The Impact of HR and Financial Capital Dynamic Tensions on the Recognition and Management of Intellectual Capital

Importance – The emergence of the knowledge economy has given prominence to Intellectual Capital (IC) as a vital contributor towards organisational performance and value. Within this context a number of gaps in the... [ view full abstract ]

Importance – The emergence of the knowledge economy has given prominence to Intellectual Capital (IC) as a vital contributor towards organisational performance and value. Within this context a number of gaps in the literature were identified including the need for research at organisational level to enable a greater understanding of the dynamics of IC recognition and management (e.g. Mouritsen, 2006; Dumay, 2009b; Cuganesan, 2005; O’Donnell et al., 2006), and the need for cross-functional knowledge exchange and interdisciplinary research (Marr and Chatzel, 2004) . Subsequently, a review of the literature suggested that there was no consensus as to which of the HR and Finance/Accounting disciplines is best positioned to manage or champion IC. There was also conflicting evidence as to the role of the Management Accountant in relation to IC management (e.g. Cleary, 2009; Scapens et al., 2003; Tayles et al., 2002, 2005; Parker, 2001; Byrne and Pierce, 2007 and Edwards et al., 2005). Furthermore, there is a need to assess the nature of the inter-relationship between HR and Finance Teams and its impact on IC management as there is a potential tension based on the different focus and priorities of these professional disciplines (Simons, 1995, 2000; Bendersky and McGinn, 2010).

Theoretical Base – Given the importance of knowledge as the foundation of IC, the Knowledge Based View (KBV) is the principal theoretical framework applied to help understand how knowledge-intensive organisations can encourage knowledge creation and thus manage IC effectively.

Research Method– Given the strong mandate from the literature (e.g. Mouritsen, 2006, O’Donnell et al., 2006), a qualitative descriptive case study research method within an interpretivist research framework was adopted for this study. Epharm, a subsidiary of a multinational company and one of the leaders within the global pharmaceutical industry, was selected for this purpose. By adopting a case study approach, this study addresses calls by Mouritsen (2006) and O’Donnell et al. (2006a), while focusing on both the HR and Finance Teams’ approach to IC recognition and management in the case site, addresses calls by Marr and Chatzel (2004) for interdisciplinary and cross-functional knowledge exchange.

Findings – This study demonstrates that IC exists in Epharm in its own unique way and is portrayed as being complex, dynamic and interconnected, adding to previous findings by Mouritsen et al. (2001a,b, 2005b), Edvinsson and Malone (1997), Cuganesan (2005), Dumay (2009a) and Beattie and Thomson (2010).

This study found that the HR Team are more receptive to this IC phenomenon and are more actively involved in the management of IC in comparison to their Finance colleagues in Epharm who are primarily concerned with Financial Capital. This supports previous findings by Mouritsen et al. (2001b, 2005b) in particular and Holton and Yamkovenko (2008). Although HR understands the importance of IC and accommodates it extensively, it is from a predominantly qualitative perspective, thus highlighting a limitation to their approach.

This study found that the Finance Team in Epharm including the Management Accountant do not have a developed understanding of IC as a concept and, consequently, do not explicitly recognise and manage it. Essentially, the Finance Team’s involvement in IC management is on HR’s terms. The role of corporate headquarters is acknowledged in facilitating this diminished view of IC by the Finance Team. This study is significant, therefore, in providing an illustration of the gradual side-lining of the Finance function in a strategically important area. Although the relationship between HR and Finance was generally positive, overall the dynamic tensions identified impede a coherent approach to IC recognition and management.

Implications and Contribution – This case study illustrates that the KBV provides an appropriate lens for IC recognition and management in the context of Epharm’s knowledge management strategy. Furthermore, it highlights that HRM/HCM can serve as the operational platform for recognising and managing IC as part of this knowledge management strategy within the KBV (Grant, 1996a,b; 1997; Nonaka and Konno, 1998; Nonaka and von Krogh, 2009; Mouritsen et al., 2001b, 2005).

Overall, the findings strongly suggest that neither HR nor Finance should have exclusive responsibility for IC recognition and management as both teams’ approach is suboptimal. This study recommends a more holistic team-based approach by establishing an IC Committee/Team to more strategically align the objectives of these disciplines. This would permit the expertise of HR and Finance to be drawn on to devise a coherent strategy on IC management. Ultimately, IC recognition and management should be driven at headquarters level. It is imperative that the Finance Team take an active role in this effort and not leave it to HR’s direction. Otherwise, this may change the trajectory of IC development in a way that is not optimal for the organisation. Consequently, having conducted research at organisational level, a significant contribution of this study is that research in IC should focus on maximising the comparative advantages of both the HR and Finance functional areas, rather than focusing on which of the two areas should take on responsibility for IC recognition and management.

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Intellectual Capital Management; Knowledge Management; Multi-Disciplinary Approach to IC Recognition and Management; Case Study. [ view full abstract ]

Intellectual Capital Management; Knowledge Management; Multi-Disciplinary Approach to IC Recognition and Management; Case Study.