Human capital disclosures and management practices
| Pages | 433-455 |
| Published date | 25 July 2008 |
| Date | 25 July 2008 |
| DOI | https://doi.org/10.1108/14691930810892027 |
| Author | Christian Ax,Jan Marton |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Human capital disclosures
and management practices
Christian Ax and Jan Marton
School of Business, Economics and Law, Go
¨teborg University, Go
¨teborg, Sweden
Abstract
Purpose – The purpose of this paper is to investigate the association between annual report human
capital (HC) disclosures and HC management practices.
Design/methodology/approach – The paper used two sets of data. Disclosure data were collected
from annual reports. Data on management practices was collected by e-mail questionnaire. Sixteen of
the most traded companies on the Stockholm Stock Exchange (SSE) were included in the study.
Findings – Results indicated that there is limited association between the two sets of data. Even
though the association was significant on an aggregate level, more detailed testing showed no
systematic associations. There was, however, a significant association between internal management
practices and companies’ perceived importance of disclosure, even though this was not reflected in
actual disclosure.
Research limitations/implications – The most important limitations of the study are that it was
based on a small non-random sample of companies from only one country and used annual report
disclosures from a single year. Also, the study focuses on quantity rather than quality of disclosures.
Originality/value – A feature of previous research is that it tends to focus on HC (intellectual
capital) from either an external or internal perspective. This study is the first that links HC annual
report disclosure and internal HC management practices.
Keywords Human capital,Annual reports, Disclosure, Workingpractices, Sweden
Paper type Research paper
1. Introduction
In recent years we have witnessed an increasing interest in intellectual capital (IC)
measurement, management and reporting. Research activities have focused on
different issues (Can
˜ibano et al., 2000; Bontis, 2001; Kaufmann and Schneider, 2004;
Marr et al., 2003; Ashton, 2005; Roos et al., 2005; Abeysekera, 2006). Organizations have
different motivations as to why they focus on IC. These can be cl assified into two broad
categories; internal and external. A review of the literature by Marr et al. (2003)
identified four main internal reasons – to help organizations formul ate their strategy,
assess strategy execution, assist in diversification and expansion decisions, and use IC
as a basis for compensation – and, one external – to communicate measures to
external stakeholders. A feature of previous research is that it tends to focus on IC from
either an internal or external perspective. Few studies have empirically linked these
two perspectives. The research presented in this paper focuses on the link between IC
annual report disclosure and internal IC management practices.
IC can be categorized in different ways (Kaufmann and Schneider, 2004). For the
purpose of this study, the focus was on a sub-category of IC, namely human capital
(HC), in line with other studies such as Abeysekera and Guthrie (2004), Stittle (2004)
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1469-1930.htm
The authors would like to thank Fredrik R. Nilsson, Linda Sahlin and Elisabeth So
¨nnergren for
collaboration in the data collection.
Human capital
disclosures
433
Journal of Intellectual Capital
Vol. 9 No. 3, 2008
pp. 433-455
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930810892027
and Stiles and Kulvisaechana (2003). According to Abeysekera and Guthrie (2004,
p 253) HC 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, 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.
The annual report is an important document because it is the principal means for
corporate communication of activities and intentions to stakeholders (Holland and
Boon Foo, 2003) and because it signals what is important to the reporting company
through the reporting mechanism (Guthrie and Petty, 2000; April et al., 2003; Guthrie
et al., 2004). Sophisticated users, such as analysts and investors, draw on annual report
information in their work, to, for example, provide earnings forecasts and to justify
recommendations to investors. This does not only relate to financial information, but
also to non-financial information and narrative reporting (Garc ia-Meca, 2005;
Rutherford, 2005). Several studies point out that annual report users are requesting
more and more reliable information related to key drivers, such as HC, of future
company value creation capabilities (Maines et al., 2002; Beattie, 2000; Healy and
Palepu, 2001; Abeysekera and Guthrie, 2004). Many companies have responded to this
request. Indeed, studies have identified an upward trend in the annual reporting of
non-financial information and accounting narratives related to value drivers (Williams,
2001; Abeysekera and Guthrie, 2004; Vandemaele et al., 2005).
In this stream of research the existence of a link between annual report disclosures
and internal management practices is implicitly assumed. Prior research argues that
positive effects of disclosure include a reduction in cost of capital, a lower level of
information asymmetry (Garcia-Meca et al., 2005), enhancement of stock market
liquidity, and increased demand for companies’ securities (Healy and Palepu, 2001).
These positive effects can only ensue if disclosures provide information about actually
occurring internal management practices. In spite of the importance of the link between
disclosures and management practice, the existence of the link has been scantily
empirically tested. Indeed, a review of the IC literature identified no such empirical
study. However, research on the link between external disclosure and internal
management practices has started in the nearby field of environmental reporting (Frost
and Seamer, 2002; Tilt, 2006).
Recent research gives reason to question the strength of the link. Despite the
previously noted functions of the annual report, there are concerns as to why
sophisticated users, despite an increasing body of literature documenting the
profitability of HC investments, are ambivalent about using HC related disclosure
information (Holland, 2003; Johanson, 2003; Holland and Johanson, 2003). Johanson
(2003, pp. 32-3) has presented four explanations to this observation. First, capital actors
might be ambivalent because they do not understand how HC investments contribute
to the value creation process of the firm. Second, capital market actors might be
hesitant about HC information because they do not know if they could rely on HC
indicators. Third, their reluctance might be connected to the lack of ownership of
intangibles related to people. Fourth, capital market actors are ultimately hesitant and
indecisive because they do not know if the measures in actual fact matter in the firm’s
management control process. This fourth explanation includes issues suc h as:
JIC
9,3
434
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