Intellectual Capital Disclosure in Sustainability Reports

Introduction

In recent years, the highly dynamic economic scenario, together with technological progress and increased competition, have moved the objects of business confrontation from the traditional, tangible assets of industrial economy (material and financial resources) to the intangible (intellectual) assets, which have taken up a fundamental role in the process of corporate value creation. Intangible resources represent a firm’s heritage of knowledge, which in a broader sense comprises not only people’s, but also the firm’s know how. This is closely associated to the firm’s organizational system, as well as to a set of information deriving from both the internal relations shaping the “corporate culture” and the external relations outlining a firm’s reputation in the market. The intangible heritage, and particularly the Intellectual Capital (IC), constitutes the basis for competitive advantage, and is therefore an asset that cannot be ignored either from a managerial or a communication point of view. Although it is true that IC is an important resource in terms of competitive sustainability and value creation, traditional accounting systems are not in fact capable of giving it an appropriate representation. Therefore, the problem arises of finding how the financial statement can correctly and adequately represents IC.

The financial statement constitutes the main means of mandatory communication, and is traditionally seen as an important tool of communication with stakeholders, although it does not prove to be a report of common advantage to all of them (Perrini & Tencati, 2006; Yongvanich & Guthrie, 2006).

Consequently, the problem is to identify new, alternative forms of reporting that might be added to the traditional annual report in order to improve the quality of the information provided, fill possible information gaps, and so satisfy the knowledge needs of stakeholders.

To this end, firms have increased their level of voluntary disclosure (Branco & Rodrigues, 2006b, 2008a, 2008b) so as to offer a more comprehensive picture of business performances, and thus better measure and manage business sustainability (Funk, 2003).

On this subject, we have witnessed the development of different reporting documents, among them the sustainability report, which is a disclosure document compiled on a voluntary basis that can well represent the different dimensions on which a business can impact, i.e. the economic (ability to generate wealth), the environmental (consideration for the activity’s ecological sustainability) and the social (relatively to the stakeholders’ expectations). This can be represented following the rationale of the triple bottom line (Higgins, 2002).

The sustainability balance has therefore gained an informative role of great consequence, since it can effectively represents non tangible components and characteristics of the firm, among them IC and knowledge (Carroll & Tansey, 2000; Sullivan & Sullivan, 2000). This is a periodical communication report which combines the firm’s economic, social and environmental activities of consequence for the most relevant stakeholders, with the intellectual dimension.

Firms provide information on IC in the sustainability balances in order to advance transparency and strengthen reputation (McPhail, 2009). The voluntary disclosure of IC also constitutes a feature that helps firms to improve their legitimacy and ability to stay in the market (Dowling & Pfeffer, 1975; Woodward, et al., 2001). The present research starts from this assumption, and recognizes in the sustainability balance a document in which IC can find an adequate representation. Referring to Pedrini’s (2007) theoretical framework, this study is intended to verify whether the sustainability report is the most appropriate instrument to offer to the outside world a representation of information on IC.