Knowledge Metrics and Measurement

Friday, November 1, 2013, 3:30pm


Value Added Intellectual Coefficient and Its Impact on Corporate Financial Performance A Comparative Study between MAKE and Non-MAKE Award Companies

Meng Liu, Jiajun Fan, Xiaolin Cheng, Kin Hang Chan, Kai Wah Samuel Chu and Ting Hong Yim
 

Summary

Value Added Intellectual Coefficient and Its Impact on Corporate Financial Performance 

A Comparative Study between MAKE and Non-MAKE Award Companies (Abstract Submission) 

1. Introduction The purpose of the study is to explore if companies which had received a MAKE award demonstrate a higher level of intellectual capital (IC) utilization than that of those did not received the award. Value Added Intellectual Coefficient (VAICTM) is employed to assess their corporate intellectual ability. Furthermore, the proxies of corporate financial performance of market-to-book value (MB), return on assets (ROA), asset turnover (ATO) and return on equity (ROE) are examined in light of their level of IC capability. The Most Admired Knowledge Enterprise (MAKE) award winners are generally considered to be proficient in knowledge management. As a result, a higher level of IC utilization and accumulation may be therefore detected when comparing with those with non-award winners in their respective fields of industries, size and categories. 

2. Literature Review Intellectual Capital According to Sveiby (2001), the term of intellectual capital (IC) was firstly introduced by John Kenneth Galbraith in 1969. Later in 1987, the pioneer of this field, Itami defined IC as a combination of intangible properties within an organization, including intellectual property, reputation, a firm’s experience, and customer relationship (Goh, 2005). Other researchers such as Stewart (1997) considered IC as the brainpower of an organization to generate profit by information, practical technique, expertise, intellectual property, and tacit knowledge of employees. Although quite a few definitions of IC existed contemporarily, it was commonly accepted that IC as an intangible asset which could create value and maintain competitive advantages for organizations (Sharma et al., 2007; Stewart, 1997; Sveiby, 1997). The number of researches linking IC to organizational performance has grown significantly in the past two decades (Goh, 2005). Steward (1997) pointed out that sustainable growth and better profitability of companies might come along with the knowledge level among employees. Their knowledge base would be expanded by exchanging tacit and explicit knowledge among employees. 

VAIC™ VAICTM was a methodology firstly introduced by Pulic (2000) to measure intellectual capital efficiency quantitatively. It has been considered to be a standardized and consistent measuring tool of the value creation efficiency of intellectual capital (Firer & Williams, 2003; Chan, 2009). VAICTM is a sum of three components: Human Capital Efficiency (HCE), Structural Capital Efficiency (SCE) and Capital Employed Efficiency (CEE) (Pulic, 2000). Companies with higher VAIC™ value are generally regarded as being more capable of making use of intellectual capital. 

MAKE award In 1998, the Most Admired Knowledge Enterprise (MAKE) Award was launched by Teleos, a British foremost independent research company in knowledge management and intellectual capital areas. Only companies having outstanding performance in one or more of the following eight criteria shall be entitled for this award (Makeaward.com, 2013). (1) Creating an enterprise knowledge-driven culture (2) Developing knowledge workers through senior management leadership (3) Innovation (4) Maximizing enterprise intellectual capital (5) Creating an enterprise collaborative knowledge sharing environment (6) Creating a learning organization (7) Delivering value based on customer/stakeholder knowledge (8) Transforming enterprise knowledge into shareholder/stakeholder’s value (Makeaward.com, 2013) 

3. Methodology Among the MAKE award winners all over the world, some were selected to be the target companies based on two criteria: 

1. Listed companies with publicly available financial information; 

2. The existence of a comparable non-MAKE award winning counterpart with similar market capitalization in the same industry. 

Finally, 50 MAKE award companies were selected. Each of them was paired up with a non-MAKE award company selected under the following criteria: 

1. Listed companies with publicly available financial information; 

2. With similar market capitalization as its MAKE award counterpart; 

3. Within the same industry as its MAKE award counterpart. 

Financial data were collected from annual reports from 2010-2012. Multiple linear regression models were developed to examine the association between IC as well as its components, measured by VAICTM methodology, and the four financial indicators. 

4. Preliminary Findings Based on the findings by Chan (2012) and Hermans (2005), who tried to relate knowledge management with IC components, we assume MAKE award companies should possess higher VAICTM. Contrary to our assumption, it was found that the difference of VAICTM for Non-MAKE award companies and the MAKE award companies is not statistically significant. On the other hand, VAICTM as a collective measure had no highly significant relationships to all the four accounting ratios. The regression model with VAICTM does not fit the financial data satisfactorily either, with low explanatory power (R2). However, IC components were found to have significant contributions to institutional financial performance. Capital Employed Efficiency (CEE) was found to be the most important factor among the three, contributing positively to all of the accounting ratios except ROA and ATO of MAKE award companies. Structural Capital Efficiency (SCE) as the second most important factors associates with only MB and ROE of non-MAKE award companies. Human Capital Efficiency (HCE) contributed the least to corporate financial performance, only MB of non-MAKE award companies showed significant relationship with HCE under this study. Return on assets (ROA) and asset turnover (ATO) of MAKE award companies show insignificant relationships to all three IC components, while market-to-book value (MB) of non-MAKE award companies show significant associations with all the three components. Among all of the linear regression models between financial indicators and VAICTM, the only significantly positive association existed between ROA and VAICTM in MAKE award companies. 

References Chan, K.H. (2009). Impact of intellectual capital on organizational performance: an empirical study of companies in the Hang Seng Index (part 2). The Learning Organization, 16(1), 22-39. Chan, K. H., Chu, S. K. W., & Wu, W. W. Y. (2012). Exploring the correlation between Knowledge Management maturity and Intellectual Capital efficiency in Mainland Chinese listed companies. Journal of Information & Knowledge Management, 11(3), 1250017-1-11 Firer, S. & Williams, S.M. (2003). Intellectual capital and traditional measures of corporate performance. Journal of Intellectual Capital, 4(3), 348-60. Goh, P. C. (2005). Intellectual Capital Performance of the Commercial Banks in Malaysia. Journal of Intellectual Capital, 6(3), 385-96. Hermans, R. & Kauranen, N. (2005). Value creation potential of intellectual capital in biotechnology – empirical evidence from Finland. R&D Management, 35 171-185. MAKE award website. (2013). from www.makeaward.com. Pulic, A. (2000). VAIC – an accounting tool for IC management. International Journal of Technology Management, 20(5-8), 702-14. Sharma, R. S., Hui, P. T. Y. & Tan, M. W. (2007). Value-added knowledge management for financial performance: the case of an East Asian Conglomerate. The Journal of Information and Knowledge Management Systems, 37(4), 484-501. Stewart, T. A. (1997). Intellectual capital: the new wealth of organizations, Nicholas Brealey Pub, London. Sveiby, K. E. (2001). Intellectual capital and knowledge management [online]. http://www.sveiby.com/articles/IntellectualCapital.html Sveiby, K. E. (1997). The new organizational wealth: Managing and measuring knowledge-based assets, Berrett-Koehler Publishers, San Francisco. 

© 2013. All rights reserved.