Intellectual capital and corporate governance: an evaluation of Oman's financial sector companies
| DOI | https://doi.org/10.1108/JIC-09-2018-0151 |
| Pages | 1125-1152 |
| Published date | 21 June 2020 |
| Date | 21 June 2020 |
| Author | Tamanna Dalwai,Syeeda Shafiya Mohammadi |
| Subject Matter | Organizational structure/dynamics,Accounting & Finance,Behavioural accounting,Knowledge management |
Intellectual capital and corporate
governance: an evaluation of
Oman’s financial sector companies
Tamanna Dalwai and Syeeda Shafiya Mohammadi
Department of Business and Accounting, Muscat College, Muscat, Oman
Abstract
Purpose –The purpose of this study is to empirically investigate the relationship between intellectual capital
and corporate governance of Oman’s financial sector companies. Intellectual capital has been found to
successfully contribute to the economic wealth creation of firms in germane literature. Unfortunately, financial
statements do not necessarily capture and reflect the contributions of intellectual capital, thereby leadingto an
information asymmetry between companies and users of financial statements. The research also investigates
the relationship between corporate governance and intellectual capital efficiency across various financial
subsectors.
Design/methodology/approach –Data are collected from annual reports available on Muscat Securities
Market for 31 listed financial sector companies for the period 2012 to 2016 and analyzed using a multiple
regression model. Intellectual capital is measured using Pulic’s efficiency measure of value-added intellectual
coefficient (VAIC). Corporate governance individual components such as board characteristics, audit
committee characteristics and ownership structure are presented as independent variables.
Findings –The findings suggest that board size and frequency of audit committee meetings have a significant
association with the intellectual capital efficiency of Oman’s financial sector. VAIC and human capital
efficiency of banks are also significantly influenced by most of the corporate governance mechanisms;
however, other subsectors do not report such findings. Corporate governance of banks in comparison to other
subsectors effectively engages in utilizing the potential of intellectual capital efficiency. Agency theory and
resource dependency theory find limited support as a result of this study. The GMM results are not robust to
the alternative instruments.
Research limitations/implications –The sample size is small as the study is limited to the listed financial
sector of Oman. Future studies can be extended to include all of Oman’s or GCC’s listed companies.
Additionally, the intellectual capital is measured using the construct of VAIC which suffers some limitations
and can be overcome using other tools such as content analysis.
Practical implications –The findings of this study suggest that Oman’s regulators can create an awareness
strategy on highlightingthe importance of intellectual capital for companies (board of directors and managers),
investors, debtors and creditors. Further, Oman’s Capital Market Authority and Muscat SecuritiesMarket need
to strengthen the regulations related to intellectual capital.
Originality/value–This study extendsintellectual capitaland corporategovernance literature by presenting
the research outcome for Oman’s financial sector. It is useful for Oman’s financial sector companies to direct
corporate governance measures for driving value creation of firms through the management of intellectual
capital efficiency.
Keywords Agency theory, Intellectual capital, Resource dependency theory, Ownership, Board of directors,
Audit commitee
Paper type Research paper
1. Introduction
Those involved in businesses must continuously evolve to sustain global competitive
advantage for their survival. This requires products and services that are created not only
from tangible assets but also intangible assets which are also known as intellectual capital
(IC). IC does not get comfortably placed in conventional accounting standards (except for
goodwill) as it does not fit into the description of an asset according to International
Accounting Standard 38 (Shiu, 2006;Joshi et al., 2013). IC is recognized to have a role in the
wealth creation of companies but is not recognized on the financial statements like other
physical assets (Burgman et al., 2005). This becomes evident through the gap between the
Intellectual
capital and
corporate
governance
1125
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1469-1930.htm
Received 7 September 2018
Revised 3 January 2019
1 October 2019
28 January 2020
13 March 2020
Accepted 7 May 2020
Journal of Intellectual Capital
Vol. 21 No. 6, 2020
pp. 1125-1152
© Emerald Publishing Limited
1469-1930
DOI 10.1108/JIC-09-2018-0151
organization’s reported firm value and market value (Rahman, 2012). Thereby, different
methods of IC efficiency valuation were developed over time such as the Skandia IC report
(Edvinsson and Malone, 1997), an intangible monitor approach (Sveiby, 1997) and value-
added intellectual coefficient (VAIC) (Pulic, 1998). Chu et al. (2006) suggest that the
measurement and reporting of IC support the organisation in creating a new image by
observing the hidden value.
There are various dimensions to the relationship between IC and corporate governance.
The decision-makers in control of corporate governance have the fiduciary responsibility to
manage and make complete utilization of the intellectual capital (Keenan and Aggestam,
2001). The directors are expected to maintain the same due diligence in managing human
capital as they would for financial capital. IC is responsible for transforming tangible and
financial capital into added value and wealth. Thus, the intensity in the relationship between
corporate governance and IC tends to determine the corporate governance systems as IC
systems themselves (Keenan and Aggestam, 2001). Extant literature has argued that
corporate governance mechanisms are responsible for developing IC (Dittmar and Mahrt-
Smith, 2007;Saifieddine et al., 2009). Gangi, et al., 2019 suggest that firms with effective
corporate governance mechanisms will add value through IC by a safe workplace, offering
training and education programs, hiring experts, enhancing process and systems and
establishing a valuable relationship with all stakeholders.
The current research is directed toward Oman’s financial sector. Financial intermediaries
are crucial drivers for innovation and growth of the economy (Schumpeter, 1912). Herring and
Santomera (1991) suggest that an efficient financial market can raise the standard of living by
reducing the cost and risk of producing and trading goods and services. Nevertheless, in
recent times, the financial sector needs to be prepared for the challenges posed by digital
disruption, converting the compliance to IFRS 9 and IFRS 17 into an opportunity and
approaching data strategy with a new mindset (KPMG, 2018). Oman’s financial sector
consolidated their position in terms of contribution to GDP in 2016 and reflected positive
growth despite the economic slowdown (Central Bank of Oman, 2016). Joshi et al. (2013, p. 265)
advise that “it is necessary for the financial sector companies to invest in their development of
human capital, organizational processes and corporate knowledge in order to make
competitive advantage sustainable and durable.”According to Dalwai et al. (2015) , empirical
studies in the field of corporate governance for the GCC region are required to support the
policymakers in formulating the appropriate regulations which motivate this study to
investigate corporate governance and IC relationship for one of the GCC countries.
Corporate governance plays an important role to minimize agency problems and
information asymmetry (Bhuiyan and Biswas, 2008;Garcia and Guillamon, 2011). Yan’s
(2017) findings suggest a significant relationship between corporate governance variables
and IC. Thereby, this raises an important question –do the corporate governance variables
influence IC efficiency in Oman’s financial sector? Bullay and Hamdan (2019) argue that there
are not enough studies that have contributed to the understanding of linkages between
corporate governance and IC. The financial institutions are knowledge-intensive firms;
thereby it is vital to investigate the IC of these firms. As IC plays an imperative role in the
value creation process, the examination of corporate governance principles adopted for the
use of IC in Oman is crucial; however, such studies are limited.
The objective of this research is to investigate the influence of corporate governance
mechanisms on IC measured by value-added intellectual capital (VAIC) and its components
using the agency theory and resource dependency theory. This is consistent with the prior
studies (Bullay and Hamdan, 2019;Zhou et al., 2018;Nadeem et al., 2017) which take a dual
theory perspective. The agency theory propagates that investors need to deter managers
from pursuing self-interest goals and act on behalf of the shareholders (Eisenhardt, 1989).
Agency theory is associated with a monitoring role perspective, whereas the resource
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