Intellectual Capital Accounting: Practices in a Developing Country (Routledge Studies in Accounting)

Intellectual Capital Accounting

‘This book recognises the significance of intellectual capital matters and explores in depth organisations’ practices and understandings about its value. An excellent piece of work.’ Professor James Guthrie, Faculty of Economics and Business, the University of Sydney This book examines and explains the intellectual capital reporting practices, with a human capital focus, of firms located in the developing nation of Sri Lanka. The study ascertains the following: first, to what extent the industry groups, based on the number of shareholders, differ in their ICR practices; and second, to what extent firms in Sri Lanka differ from counterparts in other nations in their intellectual capital reporting practices. An important aspect of this book is looking at the practices from a critical perspective to provide a more balanced view of ‘good’ and ‘bad’ effects of intellectual capital. The book meticulously outlines an extensive literature review, research methods, the theoretical perspective, findings with an engaging discussion, and concluding remarks. Indra Abeysekera’s fine research project is an impressive contribution to an emerging area of interest throughout academia and industry. This book will be of great interest to students and researchers engaged with intellectual capital reporting and can be used as an excellent resource for the relevant literature in this field. Indra Abeysekera is Senior Lecturer in Accounting at the University of Sydney.

Routledge studies in accounting

1 A Journey into Accounting Thought By Louis Goldberg Edited by Stewart Leech 2 Accounting, Accountants and Accountability Postructuralist positions Norman Belding Macintosh 3 Accounting and Emancipation Some critical interventions Sonja Gallhofer and Jim Haslam 4 Intellectual Capital Accounting Practices in a developing country Indra Abeysekera

Intellectual Capital Accounting Practices in a developing country

Indra Abeysekera

First published 2008 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2007. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Routledge is an imprint of the Taylor & Francis Group, an informa business © 2008 Indra Abeysekera All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-203-93761-9 Master e-book ISBN ISBN10: 0-415-43754-7 (hbk) ISBN10: 0-203-93761-9 (ebk) ISBN13: 978-0-415-43754-7 (hbk) ISBN13: 978-0-203-93761-7 (ebk)

To the People of Sri Lanka

Contents

List of illustrations Foreword Preface Acknowledgements List of abbreviations

viii ix x xi xii

1

Introduction and overview

1

2

Literature review of intellectual capital reporting with a human capital focus

10

3

Political economy of accounting reporting theory

23

4

Forces shaping intellectual capital reporting in Sri Lanka

36

5

Research method

47

6

Hypothesis development and data interpretation

94

7

Results of hypotheses analysis and discussion

103

8

Interpretation of results

145

9

Conclusions

172

Annual reports used for reference Bibliography Index

177 178 197

Illustrations

Figures 5.1 5.2

Total variables analysed in the data set Research methods used in the study

60 67

Tables 1.1 2.1 3.1 4.1 5.1 5.2 5.3 5.4. 6.1 6.2 6.3 6.4 7.1 7.2 7.3 7.4 8.1 8.2 8.3 8.4

Research objectives and outcomes Research objectives and outcomes Research objectives and outcomes Research objectives and outcomes An introduction to companies in the sample The intellectual capital coding framework used for this study Firms interviewed by industry sector Research objectives and outcomes Industry group classification based on the number of shareholders ICR elements Basis of interpretation of hypothesis one Research objectives and outcomes ICR elements between industry groups IC elements managed but not reported IC elements reported but not managed Research objectives and outcomes HumC reporting analysed by PEA theory ExtC reporting analysed by PEA theory IntC reporting analysed by PEA theory Research objectives and outcomes

6 22 34 46 52–53 56–59 63 69 96 99 101 102 105 106 106 107 151–152 159 163 170

Charts 5.1 7.1

Top 30 firms percentage of market capitalisation Average ICR frequency of industry groups

68 104

Foreword

Dr Indra Abeysekera has produced an interesting book from his studies into intellectual accounting practices in developing countries. I highly recommend this book as it is groundbreaking in that it provides detailed case studies and a theoretical argument about intellectual capital management, measurement and reporting in developing countries. This book recognises the significance of intellectual capital matters and explores in depth organisations’ practices and understandings about its value. An excellent piece of work. James Guthrie

Preface

This study examines and explains the intellectual capital reporting (ICR) practices, with a human capital (HumC) focus, of firms located in a developing nation, Sri Lanka. The study ascertained the following: first, to what extent the industry groups, based on the number of shareholders, differ in their ICR practices; and second, to what extent firms in Sri Lanka differ from their counterparts in other nations in their ICR practices. The literature reviewed highlighted the voluntary nature and unregulated environment of ICR. It also underlined the inability of traditional accounting to recognise IC within its financial statements. This has led to a plethora of nonuniform definitions of intellectual capital (IC) and ICR and a wide range of theoretical frameworks available for IC This study examined the top 30 firms by market capitalisation listed on the Colombo stock exchange (CSE) in both 1998/1999 and 1999/2000. It reviewed their annual reports using content analysis to analyse the type and amount of IC reported and carried out 11 case study interviews with directors and senior executives to analyse the type and amount of IC managed within the firms. Using this data, this study tested the political economy of accounting (PEA) theory. The results indicate that, overall, there were distinct differences in ICR practices between industry groups. The industry groups were found to report similarly in relation to IC category. However, in relation to IC elements, the industry groups were found to report differently, with some industry groups over-reporting on certain elements that were not well managed and vice versa. The differences in ICR practices indicate that industry groups use ICR to mediate the agenda of debate between them and their economic, social and political constituents to maximise their capital reproduction. The study also indicates that differences exist in ICR practices between firms located in Sri Lanka and firms in other nations in relation to both IC categories and IC elements. These differences are attributed to the unique economic, social and political context of each country.

Acknowledgements

I am indebted to the following people without whom this book could not have been completed. I am grateful to Professor James Guthrie of The University of Sydney for his thoughtful and critical comments. My two children, Minoli and Manil, also deserve special thanks. I am thankful to my wife, Preethi, for her unreserved support. Their love and brightness rekindled my energy to complete this book and to surpass every obstacle. I am grateful to the executives in the Sri Lankan firms who volunteered their valuable time to participate in this study. I am also indebted to others in Sri Lanka who helped me by providing relevant documents, information and leads. I apologise for the inability to mention individual names, but I am unable to mention you all due to the limitations of a short acknowledgements page. My mother and father have always been very supportive of me and gave me every possible support in helping me to complete this book. I am very grateful for their patience and humble support throughout my lifetime. Indra Abeysekera

Abbreviations

ASCPA BOI CMA CSE ExtC HumC IAS IC ICA E&W ICR IFAC IntC NIPOSL PEA SLAS USAID The CWP WIPO

Australian Society of Certified Practising Accountants Board of Investment The Society of Management Accountants of Canada Colombo stock exchange External capital Human capital International Accounting Standards Intellectual capital The Institute of Chartered Accountants England & Wales Intellectual capital reporting International Federation of Accountants Internal capital National Intellectual Property Office of Sri Lanka Political Economy of Accounting Sri Lanka Accounting Standards United States Agency for International Development The 1998 Competitiveness Paper World Intellectual Property Office

1

Introduction and overview

1.1 Introduction This chapter provides an introduction to intellectual capital (IC) and intellectual capital reporting (ICR), and also provides an overview of the subsequent chapters of this book. Section 1.2 outlines the factors that have given rise to intellectual capital reporting (ICR) (see Appendix 1.1) in an international context. Section 1.3 explains how changes in managerial and financial reporting trends have given rise to ICR. Section 1.4 explains the motivation behind, and purpose of, this study. The last section provides an introduction to, and overview of, the subsequent chapters.

1.2 Factors that can give rise to intellectual capital Several factors inherent in the current global situation have emphasised the importance of IC. These contemporary forces – such as globalisation, new technology, relatively free capital, increased competition, changes in customer demands, the demand for innovation, changes in economic and political structures and the role of the state in supporting knowledge economies – are constantly reshaping the way business is carried out (Guthrie and Petty 1999; Buckley and Carter 2000; Thorne and Smith 2000; Volberda et al. 2001). Previous research has claimed that firms have begun to realise that technology-based competitiveness is transient and that sustainable advantage lies in managing IC, that is, intangible resources (Johanson et al. 1999), and in a firm’s ability to create value through managing knowledge (Lev 2001, p. 17; Sveiby 2001, pp. 344–358). Over three decades ago, Drucker (1968) predicted the growth of knowledgebased firms, which he then called ‘information-based organisations’. Since then, knowledge-based firms have grown exponentially, mainly due to the codification of new and better programmable instructions, formulas, recipes and methods that rearrange activities to be more valuable than ever before (Romer 1998a; Malhotra 2000a). Also, the high level of specialisation and the division of labour in the modern economy have increased the importance of knowledgebased firms such as professional services and high-tech firms (King and Ranft 2001).

2

Introduction and overview

There are both common and distinct factors between knowledge management and IC management. According to Wiig (1997), knowledge management has a more detailed focus on activities such as the creation, capture, transformation and use of knowledge. However, IC management predominantly concerns maximising and renewing the intellectual assets of value to a firm. Knowledge management and IC management should be combined with other management techniques because they cannot be utilised in isolation (Wiig 1998; Malhotra 2000b). It is argued that the greatest benefit of managing IC is managing the value creation of the firm (Roos et al. 1997, p. 77). The conceptual position taken in the literature is that a firm can manage knowledge by ignoring IC, but the converse is unlikely to hold (ASCPA and CMA 1999, pp. 6–11). Petty and Guthrie (2000a) state that knowledge management and IC management are sometimes referred to in an all-encompassing fashion and that it is important to recognise the differences and establish some operational boundaries between them. Several researchers argue that knowledge helps firms to increase the sale of their products and services and conduct their activities more efficiently (WTC of London 1998). Nonetheless, it is argued that a majority of firms do not understand, manage or measure their knowledge and value creation processes (Roos and Roos 1997; Petty and Guthrie 2000a, p. 207). Some authors point out that the transformation of the communication technologies in the 1980’s resulted in the establishment of a knowledge economy. This enabled the creation of new products and services that were not possible earlier and transformed local markets into a global market space (Graham 1999; Vanoirbeek et al. 2000). Others agree that the success of firms is increasingly determined by the competitive advantage derived from effectively managing IC, such as knowledge (Count 1998; Hurwitz et al. 2002) and the know-how of leaders and employees (Brooking 1996, pp. 1–3). However, the attributes, such as ‘value creation’ and ‘intangibles’, mentioned above are not accounted for in traditional accounting statements. The IC held by a firm can be thought as a form of ‘unaccounted capital’ in the traditional accounting system. This ‘unaccounted capital’ can be described as the knowledge-based equity that supports the knowledge-based assets of a firm. The traditional accounting system looks largely at severable assets (Leadbeater 1998) although recognition is given to some IC items in the form of goodwill (Davies and Waddington 1999). With the abundance of knowledge-based products and services in the global economy, traditional accounting has left a vacuum in the recognition of knowledge-based assets (Tissen et al. 2000, p. 53). A study involving the top executives both from the Canadian Financial Post 300 firms and US Fortune 500 firms revealed the importance that they place on identifying, measuring and managing their intangible assets or IC base. They indicated that assets such as know-how, company and product reputation and relational databases contribute to the success of corporations (Stivers et al. 1997). Studies carried out in other developed nations have supported this view (Fruin 1997, pp. 200–201; Sveiby 1998).

Introduction and overview

3

Governments have been urged to respond to the changes in the global economy because of the impact it has had on national firms. Governments have had to, and continue to, grapple with issues such as increased competition, the rapid spread of innovative products, electronic commerce, change in customer demands and advancements in science and technology (The CWP 1998). Teece (1986) and Teegen (2000) argue that it is the responsibility of all governments to create an environment conducive for firms to compete and succeed and promote commercialised research and foster entrepreneurial skills (Kinsella and McBrierty 1997; Narula and Dunning 1998; The CWP 1998; Lovdal and Roberts 1999). Governments in developing countries, on the one hand, grapple with advancing technology to drive their economies towards becoming knowledgebased economies; but on the other hand, they also have to forgo certain technologies such as telecommunication networks until they become available at an affordable price (Malhotra 2000b). In summary, contemporary forces such as globalisation, the growth of knowledge-based firms (Guthrie and Petty 1999; Buckley and Carter 2000; Thorne and Smith 2000; Volberda et al. 2001) and the involvement of governments in promoting knowledge-based economies (The CWP 1998) are key factors that have highlighted the importance of managing IC.

1.3 A changing focus for accounting One of the most important factors that has emphasised the importance of IC within the firm is the shift in management’s focus from tangible to intangible capital when considering the ‘value creation’ processes within firms. This shift in focus from tangible to intangible assets has also been observed among users of accounting information, which has further accentuated the importance of ICR. For instance, Simister, Roest and Sheldon (1998, p. 2) argue that the emphasis on assets management has shifted from tangible to intangible assets and that now one of the accountant’s roles is to identify, measure and analyse these intangible assets. The accounting profession argues that the accountant is responsible for educating all stakeholders about the importance of intangibles and for reporting results to them (ASCPA and CMA 1999, p. 108). Further, previous research suggests that shareholders who are less informed about the intangible assets of a firm are not aware of the true value of the firm. These shareholders may as a result sell their shares at prices less than their value to those who have ‘inside’ information about the monetary value of the firm’s intangibles (Lev 2001, p. 19). The accounting profession can further contribute to ICR in three ways (ASCPA and CMA 1999, p. 75). First, they can communicate business drivers to stakeholders, stimulate continuous knowledge creation within the firm, manage knowledge as a resource, encourage learning as a means to an end, support the innovation process and facilitate efficient organisational structure. Second, they can construct performance indicators to manage knowledge and report the impact of strategies related to managing IC. Third, they can maintain

4

Introduction and overview

IC values in their financial reporting systems and report these selectively to stakeholders. In addition to the changes in financial reporting, management accounting has changed its emphasis from historical budgeting and cost accounting to the relationships between strategy formation, change and resource management. Roslender and Fincham (2001, pp. 383–398) state that the changes in responsibilities of management accountants are to include exploring the processes and resources by which firms can alter their strategic directions. These changes in responsibilities include reporting about variations in customer needs and demands, shorter product life cycles, global competition, new organisational forms and alliances, information technology advances, shifts in governmental requirements and social philosophies. Ferrier (1999) demonstrated using a number of Australian case studies that when IC is measured and reported in either an ad hoc or systematic manner, it leads to three important benefits. First, the quality of information provided by firms to convince shareholders to invest or to continue their investment is improved. The shareholders become aware of the full range of assets, the culture of the firm and the return realised from intangible assets. Second, firms have information that can guide and assist with their decision-making regarding the future of the firm, its organisational structure, the extent of customer focus, its image to attract appropriate staff, customers and investment, and its employment and working conditions. Third, it supports and guides human resources management to identify the skills and capabilities of its staff, identify skill gaps, invest in human resource development and identify people to establish a process of knowledge-sharing and creation. In summary, the shift in focus from tangible to intangible assets by management, accountants and shareholders has also engendered a change in financial and management reporting practices. ICR can lead to three important benefits listed above to firms. The next section examines the context of ICR in a developing nation and the factors that motivated this research.

1.4 Motivation for the research Three major factors motivated the research on IC practices in Sri Lanka with a human capital (HumC) focus. First, there is a dearth of research on the ICR practices of firms located in developing nations. Second, the recent focus of the Sri Lankan government on encouraging a knowledge economy has heightened the importance of IC within the Sri Lankan context (BOI 2000; McSheehy 2001, p. 57). Third, Sri Lanka has an unusually high adult literacy rate for a developing nation, which presents Sri Lanka as an interesting sample to examine the management and reporting of HumC in greater detail (UNDP Sri Lanka 1998, pp. 5, 42). As will be detailed in Chapter 2, several studies have been carried out to ascertain the ICR trends of firms in developed nations. However, few studies have been carried out to investigate the ICR trends of firms in developing

Introduction and overview

5

nations. The need for a study of firms in a developing country has become increasingly important because these countries have to compete with firms in developed countries due to globalisation, lower transaction costs and more freely available capital. Daley (2001, p. 5) points out that competitive advantage lies in the IC attached to the products and services rather than the actual products or services. The study examines the ICR practices of a sample of the largest listed firms in Sri Lanka over two consecutive years by identifying and codifying the IC disclosures made in their annual reports. The study also conducted 11 case interviews with the aim of ascertaining the anomalies between reporting and managing IC. The study aims to gain insight into the ICR practices of firms in a developing nation, namely Sri Lanka. The research also aims to understand the managing and reporting of IC by the listed firms in the sample and how and why their practices differ from firms in other nations. To achieve the aims mentioned above, the research undertook the following four specific measures: First, it developed a set of content categories from the research literature, providing an expanded research tool that was then used to assess the type, amount and quality of the IC disclosures. Second, it applied this disclosure content instrument to a sample of Sri Lankan company annual reports in order to identify the type, amount and quality of the disclosures. Third, it classified industry sectors into four industry groups, based on the number of shareholders as capital providers, and tested the relationship between these industry groups and ICR. Fourth, it compared the ICR results with specific previous research carried out on firms located in other countries. In summary, the contextual factors such as globalisation, the decreasing trade barrier and a more freely available capital have increased the competition for firms in developing nations (see Table 1.1). The increasing reliance of firms on IC for competitive advantage has amplified the need to examine the ICR practices of firms in the under-researched arena of developing nations. The study sought to ascertain to what extent, and how, variables such as the number of shareholders affected the disclosure practices of firms. Further, the study aimed to examine how the ICR practices of a developing nation differed from those of developed nations and determine what variables caused these differences. The next section outlines each of the subsequent chapters of this book.

1.5 Overview of subsequent chapters Chapter 2 provides a review of the literature on IC and ICR with a focus on HumC. It examines the role of the traditional accounting system in ICR. It then examines the existing IC and ICR definitions and offers an operational definition of ICR. It reviews the ICR literature via several theoretical models, nonfinancial indicators and financial statements. It then discusses the reporting, measuring and managing of HumC within the ICR environment. Finally, it

6

Introduction and overview

Table 1.1 Research objectives and outcomes Objectives

Outcomes

1 Outline several factors given rise to ICR

1 Contemporary economic forces, growth of knowledgebased economy and the knowledge-based economy has heightened the importance of and the need for ICR (see Section 1.2) 2 The shift in assets management from tangibles to intangibles has created the need to better appreciate the causes and motives of ICR to various stakeholders (see Section 1.3) 3 Firms in developing countries compete with those in developed countries on products and services, and IC forms the basis of ‘competitive advantage’. ICR practices are heavily under-researched in developing nations. A study of the ICR in firms in Sri Lanka, a developing nation, seeks to partially fill that vacuum. The study proposes to bridge that gap via three elements. It first examines the disclosure intensity of ICR to understand the reporting practices of these firms, with a focus on HumC. Second, it ascertains to what extent the number of shareholders attributes to the differences. Third it compares the results with ICR practices of firms located in other nations (see Section 1.4)

2 Introduce the changing focus of management and financial reporting in the knowledge economy 3 Establish the basic motivation for the research

identifies several research gaps in the literature and provides the basic motivation for the selection of the research topic in this study. Chapter 3 reviews the forces shaping IC and ICR in the context of Sri Lanka. It examines the economy, the Colombo Stock Exchange (CSE), the corporate sector, the Board of Investment (BOI), the educational environment, the intellectual property environment and the accounting regulations of Sri Lanka. Chapter 4 outlines the method of content analysis, how the data is to be captured and measured. This chapter analyses several perceived threats to validity and reliability of the content analysis and how variables such as size and industry factors could also affect the content analysis. It also describes the method of case study interviews and the threats to the validity and reliability of the results obtained using the interview method. It introduces the sample firms used in the study and argues for the justification of the sample size. It then discusses the reporting instruments and argues for the selection of annual reports. Chapter 5 discusses the political economy of accounting theory as the reporting theory employed in this book. It outlines the political economy theory (PE) and then describes the role of accounting and the political economy of accounting (PEA) and also describes the social, political and economic framework in which firms exist. It then outlines why PEA theory (PEAT) was selected to interpret the results of this study.

Introduction and overview

7

Chapter 6 outlines the two hypotheses. Hypobook 1 examines the differences in ICR practices between the four industry groups (clustered by the number of shareholders). Hypobook 2 examines the differences in ICR practices between firms in Sri Lanka and firms in other nations. It outlines specific factors considered under each hypobook and the factors common to both hypotheses. Chapter 7 analyses the results of the two hypotheses and interprets them in discussion. First, it presents the reporting differences between industry groups, which were established based on the number of shareholders. The reporting differences are analysed by IC category and IC element. It then outlines the results of the case study findings, which are compared with the results of the annual report analysis. Second, it presents the reporting differences between firms in Sri Lanka and firms located in other countries. Chapter 8 interprets the results outlined in Chapter 7 using the PEA theory. First, it interprets the reporting differences between industry groups by analysing the frequency of reporting of bothof IC categories and IC elements across industry groups. Second, it interprets the ICR differences between firms in Sri Lanka and firms in other nations by comparing and contrasting the research findings of this book with previous ICR studies conducted in other nations. Chapter 9 provides a summary and conclusions of the book. It outlines the contributions that this research has made to the body of the literature, the limitations in applying its results, and suggestions for future research in ICR that arise from this study.

1.6 Chapter summary The next chapter will provide a brief review of the IC and ICR literature with a HumC focus (Table 1.1). It will discuss the traditional regulated financial reporting environment, alternative methods of ICR, with a focus on HumC reporting, and identify research gaps found in the literature review.

8

Introduction and overview

Appendix 1.1 Glossary of key terms Item

Definition/description

Content analysis

A technique for gathering data that consists of codifying qualitative information, in anecdotal and literary form, into categories in order to derive quantitative scales of varying levels of complexity (Abbott and Monsen 1979, p. 504) Forces that affect the availability, production and distribution of society’s resources among competing users (Samson and Daft 2003, p. 724) The perception of value obtained by a customer from doing business with a supplier of goods and/or services (Petrash 1996, p. 366) A social entity that is goal directed and deliberately structured (Samson and Daft 2003, p. 14) The capabilities of individuals within the firm to solve problems (Edvinsson and Sullivan 1996, p. 363) Growing internationalisation of economic activity (Yarbrough and Yarbrough 1999, p. 81) A strategic definition – Non-physical benefits that contribute to future cash flows, where the benefit has already been obtained or is owned by an entity which controls the access of others to it (Edvinsson and Sullivan 1996, p. 363) An accounting definition – Identifiable (for example, separable and distinguish from goodwill) non-monetary asset (controlled by the firm as a result of past events and from which future benefits are expected to flow to the firm) without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes (IAS 38 1998, p. 994) A strategic definition – The codified, tangible or physical descriptions of specific knowledge to which the organisation may assert ownership rights (Edvinsson and Sullivan 1996, p. 363) An accounting definition – In balance sheet terms, intellectual assets are those knowledge-based items, which the company owns, which will produce a future stream of benefits for the company (IFAC 1998 p. 12) Knowledge that can be converted into value (Edvinsson and Sullivan 1996, p. 358); The difference between the book value and the market value of firm (Brooking 1997, p. 364). This includes both intellectual assets (IFA 1998 p. 12) and intellectual liabilities (Caddy 2000, pp. 141–142) External reporting intended to meet the information needs common to users who are unable to command the preparation of reports about IC tailored so as to satisfy, specifically, all of their information needs (Abeysekera and Guthrie 2002) This book defines it as an IC attribute. One or more attributes gives rise to an IC sub-category IC attributes found to decrease the stock value of the firm (Caddy 2000, p. 141–142)

Economic forces External (customer) capital (ExtC) Firm or organisation Human capital (HumC) Globalisation Intangibles

Intellectual asset

Intellectual capital (IC)

Intellectual capital reporting (ICR) Intellectual capital (IC) item Intellectual liability (IL)

continued

Introduction and overview

9

Appendix 1.1 (continued) Item

Definition/description

Internal (organisational) capital (IntC) IC sub categories

The knowledge that has been captured or institutionalised within the structure, processes, and culture of the firm (Petrash 1996, p. 366) This book identifies them as clusters of IC items similar in nature and type under each IC category A philosophical definition – If a belief is based on reasoning, then it qualifies as knowledge if, and only if, it does not depend on any chain of reasoning that has a false step, in the middle, beginning or end (Morton 1997, p. 114) An operational definition – Information laden with experience, truth, judgement, intuition, and values; a unique combination that allows individuals and organisations to assess new situations and manage change (Huseman and Goodman 1999, p. 107) An economy of a nation which is tied directly to the creation, transformation, and capitalisation of knowledge (IFAC 1998, p. 1) A firm that values and acknowledges knowledge as a primary competitive advantage, encourages continual learning, and actively manages its intellectual capital (Huseman and Goodman 1999, p. 139) Management of IC controlled by the firm (Petty and Gurthrie 2000a, p. 159) The study of the interplay of power, the goals of power wielders and the productive exchange systems within an economy (Jackson 1982, p. 74) Views accounting as a means of sustaining and legitimising the current social, economic, and political, arrangements of a firm (Cooper 1980, p. 164) The influence of political and legal institutions on people and firms (Samson and Daft 2003, p. 730) The potential ability to influence the behaviour of others (Samson and Daft 2003, p. 730) Communication units used to report IC in annual reports. Qualitative reporting units are narratives, charts, tables and photographs. Quantitative reporting units include numerals and fiscal Is concerned with the question of whether the researcher is obtaining data on which she or he can rely (McKinnon 1988, p. 36) Classification of annual reports into pre-defined sections. They are ‘Vision, Mission & Goals’ section, ‘Chairman’s’ section, ‘Directors’ section, ‘Operational’ section, ‘Financial’ section, ‘Auditors’ section, ‘Cover’ section and ‘Sundry’ section The aspects of a culture that guide and influence relationships among people – their values, needs and standards of behaviour (Samson and Daft 2003, p. 731) Is concerned with the question of whether the researcher is studying the phenomenon she or he purports to be studying (McKinnon 1988, p. 36) The operating income less the weighted average cost of capital on average net assets during the period (Electrolux 2003)

Knowledge

Knowledge-based economy Knowledge firm

Knowledge management Political economy Political economy of accounting theory (PEAT) Political forces Power Reporting units

Reliability Reporting location

Social forces Validity Value creation

2

Literature review of intellectual capital reporting with a human capital focus

2.1 Introduction This chapter provides a review of the intellectual capital reporting (ICR) literature with a human capital (HumC) focus. Section 2.2 reviews the existing intellectual capital (IC) and ICR definitions found in the literature. Section 2.3 reviews the limitations that traditional accounting imposes on ICR. Section 2.4 examines some of the techniques developed to overcome the weaknesses of traditional financial reporting. Section 2.5 examines various ICR methods. Section 2.6 discusses the reporting of HumC. It discusses existing HumC definitions and how it is measured and reported in an ICR environment. Section 2.7 outlines research issues emanating from the literature pertaining to this study. Section 2.8 provides a summary of this chapter.

2.2 Review of several definitions of IC and ICR Several authors take a strategic view when defining IC and ICR, but their definitions vary significantly (Edvinsson and Sullivan 1996; Brooking 1997; Edvinsson 1997; Edvinsson and Malone 1998; Stewart 1997, p. x; Klein 1998, p. 1; Nasseri 1998; Saint-Onge 1998; Ulrich 1998; CMA 1998, p. 3; ASCPA and CMA 1999, p. 4; Knight 1999). The diversity of definitions of IC highlights the difficulty of arriving at a standard definition (ASCPA and CMA 1999, p. 53) and a generally accepted theory of IC (Canibano et al. 1999; Petty and Guthrie 2000a; Van der Meer-Kooistra and Zijlstra 2001). However, all definitions, in general, are similar in that they describe IC as a bundle of organised, focused knowledge that can be used for some productive purpose (Edvinsson and Sullivan 1996). The literature is hazy about the distinction between intellectual assets and IC. For instance, Edvinsson and Sullivan (1996), Petrash (1996) and Lev (2001, p. 5) identify intellectual assets as synonymous to IC. There is ambiguity as to what constitutes an intellectual asset: some conceptualise that they are all intangibles (Roos et al. 1997; Knight 1999), and others conceptualise they are intangibles not currently recognised in financial statements (Caddy 2000; Edvinsson and Sullivan 1996). This book takes the latter view.

Literature review of ICR 11 The Society of Management Accountants of Canada (SMAC) offers an accounting-based definition of IC that is based on intellectual assets (IFAC 1998, p. 12). However, SMAC’s definition conflicts with the assets definition of the International Accounting Standards Committee (IASC), IAS38 (1998) and the Australian conceptual framework (CPA Australia 2000, pp. 49–69) since the SMAC defines assets using the criterion of ‘owning the asset’, whereas the IASC and the CPA define assets using the criterion of ‘controlling the asset’ (CPA Australia 2000, pp. 49–69; IAS 38 1998). Virtually, all definitions of IC mentioned above are based on intellectual assets and have ignored the possibility of the existence of intellectual liabilities. However, previous literature has pointed to the existence of both internal (Harvey and Lusch 1999; Caddy 2000) and external intellectual liabilities (Dzinkowski 2000). This book therefore has recognised the existence of intellectual liabilities in the constitution of IC. Further, the previous literature does not offer a clear definition of ICR. Therefore, this book offers an operational definition. The Australian accounting handbook defines general purpose financial reporting (GPFR) as ‘a financial report intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs’ (ASCPA 1999, p. 0005). Using the definition of GPFR as a basis, ICR is defined as: ‘a report intended to meet the information needs common to users who are unable to command the preparation of reports about IC tailored so as to satisfy, specifically, all of their information needs’. Since the most compelling reason for ICR is ‘to make [the] invisible visible’ on the axiom ‘what gets measured gets managed’ (Roos and Roos 1997, pp. 413–426; Petty and Guthrie 2000b, p. 207), it has been suggested that the challenge is to reach a consensus on the need to report, what to report and how to report (Petty and Guthrie 2000b, p. 214). In summary, the availability of several definitions and a subsequent lack of a uniform definition of IC and ICR enable firms to define them in an experimental fashion. The next section describes three broad methods of ICR suggested in the literature.

2.3 The limitations of traditional accounting in ICR This section outlines two limitations that the traditional accounting system imposes on the measuring, managing and reporting of IC. The first limitation of traditional accounting is the classification of many intellectual assets as expenses (Backhuijs et al. 1999; Lev et al. 1999). Authors have demonstrated that this leads to a systematic under-valuation and an adverse effect on the liquidity levels of firms (Boone and Raman 2001a, 2001b; Ronen 2001). Dunk and Kilgore (2001) indicated that firms are likely to cut research and development (R&D) expenditure to focus on short-term financial performance when the emphasis of the marketplace is on cost rather than on product innovation.

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Thompson (1998) suggests that in order to overcome the reluctance of firms to recognise IC as an asset in financial reports, firms could add a supplementary set of reporting elements to acknowledge forms of capital and claims to capital that cannot be measured in financial terms. Heckmian and Jones (1967) agree that it is more advantageous to measure and acknowledge IC than overlooking it, even if the measurements are slightly inaccurate. This view is supported by several other authors who suggest that including IC in financial statements is more helpful when seeking solutions to management problems such as the evaluation of investments and determining the competitive advantage of a business. (Dearden 1960; Anthony 1965, p. 1; Moorhow 1990; Buhner 1997; Davies and Waddington 1999; Petty and Guthrie 1999; Rohwer 1999; Copeland 2000; Guthrie and Petty 2000a; Petty and Guthrie 2000b, p. 215; Allen 2001). The failure to recognise IC in financial statements has resulted in the production of unrealistic and unrepresentative financial statements (Wharton Alumni Magazine 1997; Romer 1998b; Swinson 1998, pp. 4–5; Horney 1999; Petty and Guthrie 2000b, pp. 214–215). The second limitation is that accounting standards in most countries permit only the recognition of purchase goodwill to be reported in their financial statements. Purchased goodwill represents only a portion of IC (Van der MeerKooistra and Zijlstra 2001). There is some variation between the accounting standards of countries. For instance, Austria and Germany do not permit the recognition of any intangible assets (Bornemann et al. 1999). However, Japan recently amended its accounting regulation to record ‘purchased goodwill’ in consolidated accounts only (Okano et al. 1999). According to Unwin (1990), the only outcome available for several countries is to amortise ‘purchased goodwill’. The literature suggests that the lack of national homogeneity in accounting standards on these intangible assets may have given rise to a lack of international homogeneity on the accounting standards relating to all intangibles (Tozer and Hawkes 2001; Stolowy and Jenny-Cazavan 2001). The International Accounting Standard (IAS) number 38 specifically prohibits the recognition of start-up costs, training costs and advertising costs in the traditional accounting framework; it also prohibits the recognition of internally generated goodwill (IAS38 1998, pp. 983–1031). These above-mentioned two major weaknesses of traditional accounting are believed to be partially responsible for the noted gap between the net book value and market value of a firm (Knight 1999; Dzinkowski 2000; Abdolmohammadi et al. 2001). Also, Power (2001) and Tollington (2001) highlight this gap and question the ability and relevance of the accounting numbers reported to make economic decisions. Businesses have to overcome the gap between the market value and the net book value by changing their reporting to provide timely and other relevant information to meet market-needs of users (Jenkins 1998, p. 1; Swinson 1998, p. 4; ICA EandW 1998, pp. 2–3). Several authors predict that the annual report of the future is expected to recognise IC as a wealth-creating asset and provide forward-looking information that takes into account the stakeholder information

Literature review of ICR 13 needs of decision-making and innovative ability of the firm (Roos et al. 1997, p. 21; Benjamin 1998, pp. 13–15). Currently, the accounting profession is actively debating the issue of how to measure, manage and report IC. However, several authors agree that there is still many technical issues to solve before significant change can be achieved in the accounting profession and the accounting standards to recognise IC in traditional financial statements (Benjamin 1998, pp. 26–27; Brennan 2001; Cook 1998, p. 29; Fay 1998, p. 28; Lipworth 1998, p. 26). Therefore, alternative techniques of measuring and reporting IC have developed to overcome the weaknesses in traditional financial reports. This will now be explored in more detail below.

2.4 Alternative techniques to overcome the weaknesses of traditional financial reporting The noted gap between the market value and the net book value of firms has given rise to at least two alternative techniques to understand this gap in the managing and reporting of a firm’s assets. The two techniques discussed below are the balanced scorecard (BSC) and economic value added (EVA) methods. 2.4.1 BSC The BSC is a performance system that identifies and reports performance measures for each key strategic area of a business (Langfield-Smith et al. 2003, p. 675). The BSC is found to be a method that addresses the managing and reporting issues overlooked by the traditional accounting system, such as the importance of customers, business processes and the capabilities of the firm (Kaplan and Norton 1992, 1993, 1996, 2001; Gering and Rosmarin 2000; Roslender 2000). Some authors perceive it as a framework that translates the mission and strategies of a firm into objectives and performance measures by converting strategies into specific objectives that reflect four perspectives: financial, customer, internal business processes and learning and growth (Ahn 2001). Further, the BSC is criticised for not considering people as a value-generating asset, as well as for taking organisational theory for granted and accepting the traditional accounting system as its basis (Johanson 1998). 2.4.2 EVA EVA is a measure of the value created over a single accounting period, measured by the spread between the return generated by business activities and the cost of capital (Langfield-Smith et al. 2003, p. 641). One of the major strengths cited about EVA is that it is not bound by traditional accounting conventions (Young 1997). However, EVA is criticised because it focuses on short-term results and is a single-period measure. The use of the book value of assets may result in decisions not to invest in assets due to depreciation in early years of use. It does not take a future-oriented perspective (Knight 1999; Langfield-Smith et al. 2003,

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p. 642). Further, according to Wallace, (1996) capital market participants respond poorly to the EVA method and that reported earnings information generally outperforms EVA in its relative information content (Biddle et al. 1996). However, a study that compared IC in BSC and EVA management techniques concluded that none could claim to be ‘the best’, since it depends on several factors such as the firm, its people and context (Bontis et al. 1999). Nevertheless, such techniques are useful alternatives to traditional accounting due to the expansion of the knowledge base and service sectors. The expansion of such sectors has changed at least two fundamentals in business and economics. The first fundamental is that now firms in these sectors follow the law of increasing returns where their marginal profits increase with increasing production and sales, whereas manufacturing firms follow the law of diminishing returns (Sveiby 1997a, p. 22; Lev 2001, p. 23). Both law of diminishing returns and law of increasing returns can coexist in a firm that has manufacturing and service or knowledge-based business activity (Arthur 1996). The second fundamental is that now the process of understanding accounting numbers has shifted from just quantitative research (e.g. financial ratio analysis) to qualitative research that has challenged the notion of managing processes (Mouck 1998). In summary, BSC and EVA are two techniques available for reporting the aspects ignored by the traditional accounting system. Each technique has its strengths and weaknesses and cannot be treated as comprehensive techniques.

2.5 Intellectual capital reporting via frameworks Five major IC framework models have been identified in the previous literature. These are: (i) Structures holding intellectual assets (Sveiby 1997a, pp. 11–12, 93, 165), which focuses on intellectual assets; (ii) Capital holding intellectual items (Edvinsson 1997; Edvinsson and andMalone 1998; Roos et al. 1997; Edvinsson and Sullivan 1996), which has been modified by others (Roos and Roos 1997; Stewart 1997, pp. 229–246) and discusses IC in relation to intellectual assets; (iii) Assets representing IC (Brooking 1996, pp. 13–15, 129; 1999, pp. 153–155), which focuses on intellectual assets; (iv) Strategic root and measurement root (Roos et al. 1997, p. 15),which focus on reporting IC from a strategic perspective; (v) A combination of assets and capital representing IC (SMAC 1998, p. 14; IFAC 1998, p. 7; Dzinkowski 2000). This model is an extension of the assets representing IC model. Until recently, few firms have attempted to measure and assess intellectual capital (Guthrie and Petty 2000). There are currently several frameworks on offer for measuring and reporting IC. An early attempt at providing such a model was made by Brooking as early as 1996. Brooking (1996) classified IC items into four major IC categories (Brooking 1996, pp. 12–81, 129; Brooking 1997; Brooking and Motta 1996). They are: assets that give the firm power in the market place, such as trademarks, customer loyalty, repeat business and so on; assets representing property of the mind such as intellectual property

Literature review of ICR 15 (patents, trademarks, copyright so on); assets that give the firm internal strength, such as corporate culture, management and business processes, strength derived from IT systems and so on; and assets derived from the people who work in the firm, such as knowledge, competencies, work related know-how, networking capability and so on. Subsequent authors modified and built on her framework (ASCPA and CMA 1999, p. 14; Dzinkowski 1999a, 1999b; Dzinkowski 2000; IFAC 1998, p. 7). Previous researchers have successfully used the abovementioned IC frameworks to analyse the content of IC disclosures in annual reports as detailed in the next paragraph. Annual reports are an ideal research object to apply the IC framework to because they are a good proxy to measure the comparative positions and trends of IC between firms, industries and countries (Abeysekera 2001). Much of the published research has used annual reports as audit objects to ascertain the status of the IC of firms within countries (Guthrie et al. 1999; Guthrie 2000; Brennan 2001; Olsson 2001) and between countries (Subbarao and Zeghal 1997). Also, annual reports represent the concern of individual corporations in a comprehensive and compact manner. Further, they are regularly produced and offer an opportunity for a comparative analysis of management attitudes and policies across reporting periods (Niemark 1995, pp. 100–101). Researchers in Australia (Guthrie 2000; Guthrie et al. 1999; Guthrie and Petty 2000d) empirically examined Australian organisational practices in managing and reporting IC. First, they reviewed the literature on governmental and professional policy pronouncements to identify organisations that are currently discussing IC. Second, they carried out a content analysis of the top Australianlisted firms, and one other firm ostensibly active in reporting its IC, to understand to what extent these firms report their IC. They analysed the content in annual reports by frequency count. The research included a ‘best practice’ organisation as a benchmark to identify what firms were doing and what they could be doing in reporting IC. Third, the authors carried out a number of case studies, using interviews, to provide a greater understanding of how firms identify, manage, measure and report IC. The authors claim that Australia provides an ideal case study for such analysis as it is undergoing economic transformation with an increasing emphasis on new sectors such as financial services, tourism, information technology and niche manufacturing with a relative decline in its traditionally strong areas of agriculture and mining. According to the authors, the Australian economy has experienced a faster economic growth during the 1990s than most other OECD (Organisation for Economic Co-operation and Development) countries and has increased its rate of productivity growth. In undertaking their research, the authors used the IC framework developed by Sveiby (1997b) and categorised intangibles into internal structure, external structure and employee competence. Their study revealed that key components of IC are poorly understood, inadequately identified, inefficiently managed and inconsistently reported in Australian annual reports. On the whole, firms do not have a consistent framework for reporting IC. Even the Australian ‘best

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Literature review of ICR

practice’ enterprise is in need of a comprehensive management framework, especially for collecting and reporting IC information. Interestingly, where IC is reported, entrepreneurial spirit is the most frequently reported attribute. Other findings of the Australian study include the observation that reporting external capital was more in favour with large (by market capitalisation) firms. This can be understood in the light of the emphasis in recent years on rationalising distribution channels, reconfiguring value chains and reassessing customer value through exercises such as customer profitability analysis. Guthrie et al. (1999) identified that most of the IC information reported was on external capital (40 per cent). Reporting of human capital (30 per cent) and internal capital (30 per cent) were evenly distributed. Guthrie et al. concluded from their research that Australian firms appear to have taken a conceptual approach to reporting IC. The often-stated claim in annual reports is that that human resources represent the most important assets of the firm is not supported by IC elements reported and measured in the remaining sections of the annual report. In other words, there is a gap between the recognition of the importance of IC and actual steps taken to give greater room to IC reporting in the agenda of Australian enterprises and public policy. Consequently, Australian firms do not compare favourably with several European counterparts when assessing their ability to manage, develop, support, measure and report IC. Brennan (2001) carried out a similar study in Ireland of technology and people-oriented firms. The author analysed the annual reports of 11 listed firms and ten private firms. Manufacturing firms were excluded though the author stated that the manufacturing sector is the one with the most value-added and with the greatest multiplier effect on the economy as a whole. The study found significant differences between market and book values, suggesting that knowledge-based Irish-listed companies have a substantial level of non-physical, intangible IC assets. Such assets are rarely referred to in annual reports, and when they were referred to, it was in highly qualitative terms. Judging by the disclosures in the Irish annual reports studied by Brennan, there seemed to be little interest in, and demand for, improvements in the measuring and accounting for IC. The findings of this study are based on a small, non-random sample of companies and therefore cannot be used to generalise for Irish companies. The author acknowledges that the size can be an important variable in relation to IC, and an examination of the largest Irish companies might have provided more meaningful results. Olsson (2001), in a study of the annual reports of the 18 largest Swedish firms in the stock market A-list, attempted to ascertain the human capital aspect of IC reporting. The study analysed the contents of annual reports based on five criteria, namely, education and development, equality of employment, recruitment, selection of employees and CEOs’ comments about personnel. However, for reasons not provided, it excluded information about the firms’ stock, balance sheets and income statements, pictures and information about the board, auditing reports, holding firms, cash flow analyses, proposals for the distribution of

Literature review of ICR 17 profits, the cover pages, addresses and phone numbers, principles for valuation and accounting paragraphs, and definitions of key ratios. The findings of the study were that, in 1998, the percentage of human resources information did not exceed 7 per cent of the total information provided in the annual reports of each of the 18 companies. Further, the annual reports were deficient in the quality and depth of the material disclosed. The author concluded that, in the real world, there was an observable absence of transparency in human capital reporting (Olsson 2001). Subbarao and Zeghal (1997) analysed the annual reports of a sample of publicly traded firms in six countries, namely the United States, Canada, Germany, United Kingdom, Japan and South Korea, to make an international comparison of human resource information and disclosures. The authors analysed the annual reports of firms in the manufacturing and financial service sectors of each country. A total sample of 120 corporate annual reports of listed enterprises were analysed, 20 reports from each of the six countries with ten from the manufacturing sector and ten from the financial services sector. They analysed the frequency and word count of human resource information by five broad areas. These were: information on training (training); information relating to the contribution of human resources to increase the value of the corporation (valueadded); diversity of the workforce, which impacts the firm’s image as being socially responsible (equity issues); information related to employee relations (employee relations); and compensation of executives and employees (compensation). Their study revealed several interesting results. First, benefits and pensions were the most frequently disclosed items; however, employees’ benefits were statutorily required to be reported in most of the countries studied. Second, value added by human resources to a firm was the least frequently mentioned out of all the categories. The authors believed that this was either because firms found it difficult to measure or because theyfelt that such value-added information was unimportant. Third, employees featured in annual reports for their special contributions to the firm. Information about the directors’ committee of human resources ranked first and second by word count but ranked fifteenth and eighteenth by frequency of disclosure. Fourth, information on profit-sharing was not disclosed in the annual reports of firms in Japan and South Korea. The US firms, on the other hand, disclosed information on sharing of profits in relation to both stocks and stock options. In Europe, the frequency of disclosure of the number of people employed was high compared to annual reports in North America and Asia. Further, firms in Europe disclosed information on employee compensation, while very few in Asia disclosed that information. The above literature on ICR has conducted little investigation into the relationship between the extent of disclosure in annual reports and ownership diffusion in firms. Further, the previous research appears to have largely focused on the actual reporting of firms and has conducted little investigation into the broader issues such as the political, social and economic structures influencing ICR. The next section examines HumC reporting and its broad implications for ICR.

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Literature review of ICR

2.6 Human capital focus This section begins by defining HumC and then discusses literature on defining and reporting HumC. 2.6.1 Definitions of human capital Although several different definitions of HumC are found in the literature (Edvinsson and Sullivan 1996; Grojer and Johanson 1996, p. 17; Nasseri 1998; Roos 1998), it has not been operationalised for accounting and reporting purposes (Bassi et al. 2000, p. 334). HumC refers to a combination of factors possessed by individuals and the collective workforce of a firm. It can encompass knowledge, skills and technical ability; personal traits such as intelligence, energy, attitude, reliability and commitment; ability to learn, including aptitude, imagination and creativity; desire to share information, participate in a team and focus on the goals of the organisation (Fitz-enz 2000). Several authors state that HumC is important because it is what creates value and gets transformed into structural capital to extract value (Edvinsson and Sullivan 1996; Graham and Pizzo 1998, p. 25; Backhuijs et al. 1999). In summary, the plethora of definitions and lack of a uniform definition of HumC enable firms to experiment with their reporting of HumC. The next section outlines the HumC literature that pertains to developing and understanding HumC measurement for financial reporting. 2.6.2 Reporting human capital The literature on measuring HumC can be classified into the following two streams. The first stream of researchers are involved in developing financial measures for financial reporting, and the second stream of researchers are involved in attempting to understand how users make decisions using HumC measurement information. These two streams are discussed below. (i) The first stream of researchers are involved in developing financial measures for financial reporting (Heckmian and Jones 1967; Lev and Schwartz 1971; Committee Reports 1973; Turner 1996; Morrow 1996; Dobja 1998; Ra and Langendijk 1998). Heckmian and Jones (1967), in their study, discuss using historical cost, replacement cost and opportunity cost as financial measures, and they favour the opportunity-cost method. The opportunity-cost approach uses the implicit asset value that can be obtained based on competitive bidding. Only scarce employees become an investment, and others are ignored under this approach (Committee Reports 1973). Lev and Schwart (1971) stated that the value of a firm’s human capital is the average earnings data of homogenous groups discounted at the firm’s cost of capital. However, Lev and Schwart (1971) have not defined the concept of human capital in their research, and the model assumes that the employee stays with the organisation until death or retirement. Dobja (1998) capitalises human resource by measuring the cost of living and costs of professional education, and

Literature review of ICR 19 the value of human experience is measured by a slightly modified learning curve. Once human capital is measured in the above-said manner, a set of journal entries is passed to report them in the balance sheet. Dobja (1998) claims the model is still at a conceptual level. Turner (1996) argues to recognise human resources as both assets and liabilities. The asset aspect of human resources, he argues, is the expected future payments (such as salaries and benefits), and the liability aspect is the cost associated with staff turnover when the liability recognition criteria are satisfied. Morrow (1996) compared four measurement methods to value football players: historical cost; earnings multipliers (transfer prices between clubs arbitrated by an independent tribunal); directors’ valuations; and independent multiple valuations of players (by independent evaluators). The treatment of amortisation and other write-offs of players is not discussed, but it is an important aspect since profits from players can produce unprecedented swings in the income statement (Ra and Langendijk 1998). However, determining the monetary value has proven to be a complex matter (Heckmian and Jones 1967) since it is not easy to isolate HumC as a single variable (Elias 1972a). The first stream of researchers developing HumC measurement for reporting have, so far, achieved little progress in recognising and reporting HumC in financial statements (Roslender 1997; Fitz-enz 2000, pp. 116–117). Although it is theoretically interesting, such information has not proved to be useful in practice, and there is little empirical evidence to suggest the usefulness of these financial models (Flamholtz 1976; Grojer and Johanson 1996, p. 24). One of the factors contributing to this lack of progress, achieved so far, is the valuation of employees due to a range of judgemental issues (Roselender and Dyson 1992; Turner 1996; Roselender 1997). Although this stream of research is theoretically exciting, it has not proved useful empirically (Flamholtz 1976; Grojer and Johanson 1996, p. 24) nor in practice (Grojer and Johanson 1996). However, the models developed so far can contribute to change firm culture to reinforce that people are a valuable resource (Dozentin et al. 1989). According to Roslender and Dyson (1992), putting people on the balance sheet has lost much of its status as a useful option, and alternative ways of reporting human worth in a framework have not gained much acceptance among firms. They point out that it is necessary to look beyond the previously established framework to increase any prospect of reporting for HumC. The findings of Bassi et al. (2000) are consistent with Rodwell’s (2000) study of manufacturing companies in Australia, which revealed that although firms realise the intrinsic value of employees in conducting business, firms do not appear to utilise them strategically. (ii) The second stream of researchers attempt to understand how users make decisions using HumC measurement information. Users include both managers (Lev and Schwart 1971; Flamholtz 1971, 1972; Flamholz and Holmes 1972; Ronen 1972; Copeland, Francia and Strawser 1973; Jaggi and Lau 1974; Tomassini 1976, 1977; Gul 1984; Johanson and Nilson 1996; Olsson 1999) and investors (Elias 1972b; Hendricks 1976; Bassi et al. 2000, pp. 353–354). However, the use of surrogates in some of their studies has reduced the validity

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of their findings (Committee Reports 1972; Committee Reports 1973; Copeland et al. 1973; Tomassini 1977). This stream of IC literature has also begun to explore the influence reporting employment relationships of HumC has on the managements’ decision making (Handy 1995; Avery 2001, p. 10; KasperFuehrer and Ashkanasy 2001; Raghuram et al. 2001). Human resource accounting is an attempt to report the financial consequences of human resource development, readjustment, reshuffling, acquisition and turnover. It focuses on the knowledge of the organisation based on principles used in traditional accounting methods and has financial consequences because of payments received by employees (The Danish Trade and Industry Development Council 1998, p. 20). The inclusion of HumC in the balance sheet substantially impacts on the level of profitability of the firm (Turner 1996) and can alter the key financial ratios in the balance sheet (Grojer 1997). Elias (1972a) states that managers are sceptical about human resource accounting for four reasons. First, people are volatile assets since they can terminate their employment with a firm at short notice. Second, it is difficult to change management’s thinking from seeing people as an expense to an asset. Third, for some people, the label ‘human resource accounting’ has an exploitative connotation and can invoke changes in their behavioural attitudes and social order. The notion is supported by Hendricks (1976) who argues that human resource costing and accounting in financial statements has been used more frequently in Sweden in comparison to the rest of Europe, because it suits the social order in Swedish firms, its traditions, labour relations and Scandinavian management. Fourth, it is easier to put a more precise cost on employees rather than an asset value to HumC (Davis 2001). The review of the literature indicates that at present, managers do not generally link the value of HumC to the performance of the firm (Miller et al.1999), and subsequently they do not strategically utilise it as an asset (Rodwell 2000). According to Brown and Duguid (2000), firms need to foster teamwork, ‘communities of practice’ and other social forms of learning so that firm retains knowledge when individuals leave the firm. The lack of such strategies could be attributed to managers’ limited understanding in working with new measures reported in recent literature (Guthrie and Mealy 2000). As Lev (2001, p. 74) points out, an empirical determination of human resource practices and their impact on the profitability and market value of a firm are seriously hampered due to the lack of publicly disclosed information on such practices. Further, it could be why previous empirical studies state that most firms assert that people are the most important asset; however, actual firm practice does not conform to this assertion (The Economist Intelligence Unit 1998, pp. 3, 22–26). In summary, HumC refers to a combination of factors possessed by individuals and the collective workforce of a firm. ‘Human resource accounting’ is an attempt to report the financial consequences of such factors. The difficulty of accurately determining the monetary value of HumC is cited as a reason for the lack of progress in recognising HumC in traditional accounting statements. The next section describes the research issues found in the above review of the ICR literature that highlighted several research gaps.

Literature review of ICR 21

2.7 Research issues The above literature analysis, which specifically focused on ICR, identified four broad issues that become the basis for this study. These four issues will be dealt with in detail below. They are: regional bias, methodology types, ownership diffusion comparison, and focus on capital markets. 2.7.1 Regional bias As outlined in Section 2.5, the majority of country-specific research on ICR has been carried out in developed nations. Although there were a few isolated studies carried out in industrialised developing countries such as South Korea (Subbarao and Zeghal 1997), low and lower middle-income, non-industrialised developing countries are still under-represented in the published research. This book attempts to fill that vacuum by carrying out a study in a lower middleincome country, Sri Lanka. 2.7.2 Methodology types As outlined in Sections 2.3, 2.5 and 2.6, few studies have used content analysis (Subbarao and Zeghal 1997; Brennan 2001; Guthrie et al. 1999; Guthrie and Petty 2000b) to provide a more micro focus on ICR practices. This book therefore combined content analysis and case study interviews since exclusive focus on one method is unlikely to result in a complete picture of IC reporting practices. This is discussed in more detail in Chapter 4. Content analysis of annual reports allows the researcher to examine IC reporting phenomena, and case studies, on the other hand, enable the researcher to investigate the IC managing phenomena in an unregulated environment. 2.7.3 Ownership diffusion comparision As briefly noted in Section 2.5.2, previous literature has conducted little investigation into the relationship between the extent of disclosure in annual reports and ownership diffusion of firms (Hooks et al. 2002). Therefore, it is an opportunity to explore the relationship between the shareholding ownership and the level of ICR disclosure. 2.7.4 Focus on capital markets As briefly outlined in Section 2.5.2, previous literature largely has a focus on the value creation of firms. It has ignored the broader issues such as political, social and economic structures that influences and interacts with firms when they attempt to create value through ICR. The absence of a uniform definition of IC and ICR has widened the reporting definitions and thereby increased ICR choices of firms. The literature review

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Table 2.1 Research objectives and outcomes Objective

Outcomes

1 Introduce definitions of IC and ICR

1 The lack of a uniform definition for IC and ICR has given rise to firm’s defining them to suit their reporting agenda (see Section 2.2) 2 The reporting weaknesses of the traditional accounting system and general lack of the accounting profession to recognise IC in financial statements. It has contributed to perpetuate ICR in an unregulated reporting environment (see Section 2.3) 3 The BSC and EVA, are two alternative techniques offered to report IC (see Section 2.4) 4 Three broad methods and several ways under each method to report IC enable firms to choose a reporting method that suit their reporting agenda (see Section 2.5) 5 Lack of a uniformed definition of HumC, and availability of several reporting methods enable firms to select from a variety of methods that best suits their reporting agenda (see Section 2.6) 6 ICR practices are under-researched in developing nations. IC studies carried out so far are largely based on a single research method. The IC measuring and reporting indices are not adequately validated (see Section 2.7)

2 Outline the impact of traditional accounting on IC 3 Outline alternative techniques of ICR 4 Discuss the various methods of reporting IC 5 Discuss the aspect of HumC focus 6 Present the research issues

also identified four methods of ICR. First, reporting as ratios at both inter-firm and intra-firm level. Second, reporting as indicators to represent the vision of the firm, IC categories, and return on IC items. Third, reporting via IC statements. Fourth, reporting via IC framework. These choices offer firms the ability to select a way to report IC in their favour. These choices of non-uniform ICR enable firms to use IC as a commodity to mediate their political, economic and social arrangements.

2.8 Chapter summary Table 2.1 provides a summary of the research objectives of the chapter and its outcomes. The next chapter outlines the forces shaping ICR of listed firms in Sri Lanka. It discusses the role of capital and capitalist institutions, the role of state and the state institutions in shaping ICR.

3

Political economy of accounting reporting theory

3.1 Introduction This chapter describes the political economy of accounting (PEA) theory, which is tested in this book. Section 3.2 outlines the objectives of a political economy (PE) theory. Section 3.3 discusses traditional accounting in the context of PEA theory by examining the effect of globalisation on financial capital and the social character of capital. Section 3.4 describes the role of the state in PEA and describes the state as a form of capitalist social relations. Section 3.5 describes the role of capital in PEA and describes capital as an institutional system, capital accumulation based on regimes of capital, and accumulation of global and social capital. Section 3.6 extends the discussion to corporatism in an attempt to understand the reciprocal relationships between interest groups and the state and the central importance of PE theory in promoting the process of adjustment through the political capacity of the government. Section 3.7 describes factors contributing to the selection of PEA theory in this book. Section 3.8 provides a summary for the chapter.

3.2 Political economy theory Political economy is defined by Jackson (1982, p. 74) as the study of the interplay of power, the goals of power wielders and the productive exchange system. As a framework, political economy does not concentrate exclusively upon market exchanges. Rather, it first of all analyses exchanges in whatever institutional framework they occur and second, analyses the relationships between social institutions, such as government, law and property rights, each fortified by power and the economy i.e. the system of producing and exchanging goods and services. Boczko (2000, pp. 131–153) argues that a political economy analysis should attempt to achieve the following four objectives. First, to destroy the observed illusionary reality of social processes and structures. Second, to elucidate the various ways in which social processes work to dominate control structures

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through defining, mediating and legitimating knowledge of social activities. Third, to examine institutional arrangements and explore the notions of power, class and conflict between such social constituencies and the underlying myths of such arrangements. Fourth, to go beyond economic efficiency and inquire about moral questions of justice, equity and public interest. Specifically, the political economy focuses its attention upon how firms allocate resources and make decisions. Political economy views the constitution of a firm as three-fold: first, a firm is a social entity that is goal-directed and deliberately structured (Samson and Daft 2003, p. 14); second, it is a set of agreements and understandings that define the limits and goals of the collective group; and third, it creates rights and responsibilities of the participants standing in different relations to it (Jackson 1982, p. 74). As indicated by the research reviewed in Chapter 2, intellectual capital reporting (ICR) has come to the forefront due to several factors, including a shift in emphasis on intangibles, the involvement of governments in creating a knowledge-based economy, availability of capital that is not bounded by time and space, and globalisation (see Section 1.2). ICR can be seen as a means for a deliberately structured social entity to address the information needs of participants standing in different relations to the firm. The inconsistent manner of measuring and reporting intellectual capital (IC) enables firms to report their IC in a fashion that best suits the relationship between the firm and their political, economic and social framework. Although regulating ICR may not eliminate firms using IC as a commodity, unregulated reporting can increase manipulation of ICR in a borderless reporting environment to reduce the tension between the firm and its political, social and economic framework.

3.3 Traditional accounting in a political economy context Cooper’s (1980, p. 164) definition of PEA theory defines accounting as a means of sustaining and legitimising a firm’s social, economic and political arrangements. Within this construct, accounting reports are viewed as a means to create, sustain and legitimise the economic and political arrangements in the private interests of the firm (Guthrie and Parker, 1990). PEA theory observes that accounting information is used to support those groups that are currently powerful in the society (Cooper 1980; Cooper and Sherer 1984). Further, PEA theory takes the view that there are two opposing forces or principles that create tension between the constituents in a firm’s economic and political arrangements (Buhr 1998). PEA theory discerns that firms proactively provide information, within their accounting reports, from their perspective to set and shape the agenda of debate and to mediate, suppress, mystify and transform the conflict (Guthrie and Parker 1990). Traditional accounting has been criticised in the PEA literature for the following four reasons. The first one is due to a lack of will to have a conceptual preference for any particular measurement method. It is pointed out that techniques developed in accounting owe more to corporate patronage than to

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any independent scholarly criteria (Hopper et al. 1987). Second, regulatory accounting agencies continue to produce ambiguous accounting standards whilst having an inconclusive conceptual project (Robson 1999, p. 627). Third, it defines assets and liabilities based on the cash flow (either net realisable value or discounted present value) rather than based on its utility in production or exchange (Samuelson 1999, p. 631). Fourth, although accounting should provide predictive information (such as cash flows) to investors and creditors, firms or their agents (management) are not held accountable as a social class (Bryer 1999, p. 553). Traditional accounting attempts to combine, neutralise and universalise social practices in a way that masks unequal social relations by mapping the assumptions and calculations of accounting numbers to the underlying economic reality (Neu et al. 2001) rather than to any professional expertise or impartial service to the society (Hopper et al. 1987). Boczko (2000, pp. 132–133) states that political economy of accounting identifies and classifies traditional accounting by referring to social and institutional values and arrangements through the traditional accounting myths of neutrality, objectivity, faithfulness and impartiality, which is important to sustain the powerful social influence of capital. PEA seeks to go beyond the symbolic representation of social action, which is legitimated and mediated by the social and political priorities of capital. Traditional accounting can be described as a regulated institutional process; a constructed model designed to report and communicate the impact of economic activity (due to temporal and spatial displacements) and associated regimes of accumulation. It provides an external reporting mechanism for profit-orientated firms (Boczko 2000, p. 13). The regulated process secures capitalist reproduction through institutional collection (such as laws and agreements), norms and cultural habits. These institutional collections support a capital accumulation regime by laws, state policy, political practice, rules of negotiation and bargaining, culture of consumption, and social expectations (Amin 1994, p. 8). As Tinker (1985, p. 56) points out, marginalist economic theory has a striking influence on traditional accounting thought. It provides a logical rationale to accumulate capital for the capitalist (i.e. an agent who manages social capital for creditors and shareholders), creating an unequal exchange of surplus values (i.e. profits). Tinker argues that marginal economic theory is frequently enlisted to arbitrate economic claims between different constituencies. It is incompatible with socio-political analysis because marginalist economic theory deals inadequately with social conflict, economic reductionism, political voluntarism and reliance on interest groups. Tinker (1985, p. 84) argues that accounting is a belief-making informational commodity that measures and appraises the terms of exchange between different social constituencies and that helps to allocate resources and simultaneously determines a distribution of income. Accounting has become part of that exchange process by helping firms to make decisions in relation to economic

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exchange. If the accounting practice did not take part in this way, competitive pressures would eradicate it as an unnecessary overhead cost. Several authors concur that traditional accounting is deeply entrenched in the capitalist search for profits, and it is this deep focus on profit seeking that has, increasingly, made it a capital-specific commodity. This ethos, of the capitalist search for profits, has been adopted, supported and refined by traditional accounting as a means of objectifying and arbitrating the single-minded desire to accumulate further capital (Armstrong 1987; Boczko 2000, pp. 135–138). It is conditioned by reorganising regimes of accumulation, increasing the commodification of society and by the temporal and spatial displacement of capital due to globalisation and fictionalisation. Traditional accounting, by privileging the priorities of capital, can selectively communicate and translate the crises of accumulating capital. It often legitimates the action of capital accumulation and selects elite groups, assisting them to expand their already considerable societal power. As a result, traditional accounting has become an integral part of the global culture of capital (Boczko 2000, p. 135–138) and is inseparable from the social, political and economic interests of the time (Cooper and Sherer 1984). The accounting profession, as the mediator between the market and the state, is in a unique position of power and knowledge that allows it to generate abstract norms that can give de facto legitimacy to these new forms (Armstrong 1998, p. 396) such as ICR. Bryer (1995, p. 304) argues that financial reporting makes it possible for investors to observe the generation and realisation of profit and the rate of return on capital. Financial reporting also allows firms to control the equity between individual investors. The collective interests of investors are better served by deliberately distorting published accounts for further capital accumulation. Tinker (1985, pp. 14–15) argues that share prices do not reflect historical asset values but rather they represent the earnings that those assets are expected to generate. Therefore, it is to the advantage of managers to convince their capital providers of the firm’s ability to utilise those assets at the highest level of efficiency through news releases, which includes accounting reports such as company annual reports. According to Tinker, share prices no longer portend future worth and earnings; they are merely distortions and perversions of future reality. Therefore, traditional accounting practice is defined as a way of resolving social conflict and as an institutional mechanism devised to arbitrate, evaluate and adjudicate social conflict relating to economic production and exchange (Tinker 1984, 1985; Lehman 1992; Neu et al. 2001). Accounting is an informational commodity that both reflects and effects economic exchanges (Tinker 1985, p. 84), and accountants are the messengers who deliver performance results to the management (Lowenstein 1996, p. 1336). Therefore, the accounting profession plays a role in shaping and structuring regulatory fields, as the mediator between the market and the state. The social conflict that is essential to a PEA theory can be viewed as a total reorganisation of the social conditions of

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production. This reorganisation of the social conditions of production is achieved through a process in which the state plays an important part (Armstrong 1998, p. 423). The tension created by accounting regulation can be understood by three principles. According to Puxty et al. (1987), accounting regulation should be analysed within a nexus of ideal–typical principles of coordination and allocation, including market forces (capital or economic), bureaucratic controls (state or political) and spontaneous solidarity (community or social). These principles can be better understood by comparing and contrasting them to the sources of motivation and authority that lead to action and the sources of tension and violation that bring the result of that action. According to Puxty et al. (1987), an accountancy practice is regulated by the following three principles. First, capital principles that increasingly control, improve and monitor employee and organisational performance. The capital market pressures have stimulated the development of disclosures. It has been argued that company accounts, produced to facilitate the smooth operation of capital markets, have been constructed and audited without the goad of regulation. Second, state principles such as legislation (e.g. requiring preparation and publication of company accounts, which is a legal requirement) and regulation (e.g. wages and prices) that also increasingly shape the reproduction and formation of accountancy practices (Hopwood 1983). Self-governance of the profession is subjected to exercising the privilege of the profession in a way acceptable to the state. Third, community principles such as recognition of the role of the profession (e.g. gentlemanly conduct, expertise, honesty and public service) are based upon the ideals of the community. Therefore, accountancy regulation is a mix of all three principles. The way these principles are mixed may vary between nation states due to their specific state (political), market (capital) and community (social) principles and needs (Puxty et al. 1987), and each of these will be explained in the following sections.

3.4 Role of the state in PEA As outlined by Puxty et al. (1987), accounting regulation should be analysed within a nexus of ideal–typical principles of coordination and allocation in which bureaucratic controls (state or political) is one of three principles. According to Armstrong (1998, p. 405), the state is not a structure but a form of social relations. As Holloway (1994) explains, social relations between people are fluid, but they rigidify into certain forms (such as ‘state’, ‘money’) that are crucial for the stability of the capitalist society. Therefore, the state is a rigidified form of social relations. Since they are rigidified social relations, it is argued that everything the state does is not in the best interest of capital, nor what is necessary to secure that reproducing capital is achieved by the state. Holloway (1994) suggests that the important activities rigidifying states is that they define their territory. Each territorial definition has a specific relation to its community and

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also limits the mobility of ‘free’ workers as compared to ‘free’ capital between states. This territorial definition enforces a different relation to the global relation of capital. As discussed above, the state, from a political economy perspective – as a form of capitalist social relations, depends on the reproduction of those relations for its existence within the nexus of ideal–typical principles of capital and community. From this perspective, the state can never be free of state regulation because of this interdependence (Armstrong 1998, p. 405). Holloway (1994) argues that pressures from international firms and institutions also contribute to shaping the development of the state, but they alone are not sufficient in explaining the global dimensions of change in relation to states. The nation state is solid, and capital is liquid, flowing to places in the world where the ‘biggest’ profits are made. The global nature of capitalist social relations is embedded in the nature of capital relations, between labour and capital, where the labour power is sold and purchased as a commodity and exploited through the mediation of money (Armstrong 1998, p. 423; Holloway 1994). However, Puxty et al. (1987) argue that favourable policies are formulated through state administrative/bureaucratic modes of socio-economic regulation intervention such as market-based regulatory structures to attract and retain capital (Puxty et al. 1987) (see Section 4.6). The challenge for the state, of the postmodern political economy, is to attain economic growth in a socially acceptable framework while structuring the inevitable incentives and inequalities (Isaak 1991, p. 140).

3.5 Role of capital in PEA As outlined in Chapter 1, globalisation has contributed to the importance of IC reporting. According to Castells (1989), the process of globalisation favours capital rather than labour. Globalisation has increased the temporal and spatial effects of the mobility of capital, although laws relating to embarkation and disembarkation in countries have reduced the mobility of labour. However, Boczko (2000) argues that culture and society are the most important determinants of the priorities of capital, and these determinants are increasingly complex due to social pressures. The priorities of capital steer the accumulation-driven structural and institutional arrangements, which prioritise, privilege and legitimate the accumulation of further capital. Capital can be described to contain several characters (e.g. financial, cultural and social). From a historical viewpoint, the social character of capital has been described by several socio-economic theories. One of them is the Marxian political economy in which Marx provided a methodology (Tinker 1999, p. 663) that attempts to understand the influence of power structures and social relations on economic life (Ricardo 1973). This book takes an ‘open’ interpretation of the Marxian tradition of political economy, where ‘openness’ refers to taking an open approach rather than a rigid structuralist approach (Bonefeld et al. 1992).

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Commodification refers to the way capitalists carry out their objective of accumulating capital cohesively and violently (Mosco 1996, p. 140; Tinker 1999, pp. 656–657). Commodification gives rise to a new class system and simultaneously destroys the previous system. It frees up slave labour and transforms it into the new wage labour, increases the division of labour and gives up self-sufficiency of production for exchange in an expanding impersonal market (Tinker 1999, pp. 656–657). Russell (2002) cites that ‘unequal’ opportunity of employment, for example, for the disabled, women and racial minorities, is a result of their poor social or political power and subsequent inability to realise their economic wants as an interest group due to the commodification of labour. This is because in a deregulated economic environment, productive capital is privately owned, and the owners hold the right to decide the preferred type of labour to make the capital available for. Another study found that firms influence the nature of training, wage structure and competitive labour market since firms have little incentive to invest in the general skills of employees due to the mobility of labour (Acemoglu and Pischke 1999). Capital is more than a mere collection of transferable resources. Capital is an institutional system through which technology and organisational structures are progressively developed, and the organisational processes are differentiated and legitimated for rationalisation (Clegg and Dunkerley 1980, p. 5). Capital can be immobilised by embodying it in tangible assets and by state-imposed regulations (Holloway 1994). Capital relation is the attempt by capital to extract surplus labour, which is provided by the social relations of capitalist production such as ‘price’ and ‘profits’ (Armstrong 1998, p. 423; Holloway 1994). The turbulent search for profits, new products and markets, new technologies, new spaces and locations, new processes of firms and their management and the economic consequences of ever uncertain international economic environments has given rise to the crisis of capital accumulation. These economic environment uncertainties include the difficulties in valuing and recognising tangible and intangible assets (Boczko 2000). Since capital to a large extent is mobile, it is imprudent to analyse capital as if it were immobile, as though it were attached to particular activities, places or persons (Holloway 1994); on the contrary, particular activities, places and persons tend to move to where the most capital is reproduced. When the pace of capital accumulation and the product cycle has reached its maturity, skilled labour is replaced in increasing quantities by unskilled and unemployed labour (Tinker 1999, p. 660). The product cycle almost always begins in high-income market economies due to their entrepreneurial culture for product innovation. They provide an environment conducive to technological innovation and flexible risk insurance facilitating the commercial application of such technological change. When the product has reached standardisation of production, it becomes cheaper to produce it in a low-wage developing economy, with technologies recycled by developed countries to maximise their capital accumulation (Isaak 1991, pp. 169–171).

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Capital can transcend boundaries easily, as when capital is invested, capital accumulation depends on socio-economic resources and information that encourages capital accumulation strategies and flexible and fictitious regimes of capital (Harvey 1990). Fictitious capital is defined as capital that is bet on production but is non-existent. Geographical and spatial contemporary capital accumulation strategies include social commodification, economic subordination and rationalised abuse of environment (Savage and Warde 1993). Capitalist production can give rise to three effects. First, it frees increasing quantities of labour to allocate resources efficiently in accordance with capital accumulation and the market (Tinker 1999, p. 656). Second, it can add to social and environmental cost but may not be held accountable due to its relations with the state. Isaak (1991, p. 138) states that these costs are often underestimated by developing societies due to their hunger for the material luxuries of developed nations. Third, in pursuit of individual self-interest to increase the share of economic product, capital relations may negotiate with the state and social relations to pay labour as little as possible, which manifests as social inequalities (Isaak 1991, p. 138; Picciotto 1992, pp. 80–81). Since capital relations are freed from spatial constraint, nation states can achieve a share of global surplus capital by ensuring favourable conditions to reproduce capital within their own boundaries (Holloway 1994, p. 31). Isaak (1991, p. 166) argues that capital relations can give rise to unfair competition through a chaos of imperfect markets and they can motivate national and multinational oligopolistic organisations to maximise their global market share through cooperative pricing, transfer pricing and economies of scale (Murray 1981, p. 147).

3.6 Corporatism in the context of PEA Corporatism represents an attempt to understand such reciprocal relationships that have developed between the state and major organised interest groups. Corporatism is the process of negotiating policies between state agencies and interest firms that have arisen due to the division of labour in the society. Policy agreements are implemented by collaborating with interest firms (Grant 1985a, pp. 3–5). These interest firms should be willing and have the ability to secure the compliance of their members to deliver support for their benefiting constituency (Chubb 1983, p. 26). On that basis, interest groups can be assumed to be big listed firms or big listed industry groups. These arrangements are led by both parties, the state and interest firms, with both parties seeking each other out (Schmitter 1979, p. 27). This is because corporatist arrangements are an unintended outcome of different conflicts and policy crises, where neither the state nor the interest groups are capable of imposing its preferred solution (Grant 1985a, p. 7). Political economy is concerned with the costs and benefits necessitated by particular policies or particular structures of decision-making (Staniland 1985, p. 2). Firms are a focal point of economic, social and political interactions in

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most market-driven economies. They are the places where the results of conflicts and interactions leave their obvious marks. Therefore, it is necessary to comprehend the relationships between economic, social and political forces to understand the changing characteristics of firms and thereby the influence they have on the different constituents interacting with the firm. Political economy theory argues that these forces can only be understood by transcending the boundaries of a single discipline that contributes to understanding firms (Grant 1985a, pp. 3–5). Schmitter (1985, pp. 35, 39) states that the incapability to impose preferred solutions, by both the state and the interest groups, arises due to four reasons. First, interest groups cannot attain the status of monopoly constituents or form comprehensive hierarchies of sectors without some degree of official recognition or encouragement. Second, public officials need to tacitly agree or actively promote interest groups to make them regular, integral participants in making policies. Third, affected groups (interest groups or the government) may refuse to organise appropriately or refuse to participate if they find the cost is too high for collaboration. Fourth, relatively autonomous groups within the government form these arrangements. Government officials are generally reluctant to share the power of decision-making with interest groups, as they are in less control of the leadership selection and demand formation of the interest groups in order to bring about their desired adjustments. Although no one interest group can impose a preferred solution, past case studies indicate five ways how an interest group can enhance the capability of imposing a preferred solution. First, to express all demands through only a few voices for negotiation and compromise regardless of their internal structure. Second, to centralise the internal structure of the interest group to increase consensus formation and member compliance. Third, to modernise the interest group to increase its professionalism. Fourth, to encourage interest groups to play their role in corporatist cooperation (Marin 1985, pp. 97–100). Fifth, to make public corporatists go into competition with private corporatists to mediate between the state and key social interests (Grant 1985b, pp. 177–178) or forge partnerships between private and public interest groups in the delivery of products and services (King 1985, p. 205). Most of the discussion on corporatism is based on tripartite bargaining between capital (economic), labour (social) and government (political) at a national level. However, understanding the corporatist phenomena below the national level enhances our understanding of how corporatism can flourish in particular sectors or locations even when it is not apparent at the national level. The cumulative impact of such arrangements on society could be as important as weakly enforced tripartite arrangements of a nation (Grant 1985a, p. 4). Therefore, the central importance of PEA theory is to promote the process of adjustment through the political capacity of the government (political) and is often pursued by working together with economic (capital) and social (labour) forces (constituents) (Zysman 1985, p. 15) for economic production and exchange.

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3.7 Factors contributing to selecting PEA theory ICR is still developing, and many of the previous studies in the field have offered a theoretical framework to explain the results of their research. The most commonly used explanatory theories are the PEA theory and the legitimacy theory. Previous ICR research has used PEA theory to explain various aspects of corporate reporting such as using value-added statements (Van Staden 2002). The PEA theory views that accounting is a means of sustaining and legitimising the current social, economic and political arrangements. The PEA theory views that accounting is a means of sustaining and legitimising the current social, economic, and political arrangements, and accounting information is used to support those groups who are currently powerful in the society (Burchell et al. 1980; Cooper 1980; Cooper and Sherer 1984; Tinker 1980; Tinker and Neimark 1987) Accounting reports are a means to construct, sustain and legitimise the economic and political arrangements in the private interests of the firm (Guthrie and Parker 1990). The PEA theory takes the view that there are two opposing forces or principles that create tension between the constituents in the arrangement (Buhr 1998). Firms proactively provide information to set and shape the agenda of debate and to mediate, suppress, mystify and transform the conflict (Guthrie and Parker 1990). In contrast, legitimacy theorists argue that firms legitimise their continued survival by taking desired actions in relation to economic, social, political and environmental factors, in other words, in response to demands by various stakeholders or government regulation (Guthrie and Parker 1989; Jaggi and Zhao 1996). Legitimacy theory views accounting disclosures, such as IC disclosures, as a largely reactive act (Gray et al. 1996, pp. 46–47; Guthrie and Parker 1989). However, ICR, as defined in this book, is not mandated by the law or accounting standards for financial reporting to stakeholders. Therefore, IC is not reported to meet any existing implied social contract between the firm and its stakeholders. ICR is proactive rather than reactive, and the PEA theory appears to be a useful lens to view ICR. Normative accounting theories were ignored due to their prescriptive nature. Positive accounting theories were excluded because they had been used to explain reporting phenomena in a regulated environment, and ICR exists within a predominately unregulated environment. According to stakeholder theory, a firm has many stakeholders, and every stakeholder has the right to be treated equitably by the firm (Deegan 2000, p. 268). Stakeholder theory was not chosen for theory development for two reasons. First, in the context of ICR, there are some IC elements that could benefit a wide range of stakeholders, such as equity issues, but there are some other elements, such as employee measurement (ex value-added per employee), that are unlikely to benefit stakeholders as they do not offer information to evaluate each stakeholder’s position in relation to valueadded versus returns received (Van Staden 2002). Second, the review of previous literature (see Chapter 2) could not determine whether ICR was directed towards a dominant stakeholder group.

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Based on the discussion outlined above, PEA theory appears to be a suitable and germane theory to explain ICR for the following seven reasons. First, it acknowledges that human life takes place in a social, political and economic framework (Gray et al. 1996, p. 47). Adopting the PEA theory perspective to ICR can widen the researcher’s focus of analysis by explicitly attempting to introduce wider, systematic factors into the interpretation and explanation of ICR phenomena. This is more important in the context of a developing nation like Sri Lanka, as the Sri Lankan government still has a strong influence on business policy and in determining the level of competition since some of the big business enterprises are still owned by the government (see Section 4.2.1). These factors make the political, social and economic arrangements in which businesses operate more important for their stability and continuity. Second, ICR is about proactive reporting, as it is not reported to meet any regulatory requirements. The PEA theory focuses on proactive corporate disclosure provided from the management’s perspective. Here, the agent (management) sets the agenda to influence the society by selectively reporting to the societal groups considered relevant and its principal (investors) allow stakeholders to be influenced (Woodward et al. 2001, p. 359). Within the context of PEA theory, proactive reporting is designed to set and shape the agenda of debate according to a firm’s own self-interest (Burchell et al. 1980; Cooper 1980; Cooper and Sherer 1984; Tinker 1980; Tinker and Neimark 1987; Woodward et al. 2001). This contrasts with reactive reporting in which stakeholders determine the firm’s level of social responsibility, and the agent (management) takes the appropriate action of reporting the required information to justify its existence to its stakeholders (Woodward, Edward and Birkin 2001, p. 359). Third, the literature review (see Section 2.2) and discussion about accounting standards in Sri Lanka (see Section 4.2.3) indicated that the traditional financial reporting system has not adequately addressed the issue of ICR. It also indicated that firms are seeking to adopt a choice of reporting techniques (see Section 2.3 and 2.5) to construct relations between the firm and its social, political and economic framework within which it operates. Fourth, the PEA perspective perceives accounting reports as social, political and economic documents. Accounting reports are used as tools to construct, sustain and legitimise economic and political arrangements, institutions and ideological themes that contribute to a firm’s private interests (Guthrie and Parker 1990). Firms use annual reports as a tool to ease tension in social relations between the firm and the society and thereby win the support of the society. This may help firms to avert other constituents imposing any regulation on them. Accounting reports such as annual reports can use different reporting units, to varying degrees, and different reporting locations to win the support of its constituents. This is because the PEA perspective critically focuses on themes, meanings and motivations implicit in voluntary disclosures. Since annual reports are the objects of the content analysis in this book, the PEA theory should offer a critical insight.

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Fifth, the PEA theory approach takes the view that there are two opposing forces or principles that create tension in social relations (Buhr 1998). In the area of corporate reporting, such tension can manifest due to an increasing number of shareholders. Firms in return may voluntarily disclose more information such as IC information in order to ease such tensions. The literature tends to support this argument (see Section 6.2.1). Sixth, previous research on ICR (Brennan 2001; Guthrie et al. 1999) has shown that the ICR frequency can differ between IC categories. These specific studies also demonstrated that IC items reported in annual reports could differ from country to country (see Section 2.5.3). The PEA theory should offer a Table 3.1 Research objectives and outcomes Objectives

Outcomes

1 Outline the political economy 2 Outline traditional accounting in a PE

1 Outlines how firms allocate resources and make decisions. It also outlines four objectives of a PE analysis 2 The PEA theory goes beyond the symbolic representation of social action mediated and legitimated by the social and political priorities of capital. It attempts to understand the increasing commodification of the social when accumulating capital. It is deeply entrenched in the capitalist search for profits. It is conditioned by re-organising regimes of accumulation, increasing commodification of society, and temporal and spatial displacement of capital due to globalisation and fictionalisation. The collective interest of capital is better served by fabricating profits and rate of return on capital (see Section 3.3) 3 The state is not a structure but is a form of capitalist social relations relies on the reproduction of those relations for its existence. To attract and retain capital, states put out favourable policies through its administrative/bureaucratic modes of socio-economic intervention (see Section 3.4) 4 Globalisation favours capital rather than labour. Capital is an institutional system, which drives the development of technology, organisational structures, differentiate processes, and rationalise legitimation. The crisis of capital accumulation arises due to the turbulent search for profits, new products and markets, new technologies, new spaces and locations, new processes of firms and their control and economic consequences of international economic environment (see Section 3.5) 5 Firms are a focal point of economic, social, and political interactions in most market driven economies. The tripartite bargaining between capital, social, and the state enhances our ability to comprehend how some sectors or locations flourish compared to others (see Section 3.6) 6 Outlined seven reasons for selecting PEA theory (see Section 3.7)

3 Outline the role of state

4 Outline the role of capital

5 Outline the corporatism of in PEA 6 Outline factors contributing to selecting PEA theory

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critical review and insight into the results of this study and the results of previous studies carried out in this field in other countries. Seventh, the knowledge economy facilitates propagating thoughts, value and power by ultimately packaging and selling them in language. Past research on both IC and corporate social responsibility (CSR) confirmed that firms have used various reporting units,both qualitative (i.e. charts, tables, photographs and narratives) and quantitative (i.e. non-fiscal and fiscal) in combination. However, several authors have pointed out that narrative is the predominant mode used in reporting of CSR and ICR (see Section 5.2.2). Narrative is a symbolic presentation of a sequence of events linked by subject matter and related by time (Weick 1995, pp. 128–129). The choice of reporting units can determine to what extent the relations are built with their relevant constituents. As narrative is a powerful way to make sense, it can therefore be thought as a better way to proactively build relations between the firm and the ‘relevant public’ within the framework in which it operates. It should be noted that PEA theory in this study is used in the context of peripheral capitalism. As argued in peripheral capitalism, capital accumulation in peripheral countries such as Sri Lanka is driven by the central economies of the colonial and post-colonial powers, an influence which has led to shaping institutional roles and capital dependency on those central economies (Henry 1985, pp. 99–140). New state-run institutions (such as Board of Investment of Sri Lanka) and the increasing capital dependency on foreign investment in the Colombo Stock Market are symptoms of peripheral capitalism. The propagation of knowledge economy and ICR is influenced by the role of capital arrangements and by the role of state institutions, as outlined in the next chapter.

3.8 Chapter summary Table 3.1 provides a summary of the research objectives of the chapter and its outcomes. The next chapter will seek to outline the two hypotheses tested in this study. It will discuss how the data will be interpreted in relation to each hypobook to arrive at results.

4

Forces shaping intellectual capital reporting in Sri Lanka

4.1 Introduction The intellectual capital (IC) of a nation (or a region of nations) requires articulating a system of variables that uncover and manage their invisible wealth with an emphasis on human capital as current and potential future sources of intellectual wealth (Bontis 2004). The process of investment in IC is not merely the development of active economic policies but also the creation of social and political policies. However, it is difficult for a developing country to make those social policies by itself, and some forms of economic and political unions between countries could enhance the process. It has been argued that globalisation has little effect on uncovering the IC of firms in developing countries except within multinational firms (Hartungi 2006). The significance of policies of the state and capital and their influence on IC of firms have been demonstrated with firms in developing countries (Seleim et al. 2004). The differences in intellectual capital reporting (ICR) between firms in developed and developing countries have been attributed to macrolevel variables, such as the role of the state and capital with firms using IC statements for reporting in India (Ordonez de Pablos 2005). This chapter outlines several forces shaping ICR in Sri Lanka. The sections are arranged as follows: Section 4.2 discusses the role of capital institutions in shaping ICR. In this context, it reviews the Colombo Stock Exchange (CSE), the corporate sector and the accounting regulations in Sri Lanka. Section 4.3 outlines the role of state and the state institutions in shaping ICR. In this context, it describes the economy of Sri Lanka, the role of the Board of Investment (BOI), the education sector and the intellectual property environment. The last section provides a summary of this chapter.

4.2 Role of capital arrangements 4.2.1 Colombo Stock Exchange (CSE) The CSE is relatively small by market capitalisation and relies heavily on foreign investors to maintain its liquidity and to bridge the gap between investments and savings (CSE 1997). The two indicators of market liquidity, namely,

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market capitalisation as a per cent of GDP and trade value as a per cent of market capitalisation, reveal that the CSE has the lowest liquidity level in the region (CSE 1998, p. 10). Foreign investment has caused a paradoxical situation in Sri Lanka with listed firms reporting a profit growth of 43 per cent during 1999 (CSE 2000, p. 10) while at the same time reporting a decline in their market price (CSE 2000, pp. 10–27). Over the years 1997–2000, the market capitalisation and the market price to net book value of the top 30 firms showed a gradual decline (CSE 1998, p. 33; 1999, p. 50; 2000, pp. 34, 67), indicating that the Colombo Stock Market is highly influenced by the foreign investment flows. Therefore, there is a greater need for the top listed firms in Sri Lanka to report to their stakeholders to explain the decline in their IC (the difference between market price and the net book value of their firm). Although the CSE is dependent heavily on foreign investment flows for stock market liquidity, there are two major factors that discourage foreign investment. First is the absence of new economy firms listed in the CSE, and second is the lack of facilities to hedge the significantly depreciating rupee currency. Each will now be dealt with. First, although in the 1990s investing in emerging markets was popular, the Mexican crisis in 1994–1995, the East Asian Crisis in 1997 and South Asian Crisis in 1998 coupled with the long bull-run from the mid- to late-1990s in developed markets discouraged portfolio investments in emerging markets (CSE 2000). The perceived advantage of investing in new economy shares shifted investor attention to technology shares in the stock market worldwide. The CSE, however, does not list a single technology stock as it still represents an ‘old’ world economy, and this could be a further contributory factor to the gradual decline in the price to net book value of the top 30 firms to below 1.0. Countries such as Australia held on to a price to book value of 1.6, even after market shake-out during the year 2000 (Daley 2001). This was also evident from the little movement in ranking of the top 30 firms during the two years of the study (CSE 1998, p. 33; 1999, p. 50; 2000, p. 67). ICR by listed firms in Sri Lanka could shed light to investors as to why their firms have a relatively less price to book value. The second factor discouraging foreign investment is the absence of facilities to hedge the Sri Lankan rupee against depreciation (CSE 1998, p. 15). Therefore, Sri Lanka needs to either reduce its overdependence on foreign investment by providing incentives to local investors to play a greater role or to increase foreign investment by considering factors affecting international investor preferences and their demand trends in the national economic strategy to attract further foreign investment. A factor that limits local investment in the CSE is that the sovereign debt interest rates are higher than the bank deposit rates, which in turn affects the developing of the debt market (CSE 1998, p. 15). The corporate debt market is still in its infancy. Although liquidity plays a crucial role, decline in the market could be due to several reasons such as political factors, internal and external

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Forces shaping ICR in Sri Lanka

economic environment and their interaction with each other. The high financial market interest rates have acted as a disincentive for firms to issue long-term debt since local investors prefer to invest in the short-term financial market at prevailing high interest rates (CSE 1997; 1998; 2000, pp. 10–27). A factor that limits investment of both foreign and local investors in the CSE is its limited liquidity; many firms that make a significant contribution to the national economy are not listed in the CSE yet. This is because some government advisers were reportedly urging the government to proceed cautiously in its privatisation policy, in view of the limited capital markets, the concentration of private wealth and the weak regulatory environment (Country Study and Guide 2003). Giants such as Sri Lanka Telecom, if listed, would increase the market capitalisation by about 50 per cent. Sri Lanka Telecom is still controlled by the state-run corporation (61 per cent) with a minority shareholding of Nippon and Telegraph Company of Japan (NTT) holding 35 per cent of the stake and 3.5 per cent reserved for employees (Hussein 2000). The Bank of Ceylon, the largest bank in the country (Corporate World 1998), is also not listed in the stock exchange. Although its operational capacity is affected by the above-mentioned factors, the CSE’s infrastructure and regulatory framework is comparable to stock exchanges in developed markets, and interestingly, it is the only stock exchange to be unanimously elected as a member of the International Federation of Stock Exchanges (FIBV) (CSE 1998, 2000). The stock exchange classifies its listed companies into 16 industry sectors. They are: Banking, Finance and Insurance; Beverage, Food and Tobacco; Chemicals and Pharmaceuticals; Construction and Engineering; Diversified; Footwear and Textile; Hotels and Travels; Investment Trust; Land and Property; Manufacturing; Motors; Oil Palms; Plantations; Services; Stores and Supplies; and Trading. The largest sector by market capitalisation is Banks, Finance and Insurance, followed by the Diversified and Beverages, Food and Tobacco sectors (SL Handbook of Listed Companies 1998; 1999; 2000). In summary, the CSE is relatively small by market capitalisation and heavily relies on foreign investors to maintain its liquidity. This overdependence on foreign investors has led to the recent paradox of a rebound of profits in firms and a decline in their market capitalisation. This paradox could be meaningfully explained by ICR. Firms that contribute significantly to national economy also are not listed in CSE, and this is another reason contributing to its limited liquidity. The CSE lists a spectrum of firms and classifies them into 16 industry sectors. 4.2.2 Corporate sector in Sri Lanka The corporate sector is characterised by its general lack of links with major international firms, the unequal competition created by the delayed privatisation of state-owned enterprises, inconsistent policies of the state towards the private sector, and an infant IT industry.

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Most industries do not have strong links with firms of international strength and international customer bases (USAID 1998, pp. 7–8). This could be due to the fact that firms in developed countries obtain less return from international joint ventures with firms in developing countries (Ueng et al. 2000). The lack of respect and enforcement of intellectual property rights is also cited as another reason (USAID 1998, p. 7). Further, the perceived potential of investing in new economy shares has shifted the investor focus to technology shares that have a higher market price to net book value (CSE 2000, p. 13). The overall market price to net book value of firms listed in the CSE is 1.1 (CSE 1998, p. 12). The LMD 50, Sri Lanka’s version of Fortune 500, reported that 24 out of 50 firms had a price to book value less than 1 (LMD 1999). Modern knowledge-intensive organisations such as Microsoft, Intel Corporation and Amgen had a price to book value of 9.6 during the same period (Flamholtz and Main 1999). Although Sri Lanka has had an open market policy since 1977, it only began to privatise state-owned ventures in 1989. One reason for this may be the sovereign debt interest rate that has been higher than the commercial debt interest rate and subsequently discourages private local investment. Also, there are regulations that prevent the privatisation of certain state entities; for example, the maximum an individual or a group can own in a banking institution. An individual or a group can own more than 25 per cent of a banking institution only with the approval of the Monetary Board even though it is conceptually argued that an absolute ownership may not retard the growth of the banking industry (Fernando 2001, p. 2). This is despite the fact that state banks have on average 19 per cent bad-loans ratio on their books, which needs immediate restructuring with additional infusion of funds to make them profitable entities (Mahendran 2001, p. 4). The ongoing war between the government and guerrilla forces, and the attack by the guerrilla forces on the international airport in July 2001, had a direct impact by reducing foreign investment flows and increasing firm expenditure due to the significant increase in the war-risk premium on air and sea transportation by underwriters, which would unfavourably affect their reported profits (Dun and Bradstreet 2001; Special Correspondent 2001, pp. 108–110). It was also evident from past events such as sale of alcoholic beverages and tobacco that the Sri Lankan government does not have a consistent policy towards how, when and where such products can be sold to the public. The tobacco sub-sector was under political pressure from the Presidential Task Force, a committee which reviewed the production, marketing and distribution of tobacco and alcoholic beverages, and imposed marketing restrictions on tobacco products in the country (Ceylon Tobacco Company 1999, p. 26). The firms that produce alcoholic beverages were also under political pressure and came under a high-duty regime to curb alcoholic consumption in the country (Distilleries Company of Sri Lanka 1999, pp. 8–9; The Ceylon Brewery Limited 1999, p. 2; The Lion Brewery Limited 1999, p. 1). On the one hand, it could be argued that change of government policy is necessary for greater public interest to protect the public from abusing those products. On the other hand, the inconsistent policies of the government towards listed firms specifically can reduce

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Forces shaping ICR in Sri Lanka

the market price of their shares, since investors cannot accurately forecast the long-term profitability of firms. Firms can employ ICR to help investors understand the long-term profitability of firms by reporting about how the firms can leverage their intangible capital not recognised in financial statements. The Sri Lankan IT industry is still in its infancy. Most of the firms within the industry are young and rely on the domestic market. However, this industry is witnessing a dynamic change with the liberalisation of service providers in the telecommunication industry (Gamage 2001a), because to build an effective IT industry, the telecommunication cost needs to be cost effective (Gamage 2001b). The major component of their business is software and hardware sales. Most Internet service providers (ISPs) do not provide telecommunication services as there is no central internet switch, which means they need to lease digital subscriber lines from telecommunication firms. This arrangement can increase the cost of IT services to the end-users. Also, there is less regulation over activities of ISPs and security, which discourages firms to transmit firm-sensitive data electronically (Wattegama 2001, pp. 168–170). This may also have restricted the extraction of knowledge embedded in human capital and the ability to maintain them in information systems for re-use. The limited access to cable capacity and lack of digital subscriber lines (DSL) and advanced digital subscriber lines (ADSL) has retarded internet e-commerce development in Sri Lanka (Gamage 2001b). This technological environment has limited firms such as banks in the promotion of their products and services and has hampered the development and advancement of products and services such as internet banking (Wattegama 2001, pp. 168–170). Further, it is suggested that the Government of Sri Lanka must move into e-governance by reviewing its legal infrastructure, image building and marketing and support training to transform existing workers into knowledge workers so that they can use their innovative and creative skills to create more IC for their firms (Gamage 2001b). It also needs to offer business incentives to encourage the growth of the IT industry (Gamage 2001a). In summary, most Sri Lankan industries do not have strong links with firms of international strength and international customer bases (USAID 1998, pp. 7–8), which may have reduced the inflow of newly established knowledge and technologies into industrialised nations. Privatisation of state-owned ventures commenced in 1989 and has developed little. Further, the government has displayed inconsistent policies towards business activities, indicating the intervention of the government in business on behalf of the community. The IT industry is still in its infancy, and the technological environment of the country has limited the progress of their business activity. This may also have restricted the extraction of knowledge embedded in human capital to be translated as information systems in internal capital for reuse. 4.2.3 Accounting regulation The Institute of Chartered Accountants in Sri Lanka formulates the financial accounting standards applicable to firms in Sri Lanka and has the sanction of the

Forces shaping ICR in Sri Lanka

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law (Sri Lanka Accounting and Auditing Standards Act 1995). In 1999, there were 34 accounting standards in force of which six were later withdrawn (SLAS 1997, 1999). It also has urgent issues task force abstracts that are non-binding by law (Urgent Issues Task Force Abstracts 2001, pp. 1–31). Some firms use a value-added statement instead of a cash flow statement, which is problematic and limited for the following three reasons. First, it treats both management and labour as one stakeholder when they are two separate stakeholders. Second, it is argued that value-added statement adds no new information to the income statement that lends itself to manipulation. Third, it allows firms to manipulate reporting using a statement with known inconsistencies (Van Staden 2002). Value-added statements enable these firms to report IC to mediate their agenda of debate reported in their annual reports. There is also an accounting framework similar to the Statement of Accounting Concept papers in Australia. Similar to Australia, the accounting standards in Sri Lanka do not address the issue of ICR, but the conceptual framework has room for its recognition (Wyatt 2002). However, in practice, it seems that the accounting regulators in Sri Lanka have expressed a decided reluctance to recognise IC in financial statements (Sunday Times 1999a, 1999b). At present, the accounting framework neither prevents nor offers a framework to report IC either within financial statements or through other public disclosures. In summary, accounting regulators in Sri Lanka have shown a decided reluctance to recognise IC in financial statements. This has confirmed the perpetuation of ICR in an unregulated financial reporting environment.

4.3 Role of state and state arrangements The key institutional arrangements of the government that shape the IC and ICR of firms are: the state of the economy, BOI, the educational system and the intellectual property environment. Each of these is described below. 4.3.1 Economy of Sri Lanka The gross domestic product (GDP) per head of Sri Lanka categorises it as a lower middle-income, developing nation. The economy has a moderate unemployment rate and is driven by its services sector. The state still holds the monopoly of business in certain sectors via government-held corporations. Sri Lanka has a population of 19.3 million and a land area of 62,705 squaremetres. In 1999, the labour force comprised 6.7 million with 45.5- and 45-hour working weeks for shop and office workers, respectively (McSheehy 2001, p. 57). Although Sri Lanka has performed well in social development, it has lagged behind in economic development (UNDP Sri Lanka 1998, pp. 5–42). The relatively better performance in social development can be attributed to Sri Lankan cultural values such as collectivism (Hofstede 1983). The wage for unskilled labour is US$40–50 per month, for skilled labour it is US$50–70 per month, and for middle managers it is US$125–300 per month. Accountants and engineers earn

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Forces shaping ICR in Sri Lanka

an average of US$250–625 per month (McSheehy 2001, p. 57). In 1999, the unemployment rate was 7.7 per cent of the labour force (Central Bank of Sri Lanka Annual Report 2000, p. 127; McSheehy 2001, p. 57). The adult literacy rate during 1998 stood at 91.8 per cent (Central Bank of Sri Lanka Socio-Economic Data 2001, pp. 1, 63; Human Development Report 2000, pp. 157–160; McSheehy 2001, p. 57; UNDP Sri Lanka 1998). The gross national product (GNP) in 2000 was US$17.3 billion with a GNP per capita of US$823. In 2000, the rate of growth of the GDP in real term was 6 per cent (Central Bank of Sri Lanka SocioEconomic Data 2001, p. 2). The performance of GDP is heavily dependent on the performance of the services sector (Central Bank of Sri Lanka Annual Report 1999, 2000, p. 4; Central Bank of Sri Lanka Socio-Economic Data 2001, p. 22). The services sector in Sri Lanka contributes more than one-half of the GDP although it employs proportionately less people than other sectors. The agriculture sector provides the greatest proportion of employment although it contributes the least to the GDP (Central Bank of Sri Lanka Annual Report 1999, pp. 1, 23). The recent governmental policy reforms include strictly introducing labour laws covered by the International Labour Organisation (ILO), to restructure the two state banks and to lift the percentage and limits on foreign direct investment (Perera 2001, p. 7). The labour laws would determine the extent of mobility of human capital among firms. The mobility of human capital can affect the level of IC of a firm. The restructuring of state banks by making them more efficient should create fairer competition between private and public banks. The lifting of the proportion of foreign direct investment in firms should encourage greater foreign capital inflows into these firms. There are several areas of investment held by the government and/or under a monopoly situation, and the government is taking gradual steps to release these entities to competition. The steps include the partial selling of government-held entities, pricing their products and services at market prices, encouraging private firms to finance required investment in public utilities and infrastructure under the build, own and operate (BOO) or build, operate and transfer (BOT) arrangements (BOI 2000). The monopoly of LP Gas production and distribution was terminated on 31 December 2000 (Ernst and Young Sri Lanka 2000). In summary, Sri Lanka has performed well in the past three decades in the area of social development but has lagged behind in economic development (UNDP Sri Lanka 1998, pp. 5–42). The services sector contributes to one-half of the GDP. Several investments are still held by the government and/or under a monopoly situation. 4.3.2 Board Of Investment (BOI) The BOI of Sri Lanka is an autonomous statutory agency granting special concessions to firms satisfying the eligibility criteria that meet the strategic objectives of the Government. The concessions take the form of modifications, exemptions and waivers of identified laws that include: Inland Revenue Act,

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Customs Ordinance, Exchange Control Act, and Import Control (BOI 2000; Wijesinghe 2000). The BOI is one of the major vehicles used to attract foreign investment into the country. However, the type of technology and the industry sectors in which foreign investors invest have not provided a great impetus to drive Sri Lanka towards a knowledge-based economy. As a result, the 1999 budget of the Government of Sri Lanka proposed to increase the foreign ownership of the banking sector to 60 per cent and insurance to 90 per cent (Ernst and Young Sri Lanka 2000). At present, major foreign investment has been in the textiles, rubber, tea and IT sectors (McSheehy 2001, p. 57). With a view to expand the IT industry, the Sri Lankan Government has identified IT as a major thrust area, for building a knowledge-based economy, and has recommended granting incentives through the BOI for software development and training (BOI 2000). It is argued that Sri Lanka will benefit from a greater inflow of foreign exchange through the development of an export-orientated IT industry. Further, social development will result in better living conditions for the people of Sri Lanka as wages will rise and prices will come down due to greater efficiency (Gamage 2001a). The wide availability of low-cost skilled workers with IT programming skills enables firms to create IT-driven products at competitive prices (McSheehy 2001, p. 52). When firms compete in a knowledge-based economy, they tend to compete more on IC, assets and liabilities that are not recognised in financial statements. In that context, ICR becomes more important to uphold investor confidence. In addition to the various forms of government incentives offered, other strengths Sri Lanka has for attracting foreign direct investments include: its strategic location (at the 12-hour mid-point between Japan and the United States for product exports), large labour availability at competitive rates, transparent investment laws and constitutional investment guarantees. However, the recent and continuing military conflict in the north and east, the inflexible and protective labour legislation, the small domestic market and rather lackadaisical work ethics are the disincentives for direct foreign investors (McSheehy 2001, pp. 49–57). In summary, although the BOI has offered several incentives to attract foreign and local investment, but so far, it has not provided a great impetus to the recent government-backed agenda to promote a knowledge-based economy. Several extraneous intellectual liabilities, such as civil war, may have restricted attracting such investment. Further, in a knowledge-based economy, firms compete more on IC, and therefore, ICR becomes important to uphold investor confidence. 4.3.3 Education in Sri Lanka The educational sector is characterised by internationally comparable educational standards, a poor technological base to fully utilise the trained labour force, and present reforms that aim to habituate life-long learning and achieve a more ‘balanced’ approach to education.

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Both British colonial education and the pre-colonial Buddhist schools have contributed to the present-day Sri Lankan education system. Every citizen has the right to free education, and schooling is compulsory between the ages of five and 14. Although senior high school education is structured around university entrance education, the number of places to enter the university has not kept up with the increasing intake into secondary schools (Central Bank of Sri Lanka Annual Report 1998). Postgraduate education in Sri Lanka has only existed for the last 30 years and is conducted by universities and research institutions affiliated to the relevant areas. The bachelor and master degrees obtained from Sri Lankan universities are regarded to be of a similar academic standard as those obtained from developed countries such as Australia (Commonwealth of Australia 1992, pp. 1–3). At present, there are 12 universities in Sri Lanka (Central Bank of Sri Lanka Annual Report 1998, Table 29). The low emphasis on technical skills relevant to the domestic and global job market has resulted in the production of an educated but often unemployable workforce (The Presidential Task Force on General Education, Sri Lanka, 1997, p. 2; Ul Haq and Haq 1998, pp. 96–105). As a result of the lack of skill-based learning, the education system is being reformed to encourage skill-focused learning while providing training on self-realisation and life-long learning, to stimulate a balanced mental and physical growth of the individual (Educational Reforms and Restructure 1998; The First Report of the National Education Commission 1992; The Presidential Task Force on General Education, Sri Lanka 1997, p. 2). In summary, the Sri Lankan government highly values education and ensures that every citizen receives compulsory free education between the ages of five and 14. The quality of education is regarded as comparable to academic levels of industrialised countries. The high level of unemployment and the inability to productively utilise the educated workforce are the governmental concerns. 4.3.4 Intellectual property in Sri Lanka Intellectual property plays a vital and significant role both in firms and in a country’s overall economic development, especially in today’s context where knowledge has become the core capital (Wickermaratne 2000). The intellectual property rights have recently been reformed due to the government’s push to drive the nation towards becoming a knowledge-based economy. Although intellectual property is protected by the Sri Lankan Code of Intellectual Property Act No. 52 (1979), the lack of respect and enforcement of intellectual property rights is cited as a reason for international firms showing a reluctance to locate their facilities in Sri Lanka (USAID 1998, pp. 7–8). Further, the lack of respect and poor enforcement of intellectual property rights may have hindered the inflow of IC such as knowledge-based skills and technology into Sri Lanka as well as averting invitations into the international market to increase the market share of firms in Sri Lanka.

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Intellectual property in Sri Lanka encompasses two concepts: industrial property and copyright. Industrial property includes inventions, trade and service marks, trade names, industrial designs, trade secrets and protection against acts of unfair competition. Copyright relates to rights of literary and artistic works (Code of Intellectual Property Act No. 52 1979; NIPOSL 1999, p. 40) and does not include laws and decisions of courts and administrative boards or news, be it published, broadcast or publicly communicated by any other means (Jayasinghe 1994, p. 3). Sri Lanka is a member of the World Intellectual Property Organisation (WIPO), which means it observes the international intellectual property laws for arbitration. This can help uphold foreign investor confidence and encourage foreign capital flows. Code of Intellectual Property Act No. 52 (1979) has several deficiencies: it does not include certification marks, and a registrar’s hearing is not mandatory on them; marks do not include sounds and scents (Mirando 1999, pp. 209–217); an author’s original work can be translated into Sinhala or Tamil if the author does not do so within ten years (WIPO 1991, pp. 121–123). These deficiencies can discourage the creation of IC through the inventive and creative activity of individuals as well as the transfer of technology and the flow of knowledge in all areas of human endeavour (Wickremaratne 2000). The statistics indicate that overall position of intellectual property registered from 1990 to 1999 did not change significantly. The number of registrations was the highest for service and trademarks and the lowest for patents (NIPOSL 1992, p. 22; 1997, pp. 31–33; 1998, pp. 36–38; 1999, pp. 41–43; 2000). The Act was amended in the year 2000 for two major reasons: first, in the context that knowledge is the core capital of economic development and to encourage national creativity, and second, to honour international obligations in the field of intellectual property. Two amendments were proposed to the House of Representatives in June 2000 to overcome the deficiencies in the Code of Intellectual Property Act No. 52 (1979). They are (1) to protect the rights of the creators of ‘computer programs’ (Code of Intellectual Property Act No. 40 2000) and (2) to prohibit the application or fixing of a registered trademark in such a way that it is likely to mislead the public. The amendments dealt with the areas of copyright and related rights, and geographical indications, which were not sufficiently protected by its precursor. The amendments also incorporate the issues of undisclosed information such as trade secrets, new plant varieties (breeders rights) and layout design of integrated circuits (Wickremaratne 2000). These amendments should increase investor confidence in the ability of Sri Lankan firms to create, maintain and utilise their intellectual property for long-term profitability. Since intellectual property is part of IC, it also encourages firms to report about their IC to uphold investor confidence. In summary, statistics indicate that the overall position of IC registered from 1990 to 1999 has not changed significantly. The Code of Intellectual Property Act No. 52 (1979) underwent recent amendments: first, to align itself with the government’s initiative to make knowledge the core capital of economic development, and second, to honour international obligations.

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Table 4.1 Research objectives and outcomes Objectives

Outcomes

1 Outline the CSE environment

1 It heavily depends on foreign investors to maintain its liquidity. Some firms contributing significantly to the national economy are not listed in the CSE (see Section 4.2.1) 2 Most firms do not have strong links with firms of international strength. The IT industry is still at its infancy. Government also have displayed inconsistent policies towards business activities (see Section 4.2.2) 3 The accounting regulators show a decided reluctance to recognise IC in financial statements. The unregulated reporting environment of ICR also has encouraged firms to adopt more manipulative reporting statements (see Section 4.2.3) 4 The economic development has lagged behind its social development. The economy is driven by its services sector that contributes one half of the GDP. Several investments are still held under government monopoly (see Section 4.3.1) 5 Although BOI has offered several incentives to attract investment, it has failed to give sufficient impetus to the recently government backed agenda of a knowledge-based economy (see Section 4.3.2) 6 The citizens receive compulsory free education between ages five and 14. The quality of education is comparable to that in developed countries. The education system is being reformed to instil a broader perspective and accountability to students (see Section 4.3.3) 7 The Code of Intellectual Property Act 1979 was recently amended to align with the government’s initiative to make the knowledge the core capital of economic development and to honour international obligations (see Section 4.3.4)

2 Outline the corporate sector 3 Outline the accounting regulatory environment 4 Outline the economy of Sri Lanka 5 Outline the role of BOI 6 Outline the environment educational 7 Outline the intellectual property environment

4.4 Chapter summary This chapter outlined forces shaping ICR in Sri Lanka. They were discussed in the context of the CSE, corporate sector, accounting regulations, economy, BOI, education and intellectual property. Table 4.1 provides a summary of the research objectives of this chapter and its outcomes. The next chapter will outline research methods, namely content analysis and case study interviews, used in this book. It will also focus on the problems related to the validity of each methodology and how this book overcomes these issues. It will then justify the sample size of this book.

5

Research method

5.1 Introduction This chapter describes the research methods used in this study. Section 5.2 introduces the data-reporting variables adopted in this study. Section 5.3 outlines the research methods employed, namely content analysis and case study interviews. Section 5.4 investigates the effect the variables size and industry have on the sample. Section 5.5 describes the method of data capture, namely using reporting units, scales and coding. Section 5.6 explains the threats to reliability and validity in the content analysis. Section 5.7 discusses the ways these threats are overcome in this research. Section 5.8 discusses the reasons for using case study interviews in this book. Section 5.9 introduces the framework used in the interviews. Section 5.10 explains the threats to the validity and reliability of the interview data and how this research overcomes these threats. Section 5.11 explains and justifies the choice of sample size. Section 5.12 provides a summary of this chapter.

5.2 Data-reporting variables As outlined in Section 2.5.2, annual reports are well established where the intellectual capital (IC) framework can be applied (Abeysekera 2001). Annual report data can be analysed by its qualitative and quantitative aspects. The qualitative aspects include narrative, photographs and pictures, charts and diagrams, typography and reporting location. The quantitative aspects include monetary and non-monetary disclosures. 5.2.1 Annual reports Annual reports are regularly produced and present a historical account of the concerns of a firm, and its management’s thoughts, in a comprehensive and compact manner (Niemark 1995, pp. 100–101). Annual reports, however, may not reflect the objective reality of the firm. Empirical findings indicate that there is no systematic relationship between the quantity of IC disclosure in annual reports and the market value of a firm’s IC (Williams 2001). This is because

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Research method

most listed firms use the annual report as a promotional document rather than to merely comply with accounting standards and corporate law. Empirical evidence suggests that annual reports provide a special communication opportunity for firms to go beyond simply reporting financials (Cameron and Guthrie 1993) and to show leadership and vision to reflect the values and the position of the firm (Niemark 1995, pp. 100–101; Clackworthy 2000). According to Johanson et al. (1999, p. 20), annual reports are the main external reporting vehicle used for communicating IC information. 5.2.2 Qualitative reporting units The knowledge economy facilitates propagating thoughts, value and power by ultimately packaging and selling them in language (Graham 1999). Annual reports present their information using a multitude of qualitative reporting units, namely narrative, photographs, pictures, charts and diagrams. The selection and integration of narrative and visuals engages the reader as a co-maker of a story (Stanton and Stanton 2002). The three general qualitative units found within annual reports are narratives, visuals and numbers, and the way these units interact in the reporting process is of great importance. The narrative provides the bulk and the backbone of the reported message; however, the visuals provide a wholeness, and the numbers through quantification provide an element of seriousness, accuracy and reality to the narrative and visuals (Mouritsen et al. 2001). This section explains the effect and impact of qualitative reporting units within annual reports that include: narrative; photographs and pictures; charts and diagrams; and typography. Quantitative reporting units will be discussed in the next section. Narrative Several authors have pointed out that narrative is the predominant unit used in reporting of corporate social reporting (CSR) (Zukier 1986, pp. 473–476; Andrew et al. 1989; Bruner 1990; Denis 1996, pp. 163–164; Schank and Abelson 1977, p. 222; Davenport and Prusak 1998, p. 81) and intellectual capital reporting (ICR) to stakeholders (Bornemann et al. 1999; Eronen and Ahonen 1999; Guthrie and Petty 2000d). The narrative is a powerful tool for a company to promote and project a positive image of the company’s ethos, vision and aspirations. Some authors suggest that the core of storytelling is the sequencing of the events and that this is the key factor in creating a substantive narrative (Weick 1995, pp. 128–129). Some argue that people learn best from stories (Brown and Duguid, 2000) and that they can influence and change their perception and decision-making (Hough and White 2001). Others concur that encoding knowledge in stories enables a company to leverage the value of their IC (such as knowledge) (Davenport and Prusak 1998, p. 81). It provides a mechanism by which IC can be understood and reported, that is, in qualitative terms (Mouritsen et al. 2001, 2002).

Research method

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The narrative mode involves ‘action-related’ structuring and ‘pulling together’ of information to construct a pattern and to plot a story. The conceptual dependency theory (CDT) (Schank and Abelson 1977) explains how sentences represent meaning. According to the CDT, humans acquire and store information in episode form rather than in hierarchical form (Schank and Abelson 1977, p. 17) because it is intensive, comprehensive and rich, and the observer attempts to capture the ‘full picture’ (Zukier 1986, pp. 473–476). Humans store information around their personal experiences or episodes rather than around abstract semantic categories or in hierarchical form (Schank and Abelson 1977, p. 17). The episode form is the most common way of reporting information in annual reports (Bornemann et al. 1999; Eronen and Ahonen 1999). Previous research into future earnings (Choon et al. 2000), social reporting (Guthrie and Mathews 1985) and environmental reporting (Kirkman and Hope 1992) has shown that discursive information is significantly greater than other forms of communication. Photographs and pictures Words and pictures manifest themselves in different ways. Because pictures are self-evident and simple, no special training is required to read them. Sless (1981, p. 74) argues that photographs are better than drawings or paintings since photographs tend to convey a kind of truth that cannot be matched by drawings and photographs. Graves et al. (1996) suggest that television-based formats, such as pictures and photographs, allow firms to assert their truth claims unobtrusively to the stakeholders. Photographs and pictures are major ICR tools since they are a way of communicating the various aspects of IC (such as worth of employees to the firm) to stakeholders. Charts and diagrams Unlike photographs and drawings, charts and diagrams allow room for some generalisation (Sless 1981, p. 142). Certain sorts of diagrams improve both the speed and the accuracy of deductive performance and help the reasoning of an individual (Johnson-Laird 1996, p. 122). Previous research suggests that corporate performance displayed in charts is viewed most favourably by a reader and are displayed in a manner to distort the perception of the reader (Beattie and Jones 2002; Preston et al. 1996). Typography Typography is the art of choosing typefaces and organising their position in the page so that the printed words are at the centre of the visual communication. There is a possibility that typography could reveal different aspects of the content to the reader and renew and enhance reader’s appreciation of the text. However, as a prerequisite, the reader must be aware that such intricacy is possible (Sless 1981, pp. 164–170).

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In summary, narrative is the most powerful communicative reporting unit used in annual reports, and it enables firms to communicate their constructed message powerfully. Visuals such as photographs, pictures, charts and diagrams assist and support the narrative and provide a wholeness to the document. Combining reporting units in annual reports enables a firm to construct its reported message more meaningfully as a story about the past and the future. 5.2.3 Quantitative reporting units Also, quantification (metrics) in reporting is important. A study carried out in developing countries revealed that about 20 per cent of social disclosure was quantified and was equally distributed between monetary and non-monetary disclosures (Andrew et al. 1989). This low level of quantification was also consistent with studies carried out in developed countries, such as Australia, on issues relating to environmental reporting (Gibson and Guthrie 1995). Also, these findings are consistent with other types of voluntary reporting findings in annual reports such as CSR (Gray et al. 1995a), environmental reporting (Kirkman and Hope 1992) and reporting of future earnings (Choon et al. 2000). Most IC attributes reported in annual reports are reported in discursive rather than numerical terms (Brennan 2001) and confirms the widely held view that firms are more interested in ‘telling a story’ about IC rather than assigning metrics to such items (Guthrie and Petty 2000d; Holland 2001). Findings in the ICR and CSR literature indicate that any increase in the content of information should take a declarative form rather than a quantified form, since declarative forms are free of measurement problems (Andrew et al. 1989; Collier 2001). In summary, most IC research has indicated that qualitative (declarative) forms are used rather than quantified terms. However, quantification enables firms to communicate some element of the narrative and visuals concerning IC. 5.2.4 Reporting location The impact of reporting content on different sections of the annual report is noted in several areas of the voluntary reporting literature, such as CSR (Gibson and Guthrie 1995) and environmental reporting (Kirkman and Hope 1992; Gamble et al. 1996). Previous studies have found that environmental issues were reported either in a separate section or in a ‘review of activities’ section (Hughes et al. 2001) pre-emptive earnings were mainly reported in the ‘Chairman’s report’ section (Choon et al. 2000). Few firms prepare supplementary IC reports or a separate section to illustrate the importance of aspects of IC such as human resources (Grojer and Johanson 1996, pp. 64, 78–90). Hoogendoorn et al. (1999) argue that an IC statement as an appendix to the financial statements could provide greater transparency with a combination of valuation and performance indicators. Researchers are divided on the relative importance of disclosing information in different sections within the annual report. Some researchers argue that the location of an IC disclosure within the annual report helps to formulate a view

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about the firm’s degree of commitment to IC (Petty and Guthrie 2000a, p. 215; Guthrie and Petty 2000d). Some empirical evidence suggests a positive relationship between the amount of discretionary narrative disclosures in the chairman’s section and the financial performance of the firm (Smith and Taffler 2000). However, other researchers state that it is not easy to come up with a unique, single reason why a particular location was preferred for a particular reporting item (Gray et al. 1995b). In summary, past literature in CSR found that some information is reported in separate or exclusive sections. Some argue that it is not easy to offer a single reason why a particular location in the annual report is preferred, but others argue that locating information in a specific location enables firms to convey a degree of commitment. It also implies that an unregulated reporting environment enables firms to set and shape the agenda by reporting in different locations (sections) of the annual report.

5.3 Method of content analysis Content analysis is defined as a technique for gathering data that consists of codifying qualitative information, in anecdotal and literary form, into categories in order to derive quantitative scales of varying levels of complexity (Abbott and Monsen 1979, p. 504). Content analysis of annual reports has been carried out in social, environmental and accounting studies demonstrating that it is a rigorously tested research instrument for such studies (Abbott and Monsen 1979; Guthrie and Mathews 1985; Andrew et al. 1989; Cameron and Guthrie 1993; Choon et al. 2000; Champion 2002; Newson and Deegan 2002) and IC studies (Subbarao and Zeghal 1997; Guthrie et al. 1999; Olsson 2001). The content analysis involves codifying of qualitative (i.e. anything non-numerical and non-fiscal) and quantitative (numerical and fiscal) information into pre-defined categories so that a pattern could be derived from the reporting of that information. It seeks to present published information with a systematic, objective and reliable form of analysis (Holsti 1969, p. 3; Krippendorf 1980, p. 21; Guthrie and Mathews 1985). In the current study, a content analysis of annual reports was carried out on the top 30 listed companies in the Colombo stock exchange (CSE) by market capitalisation. Table 5.1 offers an introduction to the activities carried out by each firm (in total, 31 firms) in the sample (see also Appendix 5.1). These were for the years ending 31 December 1998 or 31 March 1999, and 31 December 1999 or 31 March 2000. Section 144 of the Companies Act 1982, Sri Lanka, requires firms to have a year-end of 31 December. However, section 146 of the Companies Act states that firms can have a year-end of 31 March if the foreign parent entity prepares accounts as at 31 March year-end (Companies Act 1982). Therefore, some of the annual reports analysed have a financial year-ending of 31 December and others 31 March. The annual report of 30 September 1998 is used for the Pure Beverages Company Limited since no annual report was prepared for the financial year ending 31 December 1998 because the ultimate parent entity of Pure Beverages

Diversified company operates on a worldwide basis. Engaged in hospitality, cargo, property development and plantation Owns and operates tourist hotels in Sri Lanka Owned by Caltax. Blends, imports, distributes, and markets lubricant oils and gas Diversified company operates worldwide. Engaged in plantation, real estate, brewery, and hospitality Local finance house. Engaged in leasing, financing, share portfolio management, bill discounting, real estate, and insurance brokering. Subsidiary of Carson Cumberbatch, beer brewer. Produces Carlsberg beer under a license Subsidiary of John Keels. Manufactures and distributes carbonated drinks, processed meat, bakery, and ice creams Manufactures animal feed and feed for acquaculture, livestock breeding and provision of veterinary care services, poultry and hatchery breeder farming, shrimp hatchery and farming, operating silo and warehouse complexes, manufacturing and tranship fish and shrimp feeds Manufactures tea bags for export. It has produced an internationally acclaimed brand called Dilmah tea A subsidiary of British American Tobacco group, the firm has a near monopoly (95%) on Sri Lankan cigarette manufacture and marketing Market its own local brands and Coca-Cola under the license. The firm is a market leader holding 50% of the market share Repairs ships and undertake heavy engineering work in the international market. It operates four dry-docks of deadweight capacity 100,000, 30,000, and two of 8,000 each A retail bank and a subsidiary of Chartered Bank. DFCC Bank recently acquired 29.5% of Commercial Bank giving them a strategic alliance A development Bank. Provides long- and medium-term loans, working capital loans, finance leasing, equity investments, discounting of bills, factoring, consultancy services, venture capital finance, fund management, insurance broking, property development and wholesale commercial banking In rubber gloves production and exports 100% of its produce, owning and managing tea and rubber plantations Distils, bottles and markets liquor. It uses mature coconut spirits and rectified spirits to manufacture blended products which includes brand names such as Extra Special Arrack, Blue Label Arrack, and White Label Arrack Diversified firm. Recently Vanik Incorporation acquired the 92% of the Forbes Ceylon Ltd and later de-listed from CSE.

Aitken Spence Holdings Asian Hotels Caltex Lubricants Carson Cumberbatch Centroal Finance

Forbes Ceylon

Dipped Products Distilleries Company

DFCC Bank

Commercial Bank

Ceylon Tea Services Ceylon Tobacco Company Coca-Cola Beverages Colombo Dockyard

Ceylon Brewery Ceylon Cold Stores Ceylon Grain Elevators

Brief characteristics

Firm

Table 5.1 An introduction to companies in the sample

Trans Asia Upali Investment Holdings

The Lion Brewery Tokyo Cement

Singer (Sri Lanka)

Sampath Bank

National Development Bank Nestle Lanka Property Development Richard Pieris

John Keels

James Finlay

Hatton National Bank Hayleys

Part of the worldwide group of Nestle. It is one of the two local firms which manufactures full cream milk powder Maintains, manages, and develops the Bank of Ceylon Headquarters building Principally concerned with the manufacture and marketing of a wide range of rubber and plastic products for a range of customers A retail bank that has 32 branches with all branches networked to one another by the state of the art technology and provides a complete range of banking services Singer brand name which was synonymous with sewing machine has been transformed to a sophisticated multi-brand firm. The firm’s product range includes locally manufactured items such as refrigerators, washing machines, domestic and agro water pumps, sprayers and two wheeled hand tractors Subsidiary of Carson Cumberbatch. The firm manufactures brand names such as Lion Lager and Carlsberg. Joint venture collaboration with Mitsui Mining Company of Japan. Tokyo Cement Company was the first cement firm in Sri Lanka to receive the prestigious ISO 9002 certificate Five-star hotel in Sri Lanka A diversified firm. Some include printing, publishing and distributing newspapers and periodicals, manufactures chocolates, markets audio and electronic equipment, manufactures laundry and toilet soaps and which marketing and distributing their own products

A retail bank. Has 95 branches island-wide and 78 global network of correspondents Diversified firm operating worldwide. It operates in the industry sectors of chemicals, coir, electronics and engineering, environment, rubber, agriculture, transportation, textiles and management services Integrated tea business and their principal activities include owning and managing tea plantations, manufacturing bulk tea, blending and packaging tea for export, warehousing of tea, manufacturing and exporting speciality tea such as Green Tea A diversified firm. It is an emerging blue chip, a well managed small conglomerate. Carries out business activities in food and beverage, plantations, leisure, information technology, management and transportation, investment trust, domestic and international trade, exports,financial services and property development It is the biggest development bank in Sri Lanka and ranks among the ten biggest banks in Asia

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became Coca Cola USA Inc. during that period. As a result of this change, the next annual report was published on 31 December 1999. Pure Beverages Company Limited is now renamed as Coca-Cola Beverages Sri Lanka Limited. In summary, content analysis has already been established as a useful research method in the field of IC research. This study selected the top 30 listed firms in the CSE by market capitalisation for two consecutive years ending 31 December 1998 or 31 March 1999, and 31 December 1999 or 31 March 2000. The next section will discuss the impact of size and industry on ICR.

5.4 The effect of size and industry on ICR Although firms were of similar size by market capitalisation, they belonged to different industry sectors. This section outlines previous research findings in relation to the effect of size and industry on ICR. 5.4.1 Size factor Previous research in voluntary reporting such as CSR (Guthrie and Mathews 1985; Andrew et al. 1989; Gray et al. 1995a, p. 62), environmental reporting (Kirkman and Hope 1992) and financial reporting (Ho and Mathews 2002; Mitchell et al. 1995; Smith and Taffler 2000) reveals that larger firms are more likely to disclose more voluntary information. The trends found in voluntary reporting are applicable to this research since this study codified only IC items that were voluntarily reported, that is, those which were not mandated by accounting standards or company law (Guthrie and Petty 2000d). It is also suggested that big firms, in aggregate terms, are likely to possess more IC because they are more visible and have more resources at their disposal to sponsor new initiatives (Guthrie and Petty 2000d). This study therefore controlled the size effect to some extent by selecting the sample of firms by market capitalisation, as this has been established in past IC literature (Guthrie and Petty 2000d). Further, the Colombo stock market is a less volatile market (CSE 1998, 1999, 2000). As the past research indicates, larger firms might also provide a more meaningful research sample (Guthrie and Mathews 1985). However, this study acknowledges that market capitalisation is not the only proxy for size; others include employee numbers and total assets. 5.4.2 Industry factor Industry category can contribute to the differences in the magnitude of ICR by firms (Dontoh 1989). Brennan (2001) found differences in the extent of ICR between technology and people-oriented industry categories in Ireland. Subbarao and Zeghal (1997) in addition reported differences in ICR between manufacturing and financial services sector. Although there is a dearth of research in this area, in the voluntary reporting of intangibles, firms in industry categories

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with a relatively greater number of shareholders may report more IC information in order to convince them to invest their capital in the firm. The next section will describe how the data is captured and measured for the sample firms of similar size and different industry sectors.

5.5 Data capture To undertake content analysis on the annual reports, the IC items in the annual reports were coded into the coding sheet for two consecutive years separately. The frequency of occurrence of each IC attribute under a given IC category was recorded. The frequency was determined by the number of times an IC attribute is described either qualitatively (non-numerically and non-fiscally) or quantitatively (numerically or fiscally). The common scales applied for counting include the nominal, ordinal, interval and ratio scales. This study applied the ordinal scale because the study intends to ascertain ICR trends through frequency. The nominal scale was not appropriate as it establishes the median and interval. The ratio and interval scales were not appropriate because their objective is to quantify the distance between items (Carney 1972, pp. 153–154). The study applied the ordinal scale with the units –1, 0 and 1 as frequency scores to identify items relating to IC in the frequency analysis. A score of –1 represents an intellectual liability item, 0 not an intellectual item, and 1 an intellectual asset item. The total score for a given IC item represents the net position of frequency of IC. The coding sheet recorded both qualitative data (non-numerical and non-fiscal) and quantitative data (numerical and fiscal) for each IC attribute. Further, quantitative data was analysed to ascertain whether they were numbers (numerical) or monetary values (fiscal) and were recorded in the coding sheet against each IC item. Qualitative data was recorded in the coding sheet according to its section in the annual report, to be analysed with respect to the reporting location. The coding sheet recorded the frequency analysis for the 45 IC items identified from IC models and previous specific research (Subbarao and Zeghal 1997; Guthrie et al. 1999) as shown in Table 5.2. Operational definitions were offered for each IC item under the internal capital, external capital and human capital categories and were largely based on Brooking’s Intellectual capital, Core assets for the third millenium enterprise (1996). Each IC attribute was further discussed with reference to the previous literature (see Appendix 5.2). This study identified the sections of the report as follows, and these sections were identified using past literature (Choon et al. 2000; Hughes et al. 2001). However, this book expanded on the sections identified by the existing literature and segregated the annual report into eight sections. They are the ‘Vision, Mission & Goals’ section, ‘Chairman’s’ section, ‘Directors’ section, ‘Operational’ section, ‘Financial’ section, ‘Auditors’’ section, ‘Cover’ section and ‘Sundry’ section. (The operational definitions for each section of the annual report are in listed in Appendix 5.3.)

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Fiscal values shown

Numbers shown

Sundry

Cover page; inner/outer

Auditors’ review

Financial review

Industry sector: Operational review

Internal capital items

Directors review

Year ended: Chairman’s review

Company:

Vision/mission/goals

Table 5.2 The intellectual capital coding framework used for this study

INTERNAL CAPITAL Intellectual Property 1. Patents 2. Copyrights 3. Trademarks Processes 4. Management processes 5. Technological processes Systems 6. Information systems 7. Networking systems Philosophy and Culture 8. Management philosophy 9. Corporate culture Financial relations 10. Financial relations External capital Brand building 11. Brands 12. Customer satisfaction continued

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Fiscal values shown

Numbers shown

Sundry

Cover page; inner/outer

Auditors’ review

Financial review

Industry sector: Operational review

External capital items

Directors review

Year ended: Chairman’s review

Company:

Vision/mission/goals

Table 5.2 (continued)

13. Quality standards Corporate Image building 14. Company name 15. Favourable contracts Business Partnering 16. Business collaborations 17. Licensing agreements 18. Franchising agreements Distribution Channels 19. Distribution channels Market Share 20. Market share Human capital Employee Relations 21. Employee involvement in the community 22. Union activity 23. Employee thanked 24. Employee featured Employee Measurement 25. Employee numbers continued

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Fiscal values shown

Numbers shown

Sundry

Cover page; inner/outer

Auditors’ review

Financial review

Industry sector: Operational review

Human capital items

Directors review

Year ended: Chairman’s review

Company:

Vision/mission/goals

Table 5.2 (continued)

26. Growth/renewal ratios: average professional experience 27. Growth/renewal ratios: average education level 28. Efficiency ratios: V.A./expert 29. Efficiency ratios: V.A./employee 30. Stability ratios: expert seniority 31. Stability ratios: median age of employee Training and Development 32. Know-how 33. Education 34.Vocational qualifications 35. Career development 36. Training programmes Entrepreneurial Spirits 37. Entrepreneurial spirit, innovativeness, proactive and reactive abilities, changeability Safety 38. Employment safety continued

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Fiscal values shown

Numbers shown

Sundry

Cover page; inner/outer

Auditors’ review

Financial review

Industry sector: Operational review

Human capital items

Directors review

Year ended: Chairman’s review

Company:

Vision/mission/goals

Table 5.2 (continued)

Equity 39. Equity issues: race, gender, and religion 40. Equity issues: disabled Welfare 41. Executive compensation plan 42. Employee compensation plan 43. Employee benefits 44. Employee share scheme 45. Employee share option scheme

Where section headings cannot be explicitly identified by the operational definition for a given firm in the sample, they were carefully classified into the closest section (see Appendix 5.2). Two types of information in the annual report were excluded from analysis. First, details about the Board of Directors since they are not considered as full-time employees of the firm. Second, IC information reported to meet the reporting requirements of the accounting standards and company law of Sri Lanka (e.g. goodwill reported due to acquisition of other entities, pension and superannuation contributions) was also excluded since they were not voluntary disclosures. Each section was further coded into reporting units, namely whether they were reported in a chart, table, photograph or narrative. This was recorded into each cell in the coding sheet. The ICR data was therefore analysed by 6 axes (sections in the annual report; quantitative reporting units; qualitative reporting units; number of years; frequency count; IC items) that comprise a total of 62 identifiable variables (see Figure 5.1). The frequency was determined by the number of

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IC items (45)

Number of years (2)

Quantitative reporting units (2)

Sections in the annual report (8)

Total variables analysed in the data set (62) IC elements (a = 17) IC categories (a = 3)

Frequency count (1)

Qualitative reporting units (4)

Figure 5.1 Total variables analysed in the data set.

times an IC item was described, whether qualitatively (non-numerically and nonfiscally) or quantitatively (numerically and fiscally). The content analysis isolates and atomizes the text according to a pre-defined criterion. The IC information collected from the analysis of annual reports was coded separately for two consecutive years. Each IC item was recorded by frequency of occurrence under each IC category. The units of information were double-checked to ascertain quantification. In summary, the use of content analysis on annual reports is an established research method both in CSR and in ICR. The data collected from the content analysis of annual reports was coded into the coding sheet for two consecutive years separately using the nominal scale. The next section explains in detail several perceived threats associated with the reliability and validity of coding information when using this form of content analysis.

5.6 Threats to the validity and reliability of the content analysis The term ‘validity’ is defined as the property of a measure that allows the researcher to say that the instrument measures what he or she says it measures (Abbott and Monsen 1979; Black and Champion 1976, p. 222; Ragin 1994, p. 193; Selltiz et al. 1967, p. 155). The term ‘reliability’ is defined as the ability of an instrument to consistently measure the phenomenon it is designed to measure (Black and Champion 1976, p. 234; Ragin 1994, p. 190; Selltiz et al.

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1967, p. 166). The terms validity and reliability are often expressed in relation to quantitative methodology (Black and Champion 1976, p. 221; McKinnon 1988). McKinnon (1988, p. 36) defined validity and reliability in a broader context to apply it to qualitative research: ‘validity is concerned with the question of whether the researcher is studying the phenomenon she or he purports to be studying’ and ‘reliability is concerned with the question of whether the researcher is obtaining data on which she or he can rely’. The literature identified two factors that can pose a threat to validity and/or reliability in using this form of content analysis. Since raw data in annual reports is not in a state that can be used for research purposes, the raw data needs to be coded into the coding sheet in terms of IC items. This process can give rise to two errors. First, IC items in the annual report may not reflect all of the issues of interest actually embedded in the annual report, and second, raw data can be inaccurately coded into the coding sheet in categorising raw data into IC items. Both of these potential errors in the coding of raw data can affect the validity and reliability of the research results (Abbott and Monsen 1979). Also, there can be two types of errors arising from recording and interpreting data because content analysis as a technique cannot capture the context within the context of the total written text (Manning and Cullum-Swan 1994, p. 464). The next section outlines the steps taken in this book to minimise the threats outlined above.

5.7 Overcoming threats to the content analysis The study devised two methods to increase objectivity in recording and analysing data. These two methods involve pre-defining the coding framework and re-examining the annual reports at a later point in time to confirm the consistency of the coding frequency. One popular IC framework is that proposed by Brooking (1996, pp. 12–81, 129) and Brooking and Motta (1996). Other authors have since modified this framework (ASCPA and CMA 1999, p. 14; IFAC 1998, p. 7; Dzinkowski 1999b, 2000; Guthrie and Petty 2000a). This book made further modifications to enable human capital (HumC) disclosures made by firms to be identified in more detail. The modifications made were to incorporate IC items in equity issues, HumC relations, HumC measurement, and training and development into the framework. Since the content of the annual reports was coded by the researcher interacting with the document, the researcher’s frame of reference could affect the ascertaining of content in the annual reports, as the frame of reference is guided by the researcher’s questions. The researcher therefore defined each IC item before analysing the content in annual reports. Further, the researcher reexamined the annual reports after a time interval to confirm consistent identification of content in the annual reports. This process forces the researcher to examine his or her own background assumptions in analysing the content and subsequently increases the quality of data produced by the content analysis (Carney 1972, pp. 197–200).

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This book could not use several other techniques to overcome threats in content analysis due to research-domain restrictions. This is because the conventional reliability test requires a measure of consensus between different coders, which is interpreted by a consensus coefficient. In coding data, another researcher could code semantic content differently from that recorded in this book by this researcher. This is not due to carelessness or laxity between researchers but because of the differences in objectively driven creativity and sensibility between them. The creative aspect is an accepted factor in semantic content analysis compared to syntactic content analysis. Under semantic rules, words can express different concepts to different people. Since there is no natural language that determines one interpretation of a sentence, the true or correct semantic investigation is directed towards building empirical knowledge rather than normative knowledge (Andren 1980, pp. 60–63). The consensus coefficient has two weaknesses: It can create doubt upon reliable data if the coefficient is low. A high coefficient can seem trustworthy even if it is unreliable because there is a high frequency of false data. A more qualified reliability test can constitute several others re-coding a random sample of investigated material to identify differences so that an ordinary coefficient can be calculated. However, this method is time consuming and costly. Given the above limitations, the results of the sole researcher’s judgement should be trusted in semantic analysis, as this seems to be the only feasible way of attaining a measurement of the veracity of data concerning semantic content (Andren 1980, pp. 65–66). However, this research used semantic content analysis on the grounds that the purpose of the analysis was to count pre-determined IC items referred to in the annual reports. This is because semantic content analysis classifies content in the annual reports according to its meanings (Andren 1980, p. 56). The next section details the methodology of using case study interviews, another research technique employed in this research.

5.8 Method of using case study interviews Although a key assumption in content analysis studies is that the volume of disclosure signifies the relative importance of the disclosure, there is disagreement within the literature regarding the best way to value each individual disclosure. Also, an exclusive focus on annual reports is unlikely to result in a complete picture of firms’ IC reporting practices (Unerman 2000). Case studies, on the other hand, enable us to investigate IC-managing phenomena (Yin 1994, p. 13). The combination of content analysis and case study interview techniques of measurement can increase the validity of inferences (Carney 1972, p. 199; Sepstrup 1981, p. 139). This book carried out 11 case study interviews to increase the validity of this book’s inferences. Therefore, combining case study interviews with the content analysis method will provide a greater insight into the ICR practices in Sri Lanka. The interviews will also offer the opportunity to investigate and understand the difference

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between the amount of IC managed within the firms and the amount of IC reported in their annual reports. This study conducted case study interviews in two stages. The first stage of the interviews was conducted as a pilot interview with a small sample. The parent entity, renamed ZZ to keep its name anonymous, was not in the sample. Table 5.3 Firms interviewed by industry sector Sector in the Sector stock exchange

Company name

Company activity

Banking, finance and insurance

Bank

Retail banking

Banking

Title of the person interviewed

• Human Resources Manager • Marketing Manager • Deputy General Manager, Credit and Operations Banking, Finance Finance Development • Vice President, finance and finance Human Resources insurance • Executive Vice President, Finance • Vice President, Marketing • Assistant Vice President, Banking Products Construction Engineering Engineering Ship building • Manager, Human and and repairs Resources and engineering Administration • Manager, Marketing and Newbuilding • Manager, Finance Diversified Diversified Diversified Diversified • Director, Human market leader Resources • Director, Legal Division Hotel and Hotel Hotel Hotel and • Group Divisional travel property Director, developer Corporate Affairs and Planning Land and Land and Property Property • Manager, Human property property management Resources and Administration • Accountant Manufacturing Manufacturing Manufacturing Manufacturing • Manager, Training exporter • Director, Marketing • Group Financial Controller Trading Trading Trading Appliance • Manager, Human retailer Resources • Director, Marketing • Director, Finance

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The pilot interview case study used a semi-structured interview questionnaire framework, and the results obtained were used to formulate and re-frame questions for the second stage case study interviews. It also provided feedback on the type of IC issues existing in Sri Lankan firms (see Appendix 5.4). In the second stage, 11 case study semi-structured interviews were carried out to investigate how selected firms in different industry sectors manage their IC with a focus on HumC. The interviews were carried out using a broad standard framework, and the framework used for the interviews was structured around the framework used to record data from the content analysis (see Appendix 5.5). The interview process enabled the research to ascertain how committed and internally focussed firms in Sri Lanka are to manage and create their IC. The questions were asked to extract information in three broad categories, namely internal capital (IntC), external capital (ExtC) and HumC, with an emphasis on HumC. The sample of firms used for interviews were carefully selected to represent industry sectors (by way of four industry groups) in the stock exchange classification. Company directors were chosen for interview, and in the absence of a director, the senior manager who was responsible for the given functional area was interviewed. In the case that the information obtained from the first person interviewed was not sufficient, another person of similar ranking in the same functional area was interviewed. The minimum total interview time was two hours. The minimum time allocated for each was: HumC questions, 60 minutes; IntC questions, 30 minutes and ExtC questions, 30 minutes. The name of the firms and persons interviewed has not been revealed, and names have been substituted for confidentiality (see Table 5.3). The interviews were arranged in a semi-structured style to expand the research to have more practical applications, and the purpose was to obtain the ‘operational’ view rather than the ‘official’ view of managing categories in IC. Although care was taken in the planning and implementing of the case study interviews, there were several threats to the validity and reliability of the results, which are inherent in the technique. These threats are outlined in the following section.

5.9 Threats to the validity and reliability of the interview method McKinnon (1988, pp. 36–52) states that the validity and reliability of case study interviews can be threatened by five factors that were applicable to this study. They are: observer-caused effects; interviewer-bias effects; data-access limitations; complexities and limitations of the human mind; and low objectivity. These five factors will now be examined in more detail. First, the observer-caused effects can cause the respondent to change his/her behaviour in the interviews. The respondent may also have ‘hidden agendas’ in answering the interview questions (Goddard and Powell 1994). Second, the interviewer-bias effects can affect the registering, interpreting and coding of the interview events. Third, data-access limitations can occur since data gathering

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through the interview method is restricted to the period of that interview. The time constraint on the interview can limit the quality and quantity of the data received. Fourth, the complexities and limitations of the human mind imply that the statements made by the respondents cannot be taken at their face value. This is because the respondents can consciously seek to mislead or deceive the researcher, or if the respondents are honest and accurate, their statements can still be affected by natural human tendencies and weaknesses. Fifth, the interview method relies heavily on the integrity and intellectual honesty of the researcher because the experience cannot be replicated due to the very nature of the method. In summary, the book identified five factors that posed a threat to the validity and reliability of the case study interview results. This book used a five-step approach to overcome such threats to the validity and reliability of the interview method, and this five-step approach is discussed in the following section.

5.10 Overcoming threats to the validity and reliability of the interview method The following five steps were adopted to increase the validity and reliability of the case study interview method: managing the interpersonal behaviour of the researcher; carefully selecting respondents holding senior positions; the researcher using an interview format to take active control of the interview; the use of a semistructured questionnaire; and the researcher taking notes during the interview process. First, since the researcher’s approach can influence the measurement instrument, one of the critical factors in minimising the observer-caused effects in the interview is the interpersonal behaviour of the researcher when interacting with the respondent and the firm. If it is managed badly, it can pose a serious threat to validity and reliability of data access and observer-caused effects (McKinnon 1988). The researcher overcame such barriers by creating conditions for social relationships, by developing the respondent’s trust, confidence and respect for the researcher, and the researcher was perceived as a person genuinely interested in them. Wherever possible and appropriate, the researcher used social connections to introduce himself/herself to the respondent before the initial contact (Schatzman and Strauss 1973, pp. 19–20). The researcher then contacted the respondents by phone to inform them about the interview and their selection as a respondent and that they would receive a letter containing details about the interview. The researcher explained to the respondents the purpose of the interview while seeking an appointment. The researcher’s letter to the respondents included information provided by the university about the research. The letter outlined the rights of the respondents, the duration of the interview and the nature of the questions that would be asked at the interview. Once the respondent had a chance to examine the letter, the interviewer contacted the respondent by phone to set up a mutually agreed time for the interview at the respondents’ office. At the beginning of the interview, the researcher explained again the purpose of the interview and the purpose for which the data was being used. The length of

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introduction was kept short to avoid respondents’ curiosity and suspicion (Selltiz et al. 1967, p. 575). To standardise relationships with respondents, the interviewer conducted himself as a professional in all instances and not as a friend. The communication between the interviewer and the respondents was made easier since the interviewer had prior knowledge and experience of the respondents’ cultural background (Schatzman and Strauss 1973, p. 26; Fowler (Jr.) 1988, p. 110). This was an advantage to the interviewer to judge the respondents’ non-verbal clues for genuine replies. The researcher avoided taking sides in conflicts and actively interacted with the respondent. This also helped to reduce the interviewer-biased effect. However, it was not possible to completely eliminate this effect since both the interviewer and the respondents are human beings with differing perceptions, judgements and personalities. Although the interviewerbias effect was exaggerated, it is embedded in both written and oral forms of data collected in the social sciences (Selltiz et al. 1967, pp. 583–587). Second, the respondents were chosen carefully from the firms in the sample. Most of the respondents chosen held senior positions and had experience and involvement in managing HumC, ExtC and IntC. Wherever necessary, more than one respondent was interviewed to fill any gaps in knowledge. Third, the researcher used the interview format (active control) and used the conversation to direct them to specific topics and to clarify the meaning of events and comments when they were not clear. Probing questions are a powerful way to reduce threats to validity and reliability, one which is not available in questionnaire surveys. The answers were probed in non-directive ways so as not to lead the respondent towards an answer [Fowler (Jr.) 1988, p. 110]. The probing questions helped to clarify problems arising from the complexities and limitations of the human mind and withheld the researcher’s biases (McKinnon 1988). The questionnaire was well thought out to elicit the required information, and it used the framework applied in coding content analysis information so that the interview data would support the findings of the content analysis of the annual reports. Fourth, a semi-structured questionnaire was adopted for the interview. The interview had a broad structure within which questions were asked, and a conversational approach was adopted for the respondent to air his/her views in a relatively free and informal manner. Although the emphasis varied with each respondent depending on the specific concerns and priorities of the firm, the interview covered broadly comparable areas for each firm in a flexible order and context (Goddard and Powell 1994). The idea was to put the respondents at ease so that they would reveal their frank opinions. The interviewer took active control to direct the respondent to questions and to manage the time. When the answer was inadequate, the question was simply repeated and the interviewer avoided suggesting a possible reply. Fifth, the researcher took notes at the interview. The researcher made sure that the collection of data was kept separate from the analysis of the data in order to reduce observer-bias. These steps increased the validity and reliability of the results. The interviewer wrote down the answers in an abbreviated form

Research method Threats to content analysis 1. Sample size 2. Limitations associated with looking at established information 3. Process of coding information 4. Errors relating to recording and interpreting data

67

Threats to interview method 1. Observer-caused effects 2. Interviewer-caused effects 3. Data access limitations 4. Complexities and limitations of human mind 5. Level of integrity and honesty of the researcher

Increasing validity and reliability of data

Response to the threats to content analysis 1. Pre-defined the coding framework 2. Pre-defined IC items before analysing the content

Response to the threats to interview method 1. Managing interpersonal behaviour of researcher 2. Carefully selecting respondents 3. Interview format to take active control 4. Semi-structured questionnaire 5. Taking notes

Figure 5.2 Research methods used in the study.

while the respondent answered the questions, and if necessary, the interviewer asked for extra time before proceeding to the next question. The interviewer avoided paraphrasing, adding, deleting or amending the respondents’ reply to retain its original meaning and emphasis and to avoid interviewer-bias. Soon after completing the interview, the interviewer reviewed the interview document to ensure that they filled out the document accurately and comprehensively and if necessary went back to them for any lack of information (Selltiz et al. 1967, pp. 575–583). Figure 5.2 summarises the five steps discussed above used to counter threats to the validity and reliability of the interview method in conjunction with the data from the content analysis. In summary, a five-step approach was used to counter threats to validity and reliability of the interview method. The next section outlines the sample size.

5.11 Sample size in the study The size of the firm can influence ICR as indicated in Section 5.3.1. The sample firms selected were the top 30 companies listed in the CSE as on 31 December 1998 or 31 March 1999, and 31 December 1999 or 31 March 2000 (CSE 1998, p. 33). These top 30 firms represent around 60 per cent of the market capitalisation of the CSE in Sri Lanka. Therefore, the sample taken for the study represents a

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39.84

37.27

35.8

37.25

41.23

40.42

80

36.8

100

60

59.58

58.77

62.75

64.2

62.73

60.16

20

63.2

40

1994

1995

1996

1997

1998

1999

2000

0 Top 30 firms

Others

Chart 5.1 Top 30 firms percentage of market capitalisation.

substantial portion of the firms listed in the CSE, as shown in Chart 5.1 (CSE 1997, p. 34; 1998, p. 33; 1999, p. 50). This study interviewed personnel from 11 firms. Each firm represented an industry sector in the sample. The banking sub-sector (Bank Limited) and finance sub-sector (Finance Limited) interviews represented the banking, finance and insurance sector. Since none of the sample firms in this study were from the insurance sector, this study did not interview a firm from that industry sector. The diversified sector (Diversified Limited) and manufacturing sector (Manufacturing Limited) interviews represented the diversified and manufacturing sectors respectively. The beverage sub-sector (Beverage Limited), food sub-sector (Food Limited) and tobacco sub-sector (Tobacco Limited) interviews represented the beverage, food and tobacco sector in the sample. The study interviewed a firm from the trading sector (Trading Limited). Further, the study interviewed two firms to represent the hotel and travel sector (Hotel Limited) and construction and engineering sector of the low industry group (Engineering Limited). The sample of firms contained neither a travel firm nor a construction firm, and hence this study did not interview firms from those sub-sectors. The study interviewed one firm to represent the property sub-sector of the land and property sector of the lowest industry group (Property Limited). The sample had no firm from the land sub-sector, and therefore, this study did not interview a firm from that sub-sector. The next section offers a summary of this chapter and highlights the objectives and outcomes of the chapter.

5.12 Chapter summary Table 5.4 provides a summary of the research objectives of the chapter and its outcomes. The next chapter will seek to outline the data-reporting variables associated

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Table 5.4 Research methods objectives and outcomes Objectives 1 Outline ICR variables in annual reports 2 Introduce content analysis as a research method for the study 3 Explain the impact of size and industry variables on content analysis 4 Outline the data capture by content analysis

Outcomes 1 The reporting units and reporting location in annual reports are tools to influence reporting via annual reports in the unregulated ICR environment (see Section 5.2) 2 Content analysis is already an established research method in IC research. This thesis applied it to analyse data in sample annual reports (see Section 5.3) 3 Size and industry sector can contribute to ICR differences. This study chose the top 30 listed firms by market capitalisation to control the size factor in the sample, and acknowledged the reporting differences due to industry and size factors (see Section 5.4) 4 Used a coding framework with a theoretical foundation and recorded both fiscal and non-fiscal data using ordinal scale. Data were also identified by sections of the annual report. The data set included 62 identifiable variables (see Section 5.5) 5 Identified four factors that can reduce the validity and reliability of results of content analysis (see Section 5.6)

5 Outline threats to reliability and validity of content analysis 6 Outline how to 6 overcome the threats to validity and reliability of content analysis 7 Introduce case 7 study interview methods

Followed a two-step approach to overcome threats to the validity and reliability of content analysis data (see Section 5.7)

Carried out a pilot study to obtain a feedback of IC issues and to re-frame questions for the second stage case study interviews. Carried out 11 case study interviews to represent industry sectors in the sample (see Section 5.8) 8 Identified five factors that can reduce the validity and reliability of case study interviews (see Section 5.9)

8 Outline threats to validity and reliability of interview method 9 Outline how to 9 overcome the threats to validity and reliability of interview case study 10 Introduce the 10 sample size in the study

Followed a five-step approach to overcome threats to validity and reliability in the case study interview method (see Section 5.10)

Sample firms represent approximately 60% of the market capitalisation of the CSE. Case studies substantially represent the sample and its industry sectors (see Section 5.11)

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with annual reports. The chapter will then outline reporting theories and argue for the selection of the political economy of accounting (PEA) theory to construct and test the hypotheses. Thereafter, two hypotheses are constructed, and their data interpretation is then discussed.

Appendix 5.1 Operational activities of companies in the sample The following is an introductory profile of the top 31 companies over the twoyear period of the study included in the sample in the alphabetical order. It outlines the business activities that the firms are engaged in to provide background information for the reader. 1 Aitken Spence Holdings Aitken Spence Group operates on a worldwide basis. The group recorded revenue of Rs.3.79 billion for the year ending 31 March 1999. Tourism (58 per cent), cargo handling (17 per cent), manufacturing (19 per cent), property development (1 per cent), plantations and services (5 per cent) such as insurance and trading contributed to its 1999 turnover. It has 42 subsidiaries and ten associate firms (Aitken Spence & Co. Ltd 1999, pp. 10–11, 68–69; Winthrop Corporation 2000). Their tourism arm includes acting as tour agents, operating domestic helicopter services, organising and handling conferences and owning and operating hotels/resorts. The cargo-handling sector includes acting as agents for several shipping lines, providing international sea/air freight forwarding and courier services, operating a freight station, providing container storage facilities, and refurbishing and repairing containers and chassis. The manufacturing sector is involved in printing, packaging and garment. The property development sector involves construction of a multistoried office complex, development of housing property, and developing and selling land for industrial purposes (Winthrop Corporation 2000). 2 Asian Hotels Asian Hotels Corporation Limited owns and operates tourist hotels in Sri Lanka, through a 51.63 per cent interest in Hotel Services (Cey) Limited and a 42.45 per cent interest in its associate firm, Trans Asia Hotels Limited. Its whollyowned subsidiary, Crescat Development Limited, is involved in property development (Winthrop Corporation, 2000). 3 Caltex Lubricants Lanka Ltd (in 1998 known as Lanka Lubricants) Lanka Lubricants was incorporated on 1 December 1992 as a subsidiary of Ceylon Petroleum Corporation as a prelude to privatising the entity held by the Government of Sri Lanka. On 14 July 1994, the government and Caltex

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Petroleum Corporation signed a memorandum of understanding to transfer 51 per cent of its ownership to Caltex. On 15 July 1996, the remaining 49 per cent of shares were divested to the public of which 10 per cent of the shares were gifted to the employees of now Lanaka Lubricants Limited (Lanka Lubricants Limited 1999, p. inner cover page). The principal business activities include blending, importing, distributing and marketing of lubricant oils and greases. Approximately 95 per cent of firm’s products are blended locally. 4 Carson Cumberbatch Carson Cumberbatch & Company is a result of a merger in 1947 between Carson & Company and Cumberbatch & Company. Carson & Company began in 1857 as an Estate Agency of coffee and later tea. The Cumberbatch Company began in 1867 and was associated with mercantile ventures. At present, the group is engaged in plantations, beer, real estate, leisure, investments and management services. It has 26 subsidiaries and 6 associate firms (Carsons Cumberbatch & Company 1999, pp. 12–13, 107–109). Subsidiaries include four Malaysian plantation firms, and two breweries in Sri Lanka (The Ceylon Brewery and The Lion Brewery). It has seven property development subsidiaries with prime city real estate, a clutch of airline and leisure firms that have interests in two hotels and a group of investment firms owning the most valuable listed portfolios in the country (Carsons Cumberbatch & Company 1999, pp. 12–13). 5 Central Finance Company This company was incorporated in 1957 as a private limited company. It is headquartered in the central hills of Kandy. The principal activities at that time were to provide hire-purchase facilities to the passenger transport and haulage sector of the central region. It operates nationally through nine branches and two nondeposit-taking outlets. It has diversified into asset leasing, share portfolio management, bill discounting, real estate development and housing, and insurance brokering through its 21 subsidiary and associate firms (Central Finance Company Limited 1999, pp. 64–67). 6 Ceylon Brewery In 1881, the firm was established as a cottage industry to serve British colonial tea plantations in the hill country retreat of Nuwara Eliya, where its cool climate and natural spring water were the ideal requirements for a brewery. The Ceylon Brewery is now a subsidiary of Carson Cumberbatch & Co. Ltd, a diversified group of firms in Sri Lanka. It is a market leader of the Sri Lankan beer industry, holding over 85 per cent of the market share. Over the years, the firm’s beers brands, lager and stout, won international awards for quality at the Brewers’ Exhibition held in Olympia, London. It also won gold medals at

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the Monde Selections for five consecutive years. These awards helped the firm to enter into international market and tie up with international brewers. Since 1992, the firm has been producing Carlsberg beer under a license agreement with the world-renowned brewer Carlsberg International of Denmark. In 1996, the firm also entered into a licensing agreement with Guinness Brewing Worldwide to brew Guinness, the world-famous Irish stout (Gunawardene 2000). 7 Ceylon Cold Stores The firm began its operations in 1866 as Ceylon Ice Company. The name was later changed to New Ice Company, and in 1941 to Ceylon Cold Stores Limited. Its parent firm is John Keels Holdings. The firm reported a record turnover of US$30 million for the year ending 31 March 1998 and has staff numbers of over 2,000 employees in three factories around the country. The core business of the firm is to manufacture and distribute carbonated drinks, followed by manufacturing of ice creams in which the firm is the market leader. The firm also holds a pre-eminent position in its own brands of processed meats, bakery products and home delivery of milk and milk products. It also operates its own supermarket and restaurant in the heart of Colombo City. Further, the firm has finalised its plans to manufacture and distribute fresh juices, flavoured milk and dairy products. It is actively looking for international joint ventures to export Ginger Beer, a non-alcoholic beverage made from natural ginger, one of its unique products (Walpola 2000). The firm was ranked as one of the ‘Best 50 Companies for the year 1997/1998’ by Lanka Monthly Digest (Sri Lankan equivalent of Fortune 500) and as second of ‘Best Managed Companies’ in the private sector by the Postgraduate Institute of Management (Ceylon Cold Stores Limited 1999, p. 7). 8 Ceylon Grain Elevators The firm was incorporated in 1982 by signing an agreement between Prima Limited of Singapore and the Government of Sri Lanka to manufacture animalfeed products in Sri Lanka. In 1984, the firm was granted a listing in the CSE and on 17 February 1993 became the biggest firm by market capitalisation. Presently, the group has five subsidiaries (Ceylon Grain Elevators Limited 1999, pp. 20–21, 58). At present, the principal activities of the company are the production of animal feed and feed for the aquaculture industry, livestock breeding and provision of veterinary care services, poultry and hatchery breeder farming, shrimp hatchery and farming, operating silo and warehouse complexes, manufacturing and tranship fish and shrimp feeds. The firm currently holds 60 per cent of the market share in the manufacture of poultry feed. Feedmilling and trading (82 per cent), poultry breeder farming (16 per cent) and shrimp farming (2 per cent) contributed to its 1998 revenue (Ceylon Grain Elevators Limited 1999, p. 1; Winthrop Corporation 2000).

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9 Ceylon Tea Services Ceylon Tea Services is one of the firms in MJF Group of companies. It is familyowned and the founder of the business is Merrill J. Fernando. The firm is in the business of tea-bag manufacture and export. It has produced an internationally acclaimed brand called Dilmah tea that is marketed in 82 countries around the world. The business is unique in that it successfully competes with multinationals without commanding a large advertising budget (The MJF Group 2000). 10 Ceylon Tobacco Company (CTC) A subsidiary of British American Tobacco group, the firm has a near monopoly (95 per cent) on cigarette manufacture and marketing (ABN Amro Sri Lanka Research 1999, p. 55; World News 2000). CTC has 30,000 registered farmers working with them. The firm employs over 300,000 people both directly and indirectly in tobacco farming. The network includes 57 distributors, employing over 700 people. Its sales network links up with over 41,000 outlets (LMD 1999). The steps initiated by the firm to reduce production costs have resulted in huge savings and significant margin improvements. CTC reported a net profit of SLRs 788.3 million for the first half of 1999, up 156 per cent from the corresponding previous period of last year (ABN Amro Sri Lanka Research 1999, p. 55). 11 Coca Cola Beverages Sri Lanka (1998 known as Pure Beverages) Pure Beverages is in the soft-drink market, manufacturing and distributing their own local brands and Coca-Cola under the license. The firm is a market leader holding 50 per cent of the market share (Pure Beverages Company Limited 1999, p. 4). 12 Colombo Dockyard The firm was incorporated on 2 June 1982 as a private company and was converted to a public company on 17 February 1983. The firm’s previous name was Colombo Drydocks Limited and was a result of a merger of two firms, Colombo Drydock Ltd and Colombo Dockyard (Pvt.) Ltd Colombo Dockyard Limited has a foreign collaboration with Onomichi Dockyard Co. Ltd, Japan. Ceylon Shipping Agency (Pte) Ltd, a firm incorporated in Singapore, owns 51 per cent of issued share capital. Ceylon Shipping Corporation holds a substantial portion of the remaining share capital. It is engaged in shipbuilding for the local market. It repairs ships and undertakes heavy engineering work in the international market. It operates four drydocks of dead-weight capacity 100,000, 30,000 and two of 8,000 each. The firm is an enterprise under the Board of Investment (BOI) of Sri Lanka and as per that agreement, the revenue earned from the local market is restricted to 10 per cent of the total revenue (Colombo Dockyard Limited 1999, p. 4).

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13 Commercial Bank The beginnings of Commercial Bank can be traced back to Eastern Bank that commenced business in 1920 mainly for corporate clients. In 1957, The Chartered Bank acquired Eastern Bank. In 1969, Commercial Bank was formed as a separate entity with 40 per cent control held by the Eastern Bank. In 1971, the group parent, Chartered Bank, took the full control of Commercial Bank. In 1975, the Chartered Bank transferred its business to Standard Chartered Bank. The 29.5 per cent acquisition of Commercial Bank by DFCC Bank in 1997 has led to a new strategic alliance between two leading financial institutions. At end of 1998, the bank had 61 branches, and 59 of them were linked by one of the most modern computer systems (Commercial Bank 1998, pp. 104–105). 14 DFCC Bank In 1955, DFCC bank was founded with a Rs.8 million capital as a development bank to provide long-term finance to accelerate industrialisation. In 1998, it had total assets over Rs. 25 billion and is a licensed specialised bank. Its activities are diverse in the area of project financing and investment banking for development purposes in Sri Lanka. Through its associates, it provides long- and medium-term loans, working-capital loans, finance leasing, equity investments, discounting of bills, factoring, consultancy services, venture-capital finance, fund management, insurance broking, property development and wholesale commercial banking. From 1994 to 1997, it was the biggest firm by market capitalisation in the CSE (DFCC Bank 1999, p. 1; Winthrop Corporation 2000). 15 Dipped Products Dipped Products Limited was incorporated in 1976 and commenced trial production in 1977 with an initial investment of Rs.2 million. The net assets of the group as on 31 March 1999 were Rs.2.9 billion. The group operates through six subsidiary firms in rubber glove production, owning and managing tea and rubber plantations. The rubber gloves produced using natural and synthetic rubber are exported to several countries in all continents of the world. The revenue is derived in almost equal proportions from its plantations and rubber products (Rs.1.2 million each for the year ended 31 March 1999) (Dipped Products Limited 1999, 2000). 16 Distilleries Company of Sri Lanka The firm distills bottles and markets liquor. It uses mature coconut spirits and rectified spirits to manufacture blended products that include brand names such as Extra Special Arrack, Blue Label Arrack and White Label Arrack. Pure coconut products are used to manufacture Coconut Arrack, Old Arrack, Double

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Distilled Arrack, Very Special Old Arrack (V.S.O.A) and Sri Lanka Arrack. They are distributed through its wholesale outlets. The firm also markets two brands of beer, namely ‘Ceres Royal’ and ‘Faxe Premium’. It has two major subsidiaries, Balangoda Plantations Limited (BPL) and Madulsima Plantations Limited (MPL) (Winthrop Corporation 2000). 17 Forbes Ceylon Forbes Ceylon recorded a post-tax profit of Rs.85 million for the 12 months ending March 1997 compared to Rs.74 million recorded in the previous period. However, the group turnover for the financial year 1996/1997 was down to Rs.740 million compared to a turnover of Rs.866 million recorded in the previous year. The investments and services are the main contributors to the bottom line. The group has more than Rs.1 billion worth of net assets in Barbados, which contributed Rs.35 million pre-tax profits for the period. Forbes Ceylon has controlling interest in Forbes Capital and in Kahawatta Plantations through Forbes Plantations (Pvt) Ltd. In 1999, Vanik Incorporation acquired 92 per cent of Forbes Ceylon Ltd (Corporate World 1998). 18 Hatton National Bank This bank maintains over Rs.45 billion in deposits, has 95 branches island-wide and 78 global networks of correspondents. It has a reputation for financial strength, innovation, management skills and dynamism, with a strong commitment to hold highest ethical standards in the industry (Hatton National Bank 1999, pp. 8, 13). 19 Hayleys Hayleys group operates in a wide range of diverse activities through its subsidiary firms. Its activities are principally based in Sri Lanka but have operations in Continental Europe, Japan, Australia and the United Kingdom. It operates in the industry sectors of chemicals, coir, electronics and engineering, environment, rubber, agriculture, transportation, textiles and management services (Winthrop Corporation 2000). 20 James Finlay In June 1998, James Finlay Plc, the parent firm in the United Kingdom, sold the confectionery business to Northern Foods to finance the development of tea plantations in Sri Lanka through its Sri Lankan investment firm that has major stakes in two growing firms. In 2000, James Finlay worldwide group sold its tea plantation firm to the Asian Conglomerate, Swire (UK Business Park Company Search, 2000). The Sri Lankan firm is in an integrated tea business and their principal activities include owning and managing tea plantations, manufacturing

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bulk tea, blending and packaging tea for export, warehousing of tea and manufacturing and exporting specialty tea such as Green Tea. The Sri Lankan Group also has business activities in insurance, environmental services, as foreign principals on products imported to Sri Lanka, as general sales agents of international airlines and marketing of industrial and agro-chemicals [James Finlay & Company (Colombo) Ltd 1999, p. 25]. 21 John Keels Holdings It is an emerging blue-chip firm, a superbly managed small conglomerate with a market capitalisation of just US$130 million and with a 20 per cent return on capital. The debt is one-tenth of its equity and was trading at a Price–Earnings ratio (P/E) of seven, making the stock dirt cheap and attractive (Chowdhury, 1998). Founded in 1870 as a partnership, the group enjoys a pre-eminent position in most areas of their business. The group carries out business activities in food and beverage (47 per cent), plantations (19 per cent), leisure (11 per cent), information technology (8 per cent), management and transportation (7 per cent), investment trust (3 per cent), domestic and international trade (2 per cent), exports (2 per cent), financial services and property development, which contributed to its 31 March 1999 turnover. The group has 61 firms of which 17 are listed on the CSE. In 1994, John Keels Holdings Limited became the first and the only Sri Lankan firm to obtain a quotation of its shares overseas (John Keels Holdings 1999, pp. second inner page, 1–34, 68). 22 National Development Bank It is the biggest development bank in Sri Lanka and ranks among the ten biggest banks in Asia. Its business philosophy centres on competitive pricing, commitment to excellence and a high customer focus. Established in 1979 as a government-held corporation, the bank was privatised in 1993 by transferring 61 per cent of its share capital to private ownership. In 1997, the government converted the debentures held by them into shares earlier than expected and disposed them to the public to further privatise the entity. In the same year, the bank recorded over Rs.1 billion as profit before tax. The bank has three subsidiaries and seven associate companies in its group structure and has diversified into insurance brokering, stock brokering, investment banking, venture-capital investment, fund management, industrial park development, property development, environmental consulting and leasing (National Development Bank 1999). 23 Nestle Lanka Nestle Lanka is part of the worldwide group of Nestle. It is one of the two local firms that manufacture full-cream milk powder (Cassim 1997). It also markets its branded non-milk products and exports Instant Coconut Milk Powder (Nestle Lanka 1999, pp. 9–10).

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24 Property Development The principal activities of the business are to maintain, manage and develop the Bank of Ceylon Headquarters building. The reinstatement work commenced due to the damage caused by the bomb explosions in its environs and was progressing satisfactorily. On 31 December 1998, the firm recorded net assets of Rs.879 million, and Rs.179 million profits after tax available for appropriation (Property Development Limited 1999, pp. 6–10). 25 Richard Pieris Richard Pieris & Co. Ltd conducts its operations through a large number of subsidiaries. These operations are principally concerned with the manufacture and marketing of a wide range of rubber and plastic products for a range of customers. Major subsidiaries include Richard Pieris Distributors Ltd, Dipped Products Limited, Richard Pieris Tyre Co. Ltd and Aprico Plastics Ltd. The firm also manufactures furniture and is in the business of constructing and operating industrial estates. Further, Richard Pieris processes, distributes and retails agricultural produce (Winthrop Corporation 2000). 26 Sampath Bank The bank has 32 branches with all branches networked to one another by the state-of-the-art technology and provides a complete range of banking services. On 31 December 1998, the turnover comprised of interest income (78 per cent) and other income (12 per cent) (Sampath Bank 1999, pp. 9, 36). 27 Singer (Sri Lanka) Singer in Sri Lanka has its beginnings to the first store opened in Pettah (part of Colombo) in 1877. Since then, the Singer brand name that was synonymous with the sewing machine has been transformed to a sophisticated multi-brand firm. The firm’s product range includes locally manufactured items such as refrigerators, washing machines, domestic and agro water pumps, sprayers and two-wheeled hand tractors. In 1992, the manufacturing base expanded to manufacture agro-implements and in 1995 to furniture. It also markets several branded products such as Singer, Akai, Sansui, Whirlpool and Pfaff. The firm also has diversified into equipment leasing, venture capital, fund management and merchant banking in association with Commercial Bank of Ceylon Ltd. It set up four new institutions for this purpose, namely Equity Investment Lanka Ltd, Commercial Leasing Company Ltd, Commercial Fund Management (Pvt.) Ltd and Commercial Capital Ltd. Singer also invested in Telshan Network (Pvt.) Ltd in 1995 that owns TNL television and radio station. In 1998, it introduced the mega-store concept that provides the convenience of buying ‘everything under one roof’ (Singer Sri Lanka 1999, pp. 1–3).

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28 The Lion Brewery The parent company of this firm is The Ceylon Brewery Limited. Both are in the business of production and marketing of alcoholic beverages. The firm manufactures brand names such as Lion Larger and Carlsberg (The Lion Brewery of Ceylon Limited 1999, pp. 5–6). During 1998, it began operations with a state-of-the-art production facility, one of the most advanced in the region and in the world (Gunawardene 2000). 29 Tokyo Cement The firm was incorporated in 1982 and has joint venture collaboration with Mitsui Mining Company of Japan. Tokyo Cement Company was the first Cement firm in Sri Lanka to receive the prestigious ISO 9002 certificate. During 1998/1999 period, it introduced the ‘Atlas’ brand to complement its existing premium brand ‘Mitsui Cement’ [Tokyo Cement Company (Lanka) Limited 1999, pp. 9, 17]. The firm owns a private jetty in Trincomalee harbour (Thenuwara 1997). The net assets of the group on 31 March were Rs.1.5 billion and it had Rs.425 million profits for the year ending 31 March 1999 (Tokyo Cement Company Limited 1999, pp. 35–37). 30 Trans Asia Since 3 May 1999, Asian Hotels Corporation owned 42.45 per cent of share capital of Trans Asia Hotel Limited. It is the only five-star hotel in Sri Lanka that is not linked to a worldwide chain. It became the first hotel to receive ISO 9001 certificate in South Asia. In 1995, the firm made net profits after tax of Rs.254.7 million, a marginal increase of 5 per cent from the previous year (Asian Hotels Corporation 1999, pp. 8–9). 31 Upali Investment Holdings It is a holding firm of ten entities engaged in a diverse range of activities. Upali Newspapers Limited is engaged in printing, publishing and distributing newspapers and periodicals. Upali Printers is engaged in commercial printing and packing. Ceylon Chocolates Limited manufactures chocolates, and Upali Food & Beverages Pvt. Ltd distributes their ‘Kandos’ and ‘Delta’ chocolate brands. Upali Trading markets audio and electronic equipment manufactured by Upali Electronics Limited. Upali Consumer Products Limited manufactures laundry and toilet soaps and also markets and distributes its products. Upali Travels handles inbound and outbound tourist traffic. Upali Aviation Services has temporarily suspended its operation due to the prevailing terrorism problem in the country. Upali Aircon Pvt. Ltd imports and manufactures air-conditioning equipment and handles major installation contracts (Upali Investment Holdings Limited 2000, p. 7).

3 Trademarks

2 Copyrights

Intellectual property 1 Patents

IC item

‘A legal protection offered to an expression of idea expressed in some tangible form such as been written down and the protection is not for the idea itself. It can be sold, distributed or licensed to generate wealth’ (Brooking 1996, p. 38) ‘TM is non-registered trademark. TM states that the owner believesh he or she is the only one using it. Since it is not registered the owner may or may not have the legal right to stop others from using it’ (Choy 2001, p. 35)

An exclusive property right granted by the state to its inventor for a limited period to exclude others from copying, making or selling that invention during the period of protection (Brooking 1996, pp. 36–37)

Operational definition

continued

‘When we added aerated waters to our product range over 100 years ago we decided to engrave the elephant logo on the bottle. Ever since, all our products have carried this logo making the elephant a household trust mark’ (Ceylon Cold Stores 2000, p. 8)

‘As in previous years, we continue to defend our patents and designs, both in Sri Lanka and overseas, at great cost to the Group. It is believed that stricter laws to deal with patent violations in Sri Lanka are in the process of formulation. We look forward to the speedy completion and enactment of such legislation which will better protect our intellectual property rights’ (Hayleys Limited 1999, p. 8) No information that falls into the operational definition was found in the annual reports over the two years of the study

Example from annual reports

The first part of this appendix outlines the operational definitions and examples of IC items from the annual reports.

Appendix 5.2 Definitions and examples of intellectual capital items in the coding sheet for content analysis

7 Network systems

Systems 6 Information systems

5 Technological processes

Processes 4 Management processes

IC item

Appendix 5.2 (continued)

‘These encompass enterprise-wide systems designed to manage all major functions of the firm such as SAP, PeopleSoft, JD Edwards, and general purpose database products targeted towards specific users such as products offered by Oracle, Microsoft, and many others’ (Dewett and Jones 2001, pp. 313–314) ‘Are information technologies [which] encompass a broad array of communication media and devices which link information systems and people including voicemail, e-mail, voice conferencing, video conferencing, the internet, groupware and corporate intranets, car phones, fax machines, personal digital assistants, and so on’ (Dewett and Jones 2001, p. 314)

‘Any technological activity that contributes to the creation of organisational capital’ (Roos et al. 1997, p. 49)

‘A process [that] comprises a series of actions that are principally concerned with relations between people that lead to accomplishment of objectives’ (Newman et al. p. 11).

Operational definition

‘The other major advantage in this system would be the extensive use of an electronic messaging system to speed-up the credit decision-making process’ (DFCC Bank 2000, p. 18)

‘Computerised financial systems at all estates facilitate timely and accurate management information’ (Dipped Products Limited 1999, p. 31)

‘The internal credit committee of the Bank undertakes a post approval review of all credit facilities approval under delegated authority. The delegated authority for approvals of credit facilities is also linked to the risk classification of clients, to ensure a comprehensive risk management system’ (National Development Bank 1999, p. 20) ‘A modern mixing line was commissioned during the year to increase production capacity’ (Richard Pieris 1999, p. 3)

Example from annual reports

Brand building 11 Brands

Financial relations 10 Financial relations

9 Corporate culture

Philosophy and culture 8 Management philosophy

‘Powerfully reminding customers to buy products and services in preference to another firm. They can include service brand that speaks about its quality and reliability, or corporate brands that speaks for the value in the market place in association with the name of the firm’ (Brooking 1996, pp. 20–21)

‘They are [the] favourable relationships [that] the firm has with investors, banks and other financiers’ (Brooking 1996, p. 80)

‘[The] way leaders in the firm think about the firm and its employees. The management philosophy has a substantial effect on the organisational culture’ (Brooking 1996, p. 62). ‘It is often communicated through mission statements. The mission statements can have either a positive or negative impact on performance depending on whether employees remember, understand, committed to it, and promote its shared values’ (Bart 2001, p. 322) ‘The set of key values, beliefs and understandings shared by members of the firm’ (Samson and Daft 2003, p. 50)

continued

‘Coconut milk powder, under the MAGGI brand was introduced to new overseas markets resulting in good growth’ (Nestle Lanka Limited 1999, p. 10)

‘Following our successful issue of Global Depository Receipts (GDRs) in 1994, we are the first and to date the only Sri Lankan company listed abroad-in Luxumbourg, and traded over-thecounter worldwide’ (John Keels Holdings 2000, p. 8)

‘The Board of Directors is committed to create and maintain a climate which is designed to improve the Bank’s capacity to take innovate, responsive and timely decisions’ (Commercial Bank 1998, p. 60).

‘To be the most caring and versatile provider of excellence in financial services creating opportunities for more people in more places’ (Hatton National Bank 1998, p. 2)

‘It is the customers’ after-purchase judgement or evaluation of a specific product or service. The benefits are associated with higher economic returns, profitability, customer loyalty and less reliance upon price based competition (Stank et al. 1997). Customer satisfaction is related to the customer loyalty’ (Johanson et al. 1999). ‘Maintaining of requisite standards in products and services’ (The Oxford Dictionary for International Business 1998, p. 703)

12 Customer satisfaction

Business partnering 16 Business collaborations

‘Collaboration established with other business partners’ (Brooking 1996, p. 31).

Corporate image building 14 Company names ‘The evaluation of a firm by its stakeholders in terms of their affect, esteem, and knowledge’ (Deephouse 2000, p. 1093) 15 Favourable ‘A contract obtained because of the unique contracts market position held by the firm’ (Brooking 1996, pp. 33–34)

13 Quality standards

Operational definition

IC item

Appendix 5.2 (continued)

‘With the support of the principal agency Schenker International, the firm was successful in developing various trade lanes including Pan Asia and Transpacific’ (John Keels Holdings 1999, p. 16)

‘Today, Richard Pieris is the largest manufacturer of rubber based products and the name Arpico is synonymous with rubber’ (Richard Pieris and Company 1999, p. 28) ‘Shareholders will be further pleased to know that Aitken Spence has been selected as the preferred bidder by the Ministry of Irrigation & Power and the Ceylon Electricity Board to set up two power plants of 20 megawatts each, at Anuradhapura and Matara’ (Aitken Spence and Co. Ltd. 1999, pp. 29–30)

‘A strong thrust to introduce high margin specialty products, while further diversifying the product mix, has been well received by both our distributors and customers’ (Lanka Lubricants Limited 1999, p. 2)

‘The introduction of new tread designs has been enthusiastically accepted by customers and sales volumes improved’ (Richard Pieris and Company 1999, p. 11)

Example from annual reports

continued

‘People are encouraged to demonstrate their talents and skills in many sports and social activities’ (Dipped Products Limited 2000, p. 15)

‘An opportunity for face-to-face contact with an often concealed but significant part of the firm’s stakeholders. It is a source for new ideas and the best chance for furthering the growth and development of a vital social institution’ (Byrne and Powell 1976, p. 6).

Employee relations 21 Employee involvement in the community

‘The brand’s franchise continues to benefit from its international image and quality attributes. As the fastest growing brand in the portfolio, John Player Gold Leaf broke many records in 1998’ (Ceylon Tobacco Company 1999, p. 11)

‘Royalty group 1999 Rs. 10,989,276’ (The Ceylon Brewery Limited 1999, p. 26)

‘The island-wide network of distributors and the retail chain takes Aprico steadfastly closer to the customer’ (Richard Pieris and Company 1999, p. 28) ‘The sector recorded reasonable growth on the domestic trading front with both the printing and lightening protection business increasing their market share in volume as well as revenue’ (John Keels Holdings 2000, p. 22)

‘A wide ranging agreement that gives a party the right to sell products, services or technology to other parties as per the conditions set out in the agreement (Brooking 1996, p. 33). They include both licensing and cross-licensing agreements’ (Burton and Cross 1997, p. 138) ‘A contractual agreement that grants the license by a person (franchiser) to another (franchisee) to carry out a franchise, franchiser to provide assistance to franchisee to carry out business in payment of a franchise fee. However, it is not a transaction within the consolidated group of companies’ (Brooking 1996, p. 32)

Distribution channels and market share 19 Distribution ‘Appropriate mechanism of getting products channels and services into the market’ (Brooking 1996, p. 30) 20 Market share ‘The extent of market share held in relation to the total market share for a given product or service’ (Ailawadi, Farris and Parry 1999, pp. 20–22).

18 Franchising agreements

17 Licensing agreements

26 Average professional experience 27 Average education level 28 Valueadded per expert

Employee measurement 25 Employee numbers

24 Employee featured

‘The average level of education of executives’ (Sveiby 1997b, p. 79) ‘The quantum of wealth generated by the activities of the Group and its subsidiaries’ by executives’ (Hayleys 1999, p. 95)

‘Average number of years that executives worked in their profession’ (Sveiby 1997b, p. 79)

‘Employee count of a firm’ (The Concise Oxford Dictionary 1977, p. 748)

‘Make special display or attraction of, or give special prominence to employees of the firm’ (The Concise Oxford Dictionary 1977, p. 381)

‘A continuous association of wage earners for the purpose of maintaining or improving the conditions of their working lives” (Cresswell et al. 1980, p. 54) ‘Express gratitude to an employee publicly for his or her contribution to the firm’ (The Concise Oxford Dictionary 1977, p. 1198)

22 Union activity

23 Employee thanked

Operational definition

IC item

Appendix 5.2 (continued)

Refers to the outline titled ‘Expertise’ the educational level of the executive staff (Hayleys Limited 1999, p. 35) As per chart titled ‘Age wise analysis of corporate & senior management’ (Hatton National Bank 1999 p. 35)

‘The commitment and hard work of 1283 employees of DCSL are the key factors for the continued satisfactory performance of your company, amidst every possible discouragement from the state’ (Distilleries Company of Sri Lanka Limited 1999, p. 10) As per the table titled ‘Expertise’ (Hayleys Limited 1999, p. 35)

‘The management also was successful in negotiating the Collective Bargaining Agreement with the Unions and further ensured your firm to maintain industrial harmony up to year 2001’ (Pure Beverages Company Limited 1999, p. 4) ‘My colleagues, staff and workers continue to demonstrate their dedication to your Company without which, above results could not have been achieved. The strength of business is in its loyal staff. I thank them for their cooperation’ (Ceylon Tea Services Limited 1999, p. 8) ‘Corporate management (photographs of senior management)’ (Hatton National Bank 1999, p. 32)

Example from annual reports

‘The quantum of wealth generated by the activities of the Group and its subsidiaries’ by employees (other than executives) in their disciplines’ (Hayleys 1999, p. 95) ‘Years of employment of executives with the firm’ (Sveiby 1997b, p. 81) ‘The average biological age of employees in a firm’ (Sveiby 1997b, p. 81)

Training and development 32 Know-how ‘Amount of knowledge an employee possesses about a particular topic. It could be a straightforward activity (ex. raise an invoice) or a complex activity (ex. Designing airplane wings). It also could be tacit, for example, tasting tea by a tea taster (Brooking 1996, p. 41). This line item also includes work-related knowledge that is acquired during the job in terms of tacit, explicit and implicit knowledge’ (Brooking 1996, pp. 51–52) 33 Education ‘The exposure to new knowledge, concepts and ideas in a structured way to increase knowledge or modify attitudes and beliefs’ (Mayo and Lank 1994, p. 51) 34 Vocational ‘Education received by an employee for a qualifications particular vocation that proves the skill, knowledge and understanding the employee has to a job well. The skills are verified in several ways from examinations to continual assessments. They could be obtained in a wide variety of fields and are managed

31 Median age of employee

30 Expert seniority

29 Valueadded per employee

continued

‘Whilst drawing upon a resource base that includes some 300 professional staff (including pollution control specialists, environmental economists, ecologists, planners, risk analysts, and waste management engineers)’ (National Development Bank 1999, pp. 55–56)

‘Create an environment which stimulates the productive energies of our people and offers them outstanding opportunities for development’ (Hayleys Limited 1999, p. 2)

‘The Bank took a decision to consolidate its retail expansion in 1999. This decision was influenced to a great extent, by difficulties of recruiting suitably experienced Managers to head new branches. With a view to overcoming this constraint, the Bank has now taken steps to recruit trainee managers and train them at the head office and the existing branches, on-the-job, for a period at least 1–2 years before posting them to the new branches’ (Hatton National Bank 1999, p. 41)

As shown in Chart titled ‘Service Analysis of Executives KVPL’ (Dipped Products Limited 1999 p. 29) As shown in Chart titled ‘Age Analysis of Executives KVPL’ (Dipped Products Limited 1999 p. 29)

As shown in the ‘Statement of Value Added of the Company’ (Asian Hotels Corporation Limited 1999 p. 32)

and monitored by trade and professional organisations’ (Brooking 1996, pp. 48–50) ‘Gradual unfolding of a course of progress through life or history of an employee with a firm’ (The Concise Oxford Dictionary 1977, pp. 149, 281) ‘Solutions to learning needs that takes the form of teaching or showing a way of doing things and are essentially skills-oriented’ (Mayo and Lank 1994, p. 51)

Operational definition

Entrepreneurship and employee safety 37 Entrepreneurial ‘Innovativeness is the ability to build on previous spirit, innovativeness, knowledge and generate new knowledge’ (Roos proactive and et al. 1997, p. 40) reactive abilities and changeability 38 Employment safety ‘Freedom from danger or risks when employees are at work’ (The Concise Oxford Dictionary 1977, p. 994)

36 Training programmes

35 Career development

IC item

Appendix 5.2 (continued)

‘Safety at our work environment is also given top priority with Group companies conforming to safety standards. Services of medical doctors are available at all locations. Added to which a number of medical schemes, insurance, compensation schemes are in place to ensure relief and compensation in case of injury’ (Richard Pieris & Company Limited 2000, p. 32)

‘We provide innovative solutions to our clients, combined with a strong commitment to service and in doing so, provide a unique approach to the market’ [James Finlay & Co (Colombo) Ltd. 1999, p. 15]

‘CTC recruits the best talent available by offering a challenging working environment with international career development opportunities’ (Ceylon Tobacco Company 1999, p. 17) ‘Worker participation was enhanced through series of training sessions organised for the workforce which took them through Vision and Values of F & N Coca-Cola, best work practices and productivity. The training division was established and carried out more than 40 training sessions to achieve this success’ (Pure Beverage Company Limited 1999, p. 4)

Example from annual reports

43 Employee benefits

42 Employee compensation plan

Employee welfare 41 Executive compensation plan

40 Equity issues: disabled

Equity issues 39 Equity issues: race, gender and religion

‘Recompense executive staff for their effort towards the firm in addition to their statutory entitlements’ (The Concise Oxford Dictionary 1977, p. 206) ‘Recompense employees (excluding executive staff) for [their] effort towards the firm in addition to their statutory entitlements’ (The Concise Oxford Dictionary 1977, p. 206) This book defines Employee benefits considered as fringe benefits by the taxation office offered to employees in the ordinary course of business (ATO 2003)

‘Making sure that workplace is free from all forms of unlawful discrimination and harassment, and the firm provides programs to assist people groups (women, and racial, ethnic and ethno-religious minority groups) affected by past or continuing discrimination in employment who are more likely to be unemployed and working in lower paid jobs’ (ODEOPE 2002) ‘Making sure that [the] workplace is free from all forms of unlawful discrimination and harassment, and the firm provides programs to assist disability groups affected by past or continuing discrimination in employment who are more likely to be unemployed and working in lower paid jobs’ (ODEOPE 2002)

continued

‘Unclaimed compensation-Rupee: Company at 31 March 1999 Rs. 134,755 and at 31 March 1998 Rs. 135,259. Group at 31 March 1999 Rs. 985,313 and at 31 March 1998 Rs.985, 816’ (Carson Cumberbatch & Company Limited 1999, p. 75) ‘Staff Loans at 31st December ’98 Rs. 1,037,398’ (Forbes Ceylon Limited 1999 p. Notes to the accounts on current assets)

No example was found that falls into the definition in annual reports

‘It is the Company’s policy to give full consideration to suitable applications for employment by disabled persons. The Company continues to employ visually handicapped persons, who are former students of the Deaf and Blind School. In the event of employees becoming disabled during the period of their employment, every effort is made to provide them with continuing service’ [James Finlay & Company (Ceylon) Ltd. 1999, p. 26]

‘The Company’s policy respects the individual and offer career opportunities regardless of sex, race or religion’ [Tokyo Cement Company (Lanka) Limited 1999, p. 29]

45 Employee share option

‘A method of giving employees shares in the business in which they work’ (The Oxford dictionary for international business 1998, p. 274)

44 Employee share scheme

Example from annual reports

‘Consequently all employees of the Company are entitled to purchase shares through a Share Trust established by a Trust Deed dated August 20, 1984 and managed independently by Corporate Services Ltd., an affiliate of F.J. & G. De Saram, Attorneys-at-Law & Notaries Public’ (Central Finance Company Limited 1999, p. 20) ‘A method of giving employees share options in the ‘An employee share option plan was set up during the year by a business in which they work’ (Oxford dictionary special resolution adopted by the shareholders at an extraordinary for international business Scheme 1998, p. 274) general meeting of the company held on 10 June 1998. Details of the share option plan are disclosed in Note 26 to the Accounts’ (Richard Pieris and Company Limited 1999, p. 32)

Operational definition

IC item

Appendix 5.2 (continued)

Research method

89

Appendix 5.3 Definitions of the sections in the annual report Section

What represents the section

Vision, Mission & Goals

• • • • • • • • • • • • • • • • • • •

Chairman’s Directors’ Operational Financial Auditors’ Cover Sundry

Vision statement Mission statement Goals and objectives Chairman’s section Any comments made by chairman Directors’ review Directors’ report CEO review and or report Operational review Any comments directly related to operations of the firm Financial review Any comments adjunct to financial review Audit committee report Auditors’ opinion Internal audit comments and reports Outer cover page Inner cover page Any comments not covered by previous sections

Appendix 5.4 Pilot case study interview framework and results Company name: Date of interview: Person interviewed: Interviewed by: Company background Internal capital 1 2 3 4 5 6 7

What is your financial management system? What types of database do you use? How do you manage your database? How do you manage your projects? What are your key performance indicators? How do you improve the efficiency of the plant and processes? What organisational culture have you adopted to share knowledge?

External capital 1 2

In what markets do you operate? How do you analyse your customers?

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3 4

How often do you carry out a customer satisfaction survey? What are your strengths in relation to the market?

Human capital 1 2 3 4 5 6 7 8 9 10 11 12

How do you attract and retain staff? What is your employee share and option scheme? How do you recognise the skills and abilities of your employees? What methods do you use to recruit staff? Do you have a graduate recruitment program? What training programs do you offer employees? What type of career development do you have for your employees? What is your induction program? What qualities and attributes do you seek in your employees? How do you carry out your performance reviews? Do you carry out an employee opinion survey? What do you report on Human resources?

ZZ limited representing the finance, banking and insurance sector ZZ is the substitute for the real name

BACKGROUND

ZZ is a merchant bank. Its major business activities are corporate finance and underwriting acquisitions and mergers. ZZ is the first firm to issue a debenture in the Colombo stock market and is the first to carry out a leverage buyout. PILOT CASE STUDY INTERVIEW FRAMEWORK AND RESULTS

ZZ holds the premier position in share issues and money brokering. Since 1994, the stock market has been underperforming, and it has changed its focus from fee-based activities to fund-based activities. Its fund-based activities include leasing, trading paper, factoring and bridging loans. At present, leasing is the major revenue earner for the firm. However, it cannot raise deposits like a retail bank and has to borrow funds from retail banks to operate its fund-based business while competing with retail banks on leasing business. Therefore, the leasing customers at ZZ are the ones at the high end of risk. ZZ does not have branches outside Colombo but does have ‘Windows’ that are one-person-operated outlets. INTERNAL CAPITAL

The firm uses Microsoft 95 office software, and each executive has an internet-based e-mail address. Personal computers are Pentium-based connected to

Research method

91

an NT-based server. The company has Lotus Notes, and different sections of the database can be accessed using passwords. It also has a website. The chief executive officer (CEO) believes that the firm should become more engaged in information technology in order to succeed in the future. Employee information is maintained in lotus 123 but is not a comprehensive database. There is no formal project management system, but the firm believes its ad hoc approach has worked well in the past. There are no key performance indicators. EXTERNAL CAPITAL

The firm’s major market is Sri Lanka, and recently, it has entered into Bangladesh. ZZ services the riskier segment in the leasing activities due to its higher cost of funds. Its profit centres carry out customer analysis but do not have a shared database between themselves. The firm has not carried out a customer satisfaction survey. It intends to introduce the balance scorecard in the future, and a customer satisfaction survey would be a component in that implementation. HUMAN CAPITAL

Most of the executive staff are either university graduates or professional accountants. The money brokers are the only non-graduates but have special skills. ZZ pays its employees higher than the industry average. The firm maintains an image where young employees like to work because of its pioneering activities. The employee share scheme operates through a trust. Shares are distributed if the value of shares goes above 80 per cent of the previous year’s market value. The firm recognises the skills and abilities of employees publicly on an ad hoc basis. The firm intends to introduce an incentive scheme for employees based on the economic value added (EVA). The entry executives should hold at least a degree with a class grade from a recognised university. During the interview process, they sit for a 3-hour examination and face 2 interviews. There is no graduate recruitment program in place due to very low turnover and market stagnation. At present, the firm does not have a human resource manager, and a senior executive is acting in that capacity. Internal workshops are held regularly to update employees with current market news. The senior management is sent overseas regularly for training and exposure. The firm is in a market where products change rapidly. Therefore, they look for employees who can easily adapt for recruitment. Candidates undergo an IQ test at the interview to evaluate their aptitude and analytical ability. Integrity, eye for details and ability to meet deadlines are two other sought-after attributes. An employee is given total responsibility to conduct himself or herself. They do not sign any attendance register, they are not required to adhere to stipulated lunch breaks and they can leave work anytime at their discretion. The firm is

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weak in performance reviews and has no proper evaluation system. This is partly because the firm’s revenue-based activities are project based, and benefits accruing from projects are long term. An ad hoc evaluation system has been introduced, where a senior manager determines the performance of the junior managers. However, the management takes the responsibility for any lacklustre performances of their employees. The firm has not carried out any employee opinion survey. The CEO has an open-door policy, and the staff is allowed to bypass lines of authority. At present, no HumC indicators are reported to the management.

Appendix 5.5 Final case study semi-structured interview framework Internal capital 1 2 3 4 5 6 7

How do you manage your intellectual property? How do you manage your management philosophy? How do you manage your corporate culture? How do you manage your management methods and processes? How do you manage information and knowledge? How versatile are your accounting and other information systems? How do you manage your financial relations with investors, banks and other financiers?

External capital 1 2 3 4 5 6 7

How do you manage your brands? How do you manage your market share? How do you manage your customer satisfaction? How do you manage your distribution channels and branches? How do you manage your business collaborations, licensing agreements and franchising agreements? How do you manage quality standards? How do you manage your unique market position?

Human capital 1 How do you manage the educational and vocational qualifications of employees? 2 How do you manage the know-how of employees? 3 How do you manage employees involving in the community activities? 4 How do you manage the career development of employees? 5 How do you manage the creativity and entrepreneurial qualities (risk-taking, proactive) of employees? 6 How do you manage training your employees?

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93

7 How do you manage providing equal opportunities for employees based on merit rather than on race, gender and religion? 8 How do you manage employing disabled people? 9 How do you manage the safety of employees at work? 10 How do you manage your relationship with the employee unions? 11 How do you manage the headcount in your firm? 12 How do you manage thanking employees? 13 How do you manage featuring employees in magazines, annual reports and other publications? 14 How do you manage rewarding employees non-monetarily? 15 How do you manage making employees owners of the firm (such as employee share and share option schemes)? 16 What is the place for professionals in your firm? 17 What is the place for seniority of employees? 18 How do you manage the age of employees?

6

Hypothesis development and data interpretation

6.1 Introduction This section describes the two hypotheses tested in this study. Section 6.2 outlines how the two hypotheses, which test the Political Economy of Accounting (PEA) theory, were constructed in this book. Section 6.3 discusses how the data was interpreted in relation to each hypothesis to arrive at results stated in the next chapter. Section 6.4 provides a summary of this chapter.

6.2 Hypothesis development The two hypotheses were based upon previous research findings in this field, as outlined in Chapter 2, and the PEA theory outlined in the previous chapter. The first hypothesis concerns intellectual capital reporting (ICR) differences between industry groups, and the second hypothesis concerns the ICR differences between firms in Sri Lanka and firms located in other nations. 6.2.1 Hypothesis one: ICR difference between industry groups Globalisation and the relatively free flow of capital between countries have increased shareholder interest in investing in developing economies, such as Sri Lanka, in order to maximise their accumulation of capital (see Section 4.2.1). Firms listed in the Colombo stock exchange (CSE) are vulnerable to flows of international capital migration as the CSE is heavily dependent on foreign investment. Sri Lankan listed firms also have to compete for capital from local investors, since the government debt instruments tend to offer attractive rates of return that has contributed to a flight of capital from the CSE to such instruments (see Section 4.2:1). The Government of Sri Lanka offers several incentives to attract both foreign and local investor capital. First, the government offers both foreign and local investors reduced corporate taxation rates or exemptions from direct and indirect taxation to direct the economy towards a knowledge-based economy (see Section 4.3.2). Second, the government also heavily invests in maintaining a skilled labour force and a high literacy level, which will further assist investors

Hypothesis development and data interpretation

95

in maximising their return on capital (see Section 4.3.3). Third, recent amendments to the Intellectual Property Act 1979, which were implemented to further drive Sri Lanka towards a knowledge-based economy, have strengthened the creation and enforcement of property rights, which is a crucial factor in attracting foreign investors (see Section 4.3.4). Fourth, the decided reluctance of accounting regulators and company law to implement regulations has helped firms to fictionalise their intellectual capital (IC) to stakeholders, thereby creating more capital for investors (see Section 4.2.3). Several factors contribute to shaping ICR. As outlined in the literature review, the inadequate traditional financial reporting system (see Section 2.2), alternative methods for ICR (see Section 2.3) and choices in ICR methods in an unregulated reporting environment (see Section 2.5) enable firms to proactively set their agenda and mediate and mystify selective stakeholders. The ability of a firm to proactively set its agenda and mystify selective stakeholders is accentuated by the knowledge-based economy that facilitates the propagation of thoughts, value and power. The listed firms attempt to convince shareholders that they are in the best position to maximise their return on capital. Larger firms are in a position to be more convincing since they have already been successful in attracting large amounts of shareholder capital. Since accounting standards and company law do not mandate ICR, firms can proactively and selectively report their IC in their annual reports to retain and attract more capital. In order to be more convincing towards their shareholders, firms can follow two major practices. First, they can use annual reports that are the main external reporting tool used by firms to inform their shareholders and other potential shareholders of the activities they engage in, which increase the value of their shareholder capital (see Section 5.2.1). Second, firms carefully orchestrate the reporting of IC in annual reports to mediate the agenda of debate in order to minimise conflicts arising between them and the government and the labour force. Such orchestration of reporting can be identified by comparing a firm’s frequency of reporting in their annual reports with their case study findings. Annual reports reveal IC elements that have been reported externally by firms, and case study interviews indicate IC elements that have actually been managed within the firms. Previous literature has also demonstrated that there are differences between industry groups in their choice and use of reporting units in their annual reports (see Section 5.2.2 and 5.2.3). The annual report enables industry groups to communicate their intended messages to win the support of their constituents, such as the government and the community (see Section 5.2.1). The reporting location in the annual report can also have different reporting impacts, and industry groups can report IC in different locations in their annual reports. This is because the issues and agendas of concern to various stakeholders differ from one industry group to another, and the relative importance of the issue can be communicated to the stakeholders by the location of information within the annual report (see Section 5.2.4). Further, it is also possible that firms mediate their agenda of debate by

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fictionalising their IC in order to minimise social conflict. The firms are expected to show a positive relationship between the extent of the fictionalisation of IC and the number of shareholders and their level of dependency on those shareholders for capital. This should be evident by comparing what was stated in the annual reports and what was found in the case study interviews. The anomalies can be as follows: (1) not reported when they are managed; (2) not managed when they are reported; (3) less reported when they are well managed and (4) less managed when they are well reported. The above four anomalies can give rise to differential reporting (i.e. vertically) between IC categories and IC elements. The firms in the sample are dispersed among 12 industry sectors. Table 6.1 shows how the 12 CSE industry sectors are collapsed into 4 groups to bring analytical rigour. The industry sectors are collapsed based on the number of shareholders in an industry group evident from previous research, which is reviewed below. The four groups are as follows: (1) The ‘banking, finance & insurance’ sector, the ‘manufacturing’ sector and the ‘diversified’ sector have the most number of shareholders. (2) The ‘trading’ sector and the ‘beverage, food, & tobacco’ sector have the second most number of shareholders. (3) The ‘construction & engineering’ sector and the ‘hotel & travel’ sector have the third most number of shareholders. (4) The ‘land & property’ sector and the ‘chemical and pharmaceuticals’ sector have the least number of shareholders (see Appendix 5.2) (SL handbook of listed companies 1998, 1999, 2000). Previous research found that the amount of shareholders’ investment in a firm is positively associated with the level of voluntary disclosure. Chau and Gray (2002, pp. 247–258) pointed out that only a small group of shareholders own a large portion of the shares of listed firms in Hong Kong and Singapore. In contrast, in more developed nations, a large group of shareholders own a relatively large portion of shares of listed firms. The findings of their study indicated that firms controlled by a smaller proportion of shareholders have little motivation to disclose information in excess of mandatory requirements because the demand for public disclosure is relatively weak in comparison with firms that have a greater number of shareholders. Table 6.1 Industry group classification based on the number of shareholders Category

Group

Industry group

Number of shareholders

Most shareholders

A

3,689

Second most shareholders Third most shareholders Least shareholders

B

Banking, Finance and Insurance; Manufacturing; Diversified. Trading; Beverage, Food and Tobacco Construction and Engineering; Hotel and Travel Land & Property; Chemical and Pharmaceuticals

Source: CSE 2000.

C D

3,579 2,598 2,388

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97

In a study on corporate social reporting (CSR), Adams et al. (1998, p. 17) argued that firms in the UK disclose more voluntary information than in many other countries because they are more heavily dependent on private individuals as a significant source of capital, and firms generally have a wide, or more dispersed, shared ownership. (Adams et al.1998, p. 17). The conceptual framework of accounting also argues that users, such as investors, depend more on general-purpose reports (such as annual reports) to evaluate their resource allocation. A firm’s level of dependence on such reports to evaluate their resource allocation decisions increases with the increasing spread of ownership and the degree of separation between the management and these owners (Accounting Handbook 2002, pp. 6–7). As previous empirical and normative literature argues, the quantity of voluntary disclosures, such as IC disclosures, is influenced by the number of shareholders in the firm. This is because such firms need to convince a greater number of shareholders to attract capital. This justifies the collapsing of industry groups based on the number of shareholders. Based on the above discussion, the first hypothesis can be stated as follows: Hypothesis one: There are ICR differences (of IC categories and IC elements) between the four industry groups based on the number of shareholders. 6.2.2 Hypothesis two: ICR differences between Sri Lanka and other nations Each government defines its relation to capital and social differently due to its own cultural, political and economic context (see Section 3.5). The laws and regulations that govern each state influence the extent of the free flow of capital and labour. These differences should make firms from different nation states report their IC categories and elements differently from one another, as they all seek to mediate their unique agenda of debate to maximise their reproduction of capital. Such differences in reporting are evident from previous research as outlined below. This differential reporting between countries was reported in the CSR literature by Adams et al. (1998). The authors found that there were significant differences in both the type and the frequency of disclosures made by firms from different countries. They also noted that these differences could not be explained by differences either in the size or in the industry composition of the sample. In their research, they found that German and UK firms disclosed relatively large amounts of information. However, the authors believed that the motivations behind their disclosures were different. The high level of disclosure by German firms was due to employee involvement in the management of the firm and to satisfy employee representatives in unions. The UK firms, on the other hand, disclosed more information to satisfy the needs of the trade union movement and the everexpanding ethical investment movement. Other authors cite another reason for the greater amount of disclosure by UK firms as to improve the corporate image of the

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Hypothesis development and data interpretation

firm since they use annual reports as a means of advertising (Gray and Roberts 1989, pp. 116–139). Adams et al. (1989, p. 17) concur with this conclusion. Guthrie and Parker (1990, pp. 159–173) found similar results in relation to CSR in analysing the annual reports of the 50 largest listed firms in Australia, the United Kingdom and the United States. Their results indicated significant differences between the three countries with respect to their social disclosure levels and social content themes. They further concluded that a political economy perspective offers a critical approach, since it attempts to understand the social and political determinants attributed to social disclosures and recognises non-neutrality of annual reports. A study on voluntary environmental and social accounting disclosure practices of firms located in a seven-nation Asia-pacific region indicated that across the seven nations, the amount of disclosure varied significantly (Williams 1999). The study concluded that political and civil systems were significant explanatory variables. The findings also suggested that firms provide such details to protect their self-interests in the face of social and political pressures, and they argued that a political economy model should provide a suitable theoretical perspective (Williams 1999). The differential reporting, of similar-sized firms, between countries has also been demonstrated in relation to human capital (HumC) (Subbarao and Zhegal 1997). Subbarao and Zhegal found that countries (i.e. the United States, Canada, Germany, the United Kingdom, Japan and South Korea) differed in their frequency of disclosure of the number of people employed, employee compensation and value-added information. The differential reporting of IC can also be found when country-specific ICR studies are compared to Australian (Guthrie et al. 1999) and Irish (Brennan 2001) studies of top firms selected by market capitalisation. Although the three studies (Subbarao and Zhegal 1997; Guthire et al. 1999; Brennan 2001) have methodological differences, they also cite country-specific factors to explain disclosures (see Section 2.5.3). Based on the above argument, second hypothesis is stated as follows: Hypothesis two: There are ICR differences (of IC categories and IC elements) between firms in Sri Lanka and firms in other nations.

6.3 Data interpretation 6.3.1 Common factors The following three factors were common to the data interpretation of the two hypotheses. They are (1) strengthening the analytical rigour of data; (2) validating data using statistical tests and (3) including case study interviews for data interpretation. These three factors are outlined below. The first common factor to the data interpretation of the two hypotheses was to present a more analytical coding framework. Since items in the coding

Hypothesis development and data interpretation

99

framework are descriptive, the IC items were clustered into 17 IC elements falling within the 3 IC categories to bring analytical rigour to the data interpretation. The results are analysed by IC categories and IC elements in the two hypotheses. Further, clustering of IC items into IC elements enables us to highlight reporting differences that may not be apparent at isolated IC item level, enhancing the ability of this book to comprehend the ICR differences. Table 6.2 outlines the method of grouping IC into elements. The IC items in the HumC category are clustered into seven elements: (1) training and development, (2) entrepreneurial skills, (3) equity issues, (4) employee safety, (5) employee relations, (6) employee welfare and (7) employee-related measurements. The training and development sub-category comprises know-how, vocational qualifications, career development and training programs. The equity issues sub-category Table 6.2 ICR elements IC category HumC

1 2 3

IntC

IC items

Training and development Entrepreneurial skills Equity issues

Know-how, vocational qualifications, career development and training programmes Entrepreneurial skills Equity issues relating to race, gender, religion and disability issues Employee safety Union activity, employee thanked, employee featured and employee involvement with the community Employee and executive compensation plans, employee benefits and employee share and option ownership plans Value-added statements, employee numbers, professional experience, education levels, expert seniority and age of employees

4 5

Employee safety Employee relations

6

Employee welfare

7

Employee related measurements

8 9 10

Management and technological processes Information systems and networking systems Philosophy and culture

12

Processes Systems Philosophy and culture Intellectual property Financial relations

13

Brand building

14

Corporate image building Business partnering Distribution channels Market share

Brands, customer satisfaction, and quality standards Company name and favourable contracts

11

ExtC

IC element

15 16 17

Intellectual property Financial relations

Business collaboration, licensing agreements and franchising agreements Distribution channels Market share

100

Hypothesis development and data interpretation

comprises equity issues relating to race, gender, religion and disability issues. The employee relations sub-category comprises union activity, employee thanked, employee featured, and employee involvement with the community. The employee welfare sub-category comprises employee and executive compensation plans, employee benefits, and employee share and option ownership plans. The employee-related measurements sub-category comprises value-added statements, employee numbers, professional experience, education levels, expert seniority and age of employees (Subbarao and Zeghal 1997). The internal capital (IntC) category is clustered into five IC elements: (1) processes, (2) systems, (3) philosophy and culture; (4) intellectual property and (5) financial relations. The processes sub-category includes both management and technological processes. The systems sub-category includes both information systems and networking systems. The philosophy and culture sub-category includes philosophy and culture. The intellectual property sub-category includes patents, copyrights and trademarks. Financial relations sub-category includes favourable and/or unfavourable financial relations with other institutions. The external capital (ExtC) category is clustered into five IC elements: (1) brand building; (2) corporate image building; (3) business partnering; (4) distribution channels and (5) market share. The brand building sub-category includes brands, customer satisfaction, quality standards and IC items. The corporate image building sub-category includes company name and favourable contracts. The business partnering sub-category includes business collaboration, licensing agreements and franchising agreements. The distribution channel subcategory refers to distribution channels held by the firm. The market share subcategory refers to market share held by the firm. The second common factor to the data interpretation of the two hypotheses was to avoid using parametric tests for data analysis. Instead of using parametric statistical tests, this book resorts to a distribution-free (or non-parametric) chisquare test at 5 per cent probability, and it is assumed that the ICR frequency (i.e. population) is uniformly distributed between IC categories. The study chose a non-parametric test for the following four reasons (Plott 1981, pp. 117–137). First, scholars believe that the models applied to complex political, social and economic processes inadequately and inaccurately represent the actual situation. However, when the model is applied to simple situations, with a reasonable accuracy of results, it can blindly drive researchers to accept the model thinking the model would maintain the same level of accuracy when applied to complex problems. Unless such models have internal logical inconsistencies, critics find it virtually impossible to refute them. Second, experiments designed to reject a theory can constitute an effort to speed up the elimination process. If the model fails to work, the model is rejected and the experiment has been useful. Third, parametric experimental methods can discover that slight institutional changes can cause dramatic changes in the performance of the processes. However, the researchers carrying out research using parametric experimental methods frequently cannot explain the exact reasons for those influences. Fourth, only replicating and modifying the experimental design can resolve the hypotheses

Hypothesis development and data interpretation

101

in a parametric test. Further, resolving controversial claims for large-scale social experiments using parametric tests may be expensive. Instead of applying the chi-square test to the IC elements, this book ranks the IC elements based on ICR frequency for two reasons. First, although the chisquare test discloses whether the sample population distribution is significant or not, it does not disclose which data items (i.e. IC elements) in the population are significant (McNeil 2000, p. 237). Second, each IC category has more than three IC sub-categories and ranking each IC element based on its ICR frequency enables us to analyse it with clarity. The reporting frequencies of IC elements were analysed and classified as follows: most reported, second most reported, third most reported and least reported. The third common factor to the data interpretation of the two hypotheses was to use case study interview data. The case study interviews were carried out to represent firms from different industry sectors and industry groups to offer an insight into how industry groups and large firms manage their IC. Previous research has also pointed out that exclusive focus on annual reports is likely to result in an incomplete picture of voluntary reporting practices. Case study interviews enable us to identify the anomalies between reporting and managing of IC (see Section 5.8). The findings from the case studies were incorporated into the discussion on the empirical results obtained from the content analysis of the annual reports. 6.3.2 Hypothesis one: specific factors Since the number of industries in a given industry group is variable, the study computed the average ICR frequency of each industry group. This enables us to compare the results between industry groups. Annual reporting data was then analysed by the three IC categories and their elements to bring analytical rigour to data interpretation (see Section 6.3.1: measurement and data capture). Table 6.3 outlines the basis of interpreting the empirical results of the annual reports between industry groups, which is discussed in the next chapter. The chisquare test is employed to compare the ICR differences in each IC category between industry groups. The ranking of ICR frequency is employed to compare ICR differences between IC elements (see Section 6.3.1). IC elements are ranked and analysed in two separate ways. First, they are ranked to obtain a broad understanding of the frequency distribution of the IC Table 6.3 Basis of interpretation of hypothesis one Results

Basis for interpretation

ICR categories between industry groups (see section 7.2.1) ICR elements between industry groups (see section 7.2.2)

Chi-square at 5% probability Ranking as most, second most, third most and least reported

102

Hypothesis development and data interpretation

Table 6.4 Research objectives and outcomes Objectives

Outcomes

1 Outline the hypothesis development

1 The hypotheses were built based upon the discussion outlined in previous chapters, in particular, the literature review and the PEA theory. The first hypothesis is whether there is likely to be ICR differences between different industries. The second hypothesis concerns the ICR differences between Sri Lanka and other nations (see Section 6.2) 2 Identified factors common to the two hypotheses (clustering IC items into elements, and means testing results) and the factors specific to each hypothesis (see Section 6.3)

2 Describe data interpretation in hypotheses developed

elements. Second, they are ranked by each IC category (i.e. HumC, ExtC and IntC) to obtain a deeper understanding of the frequency trends of each of these IC categories. In summary, the study computed the average ICR frequency of each industry group for comparison. This book compared and interpreted the industry group differences in IC and IC categories, IC elements, reporting units and reporting location using chi-square test. It further compared and interpreted IC sub-category differences between industry groups by ranking the average ICR frequency as most reported, second most reported, third most reported and least reported. The next sub-section outlines the factors specific to the interpretation of hypothesis two. 6.3.3 Hypothesis two: specific factors This book interpreted the differences in ICR between firms in Sri Lanka and firms in other nations. This was done by ascertaining the reporting frequency of each IC element in each country and then comparing the results between countries. Based on the reporting frequency of each IC element, the elements were ranked from the most reported to the least reported for each country. These rankings of IC elements were then compared to determine differences in ICR of elements between countries. This section outlined the basis of the data interpretation in relation to each hypothesis. It identified the factors common to both hypotheses and the factors specific to each hypothesis. The next section offers a summary of this chapter and outlines this chapter’s objectives and the outcome of each objective.

6.4 Chapter summary Table 6.4 provides a summary of the research objectives of this chapter and the outcome of these objectives. The next chapter will seek to outline the results of the hypotheses analysis and discussion. It will discuss the results of Hypotheses one and two. These results are discussed in two dimensions, namely IC categories and IC elements.

7

Results of hypotheses analysis and discussion

7.1 Introduction This chapter outlines the findings of the two hypotheses constructed in Chapter 6. Section 7.2 outlines the findings of Hypothesis one that examines intellectual capital reporting (ICR) differences between industry groups. The findings are reported under three headings: Section 7.2.1 discusses how the industry groups differed in reporting intellectual capital (IC) categories; Section 7.2.2 discusses how the industry groups differed in reporting IC elements; Section 7.2.3 discusses how the industry groups differed in reporting and managing IC elements. The case study interview findings demonstrated how IC elements are managed internally, and the annual reports demonstrated how IC elements are reported externally. Section 7.3 outlines the findings of Hypothesis two that examines ICR differences between different countries influenced by their own political, social and economic framework. Section 7.4 provides a summary of this chapter.

7.2 Results of Hypothesis one As established in Section 6.2.1, differences are expected to be found in the reporting of IC categories and IC elements between the four industry groups. This section outlines the ICR frequency findings between industry groups, using the chi-square test, of IC categories and of IC elements. 7.2.1 Differences in reporting of IC categories This sub-section outlines the ICR frequency results of IC categories and IC elements for the four industry groups using the chi-square test As shown in Chart 7.1, the results of the chi-square test show that the ICR frequency between industry groups is not uniformly distributed either in 1998/1999 (χ2 98.28 > 7.815, df = 3, p < 0.05) or in 1999/2000 (χ2 157.44 > 7.815, df = 3, p < 0.05). These findings will be discussed in Chapter 8. The results of each IC category reveal that human capital (HumC) (see Appendix 7.1) was not equally distributed between industry groups either in

Average ICR frequency

104

120 100 80 60 40 20 0

Results of hypotheses analysis and discussion

1998/1999 frequency 1999/2000 frequency

Most shareholder More shareholders Less shareholders Least shareholders Industry group

Chart 7.1 Average ICR frequency of industry groups.

1998/1999 (χ2 41.91 > 7.815, df = 3, p < 0.05) or in 1999/2000 (χ2 98.56 > 7.815, df = 3, p < 0.05). External capital (ExtC) (see Appendix 7.2) was not equally distributed between industry groups either in 1998/1999 (χ2 42.42 > 7.815, df = 3, p < 0.05) or in 1999/2000 (χ2 47.60 > 7.815, df = 3, p < 0.05). Internal capital (IntC) reporting averages (see Appendix 7.3) were not equally distributed between the four industry groups either in 1998/1999 (χ2 22.69 > 7.815, df = 3, p < 0.05) or in 1999/2000 (χ2 24.49 > 7.815, df = 3, p < 0.05). 7.2.2 Differences in reporting of IC elements The industry groups also differed in relation to ICR between IC elements. The industry group with the most shareholders reported most about employee relations. The industry group with the second most shareholders reported most about brand building. The industry group with the third most shareholders reported most about corporate image, and the industry group with the least shareholders reported most about employee welfare as shown in Table 7.1. This book also examined in detail how industry groups report IC elements within each IC category. In the HumC category, the industry groups with the most and second most shareholders reported most about employee relations. The industry group with the third most shareholders reported most about employee measurement, and the industry group with the least shareholders reported most about employee welfare. All industry groups reported least about equity-related issues and workplace safety (see Appendix 7.4). In the ExtC category, all industry groups reported most about brand building except the industry group with third most shareholders, which reported most about their corporate image building. All industry groups reported least about their market share (see Appendix 7.5). In the IntC category, all industry groups reported most about their processes followed by systems. Also, they all reported least about financial relations and intellectual property (see Appendix 7.6).

Results of hypotheses analysis and discussion

105

Table 7.1 ICR elements between industry groups Industry group

Most reported

Second most reported

Third most reported

Least reported

Most shareholders Second most shareholders Third most shareholders

Employee relations Brand building Corporate image

Brand building

Processes

Processes

Corporate image Brand building

Least shareholders

Employee welfare

Equity issues, safety Safety, equity issues Systems; market share; distribution channels; equity Nil

Employee measurement Brand building

Philosophy and culture; intellectual property; market share; business partnering

7.2.3 Differences between managing and reporting IC elements This study interviewed 11 firms in total. The study interviewed four firms to represent the industry group with the ‘most shareholders’ from the banking sub-sector (see Appendix 7.7), the finance sub-sector (see Appendix 7.8), the diversified sector (see Appendix 7.9) and the manufacturing sector (see Appendix 7.10). The study interviewed four firms to represent the industry group with the ‘second most shareholders’ from the beverage sub-sector (see Appendix 7.11), the food sub-sector (see Appendix 7.12), the tobacco sub-sector (see Appendix 7.13) and the trading sector (see Appendix 7.14). The study interviewed three firms to represent the industry group with the ‘third most shareholders’ from the hotel and travel sector (see Appendix 7.15) and the construction and engineering sector (see Appendix 7.16). The study interviewed one firm to represent the industry group with the least shareholders from the property sub-sector (see Appendix 7.17). The interview results indicated that the disclosures in the annual reports differed in several instances when compared to the IC elements managed by firms. Table 7.2 indicates the IC elements that were managed but were not reported in the annual reports. Most firms managed their intellectual property (Element 11 from Table 6.2) but never reported it in their annual reports. This was common to all industry groups except the industry group with the least shareholders. The case study interviews also revealed that all industry groups managed their financial relations but did not report it within the annual reports. However, the case study interviews also revealed that some IC elements were reported but were not managed within the firm. Table 7.3 lists the IC elements

106

Results of hypotheses analysis and discussion

Table 7.2 IC elements managed but not reported Industry group

Most frequent

Second most frequent

Third most frequent

Least frequent

Most shareholders

Intellectual property; equity Intellectual property

Safety

Financial relations; philosophy and culture Market share; philosophy and culture

Nil

Second most shareholders

Third most shareholders Least shareholders

Intellectual property; Safety Philosophy and culture; Employee relations

Financial relations; equity; training and development; entrepreneurial skills financial relations Nil

Nil

Nil

Nil

Nil

Nil

that were not managed by firms but were reported in the annual reports. The type of IC elements reported but not managed varied considerably between the industry groups. However, employee welfare was common to all industry groups except the industry groups with most shareholders. In summary, ICR was not uniformly distributed (as per chi-square at 5 per cent probability) between the four industry groups in each year of the study. The industry groups differed in their ICR of IC elements in the following manner. The industry group with the most shareholders reported most about employee relations; the industry group with the second most shareholders reported most about brand building; the industry group with the third most shareholders

Table 7.3 IC elements reported but not managed Industry group

Most frequent

Second most frequent

Third most frequent

Least frequent

Most shareholders Second most shareholders Third most shareholders

Employee relations

Brand building

Nil

Nil

Employee welfare

Nil

Nil

Nil

Brand building; corporate image building; business partnering; employee welfare Employee welfare

Nil

Nil

Nil

Nil

Nil

Nil

Least shareholders

Results of hypotheses analysis and discussion

107

reported most about corporate image and the industry group with the least shareholders reported most about employee welfare. ExtC, HumC and IntC were not uniformly distributed (as per chi-square at 5 per cent probability) between the four industry groups in each year of the study. In the ExtC category, industry groups differed in their most reported IC subcategory, but all industry groups reported least about their market share. In the HumC category, the industry groups differed in their most reported IC subcategory, but all industry groups reported least about equity-related issues and workplace safety. In the IntC category, all industry groups reported most about processes followed by systems. They reported little about their intellectual property and least about financial relations.

7.3 Results of Hypothesis two As hypothesised in Section 6.2.2, it is expected that there will be ICR differences (of IC categories and IC elements) between firms in Sri Lanka and firms in other nations. This section outlines the results of ICR frequency between firms in Sri Lanka and firms in other nations. ExtC was reported more than any other IC category for firms both in Australia (40 per cent) and in Sri Lanka (44 per cent). Australian firms reported more IC Table 7.4 Research objectives and outcomes Objectives

Outcomes

1 Outline results 1 The ICR frequency between industry groups differed in relation of ICR frequency to overall IC elements. Industry group with ‘most shareholders’, in IC categories ‘second most shareholders’, ‘third most shareholders’ and ‘least and elements shareholders’ reported ICR in descending order. The industry between industry groups also differed between IC elements in their overall IC groups in reporting frequency. The industry group with the most Hypothesis one shareholders reported most about employee relations. The industry group with the second most shareholders reported most about brand building. The industry group with the third most shareholders reported most about corporate image, and the industry group with the least shareholders reported most about employee welfare. Case study interviews revealed some IC elements are reported when they were not managed and vice versa (see Section 7.2). In relation to IC elements reported within each IC category, industry groups showed a similarity in IC reporting frequency 2 Outline results 2 ICR frequency differed in some respects between firms in Sri of ICR frequency Lanka and other nations. They differed in relation to both IC differences category and IC element reporting frequency. Technology and between firms in entrepreneurial skills were the most reported in Australia while in Sri Lanka and Sri Lanka they were moderately reported (see Section 7.3) other nations in Hypothesis two

108

Results of hypotheses analysis and discussion

on business collaborations compared to their Sri Lankan counterparts. Australian firms reported most about their entrepreneurial spirits whereas firms in Sri Lanka reported most about brand building. In relation to IntC, firms in Australia reported most on technology and intellectual property whereas firms in Sri Lanka reported most about processes. The study also found that industry groups with a greater number of shareholders use more qualitative reporting units for ICR. The differential reporting in narratives, charts, tables and photographs by industry groups indicate that industry groups with a greater number of shareholders seek to achieve a greater impact of their constructed views. Further, this research also found that ICR frequency between different sections of the annual report (i.e. the ‘Directors’’, ‘Chairman’s’, ‘Operational’ and ‘Sundry’ sections) was not uniformly distributed between the four industry groups when tested using chi-square at 5 per cent probability.

7.4 Chapter summary Table 7.4 provides a summary of the research objectives of this chapter and the outcomes of these objectives. The next chapter will interpret the results outlined in this chapter using the political economy of accounting (PEA) theory. In relation to Hypothesis one, it will examine the ICR differences between the industry groups. In relation to two, it will examine the ICR differences between the firms in the Sri Lankan sample and firms from other nations. Appendix 7.1 Human capital reporting averages between industry groups Industry group

1998/1999 frequency

Most shareholders Second most shareholders Third most shareholders Least shareholders χ2 7.815, df = 3, p < 0.05 Equally distributed?

29.3 11.5 5.5 0 41.91 No

1999/2000 frequency 58.3 8 12.5 2 98.56 No

Appendix 7.2 External capital reporting averages between industry groups Industry group

1998/1999 frequency

1999/2000 frequency

Most shareholders Second most shareholders Third most shareholders Least shareholders χ2 7.815, df = 3, p < 0.05 Equally distributed?

28.3 26.5 5 0 42.42 No

46.0 25 14.5 2 47.60 No

Results of hypotheses analysis and discussion

109

Appendix 7.3 Internal capital reporting averages between industry groups Industry group

1998/1999 frequency

1999/2000 frequency

Most shareholders Second most shareholders Third most shareholders Least shareholders χ2 7.815, df = 3, p < 0.05 Equally distributed?

19.0 11

20.7 11.5

3

3

1.5 22.69 No

2 24.49 No

Appendix 7.4 Human capital reporting elements between industry groups Industry group

Most reported

Second most reported

Third most reported

Least reported

Most shareholders Second most shareholders Third most shareholders

Relations

Measurements

Welfare

Equity

Relations

Measurements

Safety

Measurements

Relations

Welfare

Nil

Training and development Welfare and Entrepreneurial spirits Nil

Least shareholders

Equity Nil

Appendix 7. 5 External capital reporting elements between industry groups Industry group

Most reported

Second most reported

Third most reported

Least reported

Most shareholders Second most shareholders Third most shareholders Least shareholders

Brand building Brand building Corporate image Brand building

Corporate image Corporate image Brand building

Business partnering Distribution channels Business partnering Market share

Market share

Business partnering

Market share Market share Nil

110

Results of hypotheses analysis and discussion

Appendix 7.6 Internal capital reporting elements between industry groups Industry group

Most reported

Second most reported

Third most reported

Least reported

Most shareholders Second most shareholders

Processes

Systems

Processes

Philosophy and culture

Philosophy and culture Systems

Processes

Systems

Nil

Intellectual property Financial relations (not reported) Nil

Nil

Nil

Third most shareholders Least shareholders

Intellectual Nil property; philosophy and culture

Appendix 7.7 Most shareholders group: bank limited – case study findings IntC Intellectual property Patents Copyrights Trademarks Philosophy and culture Management philosophy Corporate culture

Processes Management processes

Systems Financial relations

IC activity • No • No • Numerous products •

Provide technologically advanced solutions • Teamwork, trying to do things effectively, address immediate superior by first name, very friendly, open offices, very ethical dress code for males and females

• Annual planning sessions, discuss and review targets set with heads of departments • Task forces to oversee credit, IT, productivity, human resources, and marketing; meet with managing director once a fortnight • All senior managers meet to discuss financial accounts once a month • Manual of operations of the bank • Uniform procedures for credit evaluation • Refrain from punitive action against misconduct of employees, instead verbally ask employees to leave • Best performers are asked to head various projects • Not outlined • No continued

Results of hypotheses analysis and discussion

111

Appendix 7.7 (continued) ExtC Brand building Brands Customer satisfaction

Quality standards Corporate image building Company names

Business partnering Business collaborations

Distribution channels

Market share

IC activity • Majority of bank’s products are branded, hardly any interference from others on brands • Customer service surveys done once or twice a year • Customers are free to make suggestions or complaints to management at any level • Continuous improvements through benchmarks set • Ingenious bank with a modern outlook • First to provide electronic banking; realtime online banking, telephone banking, comprehensive internet package, first virtual-banking solution and easy banking centers • • • • • • • • • • • • • •

Mobile banking solution with Dialog GSM Celltel Refresher telephone card Mobitel call back E-channelling Cyber shopping Cash back with Food City supermarket Open, on average, 5 fully functional branches a year Open offside automated teller machines Open 10 savings units a year 10–20% market share On every product, there has been a growth Supports it with promotion through budget allocation Adding an average of 5 branches a year Gained through service differentiation

HumC

IC activity

Employee relations Employee involvement in the community

• Part of the vision • Grants loans for entrepreneurial development • Allocates 20% of the budget to protect environment • Predetermined percentage of the ‘sampath’ electronic teller card goes to protect the environment • Links with universities and government departments to preserve environment continued

112

Results of hypotheses analysis and discussion

Appendix 7.7 (continued) HumC

Union activity

Employee thanked

Employee featured Training and development Know-how

Education

IC activity • Employees mostly initiate suggestions for involvement in the community • One of the company-based unions in Sri Lanka • All except top 4 employees are unionised • Progressive union directed by senior officers in the bank • Maintains a very good relationship with the management • Outstanding work commended at monthly branch meetings • Heads of department commend any detection of fraudulent action • Employees who make suggestions which are implemented by the bank are commended by the top management and management committees • Chairman, managing director and the supervising manager personally attend funerals of employees and their immediate family • Overseas trips • Managing director invites employee to his home for lunch • Managing director phones employee’s spouse to thank the family for the employee’s outstanding contribution to the firm • Managing director sends thank you cards to employees to acknowledge their outstanding contribution to the firm • Photographed in the Sampath news magazine • Employees’ names appear on the intranet • Must impart knowledge to subordinates through formal training 2–3 hours a week • Enroll trainers to discuss real-life work situations, issues and solutions • Sends employees for external training • Banking qualification primary, degrees secondary • Educational standards set at every level • Trainees must be below 23 years, GCE A.L. qualification, computer literacy and leadership skills, attitude test • Graduates must be below 27 years, any degree, attitude test continued

Results of hypotheses analysis and discussion

113

Appendix 7.7 (continued) HumC

IC activity

Career development

• Opportunities given, but employee must take the initiative • Has a mentoring program with professional accounting bodies • Reimburse examination fees up to Rs.100,000 • Passing of examinations is embedded in the promotion schemes • Training needs are analysed through selfappraisal, appraisal by the superior, discussion with the department and feedback from the participants • Prepares a training calendar based on core competencies to focus on during the year • Emphasis on knowledge-based training changed to skill-based training • Every employee is given minimum 60 hours training a year

Training programmes

Entrepreneurial sprit Entrepreneurial spirit, innovativeness, proactive and reactive abilities and changeability

Employee measurement Employee numbers

Professionalism Seniority Median age of employee

Safety Employment safety

Equity Equity issues: race, gender and religion

• Revising the appraisal system to include creativity • Brainstorming to solve issues • Innovators have the authority to complete the product to implementation stage, and they are rewarded with an overseas trip • Too many employees, but the firm needs them for verification of automation • Can manage the short-term branch expansion with the existing staff • Look for productivity and commitment as key qualities • Length of service is one-fifth of the criteria • Average age 29 years and 5 months • Promotion within, as required by the union, can lower the age • Can have adverse effect as some maturity is required of the employees • Round-the-clock insurance from Rs. 500,000 to Rs. 1 million for all employees • Insurance up to Rs.10 million for employees involved in cash transportation • Instructions not to confront robbers in the event of a break-in • Mirror the diverse backgrounds of their customer base in their employees continued

114

Results of hypotheses analysis and discussion

Appendix 7.7 (continued) HumC

Equity issues: disabled

Welfare Employee share scheme Employee share option scheme

IC activity • Conducts tamil classes for employees, and their performance in these classes is included in their performance appraisal • Deaf employees manage the entire cash department • Deaf employees in the cash department train every employee in other departments for 5 days on cash handling • Employees can buy shares from the profit bonus and can sell them when they leave • No

Appendix 7.8 Most shareholders group: finance limited – case study findings IntC Intellectual property Patents Copyrights Trademarks Philosophy and culture Management philosophy

Corporate culture Processes Management processes Technological processes Systems Information systems

Networking systems Financial relations

IC activity • No • No • Registered the company name and its products • Regular meetings are held and carries out a bottom-up SWOT analysis • Application of the philosophy is not well defined due to extreme fluctuation of its assumptions • Conflict with the non-consultative regulatory framework of the industry sector • Ad hoc employee opinion survey • Moved from a rigid to a transparent structure where ideas are encouraged • Changed from relying on people to standardising and documenting processes • Microsoft office and Oracle • Customer analyses, no databases • Oracle financial system, not interfaced with other information systems • In-house library • Information officer posts any relevant external articles on lotus notes • Intranet lotus e-mail • Executive personnel to computers 1:1 • Participatory credit institution of IDA, FMO and EEG continued

Results of hypotheses analysis and discussion

115

Appendix 7.8 (continued) ExtC Brand building Brands Customer satisfaction Corporate image building Company names

Business partnering Business collaborations

IC activity • Main brand is company name • Products except generic products are branded • Corporate image survey • Efficient, fast service and competitive interest rates; principal company in stock exchange • First development bank operated over 45 years • Stable and performance driven • Concentration of different disciplines, well qualified and experienced professionals

Licensing agreements Favourable contracts Franchising agreements Distribution channels

• Finances the companies that supply products to customers • Syndicated loans • Government institutions to implement loan schemes • No • No • No • branches

HumC

IC activity

Market share Employee relations Employee involvement in the community

• Based on repeat customers

Union activity Employee thanked Employee featured Employee measurement Employee numbers

Professionalism Efficiency ratios: V.A./employee Median age of employee

• Initiative taken to respond to needs of the community on a needs-basis but takes a passive stance in reporting such involvement • No union • Monetary rewards; 0–25% of salary, 0–6 months discretionary bonus • Do not feature • 285 employees • Headcount sufficient in the short term • Computerisation should reduce the overall headcount • Majority are professionals and are the drivers of success • Top-down performance reviews • Average age is 37 years and expected to come down with the constant infusion of management trainees • Lower age is preferred for better innovation and agility continued

116

Results of hypotheses analysis and discussion

Appendix 7.8 (continued) HumC Training and development Know-how

Education Career development

Training programmes

Entrepreneurial skills Entrepreneurial spirit, innovativeness, proactive and reactive abilities and changeability

IC activity • Management trainee program; 1 week induction • Employee returned from overseas training required to present to their superior and an audience • Post findings in the knowledge page in lotus page • Executive entrants hold a class 2 or above degree • Interest-free loan to study for MBA • Offer opportunities to develop managerial skills to identified employees • (No succession plan and career development plan) • Superior identifies training needs at performance appraisal • Does not prepare a training calendar as it respondis to external training programs and their calendars • Looks for the ability to generate new ideas when recruiting candidates • Executives initiating projects monitor them • Non-monetary rewards to employees on ideas competition

Safety Employment safety

Equity Equity issues: race, gender and religion Equity issues: disabled Welfare Employee benefits Employee share scheme Employee share option scheme

• Buildings insured against terrorist activities and glass partitions are shatter-proof • Employees have accidental disability insurance • Does not do business in politically volatile areas • No discrimination • Not proactive but would consider them without discrimination if they apply for jobs • Above industry-average emoluments • Being considered • No

Results of hypotheses analysis and discussion

117

Appendix 7.9 Most shareholders group: diversified limited – case study findings IntC Intellectual property Patents Copyrights Trademarks Philosophy and culture Management philosophy

Corporate culture

Processes Management processes

Systems Information systems

Networking systems Financial relations

ExtC Brand building Brands

IC activity • Few • No • Many • To be the best in every sphere of activity • People are important as it is a service company; retain and train them to get the correct skill set • Open accessible culture • Young and dynamic • Permits innovation and encourages challenge • Ethical • Systems are in place while allowing people to innovate, a reason for success. • Performance reviews for executives biannually • Performance reviews for non-executives annually • Feedback from new recruits • Feedback from exit interviews • Monthly sector meetings • Quarterly board meetings where each sector is represented • Continuous improvement as a standard practice • Best practices shared at sector level • Intranet to share latest news • Quarterly newsletter to share news • 60 core people to disseminate knowledge on current issues • Regular customer analysis • Customer databases maintained by majority of profit centres • No comprehensive database on employees • Pentium computers on a AS400 environment • Key people have e-mail • AAA Sri Lanka certified by Duff and Phelps • Banks have a favourable understanding with the firm IC activity • Its advertising campaigns project the image of the firm since the market in Sri Lanka is small continued

118

Results of hypotheses analysis and discussion

Appendix 7.9 (continued) ExtC

IC activity

Customer satisfaction

• Keep abreast by finding consumer needs as consumers are demanding higher standards • Carries out market surveys and recruits external sources for opinions • Experiment on innovative products and services • R& D unit in beverage subsidiary • Rely mainly on joint internationally recognised venture partners for innovative products and services

Quality standards

Corporate image building Company names Business partnering Business collaborations Licensing agreements Distribution channels Market share

HumC Employee relations Employee involvement in the community Union activity

Employee numbers Employee thanked

Employee featured

• Major reason employee likes to work • Core is reliability given to the customer that they get what is required • Joint ventures and agency agreements brought synergy and wealth • Relationships are working well • Agency agreement • Ideally like to reduce the distributors • At present working on to link with the distributors electronically • 45% of soft drinks • 65% of ice cream • 85% of frozen foods and processed meat market IC activity • Employees have not got involved, some involvement at corporate level • 35–45% workforce unionised • Relationship with some unions good and others average • Intends on strengthening these relationships by regular dialogue and interaction to solve both firm and personal problems of employees • 7,200 excluding plantation workers • Wants to reduce workforce to achieve better quality workforce • Area for improvement • Profit centres do it by rewarding monetarily, semi-monetarily and nonmonetarily • Company newsletters and intranet continued

Results of hypotheses analysis and discussion

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Appendix 7.9 (continued) HumC

IC activity • Firm is a diversified group and several cultures exist, and therefore some feature employees more than others

Employee measurement Professionalism Length of service Stability ratios: expert seniority Stability ratios: median age of employee Training and development Know-how

Education

Career development

Training programmes

Entrepreneurial spirit Entrepreneurial spirit, innovativeness, proactive and reactive abilities and changeability Safety Employment safety Equity Equity issues: race, gender, and religion

• Encourage professionals • Proposed a scheme to offer a loan to study for MBA and to reimburse 50% of cost • Performance takes precedence • Amount of share option determined by seniority, one of two factors • Prefer younger people because they have newer ideas, more forward-looking and cope up with change • Delegate knowledge to achieve promotions • Performance appraisal criteria include developing other people for the positions held by them • Has minimum qualification requirements for different grades • Depending on the sector, the qualifications required may vary • Short-term interest-free loans offered • Employees responsible to carve their own career path • Employees considered first to fill internal vacancies • Employees can move within the group, usually within the industry sector • Soft skills–presentations, dress culture, financial management, time management, dinning ethics • Functional managers identify the needsmostly soft skill • Look for intelligent, creative minds, exposed to new thinking and has people from international background as recruit • Creativity is assessed at the employee appraisal • Relevant people must wear safety gear, and violation is treated as lack of discipline • Non-focused on discrimination • Current political climate prompts to be careful in recruiting unknown, the terrorists continued

120

Results of hypotheses analysis and discussion

Appendix 7.9 (continued) HumC

Equity issues: disabled

Welfare Employee benefits Employee share scheme Employee share option scheme

IC activity • Recruiting females restricted to some extent due to cultural factors and restricted hours, they can be employed by law • Quite a number of able people unemployed • Public infrastructure limits their ability to employ them • Does not have workers’ compensation and personal accident cover for disabled employees • Monetary side far greater because of high cost of living • No • Based on length of service and seniority in the management

Appendix 7.10 Most shareholders group: manufacturing limited – case study findings IntC Intellectual property Patents Copyrights Trademarks Philosophy and culture Management philosophy Corporate culture Processes Management processes

Technological processes Systems Information systems

IC activity • No, but have trade secrets • No • No, firm manufactures for customers’ trademarks • May develop its own trademarks in future • Monitors its vision through 20 strategic tasks • Employees have flexibility, degree of authority and can initiate action • Set by the top • Continuous improvement • Bottom-up thinking • Hayleys Group Management Committee, Group Management Committee, Managers meeting and factory meeting • Some operations documented as required by ISO 9002 • Key management ideas are not documented to ensure flexibility and speedy decisions • Enterprise resource planning for manufacturing process • Increasingly reliant on information systems to share knowledge continued

Results of hypotheses analysis and discussion

121

Appendix 7.10 (continued) IntC

IC activity

Networking systems Financial relations

• Pentium-based personal computers operating in AS400 environment • Head-office employees have e-mail • Special financial relations with banks due to growth of firm, volume of business and part of Hayleys group • Joint venture with one of its customers

ExtC

IC activity

Brand building Brands

Customer satisfaction

Quality standards Corporate image building Company names

Business partnering Business collaborations

Licensing agreements Distribution channels

Market share

• No, manufactures under customers’ brands • Supporting own brands, costly and margins do not justify it • Annual surveys • Visits customers at least annually • Feedback from company representatives located overseas • Evaluating customers based on revenue contribution • Quality levels at factory regularly reported to the management • A reason why people like to work • An early independent manufacturer • Reliability, fourth largest independent non-medical glove producer • Superior technical know-how developed in-house • Largely marketing collaboration • A joint venture with a distributor • Technical collaborations are not encouraged due to its own capabilities and possible restrictions on its growth • No • Works mainly with the distributors • Increasingly working with retailers for speed, transport and to produce for their labels • Growing due to long-established relations with distributors • Product development • Packaging • Delivering on time • Maintaining high-quality standards continued

122

Results of hypotheses analysis and discussion

Appendix 7.10 (continued) HumC Employee relations Employee involvement in the community Union activity Employee numbers Employee thanked Employee featured Employee measurement Efficiency ratios: Value-added/ employee Expert seniority Stability ratios: median age of employee

Training and development Know-how

Education Career development Training programmes

IC activity • Employees get involved in the community on a needs basis • Good relations, signed a collective agreement • Person released from each factory location to work full time for the union • 2,000 employees; trend is to reduce numbers to compete with other overseas locations and to respond to more automation • Non-monetary rewards on a needs-basis; familiarisation visits, further training and letters of commendation • In-house magazines features employees to recognise their team effort and creativity • Productivity levels regularly reported to the management • Results, and not length of service, are a determinant for progress • Ageing analysis and long-term succession planning • Average age varies depending on the location of the factory, Weliweriya 20 years, and Kottawa 35 years • Lot of coaching • Higher achievers are required to coach other employees • Several employees trained on the same task • On return from overseas training, employees should make a presentation or submit a report • Weekly 2-hour personal development session • Daily 5 minutes concentration session • Vacancies offered to employees, and vacancies are filled from the bottom • Factory level 2 hours a week on personal development • 5 minute concentration session daily at factory • Cross-training to new recruits for 4 months

Entrepreneurial spirit Entrepreneurial spirit, innovativeness, • proactive and reactive abilities and changeability Safety Employment safety • • • •

Fostering a culture for creativity

Safety guidelines Hold safety and housekeeping meetings Safety news Has a safety officer continued

Results of hypotheses analysis and discussion

123

Appendix 7.10 (continued) HumC

IC activity • Hold regular fire drills • Fire team • Report accidents to the factory manager

Equity Equity issues: race, gender and religion Equity issues: disabled Welfare Employee benefits Employee share scheme Employee share option scheme Professionalism

• Based on merit • Nature of activities prevents recruiting • Free uniforms to factory workers • Minimum 15 years service with the firm • Not functional because the stock market is not performing well • No • Action and results more important than qualifications and experience

Appendix 7.11 Second most shareholders group: beverage limited – case study findings IntC Intellectual property Patents Copyrights Trademarks Philosophy and culture Management philosophy

Corporate culture

Processes Management processes

IC activity • No, trade secrets • No • Brands • To be international brewer by 2025 and have 6 breweries overseas • Balanced scorecard implemented • Registered brands as trademarks in other countries • Increase consumption per capita for a year from 2 litres to 12 litres by convincing government to reduce excise duty to compete in illicit market • The company culture changing –. employees have a new mind set as the company is young • Changing from hierarchical to a flat structure • Employees to call each other by first name and have open offices • Strong marketing vision to build the best brands • Believes in being first, killing competition, but has mutual trust and respect and drive towards excellence • Planning to have suggestions boxes and common computers to send suggestions and continued

124

Results of hypotheses analysis and discussion

Appendix 7.11 (continued) IntC

IC activity to consider all of them by their ‘town hall committee’ to be implemented • 360-degree performance evaluation to be implemented • Production, distribution and some finance processes are documented and anyone can access it. Marketing processes are documented but kept in their department • Work together with the best firms in the world

Systems Information systems

• BAAN an enterprise resource-planning system, interfaces with its parent firm’s Oracle • BAAN access is differentially restricted by passwords • Anyone can access intranet

Financial relations ExtC Brand building Brands

Customer satisfaction Quality standards Corporate image building Company names Business partnering Business collaborations Licensing agreements Distribution channels

Market share

IC activity • Brands are measured every 3 years using the brand valuation system • Match its processes and products with processes and products in sport for association and advertising • Sponsorship-tracking module • Usage and attitude test once a year • Image study using Milward Brown and Stochastic model • Blind product test to benchmark against competitors and ideals • Measures customer satisfaction by Trim Module at internal, distributor, retailer and supplier level • Audited by Lloyds London • Strength is the character of the brand and its copy line • Leverage on Carlsberg on their brand, international advertising and production • To produce and market Carlsberg beer • Distributors appointed under distributor agreement • Help them manage their competencies to run as profit centres • About 80% of legal beer market has been growing over the years continued

Results of hypotheses analysis and discussion

125

Appendix 7.11 (continued) ExtC

IC activity • Alcoholic market 10% held by beer, 30% by arrack and 60% by illicit liquor • Moving into other beverages to increase the total market share in beverage category • Beer market share restricted due to limited number of outlets and restrictive government policy

HumC Employee relations Employee involvement in the community Union activity

Employee thanked

Employee featured Employee measurement Employee numbers Professionalism

Seniority Stability ratios: median age of employee Training and development Know-how

IC activity • Mostly at corporate level, firm keeps a silent note • Poor standard of unionism and lack of professionalism • No violent demonstrations and work stoppages in the 120 years of history • Mindsets in Sri Lanka are very emotionally driven • Employees need recognition and comments about it • Issues a commend certificate • Firm needs to formalise the approach • Feature employees in the monthly newsletter • ‘Multi-skilling’ its workforce in anticipation of reducing headcount • Need to develop more professional respect for each other more • Employees do not show intense professionalism by surfacing issues openly to solve them • Length of service recognised by awards • Average age is about 35 years • Lower age, between 20 and 25, preferred to accept change • Moving towards the ‘multi-skilling’ of employees • Invite local entrepreneurs to present their success stories • Post articles about international entrepreneurs • Backs employees to initiate and implement projects with the support of world-class resources and document it • Learning organisation • Town hall meeting held with CEO monthly continued

126

Results of hypotheses analysis and discussion

Appendix 7.11 (continued) HumC

Education Career development Training programmes

IC activity • Inter-departmental meetings held monthly, announced a fortnight before so that employees can raise questions anonymously • Both technical and behavioural skill developments are in place • Coach a skill set to managers and supervisors and appraise them at performance appraisal • Identified by matching existing skills against the job description • Development skills are identified by reviewing coaching skills received by supervisors and managers

Entrepreneurial spirit Entrepreneurial spirit, innovativeness, • Whole system in place for employees to make proactive and reactive abilities suggestions and reward them and changeability • Each employee can send an appreciation note on a special notepad • Employees name goes to a committee and notice board • Considering to include as a core competence in the performance appraisal Safety Employment safety • Monitor accidents and take pride in reducing accidents • Go beyond legal requirement to provide insurance cover Equity Equity issues: race, gender • Go for the best and religion Equity issues: disabled • Has not done much and does not have a company policy • Would entertain candidature Welfare • Nil

Appendix 7.12 Second most shareholders group: food limited – case study findings IntC Intellectual property Patents Copyrights Trademarks Philosophy and culture Management philosophy

IC activity • Managed by the parent company in Switzerland • No • Registered both in Switzerland and locally • Had a vision for year 2000, committee came up with the ideal vision and educated every staff member through two seminars. continued

Results of hypotheses analysis and discussion

127

Appendix 7.12 (continued) IntC Corporate culture

Processes Management processes

Systems Information systems

Financial relations

ExtC Brand building Brands

Customer satisfaction

Quality standards

IC activity • Was preparing a vision for years beyond 2000 • Team oriented with a good structure to communicate • Friendly work environment where staff relationships are special and everyone knows each other’s family as well • Managing Director has direct contact with the staff by inviting about 7 people for lunch daily • Immediate superior is addressed by the first name • Common lunchrooms and washrooms for more communication • 2 days outing for all employees to travel together • Departmental meetings held monthly and relevant facts communicated to employees • Adhere to policies laid down in company manuals • Parent company keeps the firm up to date with latest information • Adopted BPCS accounting system based on a group concept Business Excellence through Communication Application • Deals mainly with foreign banks because of global relationship • Banks like to have the firm as a client and offer special facilities IC activity • Fundamental to the firm and believe in building strong brands • 3 types of brands; global brands are primary, regional brands and local brands • Brand performance monitored daily • Crucial, as the firm wants the consumer to repurchase the product and that is why brands are important • Keeps a broad mind in benchmarking because the product or category may compete for the share of throat or share of stomach or both • Extensive quality tests carried out before, during and after manufacture continued

128

Results of hypotheses analysis and discussion

Appendix 7.12 (continued) ExtC Corporate image building Company names

Business collaborations

Distribution channels

Market share

HumC Employee relations Employee involvement in the community Union activity

Employee thanked

Employee featured Employee measurement Employee numbers

Professionalism Seniority

IC activity • Customers are satisfied with what they get • Intangible side where the consumers feel they belong to a special group, more an attitude or emotion • Centre of the group drives business collaborations • May undertake joint venture with others, on a needs-basis • Works with distributors who are business partners • Core of the business is building brands, not logistics • Crucial since the firm wants to be the number one or number 2 in a given product category • Market share is a function of sales, and what the firm gains is what another loses • Each plan of action is dependent on a category and market position IC activity • Involvement mostly at corporate level • No direct strike since 1906 • Believes it has a strong communication system and encourages the supervisor to sort the issue first • Combination of monetary and non-monetary strategies • Salary increase, short-term bonuses • Overseas exposure, training, and feature in company magazine • New employees photographed in the company magazine published quarterly • 600 employees • Employs experts in the business and believe in multi-skilling the workforce • Likes to be right-sized in the future • Firm is flat and professionals are required at all levels. Has the highest regard for professionals • Length of service recognised, but performance is the criteria for promotion and prospects continued

Results of hypotheses analysis and discussion

129

Appendix 7.12 (continued) HumC

IC activity

Stability ratios: median age of employee

• Average is between 35 and 40 years • Firm needs to do some succession planning at production level • Skills and not age is the essential criterion in recruiting

Training and development Know-how

Education Career development Training programmes

• Sharing and communication of knowledge very strong • Finance department exchanges staff between other departments • Judged in relation to the job • Identified at performance management • 90% depends on the individual • Corporate-training needs and individualtraining needs identified from performance appraisal. Individual needs are focused on the development of the individual • Standardised training programs include local training for local staff and regional training organised by the parent firm for its sister firms

Entrepreneurial spirit Entrepreneurial spirit, innovativeness, • Corporate guidelines from the parent firm proactive and reactive abilities states renovation and innovation are and changeability important activities of the firm Safety Employment safety • The firm has a contingency plan • Factories are fully prepared with fire drills • Corporate staff are given a portable card that has phone numbers and lines of communication in case of an emergency Equity Equity issues: race, gender, • Strongly believes in respecting different and religion cultures and religions Equity issues: disabled • No proactive role but would consider employing disabled people on an equal footing with others for positions Welfare Employee share scheme • No Employee share option scheme • No Appendix 7.13 Second most shareholders group: tobacco limited – case study findings IntC

IC activity

Intellectual property Patents Copyrights

• No • No continued

130

Results of hypotheses analysis and discussion

Appendix 7.13 (continued) IntC

IC activity

Trademarks Philosophy and culture Management philosophy

• Brands are registered

Corporate culture

Processes Management processes

Technological processes Systems Information systems

Networking systems

Financial relations

• Vision, mission, values and annual company plan explained to all employees and valued business partners • ‘Winning through people and getting things done’ • Changing from bureaucratic, hierarchical culture to flat structure • Supports teamwork and relationship building; • Car park with no reservations, open offices, common canteen, common time-entry system • Booklet on company culture given to all employees • Regular employee attitudinal surveys conducted to ascertain their values • Monthly meetings improve efficiency of plants and processes • Small group meetings to increase two-way communication • Quarterly team briefings to increase two-way communication • Education and training to drive the management process • KPIs reported to management monthly and shop-floor staff bimonthly • Monthly meeting to improve efficiency of plants and processes • MRP II implemented • Cycle-plan meetings to review information obtained from distributors • Customer analysis • Employee information is on the database except shop-floor employees’ • Lotus notes to share new ideas, product development and technology news connected with worldwide group • People depend on reading books, magazines and talking to people to gather and share knowledge • Special rates from banks due to volume of business • Unlikely to forge financial relations with other firms due to cultural mindset in Sri Lanka continued

Results of hypotheses analysis and discussion

131

Appendix 7.13 (continued) ExtC Brand building Brands

Customer satisfaction

Quality standards

Corporate image building Company names Business partnering Business collaborations Distribution channels

Market share

IC activity • Two key assets: people and brands; people make the brands and not vice versa • General consumer survey at least once a year • Attitudinal survey • Response to current brands • Mini surveys (trackers) monthly • Survey retailers to benchmark company and its products • Market complaints officer visits personally to resolve complaints • Quality-related bonuses • Lowest material waste in the region • Several awards for quality • Quality improvement teams • Blind test with the product • Blind test with competitors’ products • Manufacturing processes’ tolerance level • Quality test at retailer level • Shares its best practice with national and international firms • Selects its sales outlet locations • Focusing on its core business • Collaborate with other businesses for mutual benefit, case-by-case basis • Surveys other distributors to ascertain their satisfaction • Regular meetings with front-line staff, funding best-practice visits to India • Near monopoly for legal product • Divest unrelated subsidiaries to focus on core business • Monitors the market share by new awareness of communities, lifestyle changes, and availability of its products • Point system survey reviews every brand and if necessary re-positions them or introduces new products • Lower-priced brands compete with illicit products; responds by lower length products and negotiates with the government to fine illicit traders and temporarily lower the duty rates continued

132

Results of hypotheses analysis and discussion

Appendix 7.13 (continued) HumC Employee relations Employee involvement in the community Union activity Employee thanked Employee featured Employee measurement Employee numbers Efficiency ratios: V.A./employee Stability ratios: expert seniority Training and development Know-how

Education

Vocational qualifications Career development

Training programmes (continued) Training programmes

IC activity • Community projects • Employees take initiative in an organised fashion • Excellent relationship, no strikes for past 8 years • Annual excursions • Annual employee children’s party • Letters of commendation in their personal file • Rewarding them monetarily • Photographs published in in-house magazine ‘Challenge’ • Spouses invited to workplace • Employee number is 400, 10 years ago was 2,000 • Reported to operational committee • Comprehensive performance reviews • Performance-related pay • Productivity ratios reported continuously • Annual seniority awards • Two-year training programme for management trainees • Employees are coached on core skills, ten days for executives and 2 days for non executives to make them more efficient in their work • Policy to invest in functional competencies • Multifunctional project teams • Executive entrants–graduates • Machine operators–diploma holders • Policy to invest in managerial competencies • In-house training laboratory in computing, to learn any software before and after work • Free membership, 2 in-house libraries to staff • Policy to invest in technical competencies • The firm identifies the career path of each manager yearly • Superior should coach and train the potential successors to replace him or her within an agreed period of time • Meets with regional sister firms twice a year to discuss career paths • Training needs identified through appraisal system, for managers PACE, for shop-floor employees TRADES and for secretaries STEP • Special management programs, CMS, MDC and AYIC continued

Results of hypotheses analysis and discussion

133

Appendix 7.13 (continued) HumC

IC activity • Other programs on need-basis • ‘Winning our world’ — 2-day residential change–management program for all staff • Team-building programs for all staff • 2-day residential employee education program for non-executives • Cross-functional training by ‘winning through customer focus’, ‘language of finance’ and ‘product awareness’

Entrepreneurial spirit Entrepreneurial spirit, innovativeness, proactive and reactive abilities and changeability

Safety Employment safety Equity Equity issues: race, gender and religion Equity issues: disabled Welfare Executive compensation plan Employee compensation plan Employee benefits

Employee share scheme Employee share option scheme

• Innovations Manager works with other managers to come up with new ideas • Taking employees out to the market to watch and talk to retailers • Change reward strategy to reward then and there • Safety manager in charge of safety • Employees must sign an agreement that they adhere to safety rules and procedures • Focus on getting the best through a battery of tests • Has a multicultural and multinational workforce • Does not encourage the employment of disabled persons because the firm is under pressure to reduce cost • Senior managers positions blocking career path of others offered voluntary retirement package • Excess workers offered voluntary retirement package • Above industry-average salary and fringe benefits • 15% superannuation contributed by the firm where as statutory rate is 12% • Free breakfast, lunch and dinner • Comprehensive medical scheme for all • Two-and-a-half-month bonus • Profit bonus • Attendance bonus • Quality-related bonus • Holiday allowance • No • No

134

Results of hypotheses analysis and discussion

Appendix 7.14 Second most shareholders group: tobacco limited – case study findings IntC Intellectual property Patents Copyrights Trademarks Philosophy & culture Management philosophy

Corporate culture Processes Management processes

IC activity • No • No • Few, most important are company names that are used as brand names • Vision is to be the foremost appliance retailer in the Asia pacific • Has the highest market share in 27 out of 33 product categories • Every 2 years surveys are carried out and SWOT analyses are done • Annual internal surveys are carried out to ascertain the extent employees have understood and agree with the philosophy of the firm • Very open, respect others view, and encourage ideas from the bottom and implement them • Most routine methods are formalised mostly in printed format and review them once in 2 years or before if necessary • Enhance its management processes by sending chosen managers for training and inviting visiting lecturers

Systems Financial relations

• Has special relationships with the financiers

ExtC

IC activity

Brand building Brands

Customer satisfaction

Quality standards

• Began with single brand, single product into present multibrand, multiproduct • In the future, will probably manage brands by categories • Does a lot of advertising to build the brands • Sponsor Sri Lanka national cricket, ‘Mercantile A’ division cricket, Sri Lanka hockey, inter-country Rugby 7 • Critical, since acquiring new customers are expensive • Offers a range of products • Offers easy payment • Strong after-sales service • Believes in offering trouble-free products at a higher price • Offers warranty minimum 1 year; on most products 5 years continued

Results of hypotheses analysis and discussion

135

Appendix 7.14 (continued) ExtC

IC activity • Considering to introduce extended warranty • Offers hire purchase with term life insurance

Corporate image building Company names

Business partnering Business collaborations

Licensing agreements Franchising agreements Distribution channels

Market share

HumC Employee relations Employee involvement in the community Union activity

Employee thanked

• Working towards trusted excellence so that the consumer will not worry after purchase • Widest distribution network • First and best easy payment scheme • Collaborates with ‘H-N’ Bank to finance customers • Collaborates with financiers on credit cards and mobile phone sales • Appoints freelance canvassers to sell products that margins do not justify • Pays to the parent firm • Charges royalties from sub contracting manufacturers • Franchised out service outlets • Key strength • 107 retail shops growing 10% per annum • Delivers to the customers’ doorstep and strong after-sales service through 4 regional centres and 60 service franchises • Branch opened when revenue was Rs.1 million a month, approved dealer appointed when revenue is Rs. 0.5 million a month • Expands by 10 new shops a year • It has five types of distributions; direct, indirect wholesale, ‘Csl’ brand, computer and industrial product • Market leader in several categories; refrigerators, television, gas oven, washing machine and so on IC activity • Both at corporate and at employee level • Sewing school conducted at a nominal fee • 2 unions; clerical grades and non-clerical grades • Managers are not unionised • Very cordial relationship due to good communication among employees and open negotiations • Employees can send notes of appreciation to other employees on company-provided notepads continued

136

Results of hypotheses analysis and discussion

Appendix 7.14 (continued) HumC

Employee featured Employee measurement Employee numbers

Training and development Know-how

Education

Training programmes Professionalism

Expert seniority

Stability ratios: median age of employee

IC activity • Managing director sends a letter of commendation on completion of exam • Mostly non-monetary: gold coins, internal promotion programs, entertain by the chairman, company-paid holidays, luxury cruises, discounts on products • Quarterly newsletter and notice board • Beginning this year, the firm intends on reducing the headcount by looking at unproductive areas and employees • Contractors hired as a temporary measure until restructure is complete • Rotates employees for ‘multi-skilling’ • Rewards employees for sharing knowledge at the annual appraisal • Most knowledge shared in an informal basis • Minimum qualifications set for different nonexecutive grades • Minimum qualifications for executive grades considered on a case-by-case basis • Performance appraisal system identifies the training needs and includes them in grouptraining calendar • Required at every level of management • Especially important at group sales and at a senior level as they represent the firm at the highest level • Merit is more important than length of service • Gives service awards and gift vouchers from 5 years up to 45 years • Average age varies depending on category; non-clerical support staff – 30 years, manager – 30–35 years, senior staff – 40 years

Entrepreneurial spirit Entrepreneurial spirit, innovativeness, • Small groups in various locations come proactive and reactive abilities and up with various suggestions for work practices changeability • Small group competitions held for annual conventions and are rewarded nonmonetarily • Continuous improvement by small groups in customer service Safety Employment safety • Safety and welfare committee • Carry out fire drills periodically continued

Results of hypotheses analysis and discussion

137

Appendix 7.14 (continued) HumC

IC activity • Comprehensive medical scheme for family of employees

Equity Equity issues: race, gender and religion

Equity issues: disabled Welfare

• Employing females in field marketing activities and EDP that requires long hours not possible by law, counter-productive and culturally not acceptable • All sewing school instructors are females • Mirrors employees to customers to win customers • 50% of staff are marketing and the nature of their activities restricts them from employing disabled persons Nil

Appendix 7.15 Third most shareholders group: hotel limited – case study findings IntC Intellectual property Patents Copyrights Trademarks Philosophy and culture Management philosophy Corporate culture

Processes Management processes

Systems Information systems

IC activity • No • No • Holds two trade marks: ‘C-R’ and ‘C-P’ • Property developer, not a hotelier • All hotels have a laid-back, hierarchical culture • Culture driven by cash flows, the current economic necessities • Hotels are largely driven by financial measures • Property developer does not have an established pattern of doing business as it is a growing company • Daily walk about time interaction with subordinates • Weekly meetings • Daily lunches with subordinates • 90% of staff have personal computers • 60% of managerial staff have company mobile phones • Microsoft outlook used to set tasks and goals and integrated with the mobile phones Nokia 9200 • Dos-based, accpac accounting software needs upgraded to the multi-user system continued

138

Results of hypotheses analysis and discussion

Appendix 7.15 (continued)

IntC

IC activity

Financial relations

• Good relations with the long-term financier, in a position to negotiate-lower interest rates

ExtC

IC activity

Brand building Brands Customer satisfaction

Corporate image building Company names Business partnering Business collaborations

• ‘C-R’ is marketed as an event and promotion place • ‘T-A’ hotel • Complaints procedure in place with every complaint recorded with a number and time taken to respond • Direct complaints taken up with the General Manager • Location with wonderful views, close to CBD • Leveraging on resources with other firms for mutual benefit

Licensing agreements Distribution channels Market share

• Planning to collaborate to better package their services • Franchise with ‘Dfce’ • Types of customers, length of stay • Caters to short-term travellers through two hotels • Caters to medium-term travellers through ‘C-R’

HumC

IC activity

Employee relations Employee involvement in the community Union activity Employee thanked Employee featured Employee measurement Employee numbers Professionals place Expert seniority Stability ratios: median age of employee Training and development Know-how

• At hotel level, but not at ‘C-R’ • Actively unionised in hotels, relations vary from medium to poor • Monetarily by bonuses, incentives and performance-related pay • Hotels feature employees, but not ‘C-R’ • 1,710, under staffed • High degree of professionalism • Length of service important at two operational hotels • Hotels mid-30s; around 40% of ‘C-R’ employees are 20 years old • Age should go up as maturity is an important factor • Encourage delegation continued

Results of hypotheses analysis and discussion

139

Appendix 7.15 (continued)

HumC

Education Career development Training programmes

Entrepreneurial spirit Entrepreneurial spirit, innovativeness, proactive and reactive abilities and changeability Safety Employment safety Equity issues: race, gender and religion Equity Equity issues: disabled Welfare Employee share scheme Employee share option scheme

IC activity • Add more responsibilities on return from training • Employees are not penalised when making mistakes • Managers should have a degree or a professional qualification or 25 years of work experience • Provide promotion ability • More organised at hotels, but ‘C-R’ Residencies respond on a needs-basis • ‘Dfce’ employees trained under the franchise agreement • Encourages employees to get involved in problem-solving • Practice fire drills, sprinkler system • No discrimination • Not considered due to acute focus on cash flows • Yes, can sell only when they leave • No

Appendix 7.16 Third most shareholders group: ENGINEERING LIMITED – case study findings IntC Intellectual property Patents Copyrights Trademarks Philosophy and culture Management philosophy Corporate culture Processes Management processes

IC activity • Several patents registered recently, although they existed in the past, to take ownership • No • No • Being developed • Mostly documented. Procedure manuals are maintained in all areas and revise them on a needs-basis • Exit interviews to obtain feedback • Daily production meetings in ship repairs continued

140

Results of hypotheses analysis and discussion

Appendix 7.16 (continued) IntC

IC activity

Technological processes

• Senior management have web-based e-mail facility • Selected people have group-wise internal e-mail

Systems Information systems

Financial relations

• Database of skilled contract workers maintained • Accounting system is to some extent versatile • Share knowledge through interactions and training sessions • Company matters are accessed through the Oracle database by supervisors and up • Most computers are networked, except for those used for designs for security purposes • No

ExtC

IC activity

Nnetworking systems

Brand building Brands Customer satisfaction

Quality standards Corporate image building Business collaborations Distribution channels Market share

HumC Employee relations Employee involvement in the community Employee thanked

• No brands due to nature of activities • Automatic process to record and meet client complaints as an ISO 9000 certified company • Business and production divisions regularly meet with the customer in ship repair and building • ISO 9000 certified company • Only as part of ongoing business • Obtain supplies fast from its subsidiary in Singapore • Ship repairs obtained from the region. Planning to diversify and leverage existing equipment • Ship-building restricted to market in Sri Lanka. Planning to capture overseas market IC activity • Provide in-plant training of 6 months to 1 year for engineering undergraduates • Part of firm’s culture • Chairman, managing director and human resources write letters of commendation • Chairman or managing director offers the financial reward • Certificate given, photograph sent to home and employee featured in the quarterly company newsletter continued

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141

Appendix 7.16 (continued) HumC Employee featured Employee measurement Professionalism Employee numbers

Efficiency ratios: V.A./employee Employees are evaluated biannually Expert seniority Stability ratios: median age of employee Training anddevelopment Know-how

Career development

Training programmes

Entrepreneurial spirit Entrepreneurial spirit, innovativeness, proactive and reactive abilities and changeability Safety Employment safety

IC activity • No structured approach to thank employees • Featured in quarterly newsletter • Cornerstone of the success • Senior managers are highly qualified • 1,440 employees, labour turnover is almost zero • Has a policy not to fill vacancies and a voluntary retirement scheme • Rewards employees based on efficiency • Low priority as the reward system is based on efficiency • The average age is higher than 30 years, a plus factor as firm needs employees with both maturity and competence • In-house technical library available to all employees • Specialist external resource people invited to deliver talks • Supplier of new engines must train staff on maintenance aspect as part of the agreement • Hire specialist contractors to work with staff • 2-week induction and 1-year probation • Reimburse costs on successful completion of career development courses • Rotate executives between divisions and departments • (The long hours required from employees by the firm hinders their career development) • Departmental heads identify training needs • Employees must train others after receiving training • ‘Star’ performers sent for special foreign training • Selected few sent to Japan for foreign exposure • 90% of training on engineering, software and supervisory skills, and 10% on specialised skills • Suggestions scheme operates and employees are rewarded both monetarily and non-monetarily • Safety management programme managed by a separate department continued

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Results of hypotheses analysis and discussion

Appendix 7.16 (continued) HumC

IC activity • Employees must wear safety gears or face fines or suspension • Number of accidents reported at quarterly management meetings

Equity Equity issues: race, gender religion

Equity issues: disabled Welfare Employee share scheme Employee benefits

• Nature of business, heavy engineering and restrict employing women due to physical and cultural factors • Sensitive location of the firm from guerilla attacks restrict employing certain ethnic groups at present • Requirements to wear safety gear and heavy engineering work environment can increase risk of accidents to disabled persons • Share-discount scheme in place • Provides breakfast, lunch and dinner in-house for free • Attendance incentives • Comprehensive medical scheme

Appendix 7.17 Least shareholders group: PROPERTY LIMITED – case study findings IntC Intellectual property Patents Copyrights Trademarks Philosophy and culture Management philosophy Corporate culture

Processes Management processes Systems Information systems

IC activity • Nil • Nil • Nil • On hold due to parent-firm restructure • Friendly, open-door policy • Driven by efficiency, punctuality, communication and customer satisfaction • Friendly, family type and relate to personal level • At times in conflict with public sector parent bank • Sybiz accounting system. Detailed accounting-related information provided to its departments • No website • E-mail address only given to the CEO. Others have one common e-mail address that is mainly used to obtain prices continued

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Appendix 7.17 (continued) IntC

Networking systems Financial relations Brand building Brands Customer satisfaction Corporate image building Business partnering Licensing agreements Franchising agreements Distribution channels Market share

ExtC Brand building Brands Customer satisfaction Corporate image building Business partnering Licensing agreements Franchising agreements Distribution channels Market share

HumC Employee relations Employee involvement in the community Union activity Employee thanked Employee featured Employee measurement Employee numbers Professionals place

IC activity • In the process of creating an employee database • Stand-alone computers Mainly with the parent bank • Nil • Goes beyond the tenancy agreement although the building is 100% occupied by the parent bank • Nil • Nil • Nil • Nil • Nil • Expansion limited by the expired 10-year tax holiday and the parent company • The firm was purpose-built to operate the highrise building to house the bank head office IC activity • Nil • Goes beyond the tenancy agreement although the building is 100% occupied by the parent bank • Nil • • • •

Nil Nil Nil Expansion limited by the expired 10-year tax holiday and the parent company • The firm was purpose-built to operate the highrise building to house the bank’s head office IC activity • Management and employees take initiatives to involve in the community • No unions. Only welfare society • No well-defined policy • Display names in internal notice board to give recognition • Numbers are short of what is anticipated • All employees are equally important continued

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Results of hypotheses analysis and discussion

Appendix 7.17 (continued) HumC

IC activity

Expert seniority

• Important as they have superior job knowledge and the firm has to often respond to the frequent emergency needs of the customer • Not mentioned

Stability ratios: median age of employee Training and development Know-how

Education Career development

Training programmes

• Encourage acquiring know-how by allowing time off for job-related courses • Manager must carry out a job training program at least 2 hours a month • Minimum educational standards set to be considered for different categories • Reimburse exam fees on successful completion • Candidates earmarked for internal promotions • Encourage unskilled workers to rise up by obtaining a high level of education • Determine by supervisors and informal chats with employees

Entrepreneurial spirit Entrepreneurial spirit, innovativeness, • Encouraged as a response to maintenance proactive and reactive abilities work and included in the performance and changeability appraisal Safety Employment safety • Safety gears are given to relevant employees • Senior employees setting a bad example by at times not wearing them; training programs conducted to educate them Equity Equity issues: race, gender, • Physical and cultural aspects restrict and religion employing women in its core maintenance department Equity issues: disabled • Employees who become disabled after employment are retained • Physical infrastructure and nature of business activities restrict the employment of disabled people Welfare Employee share scheme • Nil Employee share option scheme • Nil

8

Interpretation of results

8.1 Introduction This chapter interprets the results outlined in the previous chapter using the political economy of accounting (PEA) theory. Section 8.2 interprets the findings of this book in relation to Hypothesis one which examines the intellectual capital reporting (ICR) differences between the industry groups. Section 8.3 interprets the findings in relation to Hypothesis two which examines the ICR differences between the firms in the Sri Lankan sample and firms from other nations. Section 8.4 interprets additional findings of this book which are unrelated to Hypothesis one or two. This section examines the reporting units and location used in disclosing intellectual capital (IC) information in the annual reports. Section 8.5 provides a summary of this chapter.

8.2 IC elements between industry groups This section discusses the differences in ICR between industry groups in two parts. First, it examines the IC elements most reported and least reported (in relation to all IC elements) by each industry group and interprets why they were differentially reported (see Table 7.1). Second, it examines the results of IC elements as most reported, second most reported, third most reported and least reported in relation to each IC category [Human capital (HumC), External capital (ExtC) and Internal capital (IntC)] and interprets why they were differentially reported. 8.2.1 IC elements between industry groups in overall reporting The industry groups reported most frequently on the following IC elements: the ‘most shareholders’ industry group reported most about employee relations; the ‘second most shareholders’ industry group reported most about brand building; the ‘third most shareholders’ industry group reported most about corporate image building; and, the ‘least shareholders’ industry group reported most about employee welfare. All industry groups reported the least about employee equity issues and workplace safety. Each of these will now be discussed in detail in the

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following subsections. Section 8.2.1.1 will discuss ‘employee relations’ which was reported most frequently by the ‘most shareholders’ industry group; Section 8.2.1.2 will discuss ‘brand building’ that was reported most frequently by the ‘second most shareholders’ industry group; Section 8.2.1.3 will discuss ‘corporate image building’ which was reported most frequently by the ‘third most shareholders’ industry group; and, Section 8.2.1.4 will discuss ‘employee welfare’ which was reported most frequently by the ‘least shareholders’ industry group. 8.2.1.1 ‘Employee relations’ reported most frequently by ‘most shareholders’ industry group The industry group with the ‘most shareholders’ reported the most about ‘employee relations’ in their annual reports. The case study findings revealed that industry groups put significant effort into maintaining such relations, especially in the midst of redundancies and retrenchments. Therefore, reporting most about employee relations (Element 5, from Table 6.2) could be due to two reasons when interpreting using the PEA theory: first, to reduce tension arising from the increasing commodification of labour to accomplish more capital, and second, to attract more spatial capital. The above-mentioned two reasons can be substantiated as follows. First, the industry group with the ‘most shareholders’ represents the firms with the highest market capitalisation in the Colombo stock exchange (CSE). This industry group is the most dependent on shareholders for capital than any other group. It is therefore necessary for firms within this industry group to maintain their high market capitalisation to attract and maintain funding from shareholders (see Section 6.2.1). The case studies revealed that the industry group with the ‘most shareholders’ are terminating their semi-skilled and unskilled workforce and replacing them with technological systems to maximise their profits and market value. This high degree of commodification of labour can rigidify social constituents, which can manifest as employee disruptions such as strikes. These employee disruptions can increase the operational costs of the firm which has a tendency to reduce capital maximisation. Since the industry group with ‘most shareholders’ depends on a great number of shareholders, capital maximisation is far more important to them than any other industry group to retain shareholder capital. It is, therefore, probable that they report most about employee relations to construct a view that their industry group maintains the most harmonious relations with their employees. This is critical in the Sri Lankan context as the previous research on Sri Lanka confirms that employee relations are a strong moderating factor in the performance of firms (see Section 2.6.2). This industry group makes no reference to redundancies and retrenchments taking place in their firms, although the respondents mentioned them as a way to maximise capital. The respondents from Bank Limited (a firm in the industry group with most shareholders) revealed that they offer one of the best redundancy

Interpretation of results

147

packages to encourage employees who are no longer value-adding to leave their firm They offer such an attractive package because the laws of the government prohibit them from terminating employees against their will. Second, the industry group with the ‘most shareholders’ is the most dependent on the number of shareholders for their existence and continuity. This requires them to convince as many current and potential shareholders as possible to provide capital to them. This capability to access a greater number of shareholders was widened by recent legislation in Sri Lanka (see Section 4.3.2). The Government of Sri Lanka recently passed laws which liberalised the foreign ownership of selected industries. These selected industries such as banking and finance form a substantial portion of the ‘most shareholders’ industry group. Foreign capital can also give access to technology which is critical to the industry group with the ‘most shareholders’, since most firms in the industry group such as banking and finance and manufacturing are continually mechanised to maximise their return on capital. In this context, respondents from both Bank Limited and Manufacturing Limited (firms in the industry group with the most shareholders) said during their interviews that their competitive advantage lies in their technology. This new opportunity to attract foreign capital and technology, on the one hand, enables this industry group to maximise their capital reproduction. However, on the other hand, employees can lose their bargaining power due to the increasing commodification of labour. It is possible that this industry group with the most shareholders is staging a ‘pro-employee relations spin’. This industry group is proactively reporting about harmonious relationships with their employees in an attempt to dissipate any tensions arising from the liberalisation of foreign ownership. 8.2.1.2 ‘Brand building’ reported most frequently by ‘second most shareholders’ industry group The industry group with the ‘second most shareholders’ reported the most about their ‘brand building’ (Element 13 from Table 6.2). The industry groups with the ‘most shareholders’ and ‘third most shareholders’ reported second and third most frequently on brand building respectively. A further examination of firms constituting the ‘second most shareholders’ industry group revealed that they are largely owned by multinationals. The only other industry group that contained a multinational was the ‘least most shareholders’ industry group, which contained one multinational. These multinationals have access to a large array of resources available within their global group of firms which are generally not available to other firms. The case studies with Food Limited and Tobacco Limited, which are multinational firms, revealed that they have access to their global brands. They market these globally branded products locally to maximise their reproduction of their capital. The previous literature also confirms that branded products are at the highest end of the profitability chain enabling them to maximise their capital through growth in both profits and the market value of the firm. Therefore, the strength of this industry

148

Interpretation of results

group dominated by multinational firms is their access to branded products. It appears that this industry group reports about their internationally acclaimed brands to attract shareholder capital into their industry group (see Table 7.1). When annual reporting was compared with the case study interview findings, it was found that some firms, in this industry group, report more about brands than they appear to be managed. These firms over-report about brands to appear more convincing to their shareholders (see Table 7.2). 8.2.1.3 ‘Corporate image building’ reported most frequently by ‘third most shareholders’ industry group The industry group with the ‘third most shareholders’ reported most about their ‘corporate image’ (Element 14 from Table 6.2). The industry groups with the ‘most shareholders’ and ‘second most shareholders’ reported it, respectively, third most and second most frequently. The top 30 firms in the sample are visible entities due to their market capitalisation and as such, this element was frequently reported by all industry groups. However, as outlined in Section 8.2.1.1, the industry group with ‘most shareholders’ reported most about ‘employee relations’ and, as outlined in Section 8.2.1.2, the industry group with ‘second most shareholders’ reported most about ‘brands’, since for these industry groups, reporting most about these elements tends to increase shareholder confidence more than reporting about the visibility of the firm. Their corporate image is an invaluable asset in promoting their firms to their shareholders (see Section 6.2.2). The top 30 firms promote their corporate image via the annual reports by appearing as a responsible corporate entity – taking care of the community and the environment. Firms often reported about community projects they have carried out and about their harmonious relationship with the community and the funding provided on these projects. The interviews with firms in the ‘third most shareholders’ industry group which reported most frequently about their corporate image (Hotel Limited and Engineering Limited) revealed that they are more dependent on local shareholder capital than foreign shareholder capital. According to them, local shareholders invest their capital for a longer term than foreign shareholders. The firms in this industry group require substantial investment in non-current assets because of the nature of the industry in which they operate, which takes a longer period to yield a return on capital. This huge capital investment in non-current assets gives these firms greater corporate visibility, and so they need to maintain, build and report their corporate image to convince shareholders to invest. 8.2.1.4 ‘Employee welfare’ reported most frequently by ‘least shareholders’ industry group This industry group is the smallest by market capitalisation. This makes them the least powerful in mediating any agenda of debate with the state and social

Interpretation of results

149

constituents. Therefore, it appears that these firms proactively report about employee welfare (Element 6, from Table 6.2) to win the support of the political and social constituents. By comparing the case study findings with the annual report disclosures, it is also revealed that this industry group reported more about employee welfare than the amount they actually managed (see Table 7.2). From a PEA perspective, this enables them to construct the best possible image of the firm that they are concerned about, and take care of, the welfare of their workforce. The welfare of employees has been at the top of the government’s agenda, which is evident from the fact that in the past three decades, Sri Lanka has achieved greater progress in social development rather than in economic development (see Section 4.3.1). However, the literature indicates that the government expects greater participation from the industry sector in social development while supporting them with market-driven economic laws and policies. 8.2.1.5 ‘Equity-related issues’ and ‘workplace safety’ reported least by all industry groups The industry group with the ‘most’ and ‘second most shareholders’ reported least about equity-related issues and workplace safety, respectively, whereas the industry groups with the ‘third most shareholders’ and the ‘least shareholders’ did not report about them at all. This is because reporting about equity-related issues could create tension with their political and social constituents. The political tension arises because of the civil war between the government and the majority–minority group. These issues are discussed and interpreted in further detail later in this chapter under the HumC section. 8.2.2 IC elements between industry groups in each IC category The results of the case study findings and the annual report disclosures will now be analysed with respect to Hypothesis 1 which relates to the industry differences in ICR. The IC categories of HumC, ExtC and IntC will be dealt with in detail in the subsections below. The following subsections will outline the reporting frequency results by each industry group on each of these IC categories and offer an interpretation of the results. Section 8.2.2.1 will discuss the reporting frequency of IC elements in the HumC category; Section 8.2.2.2 will discuss the reporting frequency of IC elements in the ExtC category; and Section 8.2.2.3 will discuss the reporting frequency of IC elements in the IntC category. 8.2.2.1 Elements in human capital category In the HumC category, overall, industry groups reported IC elements in the following descending order: employee relations, employee measurement, training and development, entrepreneurial skills, employee welfare, equity issues and least about workplace safety (see Appendix 7.4). Each IC element is now

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Interpretation of results

discussed below with A, employee relations being the most reported, and G, workplace safety, being the least reported. Table 8.1 summarises the contents of this section. A. EMPLOYEE RELATIONS (E5)

In the HumC category, the industry groups with ‘most’ and ‘second most shareholders’ reported most about their employee relations by featuring employees, thanking employees for their contribution and reporting about the good relations their industry sector maintains with their unions (see Appendix 7.4). Several respondents in the case study interviews (e.g. Diversified Limited, Manufacturing Limited and Tobacco Limited) supported this claim. They said that they award medals for outstanding employee contribution, give them publicity for their contribution in in-house newsletters, fund Christmas and new year parties and fund employee vacation by paying for their transport and hotel accommodation. Featuring employee contribution to enhance employee relations was the most notable HumC attribute found in the annual reports. Such features generally involved the firm recognising the employee’s effort and commitment towards the firm. Four possible reasons for a firm’s underlying motivation to report ‘employee contribution’ are outlined below using a PEA interpretation. First, as outlined previously, it appears that these firms proactively report about the good relations they have with their employees to divert the attention of their social and political constituents away from the tension created by terminating employees and the social cost resulting from such a lay-off. Second, these firms appear to shape the agenda with their political constituents by appearing to subscribe to the knowledge-based economy recently initiated by the government (see Section 4.3.4), by encouraging their employees to transfer and share their tacit knowledge with each other. It is interesting to note that the employees most featured in the annual reports were the senior and middle managers who, it could be argued, represent the knowledge-base employees in their industry groups. Third, most of the annual reports from these industry groups indicated good relations between the management and their unions. The case study interviews (e.g. Tobacco Limited) revealed that those who have a cordial relationship with their unions are continually creating a culture of trust. Solidifying these relations with their unions and reporting them in the annual reports enable these firms to reduce the loss of man-hours due to strikes and subsequently maximise their capital reproduction. Fourth, from the perspective of the firm, reporting ‘employee contribution’ is no doubt intended to motivate employees, increase their loyalty to the firm and function as an example of positive contribution to other employees. The industry group with the ‘most shareholders’ and ‘second most shareholders reported most about employee relations. As summarised in Table 8.1, from the perspective of PEA theory, these industry groups are proactively reporting about employee relations because they are laying off employees and wish to divert the attention of their constituents. The early termination of employees by

IC activity

Employee relations

Employee measurement

Training and development

Employee welfare

Entrepreneurial skills

Ref.

A. Most reported

B. Second most reported

C. Third most reported

D. Fourth most reported

E. Fifth most reported

Approval of the society based on their societal culture Entrepreneurial skills encouraged are limited to improve and modify products and services

Training is provided for employees on maintenance and human relations rather than innovative skills Government supports social development

Semi-skilled and unskilled employees gradually replaced by technological systems Early termination of semi-skilled and unskilled employees

Cause for tension

Table 8.1 HumC reporting analysed by PEA theory

Political

Social

Political

Political

Political

Social

Social

Concerned constituent

continued

Avoid too much disclosure on entrepreneurial skills to hide the nature of skills developed and avoid revealing that the educated workforce is under-utilised

Win community support

Win favour of the government portraying that they are responsible corporate citizens

Construct a perception through value added statements that industry groups carry out business for the common good of participants, and managers and workers are not same stakeholders Win favour of the government that industry groups help create jobs and keep unemployment rate down Avoid too much disclosure on training to avoid disclosing about the nature of training and avoid giving the impression that the educated workforce is under-utilised

Divert attention away from early employee termination

Agenda

IC activity

Equity issues

Workplace safety

Ref.

F. Sixth most reported

G. Least reported

Table 8.1 continued

On-going civil war reduced the safety of people to chance

Concerns about employing women due to restricted work hours and nature of business activity

Low job opportunities for disabled people

Fear of recruiting terrorists having an association with a certain ethnic group

Cause for tension

Social

Political

All

Reporting more about safety does not help to win support of the constituents

Win favour of government because they can enforce further legislation Avoid initiating the issue that can cause embarrassment to the government Subscribe to society’s view which has accepted the risk to life as a reality

Avoid initiating a non-priority agenda where government have to incur additional funds on an already burdened budget Maximise capital reproduction through an able workforce Avoid initiating an agenda not in favour of constituents. Subscribe to cultural notion where men are considered breadwinners and are relatively more literate

Political Economic

Report less because disclosure does not help to win favour of any constituent

Agenda

All

Concerned constituent

Interpretation of results

153

these industry groups was confirmed during the case study interviews (e.g. Tobacco Limited and Diversified Limited). According to the PEA theory, the early termination of employees can lead to a lack of motivation among employees and can invite greater public accountability from the two industry groups. From a PEA perspective, these two industry groups report most frequently about employee relations to divert public attention away from their early employee termination activities. B. EMPLOYEE MEASUREMENT (E7)

Overall, ‘employee measurement’ was the second most frequently reported IC element in the HumC category by industry groups with ‘most’ and ‘second most’ shareholders. The value added by employees through value-added statements and employee numbers are the most reported IC items under employee measurement. As summarised in Table 8.1 above, these industry groups attempt to mediate their agenda of debate in two ways: through reporting in value-added statements and reporting about employee numbers. The ‘third most shareholders’ industry group reported the most about employee measurement as compared to other industry groups. The case study interviews with Engineering Limited and Hotel Limited (two firms from the ‘third most shareholders’ industry group) confirmed that they offer early termination packages to reduce employee numbers. The industry group with the ‘third most shareholders’ appears to reduce tension, created through the early termination of employees, by reporting about the value added by employees to the production and sale of goods. From the PEA theory perspective, reporting about the value added by employees could also be an attempt to win the favour of the government, so that they help keep the unemployment rate down by distracting their attention to value-added information (see Table 8.1). The value-added statement is a useful reporting strategy to mediate the agenda of debate for two reasons as discussed below using the PEA theory. First, firms in Sri Lanka have successfully avoided being mandated by their regulators, allowing them to use an unregulated value-added statement, with known inconsistencies, which lends itself to manipulation (see Section 4.2.3). This is facilitated by an absence of a mandated statement of cash flows from the accounting standards in Sri Lanka. As noted previously (see Section 4.2.3), the case studies revealed that the industry groups are gradually replacing the semiskilled and unskilled labour force with technology. As confirmed by previous research, reporting about the value added by employees through value-added statements enables these industry groups to create an impression to constituents that they are solely driven not by profits but by the common good of participants. These industry groups also construct a view through the value-added statement that both management and labour are a single stakeholder, while it is clear that they are two separate stakeholders. Further, these industry groups manipulate their agenda through this inconsistent and unregulated statement without adding any new information to their income statement (see Section 4.2.3).

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Interpretation of results

Second, it is possible that these industry groups report about employee numbers to maintain good relations with the state. The government has made a substantial investment in educating its workforce, and the government is looking for a rate of return on their investment. However, the decreasing level of employment offered by industry groups, as discussed previously in this section, is a cause for tension between the industry groups and the government (see Section 1.2). These industry groups appear to mediate the tension by drawing the attention of their constituents to the current level of employment rather than on previous figures. This helps industry groups further distract the attention of their political constituents in order to prevent them from introducing further legislation which may reduce their reproduction of capital. The reasons for the low level of reporting regarding executive compensation plans (an IC category included in employee measurement) are unclear. It is possible, however, that such information could increase the political visibility of the firm among lobby groups and invite counter action by unions. C. TRAINING AND DEVELOPMENT (E1)

The third most reported IC element in the HumC category by all industry groups was ‘training & development’. The case study interviews with firms from the industry groups with the ‘most’ and ‘second most shareholders’ (Diversified Limited, Property Limited and Tobacco Limited) revealed that industry groups mostly train their employees in operational and human relations skills rather than in innovative skills. They also tend to train their employees in ‘soft qualities’ relating to conduct, attitudes, willingness to learn and relationship building. These training programmes are matched to develop operational skills required by the industry groups. The respondents from Trading Limited noted that they buy technologically white goods from overseas which are readily assembled locally for sale. Beverage Limited noted that they collaborate with international firms to set up operable technology, for which they pay a royalty to use. The moderate amount of disclosure for ‘training & development’ can be attributed to, from a PEA perspective, the following two reasons. First, disclosures made in the Sri Lankan annual reports reveal that the vast majority of the training provided by employers is to improve the operational skills of employees. This emphasis on operational training rather than innovative training reveals that firms in Sri Lanka seek to use their employees to operate the technology used by the firm rather than utilise and train them to develop new technology through research and development (R&D). Second, case study interviews with several firms (e.g. Tobacco Limited, Engineering Limited and Property Limited) also revealed that employees are less mobile due to the low level of employment opportunities available within the country. The low level of employment opportunities in the country enables industry groups to commodify labour by providing job-specific training rather than career-specific training to maximise their immediate reproduction of shareholder capital.

Interpretation of results

155

The PEA theory can help further explain the nature of training in Sri Lanka which is confined to improving operational skills rather than innovative skills. The selective focus on operational skills can lead to political tension with the political counterparts owing to two reasons. First, the country’s foreign exchange has been drained to buy technologies and brands developed elsewhere, and second, the locally available educated workforce is underutilised (see Section 4.3.1). Therefore, it appears that industry groups carefully orchestrate what they are going to report about training & development to reduce tension with their political constituents (see Table 8.1). D. EMPLOYEE WELFARE (E6)

Although some firms (such as Engineering Limited and Tobacco Limited) offer funded meals during work hours through their in-house catering facilities, it was found that their underlying motivation was to increase employee attendance and motivation. The case study interviews also found a new trend among firms where employees are increasingly less subsidised on aspects of their welfare. In this respect, Finance Limited and Diversified Limited noted that they offer employees a soft loan for their career development. This trend is consistent with the previous literature which indicates that all industry sectors tend to neglect their social responsibility in their pursuit to maximise their capital reproduction (see Section 3.3). As established in Section 8.2.1.4, these industry groups tend to ‘over’ report about employee welfare to win favour with their political constituents. The ‘least shareholders’ industry group reported most frequently about employee welfare. A PEA theoretical interpretation is that since they are the smallest industry group, their reporting could be politically motivated to win support of the government, by portraying themselves as responsible corporate citizens. The least shareholders industry group is also motivated to win the community support because the societal–cultural attributes in Sri Lanka commend welfare acts by industry groups (see Table 8.1). E. ENTREPRENEURIAL SKILLS (E2)

In the HumC category, all industry groups reported fifth most frequently about the entrepreneurial skills of their employees. Entrepreneurial skills are encouraged in many industry groups but they are limited to improving and modifying products, services and processes. The case study interviews indicated that industry groups in Sri Lanka do not demand as high a level of entrepreneurship from their employees, to maximise their capital reproduction, in comparison to industry groups in developed countries. Both Food Limited and Tobacco Limited said during their case study interviews that they receive virtually all their branded products from their multinational counterparts, since most of their R&D is carried out elsewhere, in a developed country within their worldwide group. They stated that sharing brands among the global group enables them to spread their R&D costs.

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Interpretation of results

Tobacco Limited and Beverage Limited remarked that it is too expensive for industry groups in Sri Lanka to build internationally acclaimed brands on their own since to do so requires heavy financial commitment. Therefore, the industry groups in Sri Lanka do not have a need for employees with innovative entrepreneurial skills to maximise their capital reproduction. However, this approach by industry groups is contrary to the expectations of the government. The government recently introduced new legislation to encourage entrepreneurship by strengthening intellectual property rights (IPR) (see Section 4.3.4) to encourage employees and industry groups to generate new ideas and to drive the economy towards a knowledge-based economy. Therefore, it appears that industry groups report merely to satisfy the information needs of the political constituents. F. EQUITY ISSUES (E3)

In the HumC category, all industry groups reported least about equity issues relating to ethnicity. The case study interviews revealed that although many firms (Bank Limited, Finance Limited, Trading Limited and Engineering Limited) have a policy to recruit employees based on merit, most firms did not welcome recruiting employees from the ethnic group which was involved in a separatist war in the country. This is due to fears of erroneously recruiting terrorists into their industry sectors. This anomalous situation was accepted by majority of political and social constituents, because of the growing opposition to terrorist attacks, loss of innocent human life and the negative impact of terrorism on the economy (see Section 4.2.2). Therefore, reporting about employment opportunities provided to ethnic groups offered little opportunity for the industry groups to manipulate their constituents. It appears that the low frequency of reporting enabled these industry groups to be consistent with the sentiments of the social and political constituents. The interviews revealed that all industry groups had concerns about employing disabled people and the extent of their contribution towards maximising reproduction of capital. Diversified Limited said that insurance firms refuse to provide workers compensation insurance cover to employ disabled workers, and the poor public infrastructure for them to commute to work is another barrier. The director from Diversified Limited said during a case study interview: ‘we have more able people who are unemployed, and they should be looked after first’. Tobacco Limited mentioned that they are in the business of maximising profits and disabled people are an inhibitor to capital reproduction. They, in fact, had offered in the past a redundancy package for the few disabled employees that they had and those employees have now left the firm. Engineering Limited mentioned that they are unable to employ disabled people because of the nature of activities of their business. The government, on the other hand, has more immediate priorities rather than taking care of disabled people. The government is engaged in combating a separatist war in the country, which has had a heavy burden on their expenditure. Further, the lack of infrastructure to facilitate disabled workers to commute to work and the lack of workers compensation

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157

insurance for disabled people imply that the government would like to keep a low profile about their ‘political’ view and attitude towards providing employment opportunities for disabled people. Promoting opportunities for disabled people forces the government to also support disabled people by providing infrastructure and other compensatory costs, which adds to its already eroding budgetary burden (see Section 4.3.1). Reporting more about employment or lack of employment opportunities for disabled people can create tension between the industry groups and the government. This fact is supported by Bank Limited that claimed at their case study interviews that they have employed deaf people to manage their cash counting department; however, they reported little about employment opportunities offered to disabled people in their annual reports. This is an area that firms in Sri Lanka need to strengthen in order to contribute to the development of HC and to strengthen their corporate image as responsible corporate citizens (see Table 8.1). Further, some firms had concerns in employing women in certain activities, either due to the nature of their business activities or the restrictions imposed by law on their work hours. Trading Limited said that they prefer to employ men in their data processing division because employees in that division often need to work long hours which cannot be met by women due to legislation. Engineering Limited said they do not employ women in fieldwork because they are not physically strong to carry out such work. The relatively lesser employment opportunities offered to women does not give rise to a conflicting situation in the context of social, political and economic framework in Sri Lanka. This is because in the Sri Lankan context, men play a more dominant role socially, politically and economically than women and are considered the breadwinners of the family. The relatively high unemployment rate (see Section 4.3.1) has also heightened the competition for employment and it is socially and politically acceptable for men to win preference for jobs over women. Men in Sri Lanka have a higher adult literacy rate than women (see Section 1.4), which also helps industry groups justify offering more jobs to men than women. As evident from the case study findings from Trading Limited, the laws of the government relating to the equal employment of the sexes favour men in terms of liberal work hours and the types of activities in which they can be employed to facilitate reproduction of shareholder capital. Therefore, proactively reporting about equity issues does not benefit industry groups in manipulating the views of their constituents. G. WORKPLACE SAFETY (E4)

All industry groups reported least about workplace safety in the HumC category. This implies that the industries are not actively concerned about workplace safety; however, the case study findings indicated the contrary. The case study interviews revealed that many firms are highly involved in managing workplace safety. All firms interviewed had a safety plan and managed their safety aspects well. Also, all firms had an ISO 9000 certification which required them having a safety programme audited periodically by Lloyds of London.

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In comparing the case study interview findings with the annual report findings, it was found that firms deliberately under-reported about employee safety. This anomaly can be attributed to the civil war in the country. The ongoing civil war during the period of the study reduced the safety of people’s lives while outside of work. From the perspective of PEA theory, both social and political constituents in the framework accept the lack of safety to people’s lives as a perceived reality and as a national issue that affects all industry groups. Therefore, no single industry group can manipulate the views of the constituents by reporting more about workplace safety. Further, more frequent reporting about safety of employees in annual reports could embarrass the political constituents due to their inability to offer a safe environment outside the workplace. 8.2.2.2 Elements in external capital category In the ExtC category, industry groups reported IC elements in the following descending order: brand building, corporate image building, business partnering and least about market share (see Appendix 7.5). Each ExtC element is listed below, with A, brand building, being the most reported and D, market share, being the least reported. The reasons for such reporting by industry groups can be interpreted in the following ways. A. BRAND BUILDING (E5)

All industry groups except for the industry group with the ‘third most shareholders’ reported most about brand building in the ExtC category. The case study interviews with firms from the ‘third most shareholders’ industry group (Engineering Limited and Hotel Limited) revealed that they did not report about brands because they lacked branded products or services. The previous research indicates that branded products are at the highest end of the value chain, enabling industry groups to maximise their capital reproduction. Using the PEA theory, the industry groups which report most frequently about brands in the ExtC category can be attributed to those industry groups attempting to convince shareholders to invest their capital to maximise capital reproduction (see Section 1.4). The possible agenda of debate mediated by these industry groups is summarised in Table 8.2. B. CORPORATE IMAGE BUILDING (E14)

The industry group with the ‘third most shareholders’ most frequently reported about corporate image building rather than on brand building in the ExtC category (see Appendix 7.5). The industry group with the ‘third most shareholders’ is dominated by firms from the engineering hotel sectors. The case study interviews revealed that these sectors have little branded products or services. Hotel Limited disclosed at the interview that they have just initiated promoting a brand name to market their residential apartments. Further, when case study findings

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Table 8.2 ExtC reporting analysed by PEA theory Ref.

IC activity

Cause for tension

Concerned constituent

Agenda

A

Reported most on ‘brand building’

Economic

Industry groups focus on most profitable value added segment of products and services

B

Reported second most on ‘corporate image’ Reported third most on ‘business partnering’ Reported least on ‘market share’

Competitive ability of industry groups with foreign firms Corporate image and size

Social

Visible corporate citizen taking care of the capital

Civil war

Economic

Positive business attitude

Government hold monopoly status of some industry sectors

Political

Avoid creating friction with the government

C

D

were compared with the annual report disclosures, it was revealed that some firms in this industry group reported about brand building more than they paid attention in managing them. The industry groups with the ‘most shareholders’ and ‘second most shareholders’ reported second most frequently about ‘corporate image’. The industry group with ‘least shareholders’ did not report at all about corporate image. This could be because they were the least dependent on shareholders to attract capital into their industry group. Using the PEA theory, it can be argued that although the firms within the industry group with least shareholders are visible entities, it is not important for them to promote their visibility to attract capital (see Table 8.2). C. BUSINESS PARTNERING (E15)

The industry group with the ‘least shareholders’ reported second most frequently about ‘business partnering’. The industry groups with the ‘most shareholders’ and ‘third most shareholders’ disclosed third most frequently about business partnering in the ExtC category. On the other hand, the industry group with the ‘second most shareholders’ reported less frequently about business partnering. This can be attributed to the composition of the industry group with second most shareholders. A substantial proportion of the firms in this industry group are multinationals, and these firms generally did not seek business partnering to attract capital into their firms. On the contrary, firms with the most shareholders were actively seeking business partnerships with international firms. Diversified Limited, a firm from the industry group with the ‘most shareholders’, disclosed

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at their interview that one of the keys to their business success is partnering with reputable international firms. The overall lower frequency of reporting on business partnering could be attributed to the fewer franchising and licensing agreements that firms in Sri Lanka have with international firms. As past research points out, this could be due to firms in developed countries obtaining less return with firms in developing countries in international joint ventures (see Section 4.3). Further, the civil war in Sri Lanka has also contributed to an uncertain business environment, which has adversely affected business collaborations with foreign firms who are wary of the uncertain environment (see Section 4.3.2). D. MARKET SHARE (E17)

Although all industry groups reported least about their market share in the ExtC category, the case study interviews revealed that all industry groups were strongly focused on managing their market share. The only exception was Property Limited, a firm from the industry group with the ‘least shareholders’, which rents its entire property portfolio to its parent firm. This has eliminated their need to manage their market share. The case study interview findings identified three reasons as to why industry groups actively manage their market share, which has been interpreted using the PEA theory. First, one crucial business strategy used by firms is to maximise capital reproduction through a greater volume of sales. For instance, Food Limited, a firm from the industry group with ‘second most shareholders’, disclosed at their interview that they monitor their volume of sales on a daily basis and explore opportunities of synergy with other firms to increase their market share. Second, some firms have come under pressure from the government, due to lobbying by social groups, to restrict the points of sale of their products. In this respect, Tobacco Limited mentioned that they monitor their market share and explore creative opportunities to maximise their reproduction of capital to convince their shareholders to continue investing capital in their firm. Third, the government holds the monopoly position or major market share in certain products (see Section 4.3.1) and that has stiffened the competition for firms marketing those products. Corporate firms in industry sectors such as banking and telecommunication have to compete with government-held firms. Government-held firms generally hold a bigger market share in such industry sectors for the following two reasons. First, they were one of the early players in the industry enabling them to establish themselves in the market; and second, the non-competitive and inequitable pricing structure of government-held firms which enables them to attract consumers. The government budget-funding supplement, which allows government-held firms to counter inefficient practices such as relative pricing of products and further writes off bad debts for government-held firms, continues to be a prominent concern in the equality of the market place (see Section 4.2.2). With government monopolies holding onto a bigger market share, they are able to take actions that are not available to low-market share firms (see Section 4.3).

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Comparing the case study interview findings with the annual report disclosures reveals that firms have deliberately under-reported about their market share (see Table 7.1), because reporting more frequently about market share can give rise to tension. This anomaly can be interpreted using the PEA theory as follows. First, some firms in certain industry sectors are under political scrutiny due to the nature of the products they manufacture or market, such as alcoholic and tobacco products. Reporting about their market share can invite further criticism and adverse legislation. Second, since the government still holds a monopoly on certain products and services, reporting on market share may create tension between the industry groups competing with the government-held firms. In conclusion, firms from all industry groups seek to downplay reporting about their market share to ease tension with their powerful political constituent. 8.2.2.3 Elements in internal capital category In the IntC category, industry groups reported IC elements in the following descending order: processes, systems, intellectual property and least about financial relations (see Appendix 7.6). Each IntC element is listed below, with A, processes, being the most reported and D, financial relations, being the least reported. The reasons for such reporting by industry groups can be interpreted in the following way. A. PROCESSES (E8)

All industry groups (except for the industry group with the least shareholders) reported most about ‘processes’ followed by ‘systems’ in IntC category (see Appendix 7.6). Many industry groups attempt to improve their processes relating to company procedures, various types of routine evaluations, meetings and reviews. As summarised in Table 8.3 reporting most about processes can also be interpreted using the PEA theory. First, since semi-skilled and unskilled employee processes are replaced by technological systems, it is possible that industry groups report most about processes in the IntC category to divert the attention of their political constituents who can impose stricter labour laws or mandate industry groups to take a greater responsibility in solving issues of unemployment. Second, it can be seen as a way of winning government support by backing their knowledge-based economy agenda, implying that industry groups promote knowledge-sharing and knowledge-creating environments for their workers. B. SYSTEMS (E9)

As the previous literature points out, state-of-the-art technological systems are generally too expensive for developing nations, but they have the opportunity to acquire proven technological systems at an affordable price when these new

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technological systems are embraced by developed nations (see Section 1.2). The case study interviews with Tobacco Limited and Trading Limited revealed that industry groups are gradually replacing processes handled by unskilled and semi-skilled employees with technological systems. The respondents from Tobacco Limited also revealed that firms do not offer much vocational training to their non-executive employees since they are earmarked to be replaced with technology. These findings are consistent with the low frequency of reporting (on vocational qualifications of employees IC item) in their annual reports. However, as discussed in the previous paragraph, reporting about industry groups adopting technological systems to replace employees for more capital reproduction for its shareholders can create social tension between the industry groups and their social and political constituents. Table 8.3 summarises the possible causes for tension and the agenda of debate mediated by these industry groups (also see Section 2.6.2) C. INTELLECTUAL PROPERTY (E11)

The case study interviews revealed that firms in the industry group with the ‘most shareholders’ (Bank Limited and Finance Limited) have many trademarks. Some firms in this industry group (e.g. Food Limited) revealed that they also have a number of patents. However, these industry groups reported little about their trademarks and have not reported at all about their patents. However, they admitted that their intellectual property is registered with the National Intellectual Property Office of Sri Lanka (NIPOSL). A firm in the industry group with the most shareholders, which is involved in manufacturing products using chemicals, is the only exception found that does not register their trade secrets and industrial designs with the NIPOSL. Instead, they maintain restrictive covenants, with employees having the knowledge of their formulae design, and they thought that there was no necessity to report them since they are not registered with the NIPOSL. Comparing the case study findings with the annual reports disclosures indicated that firms have under reported their intellectual property in their annual reports (see Table 7.2). This low reporting anomaly on intellectual property, interpreted using the PEA theory, can be attributed to an attempt by firms to reduce tension with their social constituents. The ownership of intellectual property indicates exclusive proprietary rights on either intangible or tangible assets, which divulges to other constituents the ability of the firm to maximise their capital and commodify labour (see Table 8.3). D. FINANCIAL RELATIONS

The case study interviews confirmed that the high market capitalisation enabled firms (e.g. Beverage Limited and Manufacturing Limited) from all industry groups to have favourable financial relations with their financial institutions. The respondents from Tobacco Limited and Food Limited disclosed that their

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financial relations extend at spatial level with their multinational counterparts where they have access to funds at competitive rates. When the case study interview findings are compared with the annual report disclosures, it is revealed that industry groups deliberately under-reported their favourable financial relations (see Table 7.2). This could be attributed to the fact that more frequent reporting about favourable financial relations can create social tension because they are being perceived as receiving favourable treatment to multiply their capital. The industry groups can enjoy favourable treatment through the lower cost of funds, which gives them an unfair advantage in competition. From the perspective of the PEA theory, it appears that these industry groups avoid tension by disclosing least about their financial relations (see Table 8.3). Table 8.3 IntC reporting analysed by PEA theory Ref.

IC activity

Cause for tension

Concerned constituent

Agenda

A

Reported most about processes

Semi and unskilled employee processes are replaced by technological systems

Political, Social

Divert the attention of constituents by reporting more about processes and avoid inviting stricter labour laws imposed

Political

Subscribe to the government backed knowledge-based economy implying industry groups promote sharing tacit knowledge among workers Avoid reporting more which can create further tension

B

Reporting second most about systems

C

Reporting third most about intellectual property

D

Reporting least about financial relations

Semi and unskilled employee processes are replaced by technological systems Majority of intellectual property is trademarks. Only handful patents. Educated workforce under-utilised Size enables to obtain favourable financial position

Social

Political

Avoid reporting more which can divulge their ability to maximise their capital and commodify their labour

Social

Avoid report more reveals that they have access to low cost of funds which can lead to unfair competition

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Interpretation of results

Although previous research indicates weak laws relating to protecting IC in Sri Lanka (USAID 1998), case study interview findings in this study revealed that firms have not experienced any significant third-party malpractice on their intellectual property. The anomaly of findings could be due to the nature of the sample of this study, which has been restricted to bigger firms, and the perpetrators tend to avoid such firms since they can counter such malpractice effectively because of their financial strength. However, it may not apply to smaller firms that cannot counter such threats to malpractice (see Section 2.5.3). In summary, industry groups differ in their ICR frequency. In the ExtC category, all industry groups, except for the industry group with ‘third most shareholders’, reported most frequently about brand building. The industry group with ‘third most shareholders’ reported most about corporate image. They all reported least about market share. In the HumC category, industry groups reported most about employee relations. All industry groups reported least frequently about equity issues and safety issues. In the IntC category, all industry groups reported most frequently about processes and least frequently about their financial relations. The industry groups also differ in their ICR frequency within each IC category. In the HumC category, industry groups with the ‘most’ and ‘second most shareholders’ reported most about employee relations. The industry group with the ‘third most shareholders’ reported most about employee measurement, and the industry group with the ‘least shareholders’ reported most about employee welfare. All industry groups reported least about equity issues and workplace safety. Some of the IC elements in each IC category were also either overreported or under-reported. The differences in reporting between industry groups were interpreted using the PEA theory.

8.3 Interpretation of results in hypothesis two The following two subsections will interpret the results of the annual reports and case study interviews in reference to Hypothesis two. The first subsection, Section 8.3.1, will discuss the differences between Sri Lanka and other nations in reference to IC categories. Section 8.3.2 will discuss the differences between Sri Lanka and other nations in reference to IC elements. 8.3.1 Differences between Sri Lanka and other nations by IC categories The empirical data of annual reports of this study suggests that of the three IC categories, ExtC is the most reported and HumC is the second most reported IC category. Several researches have made similar conclusions in Australia (Guthrie and Petty 2000d), and in Ireland (Brennan 2001), but in Sri Lanka, HumC was found to be relatively more reported as an IC category. However, based on such empirical data, some researches have concluded that HumC is not the most important IC category, although some firms publicly announce that the

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HumC category is the most important (see Section 2.5.3). The case study interview findings of this study found that firms appeared to manage HumC more intensively than was reported in their annual reports due to the following four factors, as interpreted using the PEA theory. First, it appeared from the study that firms designed their annual reporting to set and shape the agenda of their economic, political and social arrangements. ICR frequency on annual reports alone does not necessarily offer a guide to the level of importance placed on HumC within the firm (see Section 5.2.1). Second, this book combined case study interviews when interpreting its empirical data. Case study findings revealed how firms manage their IC and enabled us to examine the anomalies between reporting and managing IC. Third, the case studies revealed the degree of emphasis on managing HumC and found that several HumC elements were ‘under’ reported to manipulate their social, economic and political constituents. Fourth, as outlined previously in this chapter, firms in Sri Lanka appear to depend more on relationships between employees and processes to disseminate knowledge rather than codifying them in technological systems. Using the PEA theory, it can be argued that employees can be treated as assets when firms are dependent on people for their knowledge. However, employees can be treated as labour when firms are dependent on technological systems that hold the codified knowledge of employees. Therefore, firms in Sri Lanka are more inclined to maintain employees as HumC rather than labour. 8.3.2 Differences between Sri Lanka and other nations by IC elements This section compares the findings of this study with similar previous studies carried out in other countries. Brennan (2001), Guthrie (1999), Guthrie et al. (1999), Guthrie and Petty (2000c), Olsson (2001) and Subbarao and Zeghal (1997) (see Section 2.5.3) have all carried out studies similar to this study with firms in other countries (see Section 2.5.3). Australia Similar to the previous research carried out in Australia, this book found that firms in Sri Lanka did not have a theoretical framework for ICR (Guthrie 1999; Guthrie et al. 1999; Guthrie and Petty 2000c). Guthrie et al. (1999) stated that although few annual reports in Australia, that is Lend Lease and Morgan & Banks, had a separate section to describe IC, this was non-existent in the annual reports of firms examined in Sri Lanka. It could be argued that having an exclusive section of IC in the annual reports could draw the attention of regulators to the need to regulate ICR. It appears that firms in Sri Lanka attempt to retain ICR choice in an ad hoc fashion in annual reports (see Section 2.3 and Section 4.2.3). Reporting ExtC was more in favour with firms in both Australia (40%) and Sri Lanka (44%). The global competition for capital requires them to uphold shareholder confidence by proactive ICR relating to the market. It is relatively more important for firms in Sri Lanka to report about ExtC for two possible

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reasons. First, it could counter the negative effects on shareholder confidence due to several issues inherent in the Sri Lankan business environment such as the civil war. Second, it could counter the negative impact on capital reproduction from protective labour legislation. Australian firms reported more IC on business collaborations compared to their Sri Lankan counterparts. As previous research indicates, business collaborations with developed countries obtain higher returns than with developing countries, and ICR by Australian firms enables them to attract shareholder capital from other developed nations into their firms (see Section 4.2.2). The proportion of ICR on HumC in Sri Lanka (36%) was more than that in Australia (30%). Relationships between employees and the firm are far more important in the Sri Lankan context, which is probably a factor of Sri Lankan culture. The Sri Lankan case contributes to the understanding of the ‘entity’ view of the firm. The ‘entity’ view of the firm argues that the relationships between employees and the firm are the most important factor in retaining employees. The theory of the firm most widely accepted at present assumes that there exists a particular narrowly defined kind of relationship between shareholders and managers. It is also based on the implicit assumption that the firm is a bundle of assets delegated by owners to managers who are tasked with managing these assets. However, modern management is increasingly interested in addressing the complex role of human input in the life of the firm and is increasingly cognisant of the fact that HC cannot be treated as something separate from corporate governance (see Section 2.6.2). In line with the above, it appears that firms in Sri Lanka tend to rely on their employees’ tacit knowledge base from which to leverage the firm’s knowledge, rather than concentrating their energies on the direct codification of knowledge. This is accomplished by encouraging an emphasis on relationship building within the firm and by indirectly promoting ‘communities of practice’ among employees. This practice is similar to that of many successful Japanese companies, as found by Nonaka (1991). In these companies, it was found that knowledge creation was viewed as a process of tapping into the tacit knowledge, insights, intuitions and hunches of employees, on the basis that new knowledge finds its beginnings in the individual (see Section 2.6.2). The Government of Sri Lanka is also concerned about how firms utilise HumC due to their heavy investment in the education of their people (see Section 4.7). Therefore, it is possible that firms in Sri Lanka (as compared to those in Australia) are more proactive in reporting about HumC to avoid any possible regulation relating to the use of HumC. The cultural differences between the two countries may also have an impact, although this is not explored in this study. In relation to HumC, entrepreneurial spirit was the most frequently reported attribute of HumC in Australia, whereas entrepreneurial spirit was one of the least reported in Sri Lanka. The differential reporting in HumC category of firms in Sri Lanka can be attributed to several factors including cultural, social and

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economic factors. In particular, this differential reporting could be due to firms in Sri Lanka borrowing R&D know-how from firms located overseas, and as a result, firms in Sri Lanka do not demand a high level of entrepreneurial skills in innovation from their employees. Firms in Australia are at the forefront of R&D and the business culture provides incentives to encourage the entrepreneurship of employees. The cost of innovation in Australia is not a pressing issue, and the innovators do not have to worry about the product having a high initial price. The products in developed countries, such as Australia, go through the initial phase into the growth stage where such products become widespread in the national market. The shareholders are willing to support such entrepreneurship because such markets have the ability to accept the risk of innovation and reap the benefit of success through the high initial market price. Conversely, firms in Sri Lanka cannot multiply their capital through comparable entrepreneurship because it is a low-price market (see Section 3.5). This comparison between Australia and Sri Lanka points to differences in values. It seems that Sri Lankan firms are more results-driven in their assessment of HumC, emphasising the recognition of employee contribution to the firm and reporting on value added by employees. Australian firms, on the other hand, seem to be more process-driven, emphasising the entrepreneurial qualities of employees and their work-related knowledge. Inasmuch as it is possible to generalise from this brief comparative analysis between Sri Lanka and Australia, it can be argued that the differences in HumC reporting between firms located in developing and developed countries can be attributed to the differences in their political, social and economic institutional frameworks. There is, however, a point of similarity in the behaviour between the firms of the developing and developed worlds: firms in both types of economies voluntarily report HumC as a way of shaping the standards of HumC reporting in their country. The proportion of ICR on IntC by firms in Sri Lanka (20 per cent) was less than that in Australia (30 per cent). As discussed previously, Australian firms are more process-driven and more entrepreneurial. It could be argued using the PEA theory that the Australian government is more supportive of their entrepreneurial culture, and more comprehensive laws are in place to protect intellectual property rights. Three methodological differences should be considered when comparing the two studies. First, the framework used in Australia had fewer attributes in HumC than the framework used in this book. Second, this book covered two consecutive years of sampling of the top 30 firms by market capitalisation, whereas the study in Australia sampled the top 20 firms by market capitalisation over one year. Third, the sample size in Sri Lanka was more representative of firms listed in the CSE since it is a small market (64.2 per cent in 1998; 59.93 per cent in 1999). In contrast, the sample size in Australia may not be representative of firms listed in Australian Stock Exchange because it is a much bigger market.

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Sweden The findings of Olsson’s (2001) Swedish study should be compared to the findings of this book with caution for two reasons. First, Olsson (2001) reviewed HumC in the context of total information in the annual report, whereas this book reviewed HumC in the context of IC information only. Second, Olsson (2001) tends to assume that most reporting means most important to the firm, which is not necessarily true. This Swedish study also excluded information about stock, balance sheet and income statements, auditing reports, holding firms, cash flow analysis, proposal for the distribution of profits, cover pages, addresses and phone numbers, principles for valuation and accounting paragraphs and definitions of key ratios disclosed in annual reports. On the other hand, that information was included and reviewed in this study for analysis. Therefore, the impact of excluding such information by Olsson on HumC should be taken into consideration when evaluating conclusions of that study. Further, Olsson (2001) examined only 18 firms of the A-list of the Swedish stock exchange, and their sample may not be representative of the Swedish stock exchange. Olsson (2001, p. 51) concluded that there was an observable absence of transparency in HumC reporting by firms in Sweden (see Section 2.5.2). The findings of the Swedish study contrast with the findings of this book in that the firms in Sri Lanka reported HumC second most frequently as an IC category. Further, HumC reporting in the annual reports increased over the two-year period of this study. From a PEA perspective, the differences in HumC reporting between Sweden and Sri Lanka can be attributed to differences in their political, economic and social environments. Ireland Brennan’s (2001) study, which was carried out in Ireland, reported ExtC as the most reported IC category. However, this research study is fundamentally different from Brennan’s study, which only included in its sample technological and people-oriented firms. The sample size and the nature of sample were also different, as it analysed the annual reports of 11 listed firms and ten private firms (see Section 2.5.2). The author concluded that IC is rarely reported in the annual reports of Irish firms and when IC was reported, it was in qualitative form. This is in contrast to the findings of this book which found that most of the IC disclosures in the annual reports were in qualitative form. International study Although the Subbarao and Zeghal (1997) study, which analysed the annual reports of a sample of publicly traded firms in six countries, namely, the USA, Canada, Germany, UK, Japan and South Korea, is fundamentally different from this research study, in sample identification, analytical rigour, geography of comparison and objectives of the study, it brings out important findings to compare with the HumC category. A contrasting difference is that Subbarao and Zeghal (1997) reported value added by human resources as one of the

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least frequently disclosed IC item, whereas firms in Sri Lanka disclosed it more frequently (included in employee measurement sub-category). First, it suggests that firms in Sri Lanka operate in a different social, political and economic framework. Second, it points out that firms in Sri Lanka are still using manipulative statements such as the value-added statement to construct views to their constituents due to less regulatory accounting standards (see Section 4.4). The low level of reporting about employee compensation and profit-sharing information in Sri Lanka is consistent with other countries in Asia, suggesting that their political and social framework have more similarities than with developed countries in Europe and North America. In summary, Sri Lanka’s overdependence on foreign shareholders, the government’s drive towards a knowledge-based economy and the absence of a regulatory framework for ICR encourage firms to proactive report of IC to meet the expectations of their social, economic and political constituents in the framework. The government’s recent push towards privatisation and drive towards the knowledge-based economy also encourage firms to report most about ExtC to win support of their political and economic constituents. Firms report most about brand building to mystify their shareholders and least about market share to win support of the political constituents. Firms reported most about processes and least about financial relations to reduce tension with their relevant social constituents. The ICR differences between firms in Sri Lanka and firms in other countries imply that each country reports to mediate the agenda of debate of their own social, political and economic arrangement.

8.4 Reporting units and reporting location This section makes brief reference to the use of reporting units and reporting location when disclosing IC information in annual reports. These findings are additional to the findings related to Hypotheses 1 and 2 above. The empirical analysis data of this study also found that firms have employed several units of communication to report their IC. Primarily, information about IC was reported in narrative form. The charts, tables and photographs were primarily used to communicate information on HumC. People learn best from stories, and previous research has shown that a convincing narrative is the most effective way to communicate knowledge. Description of knowledge is similar to description of a story in terms of sequencing, suggesting there is a meaningful link between the two (see Section 5.2.2). The low level of quantification of IC information reported was not surprising for three reasons. First, there is no single agreed method to quantify IC information at present and any quantification can give rise to inaccurate meaning. Second, only a few people possess the knowledge to quantify such information. Third, research done in the areas of environmental and

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social accounting has revealed that most of the information presented is not quantified. When firms communicated numbers, they were displayed in charts or were included in the narrative. The monetary values were displayed using charts and tables. It seems that the firms used them to give prominence to HumC through some generalisation of information. The study also found that non-monetary numbers (numerical) were largely reported in the HumC category and they were mostly in relation to training and Table 8.4 Research objectives and outcomes Objectives

Outcomes

1 Interpret 1 The industry groups differed in IC elements reported in their results of ICR overall reporting. Further, ‘Most shareholders’ industry group frequency in IC reported most about ‘employee relations’. ‘Second most categories and shareholders’ industry group reported most about ‘brand building’. elements ‘Third most shareholders’ industry group reported most about between ‘corporate image building’. ‘Least shareholders’ industry group industry reported most about ‘employee welfare’. Further, industry groups groups in showed reporting similarities of IC elements within each IC Hypothesis one category. In HumC industry groups reported employee relations, employee measurement, training and development, employee welfare, entrepreneurial skills, equity issues, and workplace safety in descending reporting frequency. In ExtC industry groups reported brand building, corporate image, business partnering and market share in descending reporting frequency. In IntC category industry groups reported about processes, systems, intellectual property, and financial relations in descending reporting frequency. The overall reporting differences in IC elements and reporting similarities of IC elements within each IC category were attributed to industry groups mediating their agenda of debate among its political, social and economic constituents (see Section 8.2). 2 Interpret 2 ICR frequency differed between firms in Sri Lanka and other results of ICR nations were interpreted using the PEA theory. The thesis found frequency ICR frequency differences between IC categories and IC elements. differences The reporting differences were attributed to industry groups between mediating the agenda of debate among its political, social and firms in economic constituents (see Section 8.3). Sri Lanka and other nations in Hypothesis two 3 Make brief 3 Firms employ several units of communication in ICR to achieve reference to the the best impact of ICR among its readers of annual reports. The use of reporting ICR had a low level of quantification to avoid communicate units and incorrect meaning, and incapability of firms to quantify the reporting information (see Section 8.4). location when disclosing IC information

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development and employee measurement. The training and development reported mostly concerned training programmes. The employee measurement reported mostly concerned employee numbers, value added by employees, age of employees and expert seniority. The employee measurement and employee welfare reported most of the monetary (fiscal) value of HumC. The employee measurement sub-category reported them mostly as value added by employees. IntC category quantified IC exclusively about processes. ExtC category quantified them as monetary (fiscal) values in corporate image building. HumC quantified them mostly as employee measurement. This research also found that the increase in frequency of using reporting units correlates with increase in ICR frequency. The excessive use of narratives could be attributed to firms attempting to achieve the maximum impact in constructing their views. The low level of quantification of IC was consistent with other types of voluntary reporting due to the inability to reliably quantify them. Quantifying more HumC information enabled firms to add more seriousness to the message to their constituents. This research also found that annual reports had no exclusive section on ICR but the ‘Sundry’ section reported most IC. The Sundry section of the annual report contained nearly one-half of the IC information by line count and onethird by frequency. The most notable category in that section of the annual report was on HumC. The Chairman’s section had a bias towards ExtC. The Directors’ section had a bias towards IntC by frequency and HumC by line count. A combination of the Chairman’s and Directors’ sections showed a bias towards ExtC. Some authors argue that the location of disclosure in the annual reports helps formulate a view of the commitment to the development of IC. However, others tend to think that it is not easy to find a unique, single reason as to why a particular location is preferred for reporting given information (see Section 5.2.4).

8.5 Chapter summary Table provides a summary of the research objectives of this chapter and the outcome of these objectives. This chapter provides a brief overview of the contents of this book and evaluates its contribution to the literature.

9

Conclusions

9.1 Introduction This chapter provides a brief overview of the contents of this book and evaluates its contribution to the literature. Section 9.2 briefly summarises the motivation behind the study and ambit of the research. Section 9.3 briefly summarises the data methodology and results. Section 9.4 discusses the contribution of this study in the context of intellectual capital reporting (ICR). Section 9.5 describes the limitations faced in this book. The last section suggests possible directions for future research that have arisen from the issues dealt wiAu: type query hereth in this book.

9.2 Motivation and ambit of the research Several studies have been carried out to understand and measure ICR, but these studies have predominantly been carried out in the context of a developed nation. Sri Lanka, as a lower-middle-income developing country, was an attractive choice for this study for two reasons. First, as mentioned above, there is a definite gap in the literature on ICR practices and trends that pertain to the context of a developing nation. Second, Sri Lanka is a country with a significantly high literacy rate, and therefore, a vast quantity of human capital (HumC). As such it is interesting to posit and investigate to what extent firms manage and report their HumC (see Section 1.4). The focus on HumC was captured both by the coding framework that has an extensive list of HumC items and by the case study interviews in which the primary respondents were human resource personnel (see Section 5.5).

9.3 Data, methodology and results The study employed two major methods for data collection. First, content analysis on the annual reports of the top 30 firms in the Colombo stock exchange (CSE) selected by market capitalisation. The sample had a sufficient representation (64.2 per cent in 1998 and 59.93 per cent in 1999) of all firms listed in the CSE (see Section 5.11). Second, 11 case study interviews with firms selected

Conclusions

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from the sample (see Section 5.8). The study was carried out over two consecutive years from 1998/1999 to 1999/2000, and data was recorded into internal capital (IntC), external capital (ExtC) and (HumC) categories using a coding framework. This framework pre-defined each intellectual capital (IC) item before recording and analysing the data units to ascertain patterns of ICR (see Section 5.5). The study comprised two hypotheses. Hypothesis one examined the similarities and differences in ICR between industry groups classified according to the number of shareholders (IC categories and sub-categories). Hypothesis two examined the similarities and differences in ICR between firms in Sri Lanka and firms located in other nations by referring to previous specific research (see Section 6.2). In testing Hypothesis one, it was found that industry groups differed in their ICR based on the number of shareholders. The industry groups with a greater number of shareholders proactively reported IC to convince their capital providers to continue their investment and to attract additional capital (see Section 7.2). Hypothesis two revealed that the ICR of firms in Sri Lanka differed from the ICR of firms located in other nation states, suggesting that the specific features of a nation’s market, state and community principles affect the way in which ICR is conducted (see Section 7.3).

9.4 Contributions of the research In conducting this research, this study was able to make some interesting observations, as presented in the previous chapter. This section outlines five contributions of this book, which are possible policy implications. It outlines the major contributions in five parts: filling a research gap; benchmarking; the role of accounting, the role of capital and the role of the state. 1

2

3

Filling a research gap As mentioned above, the study of ICR within the context of developing nations is largely under-researched. Using Sri Lanka as the empirical site, this research was able to meet a desperate need for material in this subject area (see Section 2.7.1). Benchmarking This study is one of the very few on ICR carried out in developing nations; as such it can be considered a benchmark by which to compare trends in ICR between firms in developing and developed nations. The findings of this study could also be taken as a benchmark for future research into the ICR trends of firms based in other developing nations (see Section 2.7.1). Further, this study has also contributed to the literature by helping to advance and refine a coding framework that can be used for further study and detailed analysis into the ICR of a firm (see Section 5.5). Role of accounting

174

4

5

Conclusions The study also highlights the role that the accountancy profession plays, and can play, in shaping ICR in a responsible manner, while acknowledging the specific views of policy makers in supporting an economy driven by market principles. Stakeholders can incur losses due to information asymmetries which arise from anomalies between IC managed and IC reported (see Section 7.3) and firms using arbitrary frameworks and approaches for ICR (see Section 2.5). Further, the deficiencies of traditional accounting for IC measurement and reporting can lead to biased and even fraudulent ICR (see Section 2.3). Although the accounting profession in Sri Lanka has put forward a conceptual framework, it does not define its accounting elements (e.g. compared to the conceptual framework of accounting in Australia) (see Section 4.2.3). This can lead to ambiguity in relation to interpreting items reported in the annual reports. Given the present non-uniformity in IC definitions, a standardisation of accounting elements (i.e. assets, liabilities, equity, revenue and expenses) in common language can enable stakeholders to understand and interpret IC information for inter-company comparison (see Section 2.2). Role of capital One of the problems facing listed firms in the CSE is their overdependence on foreign capital. The recent changes in the global market provided evidence of the capital flight to other nations. One factor was the absence of technology and knowledge-intensive firms listed on the CSE. The government through their policy mechanisms can encourage such firms to exist in Sri Lanka and be listed in the CSE. Such mechanisms include providing fiscal incentives through the tax regime; hedging facilities to hedge the depreciating local currency against foreign currencies; consistent policies and a robust legislative framework where outcomes of disputes are resolved impartially and expeditiously (see Section 4.2.1). Role of the state The book identified the role that the Sri Lankan government has played in facilitating capital reproduction through concessionary tax rates and through the liberalisation of foreign ownership and trade (see Section 3.4). However, there were also instances in which the government acted in the interest of the labour, by seeking to establish protective labour legislation. This book also found that vulnerable sectors of the community (e.g. disabled persons and women) have been disadvantaged in employment by firms due to the capital-driven market economy, which is encouraged by the government (see Section 8.2.2.1). The findings suggest that in order to remedy this situation, the government should negotiate with firms on a minimum number of employment opportunities to be filled based on an agreed criteria, so that capital-driven firms share their social responsibilities along with the state. The book also found that employees generally perform the more operational and maintenance aspects of systems and processes within a firm as

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opposed to the research and development (R&D) aspects (see Section 8.2.2.1). This is partly due to firms buying innovations from overseas at a cost-effective price. However, the suppression of innovation in the workforce appears to be inconsistent with the government’s drive towards a knowledge-based economy (see Section 4.3.2). It is therefore important for policy makers to come up with new policies and incentives that would attract capital inflow to the state, encouraging firms to establish their own R&D activities and drive them towards becoming innovation firms. However, when considering the contribution of this research, the inherent limitations must be acknowledged. These limitations are described in the following section.

9.5 Main limitations of the research This book identified seven limitations inherent in this study. First, there could be other firms, outside of the selected sample or the CSE, actively involved in the creating and managing of ICR. These firms could be private sector firms not listed in the CSE (e.g. Unilever Sri Lanka), public sector corporations, and other public sector firms that could match the top firms listed in the stock exchange by market capitalisation (e.g. Sri Lanka Telecom and Bank of Ceylon). Although such an examination is potentially fruitful, it was outside the scope of this study. Second, this research classified firms into industry groups based on the number of shareholders. However, the sample firms could also be analysed using alternative classifications. Therefore, when comparing the results of this study with the results of other studies, data must be interpreted recognising the differences in methodology. Third, this study expanded on the previously established IC framework by adding other IC items into it. Care should be taken when comparing the results of a study that used another framework. Fourth, the sample size represented 60 per cent of the CSE by market capitalisation. However, it could be argued that it constituted only 10 per cent of the listed firms’ population. In interpreting results, one should bear in mind the representation it has to the entire population. Fifth, the study classified its sample of 30 firms from each of the two consecutive years only to ascertain trends of ICR by industry groups. However, the sample size of industry groups may not be sufficiently large to generalise its findings. Sixth, this study did not address emotional assets and liabilities of firms, which could have an impact on ICR since emotional capital tends to activate or deactivate IC and accounting capital (Abeysekera 2002). Seventh, there could be other developing countries that do not share the social, economic and political characteristics of Sri Lanka. The ICR practices of other developing countries could be influenced and shaped by such factors, limiting the generalisability of the results of this study to other developing countries.

176

Conclusions

In summary, this book identified seven limitations. The next section outlines research ideas that emanated from this research.

9.6 Suggestions for future research This book identified six research suggestions for future examination. First, similar to previous studies in environmental reporting (see Section 5.3.4), it would be interesting to ascertain trends in the ICR of firms in a more longitudinal study; the empirical data examination in this study is restricted to two consecutive years. Second, a study could be constructed to investigate any relationship between ICR and other variables (such as firms classified by most frequently traded shares, differences in ownership and political ‘visibility’). A study could be carried out to determine the ICR of firms of different sizes. For example, a study could be carried out to determine the reporting trends by sampling the largest 30, medium 30 and smallest 30 firms by market capitalisation (Andrew et al. 1989; Guthrie and Mathews 1985). Further, a study could be carried out to determine the categories of ICR and their perceived importance by type of share ownership, namely private versus public sector. Another study that could be carried out could be to examine whether there is a relationship between the location of the IC disclosure in the annual report and the perceived importance of the item disclosed. Third, although the present study examined the sample via four industry groups, a larger sample size could represent more industry sectors, and could represent each industry sector in more detail, which could provide greater accuracy and reliability of data in generalising its findings. Fourth, the impact of soft qualities such as emotions, attitude and mindset on ICR is excluded in this book. The impact of emotional capital on IC was also excluded in this study. The impact of such soft qualities could constitute a separate study. Fifth, it would be interesting to investigate the explanatory power of other theories (such as positive theory, legitimacy theory or stakeholder theory) for ICR. Each theory could provide a basis for a further study. It could be hypothesised that ICR could lead to appropriating talents and achievements of individuals by firms, and an empirical study could throw light onto such a hypothesis. A study also could be constructed to ascertain whether ICR is merely used as a commodity to monopolise knowledge. This could be tested in the context of the globalised economic environment or of public policy. Sixth, this study refers to HumC as a combination of factors possessed by the individual and collective workforce of a firm. The plethora of definitions and lack of a uniform definition of HumC enable firms to experiment with their reporting of HumC (see Section 2.6.1). For example, firms could narrowly define HumC as those having formal qualifications from the tertiary sector, to ascertain the importance of HumC with formal education at the tertiary level. In summary, this book presented six suggestions for future research.

Annual reports used for reference

Aitken Spence and Co. Ltd., 1999, Annual Report 1998–1999, Colombo. Asian Hotels Corporation Limited, 1999, Annual Report 1998–1999, Colombo. Central Finance Company Limited, 1999, Annual Report 1998–1999, Colombo. Ceylon Cold Stores Limited, 1999, Annual Report 1998–1999, Colombo. Ceylon Cold Stores Limited, 2000, Annual Report 1999–2000, Colombo. Ceylon Grain Elevators Limited, 1999, Annual Report 1998, Colombo. Ceylon Tea Services Limited, 1999, Annual Report 1998–1999, Colombo. Ceylon Tobacco Company, 1999, Annual Report 1998, Colombo. Colombo Dockyard Limited, 1999, Annual Report, Colombo. Commercial Bank, 1998, Annual Report 1998, Colombo. DFCC Bank, 1999, Annual Report 1998–1999, Colombo. DFCC Bank, 2000, Annual Report 1999–2000, Colombo. Dipped Products Limited, 1999, Annual Report 1998–1999, Colombo. Dipped Products Limited, 2000, Annual Report 1999–2000, Colombo. Distilleries Company of Sri Lanka Limited, 1999, Annual Report 1998–1999, Colombo. Forbes Ceylon Limited, 1999, Annual Report 1998, Colombo. Hatton National Bank, 1998, Annual Report 1998, Colombo. Hatton National Bank, 1999, Annual Report 1999, Colombo. Hayleys Limited, 1999, Annual Report 1998–1999, Colombo. James Finlay & Co. Ltd., 1999, Annual Report 1998, Colombo. John Keels Holdings, 1999, Annual Report 1998–1999, Colombo. John Keels Holdings, 2000, Annual Report 1999–2000, Colombo. Lanka Lubricants Limited, 1999, Annual Report 1998, Colombo. National Development Bank, 1999, Annual Report 1999, Colombo. Nestle Lanka Limited, 1999, Annual Report 1998, Colombo. Property Development Limited, 1999, Annual Report, Colombo. Pure Beverages Company Limited, 1999, Annual Report 1997–1998, Colombo. Richard Pieris & Company Limited, 1999, Annual Report & Accounts 1998–1999, Colombo. Richard Pieris & Company Limited, 2000, Annual Report & Accounts 1999–2000, Colombo. Sampath Bank, 1999, Sampath Bank Annual Report 1998, Colombo. Singer (Sri Lanka) Limited, 1999, Annual Report 1998, Colombo. The Ceylon Brewery Limited, 1999, Annual Report 1998/1999, Colombo. The Lion Brewery of Ceylon Limited, 1999, Annual Report 1998/1999, Colombo. The MJF Group, 2000, Vision of a Man, online, available at: www.dilmahtea.com/ vision_of_a_man/index.html (Accessed 18 December 2001). Tokyo Cement Company (Lanka) Limited, 1999, Annual Report, Colombo. Upali Investment Holdings Limited, 2000, Annual Report 1998/99, Colombo.

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Index

accounting: changing focus 3–4; human resource 20; regulation 40 accounting reporting; political economy 23–35 accounting theory 32; normative 32; political economy 6 Adams, C.A.; corporate social reporting (CSR) 97 Aitken Spence Holdings; operational activities 70 alcohol/tobacco 39 annual reporting; data 101–2 annual reports 98; analysis 17; intellectual capital reporting (ICR) 95, 96; research method 47–8; research object 15 Asia-Pacific reason; disclosure 98 Asian Hotels; operational activities 70 asset value; employees 20 Australia; intellectual capital (IC) 165–7 balance scorecard (BSC); reporting 13, 14 Boczko, T. 23–4, 25 brand building 147–8, 158 Brennan, N. 16 Broad of Investment (BOI) 42–3 Brooking, A. 14–15; IC framework 61–2 Bryer, R. 26 business partnering 159–60 Caltex Lubricants Lanka Ltd; operational activities 70–1 capital: displacement 26; fictitious 30; institutional system 29; production 29; relation 29; role 174; unaccounted 2 capital arrangements: Colombo Stock Exchange (CSR) 36–8; role 36–41 capital markets; intellectual capital reporting (ICR) 21 capital reproduction; maximisation 160

Carson Cumberbatch; operational activities 71 Castells, M. 28 Central Finance Company; operational activities 71 Ceylon Brewery; operational activities 71, 72 Ceylon Cold Stores; operational activities 71, 72 Ceylon Grain Elevators; operational activities 72 Ceylon Tea Services; operational activities 73 Ceylon Tobacco Company; operational activities 73 Chau, G.K.; and Gray, S.J. 96 Coca Cola Beverages; operational activities 73 Code of Intellectual Property Act (1979) 45 Colombo Dockyard; operational activities 73 Colombo Stock Exchange (CSE): capital arrangements 36–8; intellectual capital reporting (ICR) 94 Commercial Bank; operational activities 74 commodification 29 competitiveness; technology-based 1 consenus coefficient 62 content analysis: overcoming threats 61–2; research method 51, 60–1; semantic 62; validity and reliability 60–1 Cooper, D. 24–7 copyright; industrial property 45 corporate image building 148, 158–9 corporate social reporting (CSR); Adams, C.A. 97 corporatism; PEA 30–1

198

Index

data capture; research method 55–60 data interpretation: common factors 98–101; hypothesis development 94–102 data-reporting variables: quantitative reporting variables 50; reporting location 50; research method 47 defintions and examples; intellectual capital reports (ICR) 79–89 development training 154–5 DFCC Bank; operational activities 74 differential reporting 96, 98 displacement capital 26 Drucker, P. 1 Dyson, J.; and Roslender, R. 19 e-governance 40 economic environment; deregulation 29 economic value added (EVA); reporting 13, 14 economy: knowledge 2, 35; Sri Lanka 41, 42 education: postgraduate 44; Sri Lanka 43–4 Elias, N. 20 employee measurement 153–4 employee relations 146–7, 150–3 employee welfare 148–9, 155 employees: asset value 20; knowledge base 166; valuation 19 entrepreneurial skills 155–6 equity: issues 156–7; workplace safety 149 expenses; intellectual assets 11–12 external capital (ExtC) 100, 158 Ferrier, F. 4 financial regulations 162–4 Fincham, R.; and Roslender, R. 4 firms: knowledge-based 1; legitimacy theorists 32 Forbes Ceylon; operational activities 75 foreign investment: discouragement 37; effect of 37 foreign investors; attraction 95 goodwill 2 government: guerilla forces 39; monopoly 160–1; Sri Lanka 94–7 Gray, S.J.: and Chau, G.K. 96; and Roberts, C.B. 98 gross domestic product (GDP); Sri Lanka 41–2 guerilla forces; government 39 Guthrie, J. 15, 16; and Parker, R. 98

Hatton National Bank; operational activities 75 Hayleys; operational activities 75 Heckmian, J.; and Jones, C. 18 Hollway, J. 27–8 human capital 5–6; definitions 18; financial measures 18; focus 18–20; measurement 19–20; reporting 18–19; research 4–5 human capital (HumC) 98, 149–58 human resource accounting 20 human resource management 4 hypothesis analysis 103–44; intellectual capital accounting (ICR) 103 hypothesis development: data interpretation 94–102; intellectual capital reporting (ICR) 94–8 IC framework; Brooking, A. 61–2 industrial property; copyright 45 industry; systems 161–2 industry groups; intellectual capital (IC) 146, 146–64, 149–64 Institute of Chartered Accountants; Sri Lanka 40–1 intangibles; value 3 intellectual accounting reports (ICR); limitations of traditional 11–13 intellectual assets: expenses 11–12; liabilities 11 intellectual capital accounting (ICR); hypothesis analysis 103 intellectual capital (IC): Australia 165–7; differences 164–9; industry groups 146, 146–64; international study 168–9; Ireland 168; practices 4–5; reporting differences 10–16, 103–4, 105–6; Sweden 168 intellectual capital reporting (ICR): annual reports 95, 96; capital markets 21; Colombo Stock Exchange (CSE) 94; conclusions 172–6; definitions 10–11; definitions and examples 79–89; differences between nations 97–8; distribution 106–7; firms 5; frameworks 14–17; frequency 107–8; hypothesis development 94–8; importance 24; industry factor 54–5; literature review 10–22; methodology types 21; ownership diffusion comparison 21; regional bias 21; research method 54; shaping 95; size factor 54; Sri Lanka 36–46 intellectual property; Sri Lanka 44–6 interest group; influence 31 internal capital (IntC) 100, 161

Index 199 international study; intellectual capital (IC) 168–9 internet service providers (ISPs) 40 interview; research method 64–7 interview framework; research method 89–92, 92–3 investor incentives 94–6 Ireland; intellectual capital (IC) 168 IT industry; Sri Lanka 40 IT sector; major development 43 James Finlay; operational activities 75 John Keels Holdings; operational activities 76 Jones, C.; and Heckmian, J. 18 knowledge economy 2, 35; establishment 2 knowledge management 1 legitimacy theorists; firms 32 Lev, B. 20 liabilities; intellectual assets 11 Lion Brewery; operational activities 78 literature review; intellectual capital reporting (ICR) 10–22 lobbying; social groups 160 major development; IT sector 43 marginal economic theory 25 market share 160–1 maximisation; capital reproduction 160 monopoly; government 160–1 Morrow, S. 19 narrative; qualitative reporting units 48–9 National Development Bank; operational activities 76 Nestle Lanka; operational activities 76 Olsson, B. 16–17 operational activities: Aitken Spence Holdings 70; Asian Hotels 70; Caltex Lubricants Lanka Ltd 70–1; Carson Cumberbatch 71; Central Finance Company 71; Ceylon Brewery 71, 72; Ceylon Cold Stores 71, 72; Ceylon Grain Elevators 72; Ceylon Tea Services 73; Ceylon Tobacco Company 73; Coca Cola Beverages 73; Colombo Dockyard 73; Commercial Bank 74; DFCC Bank 74; Distilleries Company 74; Forbes Ceylon 75; Hatton National Bank 75; Hayleys 75; James Finlay 75; John Keels Holdings 76; Lion Brewery

78; National Development Bank 76; Nestle Lanka 76; property development 77; research method 70–8; Sampath Bank 77; Singer 77; Tokyo Cement 78; Trans Asia 78; Upali Investment Holdings 78 operational definitions 55 ordinal scale 55 parametric experimental methods 100–1 Parker, R.; and Guthrie, J. 98 political economic theory 23–4 political economy 24, 30–1; accounting reporting theory 23–35; accounting theory 6; Marxian 28; traditional accounting 24 political economy of accounting (PEA): corporatism 30–1; theory 32–5, 94–102 postgraduate education 44 privatisation; state-owned ventures 39 production; capital 29 property development; operational activities 77 public disclosure; shareholders 96 Puxty, A. 27, 28; accountancy regulation theory 27 qualitative data; recording 55 qualitative reporting units: charts and diagrams 49; narrative 48–9; photographs and pictures 49; research method 48; typography 49–50 quantitative reporting variables; data reporting variables 50 recording; qualitative data 55 regulation accounting 40 reporting: balance scorecard (BSC) 13, 14; differential 98; economic value added (EVA) 13; human capital 18–19; reporting 96; traditional financial 13–14 reporting location: data-reporting variables 50; reporting units 169–71 reporting units; reporting location 169–71 research 172–5; content analysis 6; future 176; human capital 4–5; limitations 175–6; structure and method 5–7 research method: annual reports 47–8; case study interviews 62; content analysis 51, 60–1; data capture 55–60; data-reporting variables 47; ICR 54; interview 64–7; interview framework 89–92, 92–3; operational activities 70–8; qualitative reporting units 48; sample size 67, 68

200

Index

Roberts, C.B.; and Gray, S.J. 98 Roest, P.; Simister, M.; and Sheldon, J. 3 Roslender, R.; and Dyson, J. 19; and Fincham, R. 4 Sampath Bank; operational activities 77 sample size; research method 67, 68 Schmitter, P. 31 selective reporting; society 33 shareholders; public disclosure 96 Sheldon, J.; Roest, P.; and Simister, M. 3 Simister, M.; Roest, P.; and Sheldon, J. 3 Singer; operational activities 77 social groups; lobbying 160 society; selective reporting 33 Sri Lanka: economy 41; education 43–4; government 94–7; gross domestic product (GDP) 41–2; Institute of Chartered Accountants 40–1; intellectual capital reporting 36–46; intellectual property 44–6; IT industry 40 stakeholder theory 32 state; role 41, 174 state-owned ventures; privatisation 39 Statement of Accounting Concept 41 structure and method; research 5–7 Subbarao, A.V.; and Zeghal, D. 17, 98

Sweden; intellectual capital (IC) 168 systems; industry 161–2 technical skill; low emphasis 44 technology shares; investment advantages 37 Teegan, D. 3 Tinker, A. 25–6, 26 tobacco/alcohol 39 Tokyo Cement; operational activities 78 traditional accounting; political economy 24 training; development 154–5 Trans Asia; operational activities 78 typography; qualitative reporting units 49–50 Upali Investment Holdings; operational activities 78 valuation; employees 19 value: differences 167; intangibles 3 value creation; managing 2 value-added statements 41 Wiig, K. 2 workplace safety 157–8; equity 149 Zhegal, D.; and Subbarao, A.V. 17, 98