Corporate reporting of intellectual capital: Evidence from UK companies

Abstract

This paper reports the results of an empirical investigation into the intellectual capital reporting practices of UK companies in four distinct sectors. It differs from prior intellectual capital reporting studies in that it analyses a wide range of corporate reports for their intellectual capital content. It finds major differences between the elements of intellectual capital reported in each sector studied. The study also finds that a range of different types of corporate reports were used for communicating intellectual capital information, and that the annual reports were not a good proxy for the proportion of disclosures across all corporate reports analysed in this study.

Introduction

In many different sectors, knowledge management and intellectual resources are increasingly important factors in the successful achievement of organisational objectives (Boedker et al., 2005, Petty and Guthrie, 2000). For stakeholders to more fully understand an organisation, and the effectiveness of its managers, it is therefore vital that the organisation's corporate reports adequately reflect its intellectual resources – and the manner in which these knowledge-based resources are used and developed to further the organisation's achievements, both in the past and looking to the future (Boedker et al., 2005).

However, despite recent changes in the focus of financial accounting regulations towards a greater use of future financial benefits when valuing present assets and liabilities (Deegan and Unerman, 2006), many intellectual resources are not captured within mandatory financial accounting metrics (Beattie et al., 2002, Beattie et al., 2004, Mouritsen et al., 2001b, Petty and Guthrie, 2000, Petty et al., 2006). This has resulted in large areas of the accounting and reporting of intellectual resources being voluntary rather than mandatory.

Reflecting the growing importance of intellectual resources – often referred to as intellectual capital (IC) – in the success of many organisations, there has been growing academic attention paid to various aspects of IC accounting since the mid 1990s (see, for example, the studies analysed in the next two sections of this paper). One strand of this developing academic literature comprises empirical investigations into the external reporting of IC. While there have been several such studies focusing on intellectual capital disclosures (ICDs) by companies in Continental Europe, few such studies have examined these practices among UK corporations, with only one study focusing exclusively on UK ICD practices (Williams, 2001, which examined ICD in a range of companies irrespective of industrial sector). Furthermore, almost all ICD studies have examined ICDs in either the annual report or the intellectual capital statement,¹ ignoring disclosures made through other forms of corporate reporting such as .html-type web pages and analyst briefings.

The aim of this paper is to contribute towards the empirical understanding of intellectual capital reporting (ICR) practices among UK companies. This is done by analysing the ICDs within a wide range of corporate reports published by a sample of companies from four carefully selected sectors. In analysing ICDs from a wide range of corporate reports, this paper also aims to assess the appropriateness of relying exclusively on analysis of ICDs within annual reports or intellectual capital statements in developing an understanding of ICR practices. Although some of the data upon which the analysis and insights in this paper are based has already been published in a practitioner-oriented research report (Unerman et al., 2007), this paper aims to provide for a more academic audience a deeper level of analysis, and therefore deeper and additional academic insights in relation to this data, than was possible in a primarily practitioner-focused report.

To address these aims, the paper is structured as follows: The next section briefly explores what is meant by the term ‘intellectual capital’, as used in this study. As understanding of the boundaries that determine what is encompassed within the term ‘intellectual capital’ tends to vary, this is an important step in framing the remainder of the study. The following section then analyses key empirical ICD studies, to identify their features and help locate this study, and its contribution, within the extant literature. This is followed by a section that explains the content analysis research methods used to conduct the empirical analysis, after which the results of the content analysis are examined in the following section. The final section provides a summary of the paper and also discusses the key limitations of the study and future research implications of its findings.