Competence, relationships and values can be defined as:

Competence: Companies need to attract the right people and provide them with learning opportunities so that they have the right skills to meet the needs of the business now and in the future. Value is embedded in the tacit knowledge of employees and so there will be an interaction between their knowledge, skills and physical assets in the organisation to create value.

Relationships: Successful companies tend to have a network of external relationships which build value into the business. Value may be financial (that is, money received from a relationship) but it might be the knowledge and expertise derived from a relationship with another entity that generates the value.

Values: There needs to be a mutual understanding in an organisation of the meaning of value and its generation. Therefore, a company needs an appropriate culture and values in order to be successful in achieving its goals. CIMA-commissioned research in August 2001 showed that the three main practices used to promote a culture of creativity were: a) spelling out the values of such a culture; b) incorporating these values into systems so that they are implemented into day-to-day activities; and c) motivating employees to adopt these values so that they become part of day-to-day behaviours.

Why measure intellectual capital?

The value of organisations, and their potential for success (however you may wish to define success) in the future,

is tied up in assets that are not fully reflected in the balance-sheet. Employee knowhow, harnessing creativity and innovative capabilities and employee skills play a predominant role in defining the productive power of the organisation. Human capital and information technology, the core of what has been labelled the knowledge economy, are key tools of the new value creation (Edvinsson 1997). However, huge investment flows in these areas do not appear as positive asset values in traditional accounting and, therefore, the traditional accounting model does not represent them in a meaningful format.

Financial information will always remain relevant, not least because it allows for comparability between companies. Moreover, the accountancy profession has been unable to arrive at a new model because of the difficulty, particularly in terms of reliability, of assigning a numerical value on internally-generated intellectual assets. Therefore, for internal management and dynamic external reporting purposes, there is a need to measure non-financial information on an intellectual capital and intangible assets basis.

Internally, managers need to know which activities to encourage and what investments to make to improve organisational performance. It is, therefore, in their interest to understand the role of intellectual and intangible assets in their organisations.

External users such as investors are demanding greater disclosure. Investors are trying to systematically decrease the intangibles-related information asymmetries between corporate insiders and outsiders so that they can better understand an organisation's value drivers. Moreover, greater transparency via better disclosure can be beneficial for internal management purposes. It can reduce risk and those organisations that are transparent with their intangible investments can reduce their cost of capital.

Furthermore, intellectual capital management is a tool increasingly being used to facilitate organisational development by functioning as a communication tool aimed at presenting the corporate strategy and organisational vision.

Differences

As applied today, intellectual capital has many complex connotations. It is often mistakenly used synonymously with intellectual property (patents, trademarks and copyrights), which is only one aspect of it. Measuring intellectual property is important so an organisation knows what it owns but it does not capture the processes required to reach that stage. Intellectual capital can be both the end result of a knowledge transformation process or, the knowledge itself that is transformed into intellectual property or intellectual assets of an organisation. Value is created by the dynamic interaction

between information and knowledge and requires human interaction.

Intellectual assets are intangible but not all intangible assets are intellectual. Intellectual assets are knowledge-based items that a company possess that produce a stream of future benefits. Creativity is the start of the process of generating knowledge but it also underpins each stage of the knowledge-based organisation. Intellectual capital is the total stock of knowledge-based equity that a company possesses. Intangible assets are also a claim to future benefits that do not have physical or financial embodiment but are not necessarily derived from knowledge generated in an organisation.

There has been a history of preventing dissemination of some knowledge by using patents and copyright, to protect competitive advantage. Intellectual property assets are among the few intangible assets which have been recorded and valued using traditional accounting systems.

Knowledge-based organisation

The purpose of learning within the knowledge organisation (see Chart) is to create new assets or processes which will ultimately create value. The learning and innovation process requires investment, for example, employee training, technology acquisition and R&D. As developed and newly developed economies are increasingly based on knowledge, knowledge and innovative capabilities are the brainpower of many organisations and the principal drivers of value and wealth creation. This is the new business environment in which the nature of value negotiation will have to be rethought.

Role of creativity

Creativity motivates the generation of knowledge by stimulating new ideas and innovative implementation. Creativity can manifest itself in number of ways, for example, through product and process innovations and, for companies such as Sony and 3M, it has played a key role in achieving differentiation in the marketplace.

Moreover, creativity and innovation help drive shareholder wealth through the creation of value for customers. Creativity in organisations is itself stimulated by the following external drivers, as shown by recent CIMA-commissioned research: customer expectations; competitor pressures; quality pressures; and shareholder expectations.

Although the drivers are external, it is the employees of the organisation who must come up with new ideas of incremental or breakthrough nature and the finance function has a role in ensuring that creativity can flourish and that value is generated out of it. Given that creation of customer value contributes to shareholder wealth, it is important for finance directors to play a role in the development of high-level strategies at corporate and/or business unit level. Chief executives will expect them to contribute to decision-making on what products to deliver, how and to which markets, and how shareholder wealth creation can be generated from new value propositions to customers.

(To be concluded)

(Edited extracts from CIMA's Technical Briefing on "Managing the intellectual capital within today's knowledge-based organisations". janebriggs@ cimaglobal.com)

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