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Intellectual capital and

traditional measures of
corporate performance
Steven Firer
Faculty of Business and Economics, Monash University-South Africa,
Ruimsig, South Africa, and
S. Mitchell Williams
School of Accountancy, Singapore Management University, Singapore
Keywords Intellectual capital, Productivity rate, South Africa
Abstract The principal purpose of this study is to investigate the association between the
efciency of value added (VA) by the major components of a rms resource base (physical capital,
human capital and structural capital) and three traditional dimensions of corporate performance:
protability, productivity, and market valuation. Data are drawn from a sample of 75 publicly
traded rms from South Africa from business sectors heavily reliant on intellectual capital.
Empirical analysis is conducted using correlation and linear multiple regression analysis. Findings
from the empirical analysis indicate that associations between the efciency of VA by a rms
major resource bases and protability, productivity and market valuation are generally limited and
mixed. Overall, the empirical ndings suggest that physical capital remains the most signicant
underlying resource of corporate performance in South Africa despite efforts to increase the
nations intellectual capital base.
A precise denition of corporate performance proves to be highly elusive
despite frequent use by various special interest stakeholder groups, scholars
and policy makers alike. The lack of consensus may arise because this concept
is associated with a variety of facets of a rms overall wellbeing, ranging from
nancial protability to output levels to market returns. For more than 200
years since the publication of Adam Smiths Wealth of Nations
neoclassical economic principles were the general corner-stone of the dominant
theoretical paradigms in business disciplines such as management, nance and
accounting. Labor and capital were considered as the primary factors of
production determining corporate wellbeing. Recently, the development of
alternative economic theoretical frameworks and theories of the rm, a
growing recognition that traditional underlying factors of production have
changed, and an increasingly dynamic business environment have added to the
growing gulf in perceptions of corporate performance.
Some seminal work attempts to bridge the gap between traditional and
emerging views, though primarily at a theoretical level. In the new economic
era, where intellectual capital assets are increasingly recognized as the pivotal
driving force behind wealth creation, an important empirical question remains.
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
Journal of Intellectual Capital
Vol. 4 No. 3, 2003
pp. 348-360
q MCB UP Limited
DOI 10.1108/14691930310487806
Specically, do traditional measures of corporate performance effectively
capture the same constructs of corporate performance as emerging intellectual
capital-based measures? This study is unique in empirically examining the
association between a measure of intellectual capital being increasingly applied
in business and academic applications namely the Value Added Intellectual
Coefciente (VAICe) developed by Ante Pulic and his colleagues at the
Austrian IC Research Centre (Pulic, 1998, 2000; Pulic and Borhemann, 1999)
and three traditional measures of key notions of corporate performance (i.e.
protability, productivity, and market valuation).
The study further contributes to the literature by focusing on South Africa
rather than a developed Western economy as employed in related work. Key
reasons support this focus. For instance, archival evidence of the
understanding and development of intellectual capital (IC) concepts in
emerging economies is still very much in its infancy. With global prosperity
and stability increasingly dependent on emerging economies, a need to
establish evidence of intellectual capital development in different socio-political
and economic settings persists. Also, since emerging from apartheid South
Africa has been a nation in transition. Part of this transition involves efforts to
alter the nations economic base from a traditional reliance on natural resources
to one that encompasses intellectual capital. Evidence from the present study
may provide insights into the impact of intellectual capital in economies under
transition such as those in Eastern Europe. Finally, the concept of value added
(VA) which forms an important tenet of the measure of intellectual capital used
in the study (and also other emerging measures) has a strong historical past in
South Africa. This assisted in the capture of data used in measuring intellectual
capital performance.
The analysis presented is based on a sample of 75 South African publicly
listed rms from four IC intensive industry sectors:
(1) banking;
(2) electrical;
(3) information technology; and
(4) services.
Results are of interest to numerous parties. For example, policy makers capable
of inuencing the direction and nature of the South African business
environment can utilize ndings to determine possible required changes to
present policies to further promote the development of the nations intellectual
capital resource base. Also, ndings aid unsophisticated investors to better
understand the changing face of South African business, plus the suitability of
the studys underlying measure of intellectual capital performance for
evaluating the impact on rm value of change. Finally, ndings provide
archival evidence of whether South African rms continue to rely on traditional
business practices and perceptions (that is, reliance on natural resources for
IC and corporate
wealth creation), or are shifting toward a greater use of intellectual capital
The remainder of the present paper is organized as follows. The next section
develops the propositions underlying this study. Empirical results are
presented with conclusions and ideas for future research directions described in
the last section.
Developing intuitive research propositions
Donaldson and Preston (1995) argue that since Adam Smith the dominant view
of the rm is that it obtains its resources from investors, employees and
suppliers to produce goods and services for its customers. In principle, this
traditional view contrives corporate performance to be the nancial returns to a
rms owners from the consumption of tangible resources. Alternatively, more
recent theoretical views suggest investors, employees, suppliers, customers
and other relevant stakeholders (such as unions, government) both contribute
and receive benets from a rm (Turnbull, 1997). Further, alternative
theoretical views, such as resource-based theory, conceive rms as collections
of physical and intangible assets and capabilities. These contrasting views also
provide different views of corporate performance. Advocates of resource-based
theory, for example, suggest that corporate performance is a function of the
effective and efcient use of the respective tangible and intangible assets of the
rm. Further, VA (also called wealth creation) is considered as the appropriate
means of conceptualizing corporate performance rather than the mere nancial
returns to a rms owner. Sveiby (2000, 2001), for example, suggests that VA
epitomizes an effective measure of an economys production ability in the new
knowledge economy, whilst illustrating the shortfalls of traditional nancial
The measure of income highlights the contrasting nancial and VA
perceptions of corporate performance. The inquiry into whose income
accountants are striving to measure has been largely ignored (Suojanen, 1954;
Williams, 2001). A commonly accepted view is that income is the rewards due
to shareholders from their investment (Morley, 1979). A signicant factor that
underlies the acceptance of this view is the dominance of contractual theories
of the company within the accounting discipline (Williams, 2001). The
emergence of alternative theories of the rm has also led to different
perceptions of the income accountants attempt to measure. The enterprise
theory of the rm, for example, is one alternative theoretical perspective
providing an alternative notion of income (Van Staden, 1998). Suojanen (1954),
for example, in using enterprise theory conceived the rm as a decision-making
center for the people (also termed participants or stakeholders), however,
eeting or intimate their contacts with the organization. Participants include
shareholders, employees, customers, creditors and the government. Under
enterprise theory, income is the reward participants get for their participation
in the rm (Morley, 1979). This alternative interpretation of income is termed
VA, specically dened as the wealth created or distributed by the rm
through the utilization of its essential productive resources.
In our opinion and supported statements of other researchers (Bontis, 1998,
1999, 2001, 2002, 2003; Edvinsson, 1997; Pulic, 1998, 2000; Stewart, 1997;
Sveiby, 2000, 2001), traditional measures of corporate performance based on
conventional accounting principles of determining income may be unsuitable
in the new economic world where competitive advantage is driven by
intellectual capital. Use of traditional measures may lead investors and other
relevant stakeholders to make inappropriate decisions when allocating scarce
resources. These views can be expressed in the following questions: rst, if
knowledge is the key to future success, but is not adequately reected in
traditional accounting nancial measures, and second, nancial measures are
the main drivers of top managements decision making, what measuring
system would full the requirements of the new economy and the needs of
modern companies? Given that traditional measures continue to dominate, it is
important to determine the extent to which such measures may intrinsically
capture the contribution from intellectual capital resources such as human
resources, customer reputation and research and development. This is of
particular importance in emerging economies that often have borrowed
long-held nancial models from developed economies, but are striving to
strengthen their intellectual capital base to increase economic development.
The present study explores this issue, empirically analyzing the association
between a relevant measure of intellectual capital and the three commonly used
measures of different traditional sub-constructs of corporate performance:
productivity, protability, and market evaluation[1].
Given the studys exploratory nature, no formal hypotheses are formed.
Nonetheless, intuition implies some possible formative propositions. For
example, by convention most traditional measures of protability focus on the
nancial returns from tangible assets. Consequently, it is likely that such
measures are unlikely to capture the VA by intangible assets. Alternatively,
market evaluation considers the broader aspects of a rm including both its
intangible and tangible assets. As a result, there is likely to be a closer
association between market evaluation measures of corporate performance
than those for protability. The following section describes the research
method employed in the present study to explore these issues.
Research method
Measure of dependent variables
To conduct the relevant analysis in the present study, three dependent
variables related to the dimensions of protability, productivity, and market
valuation (henceforth denoted ROA, ATO and MB), respectively are used.
The literature documents various accounting- and market-based measures that
IC and corporate
may be utilized as a proxy measure designed to capture the respective
properties of the three dependent variables. Presently, there is no specic
theoretical perspective or empirical evidence supporting any specic proxy
measure over another. It is decided, therefore, that for the purposes of the
present study the use of proxy measures used widely in the prior literature is
dened as follows:
ROA: ratio of the net income (less preference dividends) divided by book
value of total assets as reported in the 2001 annual report;
ATO: ratio of the total revenue to total book value of assets as reported in
the 2001 annual report;
MB: ratio of the total market capitalization (share price times number of
outstanding common shares) to book value of net assets.
Measure of independent variables
The VAICe(Pulic, 1998) forms the underlying measurement basis for the three
major independent variables in the present study. VAICe is an analytical
procedure designed to enable management, shareholders and other relevant
stakeholders to effectively monitor and evaluate the efciency of VA by a
rms total resources and each major resource component. Formally, VAICeis
a composite sum of three separate indicators:
(1) Capital employed efciency (CEE) indicator of VA efciency of capital
(2) Human capital efciency (HCE) indicator of VA efciency of human
(3) Structural capital efciency (SCE) indicator of VA efciency of
structural capital.
The following equation formalizes the relationship algebraically:
VA intellectual coefcient for rm i;
; VA capital employed coefcient for rm i;
; human capital coefcient for rm i; and
; structural capital VA for rm i;
+ DP
+ D
+ T
+ M
+ R
[2]; VA for rm i computed as the sum
of interest expenses (I
); depreciation expenses (DP
); dividends (D
corporate taxes (T
); equity of minority shareholders in net income of
subsidiaries (M
); prots retained for the year (R
book value of the net assets for rm i;
total investment salary and wages for rm i;
; structural capital for rm i.
Several key reasons support the use of VAICe. First, VAICe provides a
standardized and consistent basis of measure (Pulic and Bornemann, 1999),
thereby better enabling the effective conduct of an international comparative
analysis using a large sample size across various industrial sectors. Alternative
IC measures are limited in that they:
(1) utilize information associated with a select group of rms (for example,
stock data);
(2) involve unique nancial and non-nancial indicators that can be readily
combined into a single comprehensive measure; and/or
(3) are customized to t the prole of individual rms (Bontis et al., 1999;
Roos et al., 1997; Sullivan, 2000).
Consequently, the ability to apply alternative IC measures consistently across a
large and diversied sample for comparative analysis is diminished. Second, all
data used in the VAICe calculation are based on the audited information;
therefore, calculations can be considered objective and veriable (Pulic, 1998,
2000). Other IC measures have been criticized due to the subjectivity associated
with their underlying indicators (Sveiby, 2000; Williams, 2001). Additionally,
concerns have been raised about difculties in verifying information used in
calculating indicators comprising other IC measures. Third, VAICe is a
straightforward technique that enhances cognitive understanding and enables
ease of calculation by various internal and external stakeholders (Schneider,
1999). Ease of calculation enhanced the universal acceptance of many
traditional measures of corporate performance. Alternative IC measures are
limited as they will be calculated only by internal parties or rely upon
sophisticated models, analysis and principles. Finally, the VAICe
methodology is utilized in the present study as it is receiving increasing
research attention (see, for example, International Business Efciency
Consulting, Inc., 2002; Williams, 2001) and applied use (see, for example,
Nova Kreditna banka Mariba (2000)).
Control variables
Correlation and linear multiple regression tests form the underlying statistical
analysis presented. For the linear multiple regression analysis four control
variables (size of the rm, leverage, nancial performance[3], and industry
type) are generally included:
(1) Size of the rm (LCAP): natural log of total market capitalization.
(2) Leverage (Lev): total debt divided by book value of total assets as
reported in each rms 2001 annual report.
IC and corporate
(3) Return on equity (ROE): ratio of the net income (less preference
dividends) divided by book value of total shareholders equity as
reported in the 2001 annual report.
(4) Industry type (BANK, ELEC, IT and SER): dummy variables
representing four major industries within the service sector.
Sample selection and descriptive statistics
Data are hand-collected from the 2001 scal year annual reports of 75 South
African publicly traded companies (listed on the Johannesburg Stock Exchange
(JSE)) from industry sectors extensively reliant on intellectual capital (namely,
bank, electronic, information and service sectors). The sample is limited to
these industries, given the studys exploratory nature and a desire to
investigate a homogeneous sample. Table I presents the mean, median and
standard deviation of the untransformed dependent variables, independent
variables and control factors for the nal usable sample. Protability (ROA)
and productivity (ATO) have means (medians) of 15.9 percent (9.9 percent) and
1.066 (0.840), respectively. The mean for market valuation (MB) indicates that
investors generally valued the sample rms in excess of the value of the book
value of net assets as reported in the nancial statements. Comparison of CEE,
HCE and SCE values suggests that during 2001 the sample rms were
generally more effective in generating value from its human resource assets
than from physical and structural assets. This nding is consistent with prior
research of South African publicly traded rms based on the 1999 data (Ho and
Williams, 2002). The nal usable sample comprises a range of both large and
small rms as indicated by total assets. Overall nancial performance of the
sample rms is quite sound as indicated by the reasonably high ROAand ROE.
Leverage levels are similar to those in other nations. Finally, the majority of the
sample rms are afliated with the services sector followed by the information
technology sector.
Correlation analysis
Correlation analysis is the initial statistical technique employed to analyze the
relationship between the dependent and the independent variables[4]. Findings
from Pearson pairwise correlations indicate that CEE is signicantly
negatively associated ( p , 0.05) with ATO. CEE is also signicantly
positively correlated with MB ( p , 0.01). This independent variable, however,
is not signicantly correlated with ROA. Results show a signicant negative
association between HCE and ATO ( p , 0.01). HCE is not signicantly
correlated with the remaining two dependent variables. Finally, SCE is not
signicantly correlated with any of the dependent variables. Overall,
correlation results imply that sample rms with a higher level of efciency
of VA from their physical capital were associated with lower levels of
productivity, but higher levels of market valuation. Further, sample rms with
higher levels of efciency of VA by their human capital were associated with
lower levels of productivity.
Linear multiple regression results
Table II presents results of three linear multiple regressions. The linear
regressions reported in Table II (Panel B, and C) are highly signicant
( p , 0.001). In contrast, the linear regression reported in Table II (Panel A) is not
statistically signicant, indicating that the independent variables and control
Variable description
name Mean Median
Protability: ratio of net income to total
assets ROA 0.159 0.099 0.364
Productivity: ratio of total turnover to total
assets ATO 1.066 0.840 1.000
Market valuation: ratio of the rms market
capitalization to the rms book value of
net assets MB 1.505 1.267 1.042
Value added capital coefcient: ratio of the
total VA divided by the total amount of
capital employed CEE 0.468 0.377 0.349
Value added human capital: ratio of the total
VA divided by the total salary and wages
spent by the rm on its employees HCE 2.078 1.074 2.327
Structural capital value added: ratio of a
rms structural capital divided by the
total VA SCE 20.313 0.069 1.238
Market capitalization: total number of
outstanding common shares multiplied by
share price at the end of 2000 CAP(Rand) 4.61E+09 7.43E+08 9.63E+09
Leverage: ratio of the rms total debt to total
assets Lev 0.650 0.489 0.535
Return on equity: ratio of net income to rms
total shareholders equity ROE 0.220 0.179 0.603
Bank sector: dummy variable with rms
from the banking sector coded one,
otherwise zero BANK 12.16 percent N/A N/A
Electronic sector: dummy variable with rms
from the electronic sector coded one,
otherwise zero ELEC 13.51 percent N/A N/A
Information technology sector: dummy
variable with rms from the information
technology sector coded one, otherwise zero IT 22.97 percent N/A N/A
Service sector: dummy variable with rms
from the service sector coded one,
otherwise zero SER 51.35 percent N/A N/A
Table I.
statistics of
IC and corporate
factors are poor explanatory factors of variations in the dependent variable.
Across the three linear regressions reported in Table II, the adjusted coefcient of
determination varies from a high of 43.5 percent (Panel C) to a low of 4.8 percent
(Panel A). For the rst linear multiple regression reported in Table II (Panel A)
only coefcients representing SCE ( p , 0.10) and LCAP ( p , 0.05) are
statistically signicant. The directional signs on the coefcients for these two
statistically signicant explanatory factors are positive and negative,
respectively. In the second linear multiple regression reported in Table II
(Panel B), the coefcient representing HCE is statistically negatively signicant.
None of the other coefcients representing the independent variables and control
factors is statistically signicant in this linear multiple regression. Finally, for
results of the last linear multiple regression reported in Table II (Panel C) the
coefcients representing CEE, HCE and BANK are statistically signicant
( p , 0.05, p , 0.05 and p , 0.10, respectively). The directional sign on
coefcients for HCE and BANK is negative whilst for CEE it is positive.
Discussion and conclusions
Empirical ndings fail to nd any strong association between the efciency of
VA by the major components of a rms resource base and protability. At best
Panel A:
Panel B:
Panel C:
market valuation
n 75 75 75
Adjusted R
0.048 0.309 0.435
F-statistic 1.459 4.630 7.250
Signicance 0.190 0.000a 0.000a
Std. b t-stat. Std. b t-stat. Std. b t-stat.
Intercept N/A 2.983b N/A 2.173b N/A 22.965a
Independent variables
CEE 20.050 20.291 0.240 1.629 0.700 5.257a
HCE 20.004 20.023 20.298 22.124b 20.393 23.094a
SCE 0.261 1.674g 20.109 20.801 0.091 0.741
Control factors
LCAP 20.373 22.383b 20.163 21.204 0.455 3.704
Lev 0.027 0.174 20.113 20.849 20.168 21.399
ROE N/A N/A 0.156 1.511 0.071 0.757
BANK 20.048 20.253 20.242 21.495 20.291 21.990g
ELEC 20.068 20.488 0.046 0.386 0.175 1.614
SER 20.181 21.142 20.119 20.878 0.072 0.590
Notes: The Table shows standardized coefcients and t-statistics for the respective independent
variables and control factors in the model. a signicant at 1 percent condence level;
b signicant at 5 percent condence level; g signicant at 10 percent condence level.
LCAP natural logarithm of the rms total market capitalization. See Table I for denitions of
dependent variables, independent variables and control factors
Table II.
Linear multiple
regression results
there is only a moderately positive association between the efciency of VA by
a rms structural capital and protability. The overall lack of association may
potentially result from the concepts of VA and protability capturing two
distinctive and completely unrelated dimensions of corporate performance. For
instance, protability may be conceived strictly as nancial and accounting
concern focusing on returns to the rms owners, solely within monetary terms.
Alternatively, VAdenes the contribution to be the overall increase in potential
and wealth to the various stakeholders of a rm other than just the owners.
Another possible explanation for the lack of association between protability
and VA is that there is a lack of variation in the dependent and independent
variables to conduct meaningful empirical analysis.
With respect to productivity, only the efciency of VA by a rms human
resources is to be signicantly associated. Empirical ndings suggest that this
association is negative. This result implies that publicly traded rms and the
business environment in South Africa may dictate a trade-off between tangible
assets and human capital. That is, rms in South Africa seeking to increase
productivity through the employment of tangible assets put less effort into
utilizing its human resource base. Alternatively, a rm focusing attention on
human resource assets appeared to give less emphasis to the effective use of
tangible assets.
Findings related to the association between market valuation and the
efciency of VA by a rms major resource components provides some
interesting insights. First, ndings imply that the market in South Africa
places a signicant emphasis on returns from physical resource assets.
Consequently, rms that provide an indication that physical assets have been
utilized effectively in generating such returns are likely to be more highly
valued. Second, whilst the market appears to consider human resource assets,
ndings suggest that the market may react negatively if a rm concentrates on
enhancing this resource base at the expense of its development of physical
capital resources. Third, empirical ndings suggest that the South African
market appears to give signicantly less attention to the structural capital
resources of a rm relative to physical capital and human capital resources.
Overall, the latter ndings suggest that in general the South African market
continues to place greater faith and value in physical capital assets than
intellectual capital assets.
Finally, empirical ndings indicate that rm size, leverage, nancial
performance and industry type contribute very little to the explanatory power
of the linear multiple regression results. Indeed, these control factors were of
statistical signicance in only two isolated cases. Consequently, the following
conclusions regarding the association between the control variables and
dependent variables can be summarized as follows:
rm size appears not to be associated with the dimensions of productivity
and market valuation;
IC and corporate
leverage is not associated with protability, productivity or market
there is no association between nancial performance and productivity
and market valuation; and
industry type is only moderately associated with market valuation and
neither protability nor productivity.
Overall, the empirical ndings, based on correlation and linear multiple
regression analysis, indicate that the association between the efciency of VA
by a rms major resource components and the three traditional dimensions of
corporate performance is limited and mixed. In general, empirical ndings
suggest that despite the efforts to improve its intellectual capital base the
business environment and market in South Africa still appear to place greater
weight on corporate performance based on physical capital assets. A possible
policy implication of these ndings from this study may be that policymakers
may have to adjust or intensify initiatives to encourage greater acceptance and
understanding of the concept of intellectual capital, and the development of
related assets. As South Africa continues efforts to join the international
community and increase its level of economic development beyond that of an
emerging economy, a continued aversion from and apathetic view toward
intellectual capital amongst South African rms and the business community
may have negative consequences.
Whilst providing various insights that should be of interest to scholars,
shareholders, institutional investigations, policymakers and other relevant
stakeholders, the ndings from the present study indicate avenues for further
investigation. For example, ndings from the present study are cross-sectional.
Future research can be undertaken to investigate the associations studied in the
present paper across time. Also, analysis in the present study draws on data
from a single nation and from rms within business sectors reliant on
intellectual capital. Additional research should be conducted using data from
alternative domestic settings and/or rms from non-intellectual capital
business sectors. Despite possible limitations of using single-period data, a
relatively focused sample and a single domestic location, it is felt that the
results from the present study provide valuable insights into the association
between intellectual capital and traditional perceptions of corporate
performance. Further, this study helps to expand the current research
agenda within the intellectual capital discipline toward alternative areas of
1. Productivity (or efciency) described which inputs are converted to outputs. Conversely,
protability described corporate performance as the degree to which a rms revenues
exceed costs. Finally, market evaluation concentrates on the degree to which a rms market
value exceeds its book value. This last dimension is related to a rms performance because
if the rm was not operating well (not performing), then its market value would probably be
limited to the net book value of its assets.
2. Prior research has dened VA by the following algebraic equation:
Rev 2B Inv W I DP D T M R 1a
S 2B Inv 2DP W I DP D T M R: 1b
Equation (1a) is commonly referred to as the gross VA and Equation (1b) is termed the net
VA. Theoretical arguments have been forwarded supporting both approaches. Empirical
research indicates that both methods have been used in practice. Pulic (1998) argues that,
because of the central active role human resources plays in the value creation process, labor
costs (wages expense) should not be included in the VA computations. This view is
consistent with the opinions of other IC experts (Edvinsson, 1997; Sveiby, 2000).
3. In the linear multiple regression with protability as the dependent variable the control
factor of nancial performance (denoted as ROE) is not included, as the return on equity may
also be used as a proxy for the dependent variable.
4. Spearman correlations were also performed. These alternative correlations tests yield the
same results. Owing to space limitations correlation values are not formally presented in the
present paper. Results of correlation analysis can be obtained from the authors upon request.
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