Keywords

1 Introduction

The constant evolution of socioeconomic scenarios, global competition, and internationalization processes has led business scholars to recognize the importance of intangible resources. Knowledge, innovation capacity, intellectual property, human resources, and organizational competencies represent intangible value drivers that bring about future benefits (Abeysekera, 2006). These are essential resources to compete in the market, and their effective management is a prerequisite for companies to obtain or preserve their long-term competitive edge. In fact, a successful business strategy is increasingly dependent upon the management’s ability to focus on new factors, such as relationships with customers/users, staff, and partners, and the ability to learn and innovate. These variables can be traced back to the concept of intellectual capital (IC), which “is the sum of everything everybody in a company knows that gives it a competitive edge” (Stewart, 1997, p. IX). The resource-based view (RBV) theory considers the company’s “intangible” resources a fundamental distinctive feature and the basis for creating a competitive advantage (Hamel & Prahalad, 1990). Thus, the terms IC, intangibles, and intangible resources are often used interchangeably in business and management literature (Petty & Guthrie, 2000).

IC is knowledge-based capital that supports a company’s knowledge-based activities and, therefore, cannot be reported by traditional financial accounts. The inadequacy of traditional reporting systems in identifying the elements that explain a company’s overall performance has motivated academic studies on the possibility of identifying, representing, and measuring the IC dimension by using specific reports (Mouritsen, 1998; Edvinsson et al., 2000). These assets contribute to the success of firms through value-creation processes that improve corporate routines and practices (Stivers et al., 1997). In this context, IC theory stands alongside value-creation theories in considering intangibles key tools in the value-creation process (Rappaport, 1986).

Edvinsson and Malone (1997) proposed a scheme to identify the single component of a firm’s market value, focusing on the concept of IC in its main declinations of human capital and structural capital. These considerations show the importance of intellectual capital disclosure (ICD) to provide accounting information regarding companies’ value-creation processes realized by intangible assets (Petty & Guthrie, 2000). Increasing attention has been paid to improving the methods and instruments used to represent a company’s intangible assets, both in the context of mandatory and voluntary disclosure. Reporting models have been proposed whereby, through physical-technical indicators and economic-financial indicators, it is possible to offer investors and lenders a complete view of the company’s knowledge, capabilities, and relationships to reduce the existing information asymmetry.

Initially, numerous scholars and analysts promoted an “Intellectual Capital Model.” A Swedish financial services company, Skandia AFS, developed the first such model (Edvinsson, 1997). Many scholars have subsequently proposed several tools to facilitate the measuring of each category of intangibles (human, customer, and structural/organizational capitals; Abhayawansa, 2014; Choong, 2008; Mouritsen et al., 2001). To date, the most well-known methods are probably the Intangible Assets Monitor (Sveiby, 1997), the Balanced Scorecard (Kaplan & Norton, 1992), the Value Chain Scoreboard (Lev, 2001), the Strategic Resources and Consequences Report (Lev & Gu, 2016), and the Value-Added Intellectual Capital Coefficient (Pulic, 2000). Despite the numerous proposals for the management and visualization of IC, some of these methods have met with considerable popularity, yet no successful experiences have emerged in the field of disclosure; on the contrary, the proposals for IC reporting that have developed in the literature and in practice have been progressively abandoned (Dumay, 2016).

The emerging trend in recent years has been to evaluate the most appropriate ways to incorporate non-financial information within the annual report, through forms of sustainability reporting (as proposed by the Global Reporting Initiative [GRI]) or integrated reporting (as issued by the International Integrated Reporting Council [IIRC]). The topic of IC disclosure, in particular, has also returned to the agenda because the IIRC has included the concept of “intellectual capital” in its framework, although with a different denomination than the traditional one.

This chapter intends to review the role of ICD in reducing information asymmetry, increasing the level of transparency and accountability toward stakeholders, and positively influencing corporate performance. Furthermore, this chapter provides an overview of how the IIRC and the GRI deal with the topic of intangibles disclosure within non-financial reporting. Therefore, the research method is based on a document analysis through reading, synthesizing, and interpreting data contained in the frameworks/standards (Bowen, 2009). This qualitative approach, combined with the literature review, makes it possible to assess whether the disclosure of intangibles in the two frameworks/standards is treated uniformly or unevenly.

Despite the centrality of issues related to the development of intangible resources, the existing literature does not present specific studies that analyze from a critical perspective how the IIRC and the GRI deal with the growing and central role of intangible resources in the current business context. This work aims to fill this gap, producing new insights that could prove prolific in generating innovative research in the field of intangible asset management and reporting.

The chapter is structured as follows: Sect. 2 focuses on the debate in the literature concerning intangibles; Sect. 3 analyzes their role in the value-creation process according to the IIRC framework and the GRI standards. Finally, Sect. 4 contains the work’s discussion and conclusions.

2 The Growing Relevance of Intangible Assets

Over the past decade, the constantly changing economic scenarios have shifted competition from businesses linked to traditional tangible assets (physical and financial resources) to those with intangible assets (knowledge, expertise, innovative capacity, and human capital) (Edvinsson & Malone, 1997; Wang et al., 2016). These are essential elements to develop and effectively implement a business strategy (Dumay, 2009; Chen et al., 2014) and to increase a firm’s probability of achieving success (Wang et al., 2021). In this context, the ability to manage the flow of available knowledge has become a decisive element for differentiating companies and for achieving sustainable competitive advantages (Nonaka & Takeuchi, 1995; Bontis et al., 2018). This is also demonstrated by the considerable investments that many leading companies have made in developing and maintaining IC, showing particular attention to human resources (Olander et al., 2015).

The term “intellectual capital” (IC) has its origins in the 1990s and the seminal work of Thomas Stewart, who identified it as the “brainpower” of a company (Stewart, 1991). IC can be defined as the “sum of all the intangible and knowledge-related resources that an organization is able to use in its productive process in the attempt to create value” (Kianto et al., 2014, p. 364). IC is generally divided into three components: human capital, relational capital, and structural/organizational capital (Choong, 2008).

Human capital is defined as the “combined knowledge, skill, innovativeness, and ability of the company’s individual employees to meet the task at hand. It also includes the company’s values, culture, and philosophy” (Edvinsson & Malone, 1997). Human capital also covers knowledge, skills, experience, creativity, and problem-solving ability (Inkinen, 2015; Kianto et al., 2017). Structural/organizational capital is composed of the hardware, software, databases, organizational structure, information systems, processes, and routines that support employees’ productivity (Inkinen, 2015; Khalique et al., 2018). Relational capital includes the system of relationships established with the external stakeholders of the company, particularly the customers (Sánchez et al., 2000).

Regarding the development and proposal of models and tools related to intangibles, in recent decades, there have been different strands of research on IC in the management field. Sveiby (1997) made an early proposal for measuring intangible assets that later developed into the well-known model of the Intangible Asset Monitor. According to the Intangible Asset Monitor, people in organizations create external and internal structures to express themselves. Therefore, it is necessary to identify indicators that monitor external structure (customers and suppliers), internal structure (organization), and people’s competencies (Sveiby, 1997).

The need for useful information regarding responsible management and enhancing the company’s value-creation process has supported developing reports that are complementary to annual financial statements. Over time, IC measurement and reporting systems have become increasingly popular to better define communication with external stakeholders and to improve control and management systems with information that allows managers to focus their attention on intangible assets.

Skandia AFS, an insurance and financial services company in Sweden, published the first IC statement in 1995 (Edvinsson, 1997). This statement was developed through using another tool for managing and visualizing intangibles, the Skandia Navigator (SN). SN aims to enable a holistic understanding of how a company creates value. This model identifies and quantifies critical success factors in five key business dimensions: financial, customer, process, turnaround, and development and human capital. This new classification tries to identify the roots of a company’s value by measuring the hidden dynamic factors that underlie the “visible company of buildings and products” (Edvinsson & Malone, 1997).

Since the late 1990s, a growing number of studies aimed at identifying and measuring intangible resources have emerged, including projects proposed by public and government bodies (Bañegil Palacios & Sanguino Galván, 2007). Fundamentally, these guidelines emphasize the importance of understanding how IC contributes to the creation of value in a business. However, these initiatives were a complete failure in their concrete application, considering firms’ limited implementation of ICD-specific reports (Dumay, 2016).

One of the most interesting aspects that emerges from this evolution is the essential link between IC and a firm’s value. In this context, IC theories stand alongside value-creation theories (Rappaport, 1986), proposing intangibles as key tools related to the process of acquiring and maintaining a long-lasting competitive advantage (Youndt et al., 2004).

At the same time, intangibles are viewed as an important resource to be developed to effectively implement corporate strategy (Marr & Chatzkel, 2004), improve corporate performance (Kim, 2012), and enhance financial returns (Chu et al., 2006).

The need to increase the level of transparency and accountability toward stakeholders has prompted a process of non-financial disclosure in which the role assumed by intangible resources represents a relevant issue for the academic community. Therefore, it is necessary to determine what information the main frameworks and standards recommend concerning intangible assets to appreciate the relative relevance of these resources. In line with these considerations, we intend to answer the following research question:

RQ

How do the main international frameworks/standards on non-financial reporting, specifically the IIRC and the GRI, deal with intangible assets as a central factor for the success of an organization?

3 Guidelines for External Reporting of Intangible Resources

The disclosure of intangible assets has introduced several accounting changes to promote greater disclosure of corporate IC in mandatory and voluntary statements, making information more accessible to external stakeholders, primarily investors (Kaufmann & Schneider, 2004; Marr & Chatzkel, 2004). Since 2001, in Europe and elsewhere in the world, many researchers have been interested in understanding “how” IC works within organizations (Chiucchi et al., 2017) rather than conducting research that is useful in applying IC as “a pre-established idea” (Mouritsen, 2006). This necessity influences the managerial and organizational approach to sustainability, which is supported in several cases by specific sustainability standards (SASB; GRI), stand-alone reporting and assurance (Michelon et al., 2015; GRI, 2019), or the choice to adopt IR (Eccles & Krzus, 2010).

3.1 Intangible Resources and IIRC

In August 2010, the International Integrated Reporting Council (IIRC) was established to integrate financial reporting with non-financial information to communicate to providers of financial capital the determinants of the value-creation process over the short, medium, and long terms (Abeysekera, 2006; Atkins & Maroun, 2015). IIRC has promoted the idea that integrated reporting can provide an alternative to traditional financial reporting and represent the various capitals that an organization uses to influence its business model and value creation over time. According to the international framework on IR published by the IIRC (2013), the purpose of IR is to illustrate, in a concise form and primarily to funders, how an organization creates value over time.

In January 2021, the IIRC published revisions to the International IR Framework to enable more quality and integrity of decision-useful reporting and to help businesses deliver more robust and balanced reporting. IR is based on recognizing six capitals—financial, manufactured, intellectual, human, social and relationship, and natural—defined as the “stocks of value on which all organizations depend for their success as inputs to their business model, and which are increased, decreased or transformed through the organization’s business activities and outputs” (IIRC, 2021, p. 53). Thus, the success of a business depends not only on the “3 Ps” (i.e., people [human capital], planet [natural capital], and profit [financial capital]) but also on other non-financial value factors, such as brand; reputation and know-how (intellectual capital); property, plants, equipment, and infrastructure (manufactured capital); and relationships, such as relationships with suppliers and customers (social and relationship capital), to manage and report multiple dimensions of value. The need to identify the six capitals, as defined by the IIRC framework, is an element that favors the awareness of IC’s centrality in the value-creation process (Badia et al., 2019).

The three “intangible” capitals seem to align with the three historical constituents of IC in the literature: structural/organizational, human, and relational (Abhayawansa, 2014; Dumay, 2016; Ferenhof et al., 2015). In particular, these analogies are emerging: human capital with human capital, social and relational capital with relational capital, and intellectual capital with structural/organizational capital (Dumay, 2016). However, the different use of the term “intellectual capital” in the two contexts (the IIRC framework and the traditional literature about intangibles) appears quite confusing. In the IIRC framework, intellectual capital is defined as “organizational, knowledge-based intangibles, including: i) Intellectual property, such as patents, copyrights, software, rights and licenses; ii) Organizational capital such as tacit knowledge, systems, procedures and protocols” (IIIRC, 2021). Thus, there is a clear relationship with the concept of structural/organizational capital in the IC literature, and there are no references to the wider concept of IC, which tends to comprise all the intangible resources that can influence business success.

Despite this different configuration, the IIRC framework seems to be able to adapt to ICD studies, and the trend of current studies seems to be consistent with the following remark: “Thus, in the era of IR, IC accounting is being reborn” (Abhayawansa et al., 2019b).

More specifically, there is some evidence (Dumay et al., 2019) that the six-capital model can adapt well to the principles of EU Directive 2014/95, which has introduced a compulsory form of non-financial reporting for some types of companies—in principle, the largest ones—in the European Union in response to the growing demand for transparency from civil society on issues that are not strictly economic-financial. In fact, EU Directive 2014/95, also called the non-financial reporting directive (NFRD), introduced new mandatory disclosure practices for non-financial and diversity information by large companies.

In the IR context, intangible resources have an important value-creating role in the future of an organization (de Villiers & Sharma, 2020). In this regard, the IIRC framework also suggests using specific performance indicators (KPIs) to achieve an accountable and transparent representation of their contribution to value creation (IIRC, 2021).

The IIRC framework provides discretion and flexibility on the disclosure of IC concepts, classifications, and values. In particular, some scholars have highlighted the opportunities of a reporting system referring simultaneously to intangible resources, value creation, and the business model (Beattie & Smith, 2013), thus favoring ICD (Abhayawansa et al., 2019b). Some scholars are unsure about the true ability of IR to operate as an effective ICD tool, in light of previous negative experiences related to ICD (Roslender & Nielsen, 2017); however, current studies seem to support the importance of IC disclosure (Abhayawansa et al., 2019a).

3.2 Intangible Resources and GRI

The GRI, founded in 1997, is an independent, international organization that promotes sustainability reporting as a tool to mobilize more responsible behavior by companies. The aim of the GRI is to offer guidelines for the disclosure of how organizations impact natural and social environments. The guidelines organize specific standard of disclosure into three categories: economic, environmental, and social. The social category is further split into four subcategories, which are labor practices and decent work, human rights, society, and product responsibility.

The GRI has introduced guidelines that organizations can use voluntarily to provide a balanced and reasonable representation of the company’s sustainability performance and communicate their impact on critical sustainability issues, such as climate change, human rights, governance, and social well-being (Abeydeera et al., 2016). Thus, non-financial information on intangibles associated with the company’s internal processes and social, environmental, and human resources seems to be suitable for promoting key objectives, such as ethical corporate social responsibility (CSR) strategies and improving a firm’s image (Leung & Gray, 2016).

The GRI guidelines identify several qualitative and quantitative indicators that provide an overview of corporate responsibility issues. The indicators most frequently utilized are allocated to five items of corporate responsibility (employment, labor management relations, health and safety, training and education, and diversity and opportunity) that compose the section entitled “Labor practices and decent work” in the GRI guidelines. This demonstrates the different kinds of attention paid to issues relating to human capital (Pedrini, 2007), as well as the other elements (structural capital and relational capital) of IC reporting (de Villiers & Sharma, 2020).

GRI guidelines improve companies’ effective communication of social information because they not only cover social information but also give such information a competitive meaning within the chain of corporate value creation (Castilla Polo & Gallardo Vázquez, 2008). In particular, social indicators related to the composition and status of the workforce may be used to highlight opportunities for expanding the firm’s IC (GRI, 2002).

Despite the GRI guidelines’ numerous references to aspects that can be referred to as the central elements of IC, particularly human capital, a holistic and unitary approach to the concepts underlying the definition of IC seems to be absent. Therefore, an overall view of the role of intangible assets in companies that use this standard for non-financial reporting is also missing.

4 Discussion and Conclusion

This chapter aims to analyze the role of intangible resource disclosure in non-financial reporting, combining a literature review with an overview of how the IIRC and the GRI address this issue. Two main aspects emerged from the literature analysis:

  • Managing the available “knowledge” flow has become a decisive element for differentiating companies, achieving sustainable competitive advantages, and representing an important resource that needs to be developed to effectively implement corporate strategy;

  • The growing interest in intangible assets is influencing managerial and organizational approaches, favoring greater integration between financial and non-financial information.

With reference to the first point, since the 1990s, the success of companies is no longer attributable solely to access to material resources but rather to intangible assets (Hamel & Prahalad, 1990; Bontis et al., 2018). Information on structural/organizational, human, and relational capital allows companies to ensure greater transparency to their stakeholders. Stakeholders, however, benefit from a greater quantity and quality of information that allows a better understanding of the real value of companies from a medium-long term growth perspective. Companies’ motivation to disclose non-financial information confirms the role that IC disclosure has in improving business performance. In addition, the disclosure of intangible assets is fundamental to appreciating the value created by companies (Abhayawansa & Guthrie, 2012).

Regarding the second point, the growing demand for non-financial information implicates companies’ increased awareness of the link between intangibles and the value-creation process (Badia et al., 2019). The increasing emphasis on IC has highlighted the limitations of traditional financial reporting systems that are unable to represent the value of all intangible assets. To overcome this limit, different international organizations, such as the IIRC and the GRI, have proposed specific guidelines to disclose information about IC.

IR is a relatively new form of reporting compared to the GRI’s sustainability guidelines, and it is mainly addressed to providers of financial capital and incorporates the elements of sustainability that are aligned with the core principles of capitalism (Thomson, 2015). The GRI helps companies communicate their impacts on sustainability issues. Both these forms of reporting disclose intangible resources, even if the IIRC places more emphasis on these aspects than the GRI.

Some critical aspects have emerged from the analysis of how the IIRC and the GRI approach the issue of disclosing intangible assets.

The IIRC framework has decided to adopt a denomination of the six capitals that is inconsistent with that which has already been widespread for many years in managerial literature and is widely known by business professionals. Once it has been clarified that the “intellectual capital” IC in the IIRC framework is the same as the structural/organizational capital in managerial literature, there should be no further problems; however, the fact remains that this different denomination may still create some misalignment in the use of the terms for at least a few years.

The GRI standards, while considering almost all the aspects involved in recognizing intangible assets as the driving force for growing companies’ value, do not provide a holistic approach to the issue and fail to support a unitary vision of this phenomenon.

However, what truly matters is how the companies that adopt guidelines for non-financial reporting are able to provide transparent—and at the same time effective—disclosure, both with a view to informing outside the company and to guiding management toward value-creation paths.

In this scenario, the necessity to increase and improve the quantity and quality of non-financial disclosure (Unerman & Chapman, 2014) is influencing the managerial and organizational approach to sustainability (Comyns et al., 2013), which standard-setting organizations have supported in several cases. Recently, the IIRC, together with other leading global ESG reporting organizations, namely, the GRI, the Sustainability Accounting Standards Board (SASB), the Climate Disclosure Standards Board (CDSB), and the Climate Disclosure Project (CDP), has addressed an open letter to the IOSCO, inviting it to promote accelerated change in the reporting system with regard to sustainability aspects, reaffirming their vision of comprehensive corporate reporting and a progressive approach (“building blocks”) for its implementation. This intention had already been expressed in the “Statement of Intent to Work Together Towards Comprehensive Corporate Reporting” issued by the same organizations in September 2020. Furthermore, the IIRC and the SASB expressed the intention to merge into a unified organization (“The Value Reporting Foundation”), whereas the GRI and the SASB drafted a collaborative work plan between them.

Future research in this field could investigate the evolution of the frameworks and standards on non-financial reporting, analyzing their profiles related to intangible assets; however, future research could involve those who are engaged, as preparers, with non-financial reporting statements to determine their points of view on the centrality and essentiality of the information concerning intangibles and to identify which reporting standards are best suited to grasp and disclose their potential.