-sponsored an International Symposium
on Measuring and Reporting intellectual capital: Experience, Issues and
Prospects (OECD, 1999). The symposium provided a forum for a multitude of
actors to share experiences in the areas of intangibles and innovation, human
capital indicators, human resource accounting, and corporate governance and
disclosure. That work underlined the growing importance of intangibles or
JIC ``intellectual capital'' as a key element in economic growth and social progress,
1,2 while at the same time demonstrating the shortcomings in institutional
arrangements for identifying, defining and measuring intellectual capital, and
signaling its importance (OECD, forthcoming)[10].
Various national initiatives. There are several national initiatives to report
on. Governments in The Netherlands, Denmark, and Norway have provided
164 incentives for investigation and experimentation with IC. The Netherlands,
for example, invited four accounting firms to conduct a ``practice-oriented
study of the intangible assets of a number of their clients, and to produce
a trial appendix to the external financial annual report without allowing
themselves to be influenced by existing conventions, legal regulations
and accounting principles.'' This group has now delivered its report (see
Hermans, 1999; Netherlands, 1999; Andriessen et al., 1999; Backuijsetal et al.,
1999).
The Danish Agency for Trade and Industry (DATI, 1998; 1999) sponsored
the preparation of a report on various attempts, at the company level, to
prepare ``intellectual capital accounts'', based on the experience of ten Nordic
companies. Further initiatives to consider the scope for, and the practical
implications of, developing better and more comprehensive intellectual capital
indicators were taken in 1998 by the Danish government through the
organisation of a pilot project with participation of some two dozen Danish
firms (see Bukh et al., 1999; forthcoming; Mouritsen et al., 1999; Mouritsen,
forthcoming; Nikolaj et al., 1999; Hoogendoorn, 1999).
In Norway, the Government has sponsored research since 1992 to develop a
competence capital model which has evolved into an ISO-type certification
process including intellectual capital (Enqvist, 1999; Lovdal and Roberts, 1999).
As with the other two initiatives, the prevailing spirit is participatory
experimentation rather than mandatory reporting.

6.2 Empirical research of practice

Brennan and Connell (2000) undertook a comprehensive review of a number of
recent empirical research studies on different aspects of intellectual capital that
were presented at the OECD Symposium. The studies covered included:
Andriessen et al. (1999); Backhuijs et al. (1999); Brennan (1999); Bukh et al.
(1999); Canibano et al. (1999b); Danish Agency for Trade and Industry (1998;
1999); Guthrie et al. (1999); Hoogendoorn et al. (1999); Johanson (1999); Johanson
et al. (1999a); Miller et al. (1999).
This empirical research of internal and external IC management and
reporting practices was conducted in The Netherlands, Denmark, Sweden,
Canada, Spain, Australia and Ireland. The various research objectives focused
on intellectual capital statements, intellectual capital frameworks and
measuring and reporting on intellectual capital. A variety of research
methodologies were used (interview, case study, questionnaire, survey of
annual reports, focus groups), the most popular being case studies involving a
small number of companies. Interviews and questionnaires were often used to
supplement each other and usually involved larger sample sizes. A rough count Intellectual
of the number of organizations represented in this group of research was about capital literature
1,700 ± a large total sample size to indicate the current state of IC management review
and reporting.
Brennan and Connell (2000) report that intellectual capital management was
found to be important for a company's long-term success. Companies managing
their own intellectual capital outperformed other companies (Bornemann et al., 165
1999; Johanson, 1999). Interestingly, of the various categories of intellectual capital,
human capital is regarded as the most valuable asset (Bachhuijs et al., 1999;
Johanson et al., 1999b; Miller et al., 1999). Numerous intellectual capital indicators
were identified (Guthrie et al., 1999; Brennan et al., 1999; Miller et al., 1999), as also
almost all of the research teams promulgated different theories of intellectual
capital and evaluated organisations against it. The plethora of theories, models,
and methods advanced for understanding and measuring IC suggests that there is
no generally accepted theoretical model for understanding IC.

6.3 Intellectual capital indicators and corporate reporting

As indicated above, endeavours to reconstruct corporate annual reporting to
include IC indicators were spearheaded in the early 1990s by a small number of
corporations which, due to heavy reliance on intellectual capital, took a
particular interest in the subject.
Among the pioneers were corporations like the Swedish insurance company,
Skandia, the Danish company Rambùll, and the Dow Chemical Company.
Skandia and Rambùll in 1994 included various aspects of their intellectual
capital in their annual reporting. In the same year, Dow Chemical Company
prepared and published a conceptual framework for assessing the contribution
of intellectual capital to the overall value of the company (see Edvinsson and
Malone, 1997; Sveiby, 1997; Petty and Guthrie, 2000a).
Recently, Guthrie and Petty (2000) reported on the findings of the Australian
research team (Guthrie et al., 1999) who created a modified version of Karl Erik
Sveiby's intangible assets monitor and then evaluated a sample of Australian
annual reports as to the attributes contained within their framework[11] (see
Table III). They examined whether indicators or a statement of objectives
appeared in the documents in narrative form, in numerical form, or in quantified
value form. They viewed the financial reports ``as a means by which a
corporation locates and identifies itself within social and political communities.''
In examining the Irish practice of measuring and reporting intangible assets,
Brennan (1999) used the same model as the Australian team and produced the first
reported international comparative study of disclosure of IC in annual reports.

6.4 Human capital

One aspect of IC that has received a significant amount of attention is the area
of human capital. The following is only a brief review to provide an overview
as to the type of research that is currently being undertaken. A key element of
JIC Internal: organisational Intellectual Patents
1,2 (structural) capital property Copyrights
Trademarks
Infrastucture assets Management philosophy
Corporate culture
Management processes
Information systems
166 Networking systems
Financial relations
External: customer Brands
(relational) capital Customers
Customer loyalty
Company names
Distribution channels
Business collaborations
Licensing agreements
Favourable contracts
Franchising agreements
Employee competence: Know-how
human capital Education
Vocational qualification
Work-related knowledge
Table III. Work-related competencies
Guthrie and Petty Entrepreneurial spirit,
(2000) modified innovativeness, proactive and
intangible assets reactive abilities,
monitor changeability

this work is the reporting of human capital. Secondary is the investigation into
the relationship between the recording and reporting of human capital and
internal human resource management and development.
The money that enterprises spend on human resources has traditionally
been reported in the accounts as a cost, rather than as an investment
(Roselander, 1997; Johanson, 1998). This has been the case even where firms
and organisations have relied heavily on the knowledge and skills (intellectual
capital) of their staff to generate earnings and growth and to improve efficiency
and productivity (Westphalen, 1999).
Substantial benefits might be gained from better information about human
resources (Sackman et al., 1989). This information might allow human
resources to be allocated more effectively within organisations and may further
enable gaps in skills and abilities to be more easily identified. It might also
facilitate the provision of more comprehensive information to investors or
potential investors (Lank, 1997).
In addition there may be public policy benefits. An important consequence
of traditional managing and reporting practices is that, because human
resource development appears as a cost rather than an investment, enterprises
may be inclined to under-invest in training. This can contribute to recruitment
and retention difficulties within the enterprise but, more broadly, can lead to an Intellectual
over-reliance on the public sector to support the required levels of training. capital literature
Better ways of measuring and reporting human resources might therefore review
encourage greater private investment in education and training (Olsson, 1999;
Johanson, 1998; Bourdreau and Ramstad, 1997).

167
7. Future research directions
7.1 Business practice and accounting research: bridging the gap
Acknowledging that the antecedents of today's intellectual capital movement
lie in practice is an important reminder of the desirability for researchers to
keep their work focussed and relevant to business practice. Business
researchers and practitioners alike often bemoan the lack of correspondence
between what researchers do and what businesses would like to know (or need
to know). Being a part of a research movement that is, in many ways,
embryonic affords a perfect opportunity to bridge the gap from the outset.
Much of the work published to date is targeted at a practitioner audience and,
though intuitively appealing, is not substantiated by an extensive research
literature. This is partly due to the long and unavoidable lead-time that is part
and parcel of any rigorous academic work. It is also attributable to the fact that
work in the field of IC has largely been demand-led (by innovative
practitioners) rather than supply driven.
This does not, however, undermine the potential for research to make a
significant contribution. At an individual firm level, action may be driven by
the whim of a powerful executive. However, at a market and regulatory level,
widespread acceptance (and possible future mandatory reporting
requirements) will likely be achieved only with the support of research
evidence indicating the advantage and value of measuring, managing and
reporting IC.

7.2 Where to from here? Avenues for future investigation

The current focus of IC research efforts may be divided into two camps. First,
there is the work that is primarily concerned with the process of creating and
managing IC. Second, there is research that focuses on understanding better the
measurement of IC. This second body of work is mainly concerned with finding
the ``best'' metrics to use for the purpose of measuring IC and also with
broadening the context of measurement.
One task researchers face is to convince others of the usefulness of
qualitative measures and to demonstrate a meaningful interplay between hard
quantitative measures of performance and softer qualitative performance
indicators. From a strategic perspective it is often the qualitative measures that
are more telling and more important. Kaplan and Norton's (1992) balanced
scorecard and Sveiby's intangible assets monitor (Sveiby, 1997) have made
great strides in convincing many of this already. Still more needs to be done.
JIC Irrespective of the conceptual focus of investigation, the choice of research
1,2 method is important. So far, scant business research has been conducted into
IC, and most of the work that has been performed has used a case study or
survey approach. There is a need for further exploratory studies involving
fieldwork to provide a more detailed appreciation of the issues involved in the
measurement and management of knowledge-based intangibles. A more
168 comprehensive case study (action research) approach will help to capture fully
the richness of the variables involved and to provide an appropriate context for
the interpretation of findings resulting from the other forms of investigation.
Survey work has served mainly to reveal the organisational IC topography
and to provide data on perceptual variables relating to the acceptability and
desirability of IC information. More work is required that relates user
perceptions to the specific use of IC data in making decisions. Finding
organisations willing to participate in such research is a large part of the battle.
However, given the practical orientation of work into IC, the benefits to
participating organisations seem clear. These include the ultimate provision of
information that may assist them in the further development of their
intellectual capital, and access to data for internal benchmarking purposes.
Though case studies, surveys, and experimental work have all been
performed, few studies have at this stage used a multi-method approach to data
collection. The potential usefulness of multiple methods has long been
recognised in the management accounting literature (Birnberg et al., 1990) as a
way of corroborating research findings and enriching an understanding of
results in light of a broader contextual analysis. For instance, combining the
collection of empirical data with data obtained from cross-sectional surveys is
an effective way of assessing the parity between what is happening and what
different groups feel should be happening. Irrespective of whether an
undertaking is inspired by a normative or positive research approach, it will
benefit from multi-method work and the opportunity for triangulation that
accompanies such analysis.
Increasingly, there has been recognition on both sides that there is a need for
more practically grounded research, as expressed in the aims of the MERITUM
project. In researching IC, there is an opportunity to bridge the gap from the
outset by taking what practitioners have already done and applying some
academic rigour to improve frameworks already in place.
At this juncture, the balance of work is tilted towards using surveys and
case studies to discover what is taking place in organisations. Increasingly,
however, we expect to see more investigations of an experimental and
analytical nature that aim to improve the tools and techniques being applied in
business. The evolution of IC reporting will likely be redirected away from the
influence of in-house corporate experience towards a development inspired by
research findings. Experimental and analytical work offers the prospect of
being able to determine exactly what is the best way to report IC in terms of
content (metric choice) and decision-usefulness.
 Leaving a consideration of methods aside, there is also the issue of what Intellectual
topics are most relevant and interesting to researchers. The best way to delimit capital literature
the topics is to identify some questions that are open to investigation: review
. What motivates firms to want to measure their intellectual capital? For
instance, do firms intend that measuring IC will enable them to predict
future performance better? Alternatively, do firms view the
measurement of IC as something that will assist them operationally by 169
augmenting decisions related to staffing or supplier or customer
relationships? Is it the case that management believes the labour and
capital markets will view the company more favourably if it reports on
its IC? Perhaps managers simply think that the firm needs to report on
its IC in order to be viewed as an innovator rather than a follower.
. What are the current, and anticipated, effects of reporting intellectual
capital? Is reporting IC likely to favourably impact productivity?
Improve efficiency? Deliver external kudos? Enhance corporate spirit?
Establish a more relevant corporate identity?
. Is generating information on intellectual capital feasible from a cost/
benefit perspective?
. Within an organisation, who is best positioned to measure and manage
intellectual capital?
. How might current methods of measuring intellectual capital be
improved? How feasible is it to develop further the various reporting
frameworks for intangible assets that are currently in use such as the
IAM (Sveiby, 1997) or the balanced scorecard (Kaplan and Norton,
1992)?
. What is the extent of demand for intellectual capital reporting at the
market and firm levels?
. Is information on intellectual capital transparent, robust, reliable, and
verifiable (i.e. auditable and suited to inclusion in external reports)?
. In what manner are current gaps in information a barrier to the better
internal management of intellectual assets and improved enterprise
decision making?
. What specific difficulties are associated with the development of an IC
reporting system and how might they best be overcome
. Where should IC information be presented/reproduced? (Annual report?
Press release/promotional material?)

7.2 Concluding remarks

We have attempted to conduct a meta-analysis of the field of intellectual
capital. In the knowledge-based economy, where the knowledge worker is a
premium commodity and technologies like electronic commerce represent the
new lingua franca of business, conventional accounting and reporting systems
JIC capture little of substance and meaning. Without an improved understanding
1,2 of how and why organisations develop their intellectual capital, we remain
unenlightened in the ways and means of improving the stock of intellectual
capital, ignorant of how to construct an appropriate dialogue aimed at enabling
progress in further developing and managing intellectual capital, oblivious to
the need for information on IC (Who are the users? What decisions would they
170 like to make?), and unaware as to the appropriate reporting metrics and format.
Our review of the literature and ongoing projects points to the ever-
increasing sophistication of material presented on IC and research conducted
into the further development of IC. We believe that the most valuable insights
are likely to result from a combination of research methods being applied in
investigating specific problems as they present at a firm (case study) and
market (survey and experimental work) level. Many of the big-picture issues
remain hazy at this interval and many of the granular topics have not been
adequately identified and articulated. In short, the embryonic stage of research
into IC offers the potential for researchers to make meaningful contributions
that are either theoretical, methodological, or empirical in nature.
Notes
1. Please note that we now teach and research in a variety of disciplines including
management, research methods and knowledge management.
2. For more information, see Allee (1997); Boiot (1999); Burton-Jones (1999); Dowson (2000);
Prusak (1997); Klein (1997); Rappaport (1996); Tissen et al. (1998); Work Life 2000 (1998a;
1998b). For another excellent review of the IC movement, see Sullivan (2000) and the
detailed history of the development of IC movement (pp. 238-45).
3. Organisation for Economic Co-operation and Development (1999); Measuring and
Reporting intellectual capital: Experience, Issues and Prospects, an international
symposium, Programme Notes and Background to Technical Meeting and Policy and
Strategy Forum.
4. There is an emerging body of work that is examining the corporate financial reports and
IC. We do not explore this work in this review other than the following, as intangible
investments and know-how becomes more important, especially in high-tech companies,
the inadequacies of traditional reporting increasingly leaves the average investor at a
disadvantage compared with knowledge insiders and outsiders with ``private'' access to
inside information. This type of work is represented by Baruch Lev (1999). As indicated by
the author, this paper is composed mainly of elements from previous work, such as: The
Boundaries of Financial Reporting and How to Extend Them (with Paul Zarowin), What
Values Analysts (with E. Amir and T. Sougiannis), R&D-related Reporting Biases and
Their Consequences (with B. Sarath and T. Sougiannis), and The Value Relevance of
Intangibles: The Case of Software Capitalisation (with D. Aboody).
5. For a discussion on the similarities and differences between various frameworks, see also,
Brennan and Connell (2000); and Bornemann et al. (1999).
6. This book was important for a number of reasons, not the least being the message that
effectively managing knowledge was a cornerstone of the success of a great many highly
successful Japanese enterprises and may well have been their source of competitive
advantage over their western counterparts. The authors also present one of the first
accounts dealing with how the process of managing knowledge and creating intellectual
capital operates. Rather than seeking simply to measure and manage what is already in
place, the ultimate goal is to leverage an understanding of the process so that new
 knowledge (intellectual capital) is created. The management/creation cycle is mutually Intellectual
reinforcing. Nonaka and Takeuchi were perhaps the first to develop ideas relating to the
second-stage ``how'' of intellectual capital development. capital literature
7. The book makes a number of significant contributions including a detailed discussion of review
Skandia's ``Navigator'' which the authors assert ``has already proven to be so effective that
it will likely be the basis for most future IC navigation tools'' (p. 69). A comprehensive list
of metrics is provided that interested parties might use in the construction of customised
intellectual capital monitors. 171
8. The symposium, Measuring and Reporting intellectual capital: Experience, Issues, and
Prospects: An International Symposium, was convened in Amsterdam on 9-11 June, 1999.
Over 200 delegates from 30 countries were in attendance. Attendees included leading
academics, corporate chiefs, professional association representatives, and government
policy-making groups. The general aim of the conference was to begin considering how
international guidelines and standards of practice for the measurement and reporting of
intellectual capital might be drawn up.
9. Six European countries (Finland, France, Denmark, Norway, Spain and Sweden) are
participating in this research. The project started in November 1998 and will continue for
30 months (e.g. Johanson, 1999; Canibano et al., 1999a; Eronen and Ahonen, 1999).
10. The background papers, the reports from the research teams (technical reports), speeches
delivered to the OECD Symposium Technical Meeting and the Strategy and Policy forum,
and the chairman's conclusions, can be consulted at and downloaded from the OECD
Website http://www.oecd.org/dsti/sti/indcomp/act/Amsconf/symposium.htm In addition,
the final Report on the Symposium (OECD, forthcoming) provides an overview and
conclusion to the conference.
11. The content analysis involved examining the annual report of each company and coding
the information contained therein according to a developed framework of intellectual
capital indicators. This framework was derived from several professional pronouncements
on intellectual capital (see IFAC, 1998; SMAC, 1998). A total of 26 intellectual capital
attributes were searched for in conducting the content analysis. In terms of the modified
Sveiby model, 11 of these related to internal structure, nine to external structures, and six
to employee competence.

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