Corporate Governance and Intellectual Capital Reporting in Corporate Annual Reports of Emerging Economies: An Empirical Investigation of Listed Companies in Bangladesh

Abstract

Intangible resources are not less impo1tant than physical or financial resources. It is expected that these resources support organizational activities along with financial and physical resources and, therefore, we may call these as intellectual capital (IC). Generally, a firm possesses three types of capital - physical capital, financial capital, and IC. IC includes an organization's collective knowledge and learning, leadership talent, the values that shape its culture, routines and processes and the collaborative relationships. It is the need of the era that organizations maximize their value through efficient utilization of their IC. It is agreed that IC plays an increasingly important role in sustaining competitive advantages and creating corporate value and, thus, companies have increased their investments in this type of capital. In a knowledge-based economy, it is indispensable for organizations to identify, maximize and utilize their IC to stay in a competitive environment. It is expected that in order to take advantage of a rapidly changing environment, an enterprise will enhance the accumulation of its IC and go through the corporate governance to improve its organizational performance. JC should be reported in the financial statements of a firm for proper communication to stakeholders. An entity can enjoy competitive advantages by disseminating such information. Simultaneously, stakeholders may take pragmatic decisions on the basis of this information. This is also important for the investors to judge the profitability, potentiality and sustainability of the organization. IC includes human capital (HC), structural capital (SC) and relationship capital (RC). Extensive studies have been carried out to ascertain the status of IC reported by firms in developed countries, though, very few studies have been carried out in a developing country while there is a dearth of research on the intellectual capital reporting (ICR) practices of firms in Bangladesh. Prior research found that the disclosure level of Bangladeshi listed companies is generally poor. The results indicate that companies in general have not responded adequately to the mandatory disclosure requirements of the regulatory bodies. There are some studies on the Bangladeshi companies to show the voluntary disclosure status and disclosure level is not satisfactory. Conventional accounting does not recognize all of the components of IC as assets. IC reporting in the financial statements is not obligatory for the listed companies in Bangladesh. Thus, it is high time to examine the IC reporting practices by the Bangladeshi firms. There is no study in Bangladesh covering all three components of intellectual capital i.e., HC, SC and RC based on all types of listed companies. Besides, none of the existing study on the Bangladeshi companies conducted perception survey of different stakeholders of the listed companies, which has been done for the current study. Furthermore, the present study investigates the relationship between corporate governance and extent of intellectual capital reporting in corporate annual reports of the listed companies in Bangladesh. The regulatory authorities, like the Bangladesh Securities and Exchange Commission (BSEC), Bangladesh Bank (BB), are working for ensuring good governance in Bangladesh. Without adequate reporting mechanisms, shareholders and others cannot be confident that the affairs of the company are being run in a prudent manner for their benefits. Besides, extent of IC reporting may be influenced by different corporate attributes. In addition, a company may change its reporting pattern and extent with the passage of time. Therefore, the study poses some research questions: to what extent are Bangladeshi listed companies repo11ing IC in their annual reports; what are the influencing determinants for IC reporting; do IC rep011ing practices differ among industries and over years and what are the perceptions of stakeholders regarding IC reporting. Jn connection with these research questions, the study sets some specific objectives vis-a-vis to examine the intellectual capital repo1iing (ICR) practice by listed companies in Bangladesh; to investigate empirically some corporate attributes including corporate governance as determinants of ICR; to compare the ICR level among various industries and years; and to summarize the perceptions of different stakeholders regarding ICR. Descriptive and empirical analyses have been conducted by the researcher to fulfil the objectives of the study. The study covers 149 annual reports of the listed companies for the years 2008 and 2011. Sample covers non-financial institution (NFI), insurance (INS), non-banking financial institution (NBFI) and banking financial institution (BFI). There are 37 intellectual capital items in the ICR checklist namely human capital (HC) 19, structural capital (SC) 9 and relationship capital (RC) 9. Perception survey has been conducted on 265 stakeholders grouping as supplier of information, direct user of information and indirect user of the information. For the purpose of regression analysis, "Total Intellectual Capital (TIC)" repo1ting index has been used as dependent variable. Independent variables are classified into three categories vis-a-vis corporate governance (COG), status in share market (MKT) and corporate attributes (COA) and there are three variables in each category. Moreover, industry type (IND) is also used as an explanatory variable. Four regression models have been developed with these variables. Results show that IC items are not sufficiently reported by the listed companies. Two reasons may have behind this - they do not have sufficient IC in their firms or they do not address stakeholders' information needs. BFIs, in general, and some other firms are reporting more IC items in annual report and other organizations, who are not providing such information, may follow the style of their presentation of information. Stakeholders are expecting more information in CAR for taking informed decision. Present study confirms that there is a positive association between the number of members on audit committee and IC reporting. As IC reporting is cost effective, that perceived by the stakeholders, comparatively lower capitalized firms may follow the reporting pattern of higher capitalized firms. The study also validates that there is a positive association between PNPAT and TIC. If all of the concerned bodies take synchronized approaches from their end, it may be expected that IC reporting status will be improved in days to come.