The Effect of Company Characteristics and Corporate Governance on the Practices of Intellectual Capital Disclosure

Isnalita, Fitri Romadhon Departement of Accountancy, Universitas Airlangga. Jl. Airlangga 4-6, Surabaya S A R I P A T I Vol. 11 | No. 3 ISSN: 2089-6271 | e-ISSN: 2338-4565 | https://doi.org/10.21632/irjbs


INTRODUCTION
The changes in the business trend tend to be knowledge-based oriented by prioritizing creation of values for all activities in a company.As a consequence, the terms financial capital and physical capital become less significant compared to intellectual capital (Sawarjuwono & Kadir, 2003).Intellectual capital becomes an important component for a company to gain competitive advantages because this capital is unique, and not easily imitated.
The shifts make knowledge-based assets an important element to be included in financial statements rather than merely reporting physical assets.This phenomenon is highlighted by a research that suggests financial statements as insufficient to meet the needs of the users and are less relevant to be used as guidelines in making decisions (Oliveira, Rodrigues, & Craig, 2006).Some studies also mention that the present financial statements are full of information asymmetries, and considered as incapable of revealing the key factors of the company's long term value, which is the intangible resources.These information asymmetries resulted in the irrelevance of the financial statements as the information source for investors.Therefore, other components are needed to improve the quality of information, and one of them is intellectual capital disclosure.
Pricewaterhouse Coopers survey indicates that information regarding intellectual capital is one of the ten information needed by users (Eccles et al., 2001in Suhardjanto & Ward, 2010).
The urgency of revealing and investor interest towards intellectual capital is not comparable with existing practices in Indonesia.Although a research conducted by Purnomosidhi (2005), showed an increase in intellectual capital disclosure in several companies listed on the Indonesia Stock Exchange (BEI), but in general the presented content-related intellectual capital is still low.Similar to a research conducted by Suhardjanto and Ward (2010), Purnomosidhi (2005), indicated that the level of intellectual capital disclosure by listed companies in Indonesia is still less than 50%.One of the factors causing this low intellectual capital disclosure is the high cost of the disclosure.
In addition to poor disclosure practices, the disclosure of intellectual capital also varies from one company to another.One factor that is quite dominant is the characteristics of the company.The company characteristics mostly include financial characteristics, industry type, and company size.Some researchers have proved that company characteristics affect the level of intellectual capital disclosure (Purnomosidhi (2006), Suhardjanto and Ward (2010), Ousama, Fatima & Hafiz-Majdi (2012)).Previous research showed that there are inconsistent variables against the practice of intellectual capital disclosure related to the characteristics of the company, such as leverage, company size and industry type.
this topic is an interesting research object, since the disclosure of intellectual capital is still voluntary in nature and relatively small in number.Further, the financial accounting standards have no fixed regulations on intellectual capital.Another motivation underlying the researchers to explore this topic is to contribute empirically to the intellectual capital disclosure practices in Indonesia.

Agency Theory
Agency theory is a theory that explains the relation between the principal of an entity and the manager (agent).This theory explains the reasons managers disclose information to shareholders (Wallace, Naser, & Mora, 1994).Agency theory provides a framework that can connect the voluntary disclosure of corporate governance, namely by using a mechanism that can reduce the costs occur as a result of conflict between managers and shareholders, and the conflict between the company and its creditors.The mechanism may be in a form of report which can be used to monitor all activities, namely to reveal more voluntary information such as intellectual capital disclosure (Oliveira et al., 2006).

Stakeholder Theory
Stakeholder theory provides a point of view that a disclosure is a mechanism for maintaining a good relationship between the company and its stakeholders.It is also a strategy to realize a certain interest.Stakeholder theory function is to assist company managers in understanding the stakeholder environment in a bid to create an effective relationship, evaluating the impact of all activities undertaken intended to create a useful value for the company and minimize the risk that may befall to the stakeholders.

Signaling Theory
Signaling theory assumes that information disclosure is a reaction against information asymmetries on the market.The reason that may cause information asymmetries is the internal company knows more about company's information compared to the external parties, namely investors, creditors, and other stakeholders.As a consequence, the external parties will try to protect themselves by giving a low value to the company.In anticipation of such action, companies can increase their value by reducing the information asymmetries through information disclosure, one of which may include financial information (Wolk, Tearney, & Dodd, 2000).

Intellectual Capital
Intellectual capital can be identified as a set of intangible assets that includes resources, capabilities and competencies to increase the performance and create value for the organization (Bontis, 2001).Some forms of intellectual capital disclosure are invaluable information for investors, because the information can reduce uncertainty about the future and facilitate an accurate assessment of the company (Bukh, Nielsen, Gormsen, & Mouritsen, 2005).The invaluable information which are not normally shown on the balance sheet include internal structures (organizational capital), external structure (customer / relational capital), and employee competence (human capital) (Sveiby, 1997;Li et al., 2008)

Company Characteristics
Company characteristic variations lead to the relevance and urgency of different disclosures in each company.Some company characteristics discussed in this study are the size, the profitability, the leverage, the liquidity, and the industry type.The company size is related to the measurement of a company.While profitability is one indicator to assess the company's ability to generate profits and increase shareholder value.Leverage is the company's overall unfulfilled financial obligations to the other parties in which leverage is the source of a company's funding from creditors.Liquidity refers to a company's ability to meet its short-term obligations.Classification of the type of industry can be done using criteria derived from a research conducted by Bukh et al. (2005), that classifies the types of industry into two: the High Tech and Non-High Tech.

Corporate Governance
Corporate governance is the set of rules defining the relationship between shareholders, managers, creditors, governments, employees, the internal and external parties regarding their rights and obligations, or a system by which the company can be directed and controlled.Agency theory is a theory that provides a framework for linking the voluntary disclosure with corporate governance, in which the control mechanism is designed to reduce the agency problems arising from the separation between the owner and the management (Welker, 1995in Li, Pike, & Haniffa, 2008).
The mechanism in question is reflected in the corporate governance structure comprising of the audit committee and board of commissioners.The audit committee is the board operating committee responsible for executing the oversight function of financial reporting and disclosure.Meanwhile, the board of commissioners is the core of corporate governance, which is the party given the task to ensure the implementation of company strategy, oversees the company's operated by the management, and the implementation of accountability.

Size Effects on Intellectual Capital Disclosure
The larger the company size, the demand for information disclosure is also higher compared to smaller companies.This is consistent with agency theory which states that agency costs in large companies are higher than that of small ones.Larger companies also tend to have a conflict between corporate managers and stakeholders, which in turn, increase the agency costs.Therefore, the company voluntarily discloses more information, including information on intellectual capital, to reduce the agency costs (Ousama et al., 2012).Research conducted by Nurunnabi, Hossain, &Hossain (2011) andOusama et al., (2012)  Therefore, it is possible for the company to reveal information related to intellectual capital (Ousama et al., 2012).The research conducted by Ousama et al. (2012) and Suhardjanto and Ward (2010) showed that profitability has a positive significant effect on the intellectual capital distress (Jensen & Meckling, 1976).Thus, creditors and other parties such as bondholders, will ask for more information to reduce information asymmetries.Consequently, companies with higher leverage is expected to have higher incentive in disclosing voluntary information with higher intensity, one of which includes the intellectual capital disclosure, in order to reduce agency costs, like the cost of supervision and to help to convince creditors that their needs will be fulfilled (Hanifa & Cooke, 2002, in Whiting & Woodcock, 2011).
H3: Leverage significantly affects on the intellectual capital disclosure

Liquidity Effects on Intellectual Capital Disclosure
Companies with low liquidity positions will reveal more information to justify their liquidity status.Based on research by Cooke (1989), companies with higher liquidity tend to disclose more information to convince stakeholders that the company is aware of the present problems (Wallace et al, 1994Alsaeed, 2006).The argument is supported by the signaling theory, in which companies with high liquidity posses higher incentive in providing elaborate explanation in their annual report as a signal on their ability to meet short-term financial obligations.
H4: Liquidity significantly affects the intellectual capital disclosure.

Types and Data Sources
The data analysed in this research is secondary data which was taken from annual reports of companies included in the LQ-45 index of the year period 2012 to 2013.

Sampling technique
The data collection method applied in this study was purposive sampling using criteria set by the researchers.The criteria of sampling research were as follows: 1

Research variables
Dependent variables are used for this research.This is the breadth of intellectual capital disclosure (ICD).The instrument used in this study refers to the components of intellectual capital declared by Sveiby (1997), and refers to the study of Li et. al., (2008)

Liquidity
Liquidity shows the company's ability to meet its short-term liabilities.In this study, liquidity will be proxied by using the current ratio (Alsaeed, 2006).Current Ratio Ratio

Industrial Type
The company will be classified based on the Global Industry Classification Standard (GICS), which recognizes two types of industries, those that belong to high-tech (knowledge intensive industries) or low-tech (Whiting & Woodcock, 2011).
Variable size of the audit committee is measured by counting the number of audit committee members (Felo et al., 2003, in Uzliwati, Suhardjanto, & Djati, 2014).
The number of independent commissioners on the audit committee Ratio

Composition of the Board of Commissioners
The composition of the board of commissioners can be proxied by the number of percentage of the board of commissioners coming from external company (independent commissioner) compared to the total members of the board of commissioners in the company.The expected result is at least 30% which is in accordance with the requirements of BEI.
The number of independent commissioners is divided by the total members of the board of commissioners Ratio item was not disclosed the score was 0. The breadth of the disclosure is the ratio of the information items found in the annual report divided by the maximum number of items of information on the disclosure index.Thus, the measurement of the breadth of intellectual capital disclosure can be calculated by the following formula (Ousama The independent variable of this research consisted of size, profitability, leverage, liquidity, industry type, size and composition of the audit committee and of the board of commissioners.The definition of each operational independent variable is further explained through the table 1.

Data collection Method
Method of data collection applied in this research was the content analysis method which is used to assess the frequency and types of intellectual capital disclosure.The level of reliability for content analysis based on Cronbach's α (cronsbach's alpha) with a value of +0.60 as the minimum threshold of acceptable reliability, as a construct can be said to be reliable if the value Cronbach's alpha> 0.60 (Ghozali, 2006).

Data analysis technique
This study used multiple regressions analysis technique, with the analysis model as follows: Where the ICD is the Intellectual Capital Disclosure, SIZE is the size of the company, PRFT is profitability, LEV is leverage, LIK is liquidity, TI is the industry type, KA is the size of the audit committee, and DK is the composition of the board of commissaries.

Hypothesis testing
The test is conducted by measuring the goodness of fit regression model, to assess the accuracy of the sample regression in estimating the actual value.The steps to measure the goodness of fit is by calculating the coefficient of determination R 2 and t test.

Research Object Description.
Based on the criteria specified, there were found 50 listed companies which were included in the LQ-45 index for the period 2012-2013.Since every 6 months there are always updates of companies that enter the LQ-45 index, then not every year a company can enter the LQ-45 index.

Sample criteria amount
Companies It is known also that the average leverage on the company samples is 1.1140 with a standard deviation of 3.7832.This means that most companies listed in the LQ-45 index have a balanced proportion between the use of debt and equity.Meanwhile, the average liquidity in the samples is 2.1680 with the standard deviation of 1.50792, where the higher the standard deviation the higher the company's ability to meet the current liabilities.Industry type variable shows an average of 0.47 with a standard deviation of 0.502.The maximum value for the industry type variable is 1 which is given to high-tech companies.
There are 23 companies belong to this category.
The minimum value of 0 is given to the low tech companies that in this study is amounted to 27 companies.

RESULTS AND DISCUSSION
Based on the reliability test, the Cronbach alpha value received is 0.882 which is greater than +0.60.Despite the fact that this information offers an added value to the company, some companies are reluctant and concern more on the possible risks if the companies reveal their internal information.One of the possible risk is that with more disclosure, the company's competitors may benefit from the provided information.

Capital Disclosure
The results of research had illustrated that profitability did not significantly influence the intellectual capital disclosure.Thus, the level of profitability does not affect intellectual capital disclosure.This research is in line with the research conducted by Purnomosidhi (2005)  capital providers and managers, so that the agency costs which may be incurred as a result of the high degree of leverage can be reduced.In addition, the company also considers the costs and benefits incurred by the existence of intellectual capital disclosure.

Disclosure
Based on the results of hypothesis testing, it can be concluded that liquidity does not have an influence on the intellectual capital disclosure.The results support the research conducted by Nurunnabi et. al., (2011).Liquidity as a performance benchmark can be interpreted that companies with a higher level of liquidity tend not to disclose more information.Meanwhile, companies with a lower liquidity level, have greater pressure to explain their ability (Wallace et al., 1994).This insignificant relation may be caused by higher liquidity value, which is not always meant a good signal, good news or an incentive for companies to disclose extensive information.

Disclosure
The results showed that the industry type was not a factor capable of explaining the variation  (2011).The existence of independent commissioners are supposed to be supporting the principle of responsibility, namely through the intellectual capital disclosure as the implementation of good corporate governance.However, the results found is the opposite.Therefore, the implementation of corporate governance is still questionable.This insignificant influence may be due to the fact that the board of commissioners relating to voluntary disclosure may only happen in a highly proactive environment to disclose information, which is for the government with top anti-directors (outside investors) rights and excellent law enforcement atmosphere.

MANAGERIAL IMPLICATIONS
Based on the finding, it can be seen that companies listed in the LQ-4 index have revealed intellectual capital, but the average disclosure is still relatively low at 46.91%, or reveal about 27 items from a total of 61 items should be disclosed.The result is certainly not in accordance with the level of disclosure expected by stakeholders to be able to provide information not only limited to financial information such as information about the mana-gement of resources owned by the company, business processes, relationships with external parties.Though the company incorporated in the LQ-45 index is considered as a company with characteristics of a very good company by the market.
However, most companies only disclose compulsory information, the company's awareness to disclose voluntary information is still relatively low.
Through the intellectual disclosure, stakeholders can obtain information that can be used to evaluate the company's performance or assess the company's potential in the future.For example, when investors will invest, investors can not only use financial statements to assess company performance, but can also use information about intellectual capital, which is about managing human capital in a company, a description of a business process that can demonstrate a company's ability to manage its business.So that investors can assess more closely how the conditions of the company.
Intellectual capital disclosure is not only useful for users of information but also for companies.
relation between leverage and intellectual capital disclosure, from year to year always provided various results.The research conducted by Suhardhjanto and Ward (2010), Ousama et al. (2012), and Whiting & Woodcock, (2011) show that leverage gives no significant effect.While the study of Bruggen, Vergauwen, & Dao (2009), found that there was a significant positive relation between leverage and intellectual capital disclosure.Agency theory can be used to explain the relation between the breadth of the disclosure and leverage.Companies with high leverage have high agency costs associated with high risk, such as the possibility of financial CapitalDisclosureSignaling theory can be used to explain the reason why a company in a certain industry may reveal more information.A company is expected to send positive signals by providing as much information as possible as an evidence that the company has conducted the best practices in an industry(Watson et al, 2002in Ousama et al., 2012).When a company in an industry failed the practice of disclosures conducted by similar companies, it could be regarded as a signal that the company deliberately concealed information regarding bad news.The relation between the industry type and intellectual capital disclosure can be clarified using stakeholder theory, in which stakeholders are entitled to obtain information about the activities of the company which could affect their interests(Guthrie et al, 2004in Whiting & Woodcock, 2011).Some research suggested that technology or knowledge-based industries have the tendency to reveal more intellectual capital disclosure, such as the research conducted byBozzolan, Favotto, & Ricceri (2003);Petty and Cuganesan, (2005); andOliveira et al., (2006) H5: Industry type significantly affects the intellectual capital disclosure.The Audit Committee Size Effects on IntellectualCapital DisclosureAn audit committee is established to supervise and control effectively the validity of accounting information and assure the quality of information disclosed(McMullen, 1996in Nurunnabi et al, 2011).An effective audit committee should be able to improve internal control and act as a party with the power to oversee the activities in the company to enhance the value relevant to intellectual capital disclosure.H6: The size of the audit committee significantly affects the intellectual capital disclosure The Board of Commissioners Composition Effects on Intellectual Capital Disclosure One important role of the board of commissioners is to reduce information asymmetries, between owners and agents.Board of commissioners is expected to protect investor interests related to decision making and to ensure that the management policy is in line with the investor interests.More disclosures can reduce uncertainty for investors and information asymmetries.Independent commissioners can positively influence the disclosure.Previous studies regarding voluntary disclosures that consider the composition of the board of commissioners as determinants of voluntary disclosure widely varies.Some found that the proportion of members of the board of directors comprising of independent commissioners positively related to the ability of the board of commissioners to influence voluntary disclosure decisions, as shown by Chen & Jaggi (2001) (in Li et al., 2008).The research conducted by Ho & Wong,2001(in Li et al., 2008) ) found that there was no relation between the independent commissioner composition with intellectual capital disclosure.H 7: The composition of the board of commissioners significantly affects on the intellectual capital disclosure

Figure
Figure 1.Conceptual Framework intellectual capital disclosure index TADS = total actual disclosure scores for each company, by providing: a score of 1 if there is a intellectual capital disclosure items; score 0 if not MRD = maximum disclosure items (61 items) Intellectual capital disclosure can provide value added for the company and one strategy that can be used to convince stakeholders about the ability of the company.Based on the results of the low disclosure rate of intellectual capital disclosure, and considering the benefits of intellectual capital disclosure, companies in Indonesia should be able to increase the level of disclosure of intellectual capital.CONCLUSIONThe research results indicate that only size variable (the size of the company), which has a significant influence on the ICD.Thus, it can be concluded that company size is a major predictor that may affect the variety of ICD practices on companies listed in the LQ-45 index.On the other hand, variables of profitability, leverage, liquidity, industry type, the size of the audit committee, and the composition of the board of commissioners bring no significant influence on the ICD.Unfortunately, this study only analysed limited data, 81 companies, and the study period was only 2 years.Therefore, any future research may prolong the research period, add more variables, i.e. blockholder ownership, type of auditor, the breadth of information technology.In addition, the selection of proxies for the industry type should also consider the condition of a country, because some proxies for the industry type on developing countries and developed countries can be different.

Profitability Effects on Intellectual Capital Disclosure
level of voluntary disclosure.The theory supports the relation between profitability and intellectual capital disclosure is signaling theory.Profitable companies have the benefit of signaling that the company is performing better than any other companies.The signals can be in the form of information about intellectual capital.In addition, one of the factors that cause a company to have a higher profit is the intellectual capital owned.

The Composition of the Board of Commissioners Influence on Intellectual Capital Disclosure Based
on the hypothesis testing, the composition of the board of directors did not affect the intellectual capital disclosure.This study is in line with the research conducted by Suhardjanto & Ward (2010), Fatima & Purnamasari (2012) and Hidalgo et al.,